10-K

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

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended October 31, 2009
or
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: 0-13907

Synovis Life Technologies, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota	41-1526554
(State of Incorporation)	(I.R.S. Employer Identification No.)

2575 University Avenue W.,

St. Paul, Minnesota 55114-1024

(Address of principal executive offices)

Telephone Number:

(651) 796-7300

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:	Name on Each Exchange on Which Registered:
Common Stock, $.01 par value Common Stock Purchase Rights	The Nasdaq Stock Market

Securities Registered Pursuant to Section 12(g) of the Act: None

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

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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

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

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

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

Indicate 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 April 30, 2009, the last business day of the registrant’s second quarter of fiscal 2009, 11,532,372 shares of Common Stock of the registrant were outstanding, and the aggregate market value of the registrant’s outstanding Common Stock (based upon the closing price of the Common Stock on that date as reported by the Nasdaq Global Market), excluding outstanding shares owned beneficially by executive officers, directors and affiliates, was approximately $168,274,000.

As of December 19, 2009, 11,185,497 shares of the registrant’s Common Stock were outstanding.

Part III of this Annual Report on Form 10-K incorporates by reference (to the extent specific sections are referred to herein) information from the registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held March 4, 2010 (the “2010 Proxy Statement”).

PART I

Except where the context otherwise requires, references in this Annual Report on Form 10-K to “Synovis”, “Company”, “we”, and “our” are to Synovis Life Technologies, Inc. and its subsidiaries collectively.

Registered Trademarks:

APEX Processing^®, Dura-Guard^®, Flo-Rester^®, Flo-Thru Flo-Rester^®, Flo-thru Intraluminal Shunt^®, Flow Coupler^®, Neurotube^®, OrthAdapt^®, Peri-Guard^®, Peri-Strips^®, Peri-Strips Dry^®, Supple Peri-Guard^®, Synovis^®, Unite^®, Vascu-Guard^® and Veritas^® are registered trademarks of the Company or its business divisions.

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may”, “should”, “will”, “expect”, “believe”, “anticipate”, “estimate,” “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. All forward-looking statements in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statements. You are advised, however, to consult any future disclosures we make on related subjects in future filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors may include, among others, those factors set forth under the heading “Risk Factors” beginning in Part I, Item 1A on this Form 10-K.

Item 1 — Business

(a)  General Development of Business

Introduction

Synovis Life Technologies, Inc., a diversified medical device company, develops, manufactures and markets mechanical and biological products used by several surgical specialties to facilitate the repair and reconstruction of soft tissue damaged or destroyed by disease or injury. The Company’s products include implantable biomaterials for soft tissue repair, devices for microsurgery and surgical tools — all designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes and reduce healthcare costs.

History

Synovis Life Technologies, Inc. was incorporated in July of 1985. In 1985, the Company was spun-off to the shareholders of its then parent company, thereafter operating as a separate public company.

In 2001, we acquired Micro Companies Alliance, Inc. (“MCA”), a Birmingham, Alabama company that provides products to the microsurgery market. MCA’s products include, among others, the Microvascular Anastomotic Coupler, a patented technology for connecting small veins and arteries faster, easier and as effectively as conventional suturing. MCA’s name has since been changed to Synovis Micro Companies Alliance, Inc.

During fiscal 2006 and fiscal 2007, we transitioned from a third-party distribution sales force to a direct sales force in the U.S.

In January 2008, we sold substantially all of the assets of our former interventional business to Heraeus Vadnais, Inc. and its related entities, pursuant to an Asset Purchase Agreement. Our interventional business developed and manufactured metal and polymer components and assemblies used in or with implantable or minimally invasive devices for cardiac rhythm management, neurostimulation, vascular and other procedures.

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Operating results pertaining to our former interventional business for the fiscal years ended October 31, 2008 and 2007 have been reclassified and presented as discontinued operations. Unless otherwise indicated, the following description of our business refers only to our continuing operations.

On July 17, 2009, the Company, through its wholly-owned subsidiary Synovis Orthopedic and Woundcare, Inc. (“Ortho & Wound”), completed the acquisition of substantially all of the assets of Pegasus Biologics, Inc., a Delaware corporation. Operating results for Ortho & Wound from July 17, 2009 to October 31, 2009 are included in our Consolidated Statement of Operations for the fiscal year ended October 31, 2009. The assets acquired in the transaction are included in our Consolidated Balance Sheet as of October 31, 2009 and the purchase transaction has been included in our Consolidated Statement of Cash Flows for the fiscal year ended October 31, 2009. Our Ortho & Wound business is focused on developing advanced biological solutions for soft tissue repair, primarily within the orthopedic and wound care markets.

Our principal executive offices are located at 2575 University Avenue W., St. Paul, Minnesota 55114-1024. We can be contacted by telephone at (651) 796-7300, by facsimile at (651) 642-9018, or by electronic mail at info@synovislife.com. Our website is www.synovislife.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC.

(b)  Financial Information about Industry Segments

We operate as one segment as a developer, manufacturer, marketer and seller of medical devices.

(c)  Narrative Description of Business

The table below summarizes the revenue contributed by our significant products or product lines for the periods indicated.

	Years Ended October 31,
	2009					2008					2007
	$		%			$		%			$		%
	($ in thousands)
Net Revenue:
Peri-Strips®	$	19,384		33	%	$	17,653		35	%	$	13,788		37	%
Veritas®		8,757		15	%		4,468		9	%		1,296		4	%
Tissue-Guard		15,806		27	%		14,477		29	%		12,137		32	%
Microsurgery		8,668		15	%		7,749		16	%		5,439		14	%
Surgical Tools and other		5,596		10	%		5,453		11	%		5,031		13	%
Total Net Revenue	$	58,211		100	%	$	49,800		100	%	$	37,691		100	%

Products, Markets and Competition

Business Description

We are a diversified medical device company engaged in developing, manufacturing and marketing mechanical and biological products used by several surgical specialties for the repair of soft tissue damaged or destroyed by disease or injury. Our products are designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes and reduce healthcare costs.

Biomaterial Products

A core competency of our business is the development and manufacture of implantable biomaterial products for use by surgeons in various procedures where reinforcing, reconstructing and repairing tissue or preventing leaks of air, blood or other bodily fluids is desirable to achieve a favorable outcome. The historical

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choice when tissue repair is necessary has been to use autologous tissues, requiring the surgeon to excise tissue from another part of the patient’s body. Harvesting tissue from a second surgical site may increase procedure cost, time and the risk of complications, leading to additional pain and recovery time for the patient. Use of an available, off-the-shelf implantable medical product, whether tissue-based or synthetic, is an alternative to harvesting autologous tissue from the patient and is a means to reduce surgical costs and improve patient outcomes.

Our biomaterial products are produced from bovine and equine pericardium. Many of our product’s characteristics and competitive advantages are derived from the pericardium’s collagen composition. Collagen, a fibrous protein, makes the pericardium durable and provides performance characteristics superior to synthetics and similar to autologous tissue.

We process pericardium using proprietary and patented technologies to create three distinct product platforms:

•  Our Veritas tissue processing results in an extremely strong and conformable biomaterial. Once implanted, Veritas acts as a scaffold that is rapidly revascularized and repopulated by the patient’s surrounding tissue. Animal studies have demonstrated the formation of new blood vessels (angiogenesis) and cell in-growth with Veritas as early as 28 days post-implant. The Veritas tissue format is used to manufacture our Veritas Collagen Matrix, Peri-Strips Veritas and Peri-Strips Veritas Circular products.

•  Our Apex tissue processing creates a permanent patch or buttress that provides enduring strength and reinforcement to a repair site or staple line. Apex processing is used to manufacture our Tissue-Guard and Peri-Strips Apex products.

•  Our flexible cross-linking technologies are based on proprietary stabilization and sterilization processes, resulting in a safe, sterile, structurally sound, biologic scaffold of highly organized collagen for soft tissue repair. We have exclusive worldwide licenses for these processes for use in orthopedic, oral/dental, spinal and neurological, abdominal and thoracic, breast and wound applications and such licenses are used to manufacture our OrthADAPT Bioimplant and Unite Biomatrix products.

Peri-Strips.  Peri-Strips (“PSD”) is a biomaterial stapling buttress used as reinforcement at a surgical staple line to reduce the risk of potentially fatal leaks, most significantly in bariatric surgery, a treatment for morbid obesity, as well as in certain thoracic procedures. Peri-Strips accounted for 33% of our revenue in fiscal 2009, compared to 35% in fiscal 2008.

We have two tissue platforms for our linear Peri-Strips products. Our PSD Veritas product incorporates our Veritas tissue platform, which becomes the histological equivalent of the host tissue over time. Our PSD Apex product is a permanent technology in which the buttress permanently remains with the staple line. Due to differing attributes between PSD Veritas and PSD Apex, along with varying surgeon preference of those attributes, we expect markets for both products to continue to co-exist in the future. In addition to our linear buttresses, we have a PSD Circular buttress which utilizes our Veritas remodelable technology and is currently being marketed for bariatric surgery.

In bariatric surgery, Peri-Strips are proven to reduce the incidence of gastric leaks and to reduce bleeding at the staple line. Because of the clean visual field provided by the improved hemostasis and the atraumatic tissue manipulation provided by Peri-Strips, it can also facilitate a quicker and safer surgical procedure. Peri-Strips is typically applied during the formation of the gastric pouch in a Roux-en-Y gastric bypass procedure. Recently, Peri-Strips has also been applied to other stapling sites such as the J-J anastomosis of the Roux-en-Y procedure and the gastric sleeve staple line of the sleeve gastrectomy procedure.

Peri-Strips are also utilized in certain thoracic surgeries and are proven to reduce bleeding and air leaks at the staple line during lung resection procedures. Initially introduced as a stapling buttress for Lung Volume Reduction Surgery (“LVRS”), Peri-Strips are also used in a variety of thoracic procedures: blebectomies, bullectomies, wedge resections, segmentectomies, and lobectomies.

Veritas.  Veritas is used in surgery to repair soft tissue. Veritas accounted for 15% of our revenue in fiscal 2009, compared with 9% in fiscal 2008. We launched Veritas into the complex ventral hernia repair

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market in the U.S. during fiscal 2007, following our 510(k) market clearance in which indicated Veritas as having minimal tissue attachment. We launched Veritas into the breast reconstruction market in the U.S. in fiscal 2008. Veritas has been used by surgeons in a broad range of procedures since launch, including complex abdominal wall reconstruction, breast reconstruction, chest wall repair, and repair of ventral, hiatal, and parastomal hernias. Surgical results and experience with Veritas in these applications have been favorable. In the fourth quarter of fiscal 2009, we launched Veritas in Europe after obtaining CE Mark approval for soft tissue repair of abdominal wall, breast reconstruction, chest wall and hernia indications.

Tissue-Guard.  Our Tissue-Guard family of products is used to repair and replace damaged tissue in an array of surgical procedures, including cardiac, vascular, thoracic, and neurologic procedures. Apex Processing, used to manufacture Tissue-Guard products, is designed to retain the intrinsic nature of bovine pericardial collagen with improved biocompatibility, performance and safety. Tissue-Guard products accounted for 27% of our revenue in fiscal 2009, compared to 29% in fiscal 2008. Tissue-Guard products offer exceptional strength and durability, resistance to leakage, autologous-like handling characteristics and proven clinical performance. Since their introduction, Tissue-Guard products have been used in over 850,000 procedures, including use for pericardial closure, intracardiac defect repair, peripheral vascular repair and reconstruction, dural closure and soft tissue repairs.

Ortho & Wound.  Our recently acquired Ortho & Wound products include the OrthADAPT^® Bioimplant and Unite^® Biomatrix products. OrthADAPT Bioimplant received FDA marketing clearance in fiscal 2005 and is used in numerous orthopedic applications, including rotator cuff and achilles tendon repair, where there is a clinical need to reinforce the repair. Unite Biomatrix received FDA marketing clearance in fiscal 2006 and offers treatment for chronic wounds, such as diabetic foot ulcers and pressure ulcers. Unite Biomatrix provides a durable, collagen structure that can be applied to the wound easily and maintains its integrity while promoting wound healing.

Microsurgery

In addition to our biomaterial products, our business offers medical devices for microsurgery. The primary device within this product group is the Microvascular Anastomotic Coupler (the “Coupler”), a mechanical anastomotic product comprised of a pair of implantable, single-use rings. The Coupler is available in seven sizes, ranging from 1.0mm to 4.0mm in diameter, in half millimeter increments. The Coupler enables microsurgeons in numerous surgical specialties, including plastic and reconstructive, head and neck, orthopedic and hand, to perform highly effective anastomotic microsurgical procedures (the connecting of small veins or arteries) faster, easier and as or more dependably than traditional suture or sleeve anastomosis.

In addition to the Coupler, we sell several other products to the microsurgery market. These include the GEM Microclip, a hemostatic clip designed to securely ligate vessels and provide for atraumatic occlusion, as well as the Neurotube, a device designed to assist in the reconnection of severed nerves. We also distribute product lines for other companies in the microsurgery market, including the S&T microsurgery instrument product line.

Competition

Our products compete primarily on the basis of product performance, quality and service. The surgical markets in which we compete worldwide are characterized by intense competition. These markets are typically dominated by very large, established manufacturers that have broader product lines, greater distribution capabilities, substantially greater capital resources and larger marketing, research and development staffs and facilities. Many of these competitors offer broader product lines within our specific product market, particularly in our surgical tool markets and/or in the general field of medical devices and supplies. Broad product lines give many of our competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing for their products, including those that compete with our products. By offering a broader product line in the general field of medical devices and supplies, competitors may also have an advantage in marketing competing products to group purchasing organizations, health maintenance organizations and other managed care organizations that increasingly seek to reduce costs by centralizing and consolidating their purchasing functions.

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Competition for our biomaterial products is primarily from synthetic materials, other xenograft tissues and human cadaveric tissue. The ability of these products to compete with our biomaterial products varies based on each such product’s indications for use, relative features and benefits and surgeon preference.

Currently, we believe the major competitors to Veritas include KCI Corporation, Covidien, Ltd., Ethicon, Inc., C.R. Bard, Inc., and Cook Group, Inc. We believe the major competitors to our Tissue-Guard products include W.L. Gore & Associates, Inc., Cook Group, Inc., Integra Lifesciences Corporation, and Getinge AB. We believe the major competitors to our Ortho & Wound products include Wright Medical Group, Inc. and Integra Lifesciences Corporation.

At the beginning of fiscal 2009, there were two primary companies, W.L. Gore & Associates, Inc. and Cook Group, Inc., which offered buttress products that competed with Peri-Strips. In the second quarter of fiscal 2009, a third competitor, Covidien Ltd., one of the two primary companies which offers surgical staplers on which our Peri-Strips products are used, launched a buttress product supplied integral with their stapler cartridges. During the second half of fiscal 2009, worldwide revenue from Peri-Strips products which can be used with Covidien staplers decreased 24% from the first half of fiscal 2009. This was partially offset by revenue for Peri-Strips products used with another manufacturer’s staplers increasing 11%. We are addressing the Covidien competitive threat by highlighting the clinical history of Peri-Strips through our expanded direct sales force, the development of product enhancements and strengthened efforts to convert additional non-buttressing surgeons.

Peri-Strips also face indirect forms of competition, which include alternate surgical techniques such as oversewing the staple line and alternative bariatric procedures which do not use surgical staplers or buttresses such as gastric banding. Synthetic materials may be less expensive to produce and to the extent that comparable synthetic materials are available and effective in surgical procedures, we face significant price competition for our biomaterial products. There are other multi-purpose patches made from bovine and other types of animal tissue that compete with our products. Cadaveric tissue from tissue banks or from commercial distributors is utilized in breast reconstruction, hernia repair, neurological surgery and urologic procedures. There can be no assurance that competing products or indirect forms of competition will not achieve greater acceptance or that future products or alternative treatments for morbid obesity will not offer similar or enhanced performance advantages.

We believe that the collagen characteristics exclusive to pericardial tissue, the strength of the multi-directional fibers of the pericardial substrate, the proprietary tissue-treatment process and the purification process we employ offer significant benefits in product performance over competitive cadaveric tissue and synthetic materials.

Intellectual Property

We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspects of our technology. We rely on a combination or patent, trademark, confidentiality, trade secret and other intellectual property rights and measures to aggressively protect intellectual property we deem important to our business.

We have developed a patent portfolio internally, as well as through acquisitions, that cover many aspects of our product offerings. As of October 31, 2009, we held approximately 60 U.S. and foreign patents and 42 U.S. and foreign pending patent applications. The expiration dates of our material patents range from fiscal 2014 to fiscal 2024.

Synovis holds key patents related to Veritas Collagen Matrix in both wet and dry forms, patents related to the Peri-Strip Dry in both linear and circular formats, as well as the microanastomic Coupler and Flow Coupler. Synovis has exclusive rights to technology used in the cross-linking and sterilization of our Ortho & Wound products.

We own trademarks on Synovis^® as well as trade names used in conjunction with the sale of most of our products, including Peri-Strips and Veritas.

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We manufacture, market and sell our products both under our own patents as well as license agreements. While we believe that our patents are valuable, our knowledge and experience, our product development teams and marketing staff, and our confidential information regarding our manufacturing processes, materials and product design have been equally important in providing for and maintaining our proprietary product offering. To protect this value, we have established policies and procedures, as well as requiring as a condition of employment, all employees to execute a confidentiality agreement with respect to proprietary information and the assignment of intellectual property to us.

We also rely on unpatented proprietary technology and know-how. We seek to protect our trade secrets and proprietary know-how with confidentiality agreements with our employees, consultants and vendors.

There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. We have strongly defended, and will continue to defend, our intellectual property. Despite our measures to protect our intellectual property, however, we cannot be certain that the measures we take to protect our intellectual property will be successful. These risks are discussed in more detail in this Report in Part I, Item 1A, Risk Factors under the heading “We may not be able to adequately enforce or protect our intellectual property rights or to protect ourselves against the infringement claims of others.”

Marketing and Customers

Our marketing and sales strategies include supporting our superior quality products with sales and marketing programs. These programs include advertising and direct mail campaigns, participation in trade shows, support of key surgeons’ gatherings, publication and presentation of clinical data and new product information, and collaboration with key surgeons on educational activities and internet-based programs. An important strategy of our marketing programs is to identify and assess customer needs. This is accomplished by developing and maintaining a close working relationship with the hospitals and surgeons who purchase and use our products and through observations and interactions with our customers.

In the U.S., we utilize a direct sales model for all products except for our newly acquired Ortho & Wound products. As of October 31, 2009, we have 56 direct sales representatives selling our Peri-Strips, Veritas, Tissue-Guard and Surgical tools and other products. Additionally, we have 9 direct sales representatives selling our microsurgery products. Internationally, we utilize an independent distributor sales network to sell these products.

For Ortho & Wound, we are in the process of establishing a hybrid sales model in the U.S. comprised of both direct sales representatives and independent distributors. We expect to hire eight direct sales representatives in the U.S. by January 2010, and additionally to appoint up to 16 independent distributors in targeted U.S. territories in fiscal 2010. Internationally, we expect to appoint three or more independent stocking distributors in Europe during fiscal 2010.

Additional Information Regarding Our Business

Backlog

Based on our experience, we believe that backlog is not a meaningful predictor of future revenue levels of our business.

Raw Materials

We acquire bovine pericardium for use in our biomaterial products from United States Department of Agriculture (“USDA”) inspected abattoirs as well as a USDA approved source in New Zealand. We acquire equine pericardium for use in our biomaterial products from USDA approved abattoirs located in Mexico and Canada. The supply of bovine and equine pericardium, as well as other raw materials, is currently adequate. We have not experienced any product shortages arising from interruptions in the supply of any raw materials or components, and have identified alternative sources of supply for significant raw materials and components, although at times certain materials may be “single sourced” due either to the complex nature or minimal requirements of various components we purchase.

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Research and Development

As a component of our business strategy, we continue to make a significant investment in research and development (“R&D”) as well as new product design and engineering. R&D expense for fiscal 2009, 2008 and 2007 was $3,798,000, $3,248,000 and $2,620,000, respectively.

The R&D activities we expect to advance in fiscal 2010 include expanding the indications for use of our Veritas product into new markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring other process improvements and product enhancements for our proprietary tissue products, improving the delivery system for our Peri-Strips products, advancing the technology of the Coupler and further development of an OrthAdapt-based product and related instrumentation.

Governmental Regulation

General

Our business operates in a medical device marketplace subject to extensive and rigorous regulation by the Food and Drug Administration (“FDA”) and by comparable agencies in foreign countries. In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping and surveillance procedures for medical devices.

Food and Drug Administration

FDA regulations classify medical devices based on perceived risk to public health as either Class  I, II or III devices. Class I devices are subject to general controls, Class II devices are subject to special controls and Class III devices are subject to pre-market approval (“PMA”) requirements. While most Class I devices are exempt from pre-market submission, it is necessary for most Class II devices to be cleared by a 510(k) pre-market notification prior to marketing. 510(k) establishes that the device is “substantially equivalent” to a device that was legally marketed prior to May 28, 1976, the date on which the Medical Device Amendments of 1976 became effective. The 510(k) pre-market notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. If the product is notably new or different and substantial equivalence cannot be established, the FDA will require the manufacturer to submit a PMA application for a Class III device that must be reviewed and approved by the FDA prior to sale and marketing of the device in the United States. The process of obtaining PMA approval can be expensive, uncertain, lengthy and frequently requires anywhere from one to several years from the date of FDA submission, if approval is obtained at all. The FDA controls the indicated uses for which a product may be marketed and strictly prohibits the marketing of medical devices for unapproved uses. The FDA can withdraw products from the market for failure to comply with laws or the occurrence of safety risks.

Our microsurgery instruments and 4Closure System are Class I medical devices. The rest of our products are classified as Class II medical devices and have received 510(k) marketing clearance from the FDA. Our manufacturing operations are subject to periodic inspections by the FDA, whose primary purpose is to audit the Company’s compliance with the Quality System Regulations published by the FDA and other applicable government standards. Strict regulatory action may be initiated in response to audit deficiencies or to product performance problems. We believe that our manufacturing and quality control procedures are in compliance with the requirements of the FDA regulations.

International Regulation

International regulatory bodies have established varying regulations governing product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax. Many of these regulations are similar to those of the FDA. With the exception of the European Union (“EU”), Canada and Australia, we typically rely on our independent distributors covering a given country to comply with the foreign regulatory requirements, including registration of our devices with the appropriate governmental authorities. To date, and to the best of our knowledge, we have complied with the regulatory requirements in the foreign countries in

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which our medical devices are marketed. We do, however, face certain regulatory risks in international markets related to our bovine tissue products, which are discussed in Part I, Item 1A of this report.

The registration system in the EU for our medical devices requires that our quality system conform to international quality standards and that our medical devices conform to “essential requirements” set forth by the Medical Device Directive (“MDD”). Manufacturing facilities and processes under which our Ortho & Wound medical devices are produced are inspected and audited by the National Standards Authority of Ireland (“NSAI”). Manufacturing facilities and processes under which all of our other medical devices are produced are inspected and audited by the British Standards Institute (“BSI”). These audits verify our compliance with the essential requirements of the MDD, as well as supplementary requirements for “medical devices incorporating animal tissue.” These certifying bodies verify that our quality system conforms to the international quality standard ISO 13485:2003 and that our products conform to the “essential requirements” and “supplementary requirements” set forth by the MDD for the class of medical devices we produce. These certifying bodies also certify our conformity with both the quality standards and the MDD requirements, entitling us to place the “CE” mark on all of our current medical devices.

Third Party Reimbursement

The availability and level of reimbursement from third-party payers for procedures utilizing our products is significant to our business. Our products are purchased primarily by hospitals and other end-users, who in turn bill various third party payers for the services provided to the patients. These payers, which include Medicare, Medicaid, private health insurance plans and managed care organizations, reimburse all or part of the costs and fees associated with the procedures utilizing our products.

In response to the focus of national attention on rising health care costs, a number of changes to reduce costs have been proposed or have begun to emerge. There have been, and may continue to be, proposals by legislators, regulators and third party payers to curb these costs. The development or increased use of more cost effective treatments for diseases could cause such payers to decrease or deny reimbursement for surgeries or devices to favor alternatives that do not utilize our products. A significant number of Americans enroll in some form of managed care plan. Higher managed care utilization typically drives down the payments for health care procedures, which in turn places pressure on medical supply prices. This causes hospitals to implement tighter vendor selection and certification processes, by reducing the number of vendors used, purchasing more products from fewer vendors and trading discounts on price for guaranteed higher volumes to vendors. Hospitals have also sought to control and reduce costs over the last decade by joining group purchasing organizations or purchasing alliances. We cannot predict what continuing or future impact these practices, the existing or proposed legislation, or such third-party payer measures within a constantly changing healthcare landscape may have on our future business, financial condition or results of operations.

Employees

On October 31, 2009, we employed approximately 290 full-time and part-time individuals. Our employees are not represented by a union, and we consider our relationship with our employees to be good.

(d)  Financial Information About Geographic Areas

For information regarding net revenue by geographic area, please refer to Note 5 to our consolidated financial statements under Item 8 of this report.

Item 1A — Risk Factors

The following factors are important and should be considered carefully in connection with any evaluation of our business, financial condition, results of operations, prospects and an investment in our common stock. Additionally, the following factors could cause our actual results to materially differ from those reflected in any forward-looking statements.

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We may not be able to sustain or manage our growth.

We have achieved notable revenue growth over the past several years. Our business has increased revenue 17% in fiscal 2009, 32% in fiscal 2008 and 36% in fiscal 2007. There can be no assurance that we can manage the significant challenges that accompany such growth, including management of an increasingly diverse product portfolio and provision of necessary infrastructure. In addition, there can be no assurance that we will be able to identify and successfully consummate and integrate acquisitions or develop new products to sustain rates of revenue growth and profitability in future periods comparable to those experienced in the past several years.

We may not be able to timely re-establish our newly acquired Ortho & Wound products in the marketplace and further, we expect to incur significant operating losses in the future.

On July 17, 2009, the Company, through its wholly-owned subsidiary Synovis Orthopedic and Woundcare, Inc., completed the acquisition of substantially all of the assets of Pegasus Biologics, Inc. (“Pegasus”), a privately held medical device company focused on the development of advanced biological solutions for soft tissue repair. In 2008, Pegasus generated $9,100,000 in revenue, and approximately 10,000 patients having received treatment with various Pegasus products from March 2006 to May 2009 when Pegasus effectively ceased operations after attempts to raise additional operating capital were unsuccessful due to the overall economic climate.

Following the completion of the acquisition, we faced several key challenges with “re-starting” the Ortho & Wound business.

•  First, we needed to identify, contact, interview and successfully hire employees in certain functions, including production, quality, regulatory and clinical affairs, customer service and general and administrative.

•  Second, our Ortho & Wound products were out of the market for over four months as we were required to obtain the California Department of Public Health manufacturing license necessary to repackage acquired inventory with Synovis labeling, manufacture new products, and to sell products in the marketplace. We obtained this license on September 29, 2009.

•  Third, we need to build new sales channels for our Ortho & Wound products. We believe that a hybrid model of direct sales representatives and third-party independent representatives will provide for the best opportunity to generate revenues. Significant focus has been placed upon establishing our hybrid sales force. We expect to hire eight direct sales representatives in the U.S. by January 2010, and additionally to appoint up to 16 independent distributors in targeted U.S. territories in fiscal 2010. Internationally, we expect to appoint three or more independent stocking distributors in Europe during fiscal 2010.

Based on the complexities associated with these and other challenges, there can be no assurance that our sales channels will be effective at re-establishing our Ortho & Wound products in the marketplace or that our Ortho & Wound products will achieve desired revenue levels. We also plan to invest significant resources to build a foundation for future growth of our Ortho & Wound business. Based on the cost structure we presently expect for our Ortho & Wound business, we believe that breakeven operating results will require revenue levels well above what Pegasus had historically achieved.

We face significant competition from established competitors in the medical device industry.

We face intense competition. The medical device industry is highly competitive and characterized by rapid innovation and technological change. We expect technology to continue to develop rapidly, and our success will depend to a large extent on our ability to maintain a competitive position with our technology. There can be no assurance that we will be able to compete effectively in the marketplace or that products developed by our competitors will not render our products obsolete or non-competitive. Similarly, there can be no assurance that our competitors will not succeed in developing or marketing products that are viewed by surgeons as providing superior clinical performance and/or are less expensive relative to the products we currently market or may develop.

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Established companies manufacture and sell products that compete with each of our products or capabilities. Some of the companies with whom we compete have greater sales and/or distribution capabilities, substantially greater capital resources, larger marketing, research and development staffs and larger facilities. In addition, many of our competitors offer broader product lines within our specific product markets. Broad product lines may give our competitors the ability to negotiate exclusive, long-term medical product supply contracts and the ability to offer comprehensive pricing for their products. There can be no assurance that we will be able to compete effectively with such manufacturers.

We continue to evaluate new market opportunities for our existing products. This process involves numerous steps, including, but not limited to, identifying meaningful new markets for our products, performing in-depth research and analysis to forecast the market potential for our products in these new markets, obtaining the required regulatory market clearances, developing an attractive value proposition for potential customers, and translating this value proposition into meaningful revenue. Due to the inherent complexity of this process, there can be no assurance that we will be able to effectively enter new markets with our existing or newly developed products.

Increases to the size of our U.S. direct sales force may not generate desired increases in revenues.

During fiscal 2006 and fiscal 2007, we converted from a third-party distribution sales force to a direct sales force in the U.S. for all products except for our Ortho & Wound products. We initially hired 24 sales representatives in fiscal 2006, and had expanded to 49 representatives by January 2009. In May 2009, we announced our intentions to expand the size of our domestic sales force by as many as 16 for a total of 65 sales representatives by the end of fiscal 2009. As of October 31, 2009, we have 56 direct sales representatives selling our Peri-Strips, Veritas, Tissue-Guard and surgical tools and other products. Additionally, we have 9 direct sales representatives selling our microsurgery products.

We believe previous expansions in our sales force have been a significant driver of our revenue growth in recent years, with new sales representatives becoming effective and able to generate increased sales volumes in approximately six to nine months after hire. While we believe a direct sales force provides us with the best avenue to maximize the revenue potential of our current and future market opportunities, there can be no assurance, however, that this strategy will continue to result in the desired outcome of increasing sales volumes.

We may not be able to adequately enforce or protect our intellectual property rights or to protect ourselves against the infringement claims of others.

We protect our technology through patents, trade secrets, and proprietary know-how. We also seek to protect our technology through confidentiality agreements with employees, consultants and other parties.

There can be no assurance that our trade secrets or confidentiality agreements will adequately protect our proprietary information or, in the event of a breach of any confidentiality agreement, that we will have adequate remedies. Additionally, there can be no assurance that any pending or future patent applications will result in issued patents, or that any current or future patent, regardless of whether we are an owner or licensee of such patent, will not be challenged, invalidated or circumvented or that the rights granted thereunder or under our licensing agreements will provide a competitive advantage to us. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by us, or that our technology does not or will not infringe patents or other rights owned by others.

The medical device industry is characterized by frequent and substantial intellectual property litigation, and competitors may resort to intellectual property litigation as a means of competition. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict.

From time to time, the Company may become involved in litigation which is ordinary, routine litigation incidental to its business. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. Management believes that the Company’s risk management practices, including its insurance coverage, are reasonably adequate to protect against potential material liability losses.

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Oversight of the medical device industry might affect the manner in which we may sell medical devices.

There are laws and regulations that govern the means by which companies in the healthcare industry may market their products to healthcare professionals and may compete by discounting the prices of their products, including for example, the federal Anti-Kickback Statute, the federal False Claims Act, the federal Health Insurance Portability and Accountability Act of 1996, and state law equivalents to these federal laws that are meant to protect against fraud and abuse. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, in some instances civil and criminal penalties, damages, fines, and exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Although we exercise care in structuring our sales and marketing practices and customer discount arrangements to comply with those laws and regulations, we cannot assure you that:

•  government officials charged with responsibility for enforcing those laws will not assert that our sales and marketing practices or customer discount arrangements are in violation of those laws or regulations; or

•  government regulators or courts will interpret those laws or regulations in a manner consistent with our interpretation.

ADVAMED, the principal U.S. trade association for the medical device industry, has put in place a model “code of conduct” that sets forth standards by which its members should abide in the promotion of their products. We have policies and procedures in place for compliance that we believe are at least as stringent as those set forth in the ADVAMED Code, and we provide routine training to our sales and marketing personnel on our policies regarding sales and marketing practices. Nevertheless, the sales and marketing practices of our industry have been the subject of increased scrutiny from federal and state government agencies, and we believe that this trend will continue. For example, proposed federal legislation and recent state legislation would require detailed disclosure of gifts and other remuneration made to health care professionals. In addition, prosecutorial scrutiny and governmental oversight, on the state and federal levels, over some major device companies regarding the retention of healthcare professionals as consultants has limited the manner in which medical device companies may retain healthcare professionals as consultants. We have in place policies to govern how we may retain healthcare professionals as consultants that reflect the current climate on this issue and provide training on these policies. Finally, various hospital organizations, medical societies and trade associations are establishing their own practices that may require detailed disclosures of relationships between healthcare professionals and medical device companies or ban or restrict certain marketing and sales practices such as gifts and business meals.

Our failure to obtain regulatory clearance/approval and maintain regulatory compliance for any of our products would impact our ability to generate revenue from those products.

We must comply with FDA regulations to market our products in the United States.  The medical device industry in which our business operates is subject to extensive and rigorous regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping and surveillance procedures for our medical devices.

The process of obtaining marketing clearance or approvals from the FDA for new products and new applications for existing products can be time-consuming and expensive, and there is no assurance that such clearance/approvals will be granted, or that the FDA review will not involve delays that would adversely affect our ability to commercialize additional products or additional applications for existing products. Some of our products that are in the research and development stage may be subject to a lengthy and expensive pre-market approval process with the FDA. The FDA has the authority to control the indicated uses of a medical device. Products can also be withdrawn from the market due to failure to comply with regulatory standards or the occurrence of unforeseen problems. The FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us.

Our facilities and processes are subject to regulation.  The FDA, various state agencies and foreign regulatory agencies inspect our facilities to determine whether we are in compliance with various regulations

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relating to quality systems, such as manufacturing practices, validation, testing, quality control, product labeling and product surveillance. A determination that we are in violation of such regulations could lead to imposition of civil penalties, including fines, product recalls or product seizures and, in extreme cases, criminal sanctions, depending on the nature of the violation.

We must obtain regulatory approvals to market our products internationally.  The registration scheme in the majority of international markets (e.g. Europe, Canada) for our products requires that our quality system conforms to international quality standards. We must remain compliant with these requirements as well as product standards in order to sell our products in these countries. There can be no assurance that we will be able to maintain compliance with these regulations. In addition, there can be no assurance that we will be successful in obtaining registration for new product introductions.

Further, international regulatory bodies have established varying additional regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We rely, in part, on our independent distributors to comply with such foreign regulatory requirements. As a result, our communication with foreign regulatory agencies may be indirect as it occurs through the foreign distributor. The inability or failure of independent distributors to comply with the varying regulations or the imposition of new regulations could restrict such distributors’ ability to sell our medical products internationally and thereby adversely affect our business, financial condition and results of operations.

Because many of our biomaterial products are manufactured from bovine pericardium, perceptions about Bovine Spongiform Encephalopathy may impact our sales.

Under the direction of the United States Department of Agriculture (“USDA”), the U.S. government has had an active program of surveillance and import controls since the late 1980s designed to prevent the introduction of Bovine Spongiform Encephalopathy (“BSE”) into U.S. cattle. The USDA program includes certain feed restrictions which began in 1997. The World Health Organization has categorized the levels of BSE infectivity of tissue. This characterization places pericardium (which primarily consists of collagen) as having no detectable infectivity, the lowest risk category. The European authorities have specifically reviewed our biomaterial sourcing and manufacturing processes and have also certified our bovine pericardium products.

We obtain our raw bovine pericardium for our biomaterial products from USDA-inspected abattoirs as well as from a USDA approved source in New Zealand. The bovine pericardium is collected under strict conditions; inspectors examine each heart for disease and anomalies prior to harvesting the pericardium. Additional measures are also taken to ensure brain and spinal cord matter does not come into contact with the bovine pericardium. Our bovine-based tissue products are manufactured with sodium hydroxide, a processing technique recommended by international experts to remove or inactivate the prion, the agent believed to cause BSE, should it exist in the tissue. The bovine pericardium used in our products is sourced from animals who are 30 months or younger. Sourcing from these younger animals markedly decreases the likelihood of BSE transmission. Notwithstanding these safeguards, if the perception of risk associated with BSE increases, it could have a material adverse effect on our business, financial condition and results of operations.

In 2004, the EU enacted medical device regulations that require product specific evaluation of bovine-based products for potential BSE patient health risks. All bovine-based medical products currently sold in the EU are subject to this evaluation. Our bovine-based products have been evaluated and have obtained approval, although our Dura-Guard product has not been approved for sale in France. Currently, none of our bovine-based products are approved for sale in Japan or Taiwan. In August 2006, the government of China began prohibiting the sale of U.S. bovine-based products. We understand that regulatory approvals will not be granted in the present environment within those countries for products derived from bovine pericardium, unless we source bovine pericardium from countries which they consider at no risk for BSE (e.g. New Zealand and Australia). Total international sales of our bovine-based products accounted for 11.5% and 10.8% of our consolidated net sales for the fiscal years ended October 31, 2009 and 2008, respectively, and increased 25% in fiscal 2009. Any prohibition by certain other countries of U.S. bovine pericardium products as a result of concerns related to BSE could have an adverse effect on our ability to maintain or grow international sales of these products.

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We may face the risk of product liability claims and product recalls that could result in costly and time consuming litigation and significant liability.

The medical device industry historically has been litigious, and the manufacture and sale of our products entails an inherent risk of product liability claims. In particular, our principal medical devices are designed to be permanently placed in the human body, and production or other errors could result in an unsafe product and injury to the patient. Although we maintain product liability insurance in amounts believed to be adequate, based upon the nature and risks of our business in general and our actual experience to date, there can be no assurance that one or more liability claims will not exceed the coverage limits of such policies or that such insurance will continue to be available on commercially reasonable terms, if at all. Furthermore, we do not have nor do we expect to obtain insurance covering our costs and losses as the result of any recall of our products due to alleged defects, whether such a recall is instituted by us or required by a regulatory agency. A product liability claim, recall or other claim with respect to uninsured liabilities or in excess of our insured liabilities could have a material adverse effect on our business, financial condition and results of operations.

Due to the unpredictability of the health care industry, our customers may not be able to receive third-party reimbursement for the medical procedures utilizing our products.

Our products are purchased primarily by hospitals and other end-users. Hospitals and end-users of our products bill various third-party payers, including government health programs, private health insurance plans, managed care organizations and other similar programs, for the health care goods and services provided to their patients. Third-party payers may deny reimbursement if they determine that a procedure was not in accordance with established third-party payer protocol regarding treatment methods. Our products are covered by procedure costs as a component of the overall medical procedure reimbursement obtained from the third-party payer.

Third-party payers are also increasingly challenging the prices charged for medical products and services and, in some instances, have put pressure on medical device suppliers to lower their prices. While we believe our pricing is appropriate for the niche markets and technology of our products, we are unable to predict what changes will occur in the reimbursement methods used by third-party payers. There can be no assurance that medical procedures in which our products are used will continue to be considered cost-effective by third-party payers, that reimbursement for such procedures will be available or, if available, will continue, or that third-party payers’ reimbursement levels will not adversely affect our ability to sell our products on a profitable basis. The cost of health care has risen significantly over the past decade, and there have been and may continue to be proposals by legislators, regulators and third-party payers to curb these costs.

Failure by hospitals and other users of our products to obtain reimbursement from third-party payers for procedures in which our products are used, changes in third-party payers’ policies towards reimbursement for procedures using our products or legislative action could have a material adverse effect on our business, financial condition and results of operations.

Healthcare reform legislation could adversely affect our revenue and financial condition.

In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs. Recently, President Obama and members of Congress have proposed significant reforms to the U.S. healthcare system. Both houses of Congress have conducted hearings about U.S. healthcare reform and a number of bills have been proposed in Congress. A leading proposal includes an excise tax on the medical device industry that would be payable based on revenue, not income. In addition, recent legislation and many of these proposed bills include funding to assess the comparative effectiveness of medical devices. Although Congress has indicated that this funding is intended to improve the quality of health care, it is unclear what impact this assessment will have on coverage, reimbursement or other third-party payor policies, or what effect that assessment and the excise tax proposal would have on our products or our financial results. To the extent these or other reform measures

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affect the coverage and reimbursement of our current or future products, there could be a material adverse affect on our financial condition and operating results.

The ultimate content or timing of any future healthcare reform legislation, and its impact on medical device companies such as Synovis, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms could materially impact our business, financial condition and operating results.

The current global economic downturn could continue to adversely impact our business.

A significant portion of our product sales are used in medical procedures covered by patient health insurance. Additionally, a notable percentage of medical procedures utilizing our products may be considered elective by the patient. The current global economic downturn may have a meaningful impact on availability to or affordability of health insurance, or may impact patient decisions to have an elective medical procedure performed. This may in turn also impact the financial condition of our customers. Accordingly, a pronounced and sustained economic downturn could have a material, adverse effect on our business, financial condition and results of operations.

We depend on highly specialized equipment to manufacture our products and loss of or damage to one of our manufacturing facilities could result in reduced revenues and significant losses.

We presently have two manufacturing facilities: our newly acquired Irvine, California (“CA”) facility which manufactures our Ortho & Wound products, and our St. Paul, Minnesota (“MN”) facility. The loss of or damage to either of our manufacturing facilities due to natural disaster, equipment failure or other difficulty could result in significant delays in production. In the event of such disaster, re-starting manufacturing activity at our other location, or locating third-party manufacturers to manufacture our products in any such event would likely be difficult given the specialized equipment and processes necessary to produce those products. Although we maintain business interruption insurance to mitigate the financial impact on our business, any sustained period of suspended production would likely have a material adverse effect on our business, financial condition and results of operations.

We cannot predict the outcome of our clinical studies.

In fiscal 2010, we expect to perform several post-clearance marketing clinical studies for certain of our products, which are designed to document the comparative strengths of our products versus competitive products, and also to more fully understand the role implant technique and other factors may affect clinical outcomes. We expect these clinical studies will require significant investment and may span several years. We cannot predict the outcome of our clinical studies, nor what impact, if any, they may have in the marketplace.

Our strategy to acquire complementary businesses and technologies involves risk and may result in disruptions to our business by, among other things, distracting management time and diverting financial resources.

One of our growth strategies is the acquisition of complementary businesses and technologies. We may not be able to identify suitable acquisition candidates, or if we do, we may not be able to make such acquisitions on commercially acceptable terms. If we make acquisitions, a significant amount of management time and financial resources may be required to evaluate or complete the acquisition and integrate the acquired business into our existing operations. Even with this investment of management time and financial resources, an acquisition may not produce the desired revenue, earnings or business synergies. Acquisitions involve numerous other potential risks including: assumption of unanticipated operating problems or legal liabilities, problems integrating the purchased operations, technologies or products, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, and potential loss of customers or key employees of acquired businesses, among others.

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We may be obligated to indemnify the purchaser or our former interventional business for certain material adverse events that may arise.

As contractually defined, we may be obligated to indemnify the purchaser of our former interventional business for certain material adverse events arising out of or related to our prior operation of that business, including environmental matters, intellectual property disputes and unforeseen liabilities, among others. While we have not been made aware of any such potential indemnification matters by the purchaser, our obligation to indemnify the purchaser in the future for a qualifying adverse event could have a material, adverse effect on our business, results of operations and financial condition.

We may not be able to hire or retain key personnel.

We depend on key management, sales and technical personnel. Moreover, because of the highly technical nature of our business, our ability to continue our technological developments and to market and sell our products depends in large part on our ability to attract and retain qualified technical, sales and key management personnel. Competition for qualified personnel is intense, and we cannot ensure that we will be able to attract and retain the individuals we need. The loss of key personnel, or our inability to hire or retain qualified personnel, could have a materially adverse effect on our business, financial condition and results of operations.

Item 1B — Unresolved Staff Comments

None.

Item 2 — Properties

We have a lease for our corporate headquarters and manufacturing facility, totaling 65,000 square feet, located at 2575 University Ave. W., St. Paul, Minnesota. The lease expires on December 31, 2013, and the base rent is currently $724,000 annually.

We lease approximately 14,830 square feet for our Ortho & Wound facility at 4 and 6 Jenner Drive, Irvine, CA. The lease expires August 31, 2012, and the base rent is currently $223,000 annually.

We lease approximately 3,750 square feet for our MCA facility at 439 Industrial Lane, Birmingham, Alabama. The lease expires June 30, 2011, and the base rent is currently $37,000 annually.

We pay apportioned real estate taxes and common costs on our St. Paul, MN and Irvine, CA leased facilities.

Item 3 — Legal Proceedings

In March 2007, we initiated a patent infringement action in U.S. District Court for the District of Minnesota against W.L. Gore & Associates, Inc. The action alleged infringement of U.S. Patent No. 7,128,748 “Circular Stapler Buttress Combination,” which covers certain surgical buttress technology. Gore brought a counterclaim seeking a determination that the patent is invalid.

We have reached a settlement in the litigation with W.L. Gore & Associates, Inc. By Order dated November 12, 2009, the court approved the parties’ stipulation and ordered that all claims and counterclaims be dismissed with prejudice, with each party to bear its own costs and attorneys’ fees. Judgment dismissing all claims and counterclaims was entered on November 13, 2009.

From time to time, we may become involved in routine litigation incidental to our business. Further, product liability claims may be asserted in the future relative to events not known to management at the present time. Management believes that our risk management practices, including our insurance coverage, are reasonably adequate to protect against potential material product liability losses.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Item 4A — Executive Officers of the Registrant

Our executive officers, their ages, and the offices they held as of December 1, 2009, and certain biographical information, are as follows:

Name	Age		Title
Richard W. Kramp		64	President and Chief Executive Officer
David A. Buché		48	Vice President and COO of Synovis Surgical Innovations
Michael K. Campbell		58	President of Synovis Micro Companies Alliance, Inc.
Timothy F. Floeder		51	Vice President of Corporate Development
Mary L. Frick		56	Vice President of Regulatory/Clinical/Quality Affairs
Daniel L. Mooradian		51	Vice President of Research and Development
Brett A. Reynolds		41	Chief Financial Officer, Vice President of Finance and Corporate Secretary

Richard W. Kramp.  Mr. Kramp was named Chief Executive Officer of the Company effective January 2007. Mr. Kramp has served as President of Synovis Life Technologies, Inc. since June 2006. From August 2004 to May 2006, he served as President and Chief Operating Officer of the Company’s former interventional business. Prior to joining the Company, Mr. Kramp most recently served as the President and Chief Operating Officer of Medical CV, Inc. From 1988 to 2003, Mr. Kramp served as President and Chief Operating Officer, and then President and Chief Executive Officer, as well as a Board Member at ATS Medical. From 1978 to 1988, Mr. Kramp held sales and marketing positions at St. Jude Medical, serving as Vice President of Sales and Marketing from 1981 to 1988.

David A. Buche.  Mr. Buche has served as a Vice President and Chief Operating Officer of Synovis Surgical Innovations since June 2004. From January 1998 to May 2004, he served as Vice President of Marketing and Sales of Synovis Surgical Innovations. Prior to January 1998, Mr. Buche held the positions of Director of Marketing from November 1997 and Director of International Marketing and Sales from March 1995.

Michael K. Campbell.  Mr. Campbell has served as President of Synovis Micro Companies Alliance, Inc. since the acquisition of MCA by the Company in July 2001. Prior to the acquisition he was President and CEO of MCA from July 2000 through July 2001. From June 1999 to May 2000, Mr. Campbell served as Executive Vice President of PrimeSource Surgical, a specialty medical products distributor. From 1979 to June 1999, he was a director and Vice President of Futuretech, Inc., a specialty medical distribution company serving the southeastern United States.

Timothy F. Floeder.  Mr. Floeder has served as Vice President of Corporate Development of the Company since May 2008. Prior to joining the Company, Mr. Floeder served as Vice President of Business Development for Compex Technologies, Inc. (“Compex”) from 2003 to 2006, and upon the sale of Compex to Encore Medical Corporation, served as interim CEO/managing director of Compex’s U.S. consumer business and Compex’s European subsidiary (Compex S.A.) from 2006 to 2007. In addition, Mr. Floeder served as a non-employee director for HEI, Inc. from 2002 to 2007. From 1996 to 2002, Mr. Floeder served as Managing Director of merger and acquisition services for Miller Johnson Steichen Kinnard, Inc., advising companies in several industries, including the medical device industry.

Mary L. Frick, M.S.C.  Ms. Frick has served as Vice President of Regulatory/Clinical/Quality Affairs of the Company since November 2000. She had previously served in several positions within the Company, including Director of Regulatory/Clinical/Quality Affairs since November 1998 and as Group Manager of Regulatory/Clinical/Quality Affairs from June to November of 1998. From 1984 to June 1998, Ms. Frick held a series of management positions in Research, Operations and Regulatory/Clinical Affairs at INCSTAR Corporation, a diagnostic medical device manufacturer.

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Daniel L. Mooradian, Ph.D.  Dr. Mooradian has served as Vice President of Research and Development since December 1, 2008. From May 2006 to November 2008, Dr. Mooradian held various positions at Boston Scientific, including Director of Preclinical Sciences and Director of the Research and Technology Center. From January 2005 to April 2006, Dr. Mooradian served as Vice President of Research and Development for QuestStar Medical, Inc. From January 2001 to December 2004, Dr. Mooradian held various positions at Synovis Life Technologies, Inc., including Director of Research and Development and Principal Scientist. From September 1987 to December 2000, Dr. Mooradian held various positions at the University of Minnesota.

Brett A. Reynolds.  Mr. Reynolds has served as Chief Financial Officer, Vice President of Finance and Corporate Secretary since April 2005. Prior to April 2005, Mr. Reynolds served as Director of Finance from September 2003. From October 2001 to September 2003, Mr. Reynolds served in several financial positions at Chiquita Processed Foods, LLC, a division of Chiquita Brands International, ultimately serving as Corporate Controller. From 1991 to 2001, Mr. Reynolds held a series of audit, accounting and consulting positions with Deloitte and Touche LLP.

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range

Our common stock is currently traded on the Nasdaq Global Market under the symbol “SYNO.” The following table sets forth, for each of the fiscal periods indicated, the range of high and low closing sale prices per share as reported by the Nasdaq Global Market.

	2009				2008
Fiscal Quarter Ended:	High		Low		High		Low
January 31	$	18.74	$	11.62	$	23.17	$	15.15
April 30		18.10		11.60		18.69		15.10
July 31		21.45		12.90		21.75		16.62
October 31		16.05		12.06		24.43		15.16

Dividends

We have not declared or paid any cash dividends on our common stock since inception, and our Board of Directors presently intends to retain all earnings for use in the business for the foreseeable future.

Shareholders

As of November 30, 2009, there were approximately 5,500 beneficial owners and 900 registered shareholders of our common stock.

Sales of Unregistered Securities

None.

Purchases of Equity Securities

On May 28, 2008, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,000,000 shares of its common stock. This program was completed on January 9, 2009. The share repurchase was funded using the Company’s existing cash balances and occurred in the open market in accordance with SEC regulations. The timing and extent to which the Company bought back shares depended upon market conditions and other corporate considerations.

From inception of the program on May 28, 2008 through its completion on January 9, 2009, the Company used $16,675,000 to repurchase 1,000,000 shares at an average price of $16.68 per share. The following table

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presents the total number of shares repurchased from May 28, 2008 through January 9, 2009, the average price paid per share and the number of shares that were purchased.

					Total Number		Maximum Number
					of Shares Purchased		of Shares That May
	Total Number				as Part of Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plan or		Under the Plan
Period	Purchased		Paid per Share		Program		or Program
May 1, 2008 — May 31, 2008		—	$	—		—		1,000,000
June 1, 2008 — June 30, 2008		87,585	$	17.82		87,585		912,415
October 1, 2008 — October 31, 2008		416,582	$	16.77		504,167		495,833
November 1, 2008 — November 30, 2008		145,833	$	16.67		650,000		350,000
December 1, 2008 — December 31, 2008		294,801	$	16.02		944,801		55,199
January 1, 2009 — January 31, 2009		55,199	$	17.61		1,000,000		—
Total		1,000,000	$	16.68

On September 29, 2009, the Company announced that its Board of Directors had authorized the Company to repurchase up to 500,000 shares of its common stock. The share repurchase is funded using the Company’s existing cash balances and may occur either in the open market or through private transactions from time to time, in accordance with SEC regulations. The timing and extent to which the Company may buy back shares depends upon market conditions and other corporate considerations. The repurchase plan does not have an expiration date.

From inception of the program on September 29, 2009 through October 31, 2009, the Company used $2,893,000 to repurchase 220,404 shares at an average price of $13.12 per share. The following table presents the total number of shares repurchased from September 29, 2009 through October 31, 2009, the average price paid per share and the number of shares that were purchased and the maximum number of shares that may yet be purchased at October 31, 2009, pursuant to our stock repurchase program:

					Total Number		Maximum Number
					of Shares Purchased		of Shares That May
	Total Number				as Part of Publicly		Yet Be Purchased
	of Shares		Average Price		Announced Plan or		Under the Plan
Period	Purchased		Paid per Share		Program		or Program
September 29, 2009 — September 30, 2009		43,968	$	13.75		43,968		456,032
October 1, 2009 — October 31, 2009		176,436	$	12.97		220,404		279,596
Total		220,404	$	13.12

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Performance Graph

In accordance with the rules of the SEC, the following performance graph compares the performance of our common stock on the Nasdaq Global Market to the Nasdaq Global Market and to Nasdaq’s “Surgical and Medical Instruments and Supplies” Index. The following performance graph compares the cumulative total shareholder return as of the end of each of our last five fiscal years on $100 invested at the beginning of the period and assumes reinvestment of all dividends.

	Date
	10/31/04		10/31/05		10/31/06		10/31/07		10/31/08		10/31/09
Company Index		100.0		85.2		69.8		225.9		165.4		114.1
Nasdaq Market Index		100.0		108.3		121.3		144.3		89.4		83.7
Nasdaq Surgical and Medical Instruments and Supplies Index		100.0		125.2		140.8		193.5		111.6		124.0

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Item 6 — Selected Financial Data

Summary Statement of Operations Data

	For the Year Ended October 31,
	2009		2008			2007		2006			2005
	(In thousands except per share data)
Net revenue	$	58,211	$	49,800		$	37,691	$	27,743		$	24,993
Gross margin		41,767		34,144			24,370		16,435			14,077
Operating income (loss)		4,002		7,194			2,468		(3,226	)		(1,206	)
Net income (loss) from continuing operations		2,706		6,165			3,292		(862	)		(111	)
Gain on sale of discontinued operations		—		5,340			—		—			—
Income (loss) from discontinued operations		—		(20	)		518		(619	)		994
Net income (loss)	$	2,706	$	11,485		$	3,810	$	(1,481	)	$	883
Basic earnings (loss) per share
Continuing operations	$	0.23	$	0.50		$	0.27	$	(0.07	)	$	(0.01	)
Discontinued operations		0.00		0.43			0.04		(0.05	)		0.08
Net income (loss)	$	0.23	$	0.93		$	0.31	$	(0.12	)	$	0.07
Diluted earnings (loss) per share
Continuing operations	$	0.23	$	0.48		$	0.26	$	(0.07	)	$	(0.01	)
Discontinued operations		0.00		0.42			0.04		(0.05	)		0.08
Net income (loss)	$	0.23	$	0.90		$	0.30	$	(0.12	)	$	0.07
Weighted average shares outstanding
Basic		11,588		12,395			12,225		12,004			11,793
Diluted		11,827		12,721			12,528		12,004			11,998

Summary Balance Sheet Data

	At October 31,
	2009		2008		2007		2006		2005
	(In thousands)
Working capital	$	63,885	$	62,097	$	66,616	$	50,253	$	48,520
Total assets		93,720		97,401		94,677		80,540		80,243
Shareholders’ equity		86,011		89,861		86,953		77,049		76,747

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth in Part 1, Items 1A, “Risk Factors,” of this report.

Overview

Synovis Life Technologies, Inc., a diversified medical device company, develops, manufactures and markets mechanical and biological products used by several surgical specialties to facilitate the repair and reconstruction of soft tissue damaged or destroyed by disease or injury. The Company’s products include implantable biomaterials for soft tissue repair, devices for microsurgery and surgical tools — all designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes and reduce healthcare costs.

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Operating Results — Fiscal 2009 ($ in thousands except per share data)

Net revenue increased 17% during fiscal 2009 to $58,211 from $49,800 in fiscal 2008. Our operating income was $4,002 in fiscal 2009, compared to $7,194 in the prior year. The decrease in profitability was primarily due to the expense of acquired in-process research and development costs and start-up costs related to our acquisition of Synovis Orthopedic and Woundcare, Inc. (“Ortho & Wound”). Net income from continuing operations for fiscal 2009 was $2,706, or 23 cents per diluted share, compared to $6,165, or 48 cents per diluted share during fiscal 2008.

On July 17, 2009, the Company, through its wholly-owned subsidiary Synovis Orthopedic and Woundcare, Inc., (“Ortho & Wound”) acquired substantially all of the assets of Pegasus Biologics, Inc., a Delaware corporation (“Pegasus”). The acquisition resulted from a sealed bid auction process after Pegasus effectively ceased operations when attempts to raise additional operating capital were unsuccessful. Our Ortho & Wound business is focused on developing advanced biological solutions for soft tissue repair, primarily within the orthopedic and wound care markets. Synovis paid $12,100 in cash to Comerica Bank for the assets transferred. See Note 2 to the consolidated financial statements included in this report on Form 10-K for additional information.

In fiscal 2009, we had $65 of revenue from our Ortho & Wound products after obtaining the California Department of Public Health manufacturing license necessary to sell these products in the marketplace. We also incurred $1,840 of operating expenses related to the start-up of Ortho & Wound operations during the year.

The following table summarizes our net revenue by product group and geography for fiscal 2009 and fiscal 2008:

	2009		2008
Peri-Strips®	$	19,384	$	17,653
Veritas®		8,757		4,468
Tissue-Guard		15,806		14,477
Microsurgery		8,668		7,749
Surgical tools and other		5,596		5,453
Total	$	58,211	$	49,800
Domestic	$	49,290	$	42,190
International		8,921		7,610
Total	$	58,211	$	49,800

The increase in net revenue in fiscal 2009 compared to the prior-year was primarily due to the following:

•  Incremental worldwide units sold (inclusive of new product introductions) and product mix changes increased revenue approximately $6,700; and

•  Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenues by approximately $1,700.

We believe that expansion of our direct sales force is a key long-term strategy to increase revenues. During the first half of fiscal 2009, we expanded our direct sales force from 43 to 49 sales representatives in the U.S. In the second half of fiscal 2009, we further expanded our sales force by an additional 16 sales representatives. As of October 31, 2009, we had 56 direct sales representatives selling our Peri-Strips, Veritas, Tissue-Guard and Surgical tools and other products. Additionally, we have 9 direct sales representatives selling our microsurgery products.

For our Ortho & Wound products, we are in the process of establishing a hybrid sales model in the U.S. comprised of both direct sales representatives and independent distributors. We expect to hire eight direct sales representatives in the U.S. and to appoint up to 16 independent distributors in targeted U.S. territories in fiscal 2010.

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The increase in worldwide units sold was primarily attributable to our direct sales force, the expansion of our direct sales force and increased market acceptance of Veritas into the domestic hernia and general surgery markets.

We cannot fully assess the impact that the current economic downturn may have had on our results of operations during fiscal 2009. We believe, however, that the volume of certain surgical procedures in which our products are used, particularly those which may be considered elective, has been impacted by the current economic downturn. In addition, we believe the financial conditions of certain of our hospital customers have been negatively impacted by the economic downturn. These notable items, as well as other factors, may have had an impact our results of operations.

Worldwide net revenue from Peri-Strips was $19,384 in fiscal 2009, an increase of 10% from $17,653 in fiscal 2008. Peri-Strips growth rate exceeded the estimated growth of procedures in which the product is used, which we believe was attributable to product performance, our direct sales force communicating the benefits of Peri-Strips, and the increased international market penetration of PSD Veritas, partially offset by increased competition. Peri-Strips are used to reduce risks and improve patient outcomes in several procedures, with the predominant procedure being gastric bypass surgery. Included in the Peri-Strips product line was revenue from our two linear products: PSD Veritas, our remodelable buttress, and PSD Apex, our permanent buttress, as well as revenue from our PSD Veritas Circular buttress.

We believe increased market acceptance of Peri-Strips has been offset by the impact of increasing competition within the buttressing market. Covidien, one of the two primary companies which offer surgical staplers on which our Peri-Strips products are used, launched a buttress product which is supplied integral with their stapler cartridges in mid-fiscal 2009. During the second half of fiscal 2009, worldwide revenue from Peri-Strips products which are used with Covidien staplers decreased 24% from the first half of fiscal 2009. This was partially offset by revenue for Peri-Strips products used with another stapler manufacturer’s products increasing 11%. We are addressing the Covidien competitive threat by highlighting the clinical history of Peri-Strips through our expanded direct sales force, the development of product enhancements and strengthened efforts to convert additional non-buttressing surgeons.

Revenue from Veritas patch products was $8,757 in fiscal 2009, an increase of $4,289 or 96% from $4,468 in fiscal 2008. Veritas revenue growth in fiscal 2009 was primarily driven by incremental sales into the domestic hernia, reconstructive and general surgery markets. Additionally, late in the fourth quarter of fiscal 2009, we received CE Mark approval for the use of Veritas in hernia and breast reconstruction. Veritas is an extremely strong and conformable biomaterial which acts as a “scaffold” that enables rapid repopulation and revascularization by the surrounding host tissue.

Revenue from Tissue-Guard patch products was $15,806 in fiscal 2009, an increase of $1,329 or 9% from $14,477 in fiscal 2008. The fiscal 2009 increase was driven by an 8% increase in units sold worldwide. Our Tissue-Guard family of products is used to repair and replace damaged tissue in an array of surgical procedures, including cardiac, vascular, thoracic, and neurologic procedures.

Revenue from microsurgery was $8,668 in fiscal 2009, an increase of $919 or 12% from $7,749 in fiscal 2008. This revenue growth was driven by Coupler unit sales growth in the current year as well as list price increases to the Coupler in late fiscal 2008. The Coupler is a device used to connect extremely small arteries or veins, without sutures, quickly, easily and with consistently excellent results.

Our gross margin increased three percentage points to 72% in fiscal 2009 from 69% during fiscal 2008, due primarily to the following factors:

•  Favorable sales mix (both product and geographic) benefited the fiscal 2009 gross margin by nearly two percentage points.

•  Improved utilization of production resources in fiscal 2009 benefited the current-year gross margin by nearly one percentage point.

•  Higher average list selling prices for certain of our products benefited the fiscal 2009 gross margin by approximately one-half of one percentage point.

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Factors which may affect the gross margin include product and geographic mix of products sold, volume, product acquisitions and disposals, and other production activities. Accordingly, our gross margin may fluctuate from period to period based on variations in these factors.

Selling, general and administrative (“SG&A”) expense during fiscal 2009 was $29,867, an increase of $6,165 or 26% from SG&A expense of $23,702 in fiscal 2008. As a percentage of net revenue, SG&A expense was 51% in fiscal 2009 as compared to 48% in the prior year. The SG&A increase was due to the aforementioned expansion of our direct sales force in fiscal 2009, $1,840 of operating expenses related to the start-up of our newly acquired Ortho & Wound business, increased legal expense as well as general and administrative investments in new business development, clinical personnel and information technology. Additionally, stock-based compensation expense was $937 (7 cents per diluted share) in fiscal 2009, up from $509 (3 cents per diluted share) in fiscal 2008.

In fiscal 2010, we expect to incur significant additional operating expense as compared to fiscal 2009 due to a full year of expense related to our expanded sales force. In addition, we will incur a full year of Ortho & Wound operating activity as compared to three and a half months of operating activity in fiscal 2009.

Research and development (“R&D”) expense totaled $3,798 during fiscal 2009, an increase of $550 or 17% from the prior year, driven by increased project activity during the current year. Fiscal 2009 activity focused on several activities, including research to support current indications for use of Veritas, exploring potential opportunities for further expanding the indications for use of Veritas, improving the delivery system for our Peri-Strips products and advancing the technology of the Coupler, among others.

In fiscal 2010, we expect R&D expense to increase compared to fiscal 2009 due to several activities, including research to expand the indications for use for our Veritas product into new markets, providing research and clinical data to support the use of Veritas in various surgical procedures, exploring other process improvements and product enhancements for our proprietary tissue products, improving the delivery system for our Peri-Strips products, advancing the technology of the Coupler and further development of an OrthAdapt-based product and related instrumentation. R&D expense fluctuates from year to year based on the timing and progress of internal and external project-related activities and the timing of such expense will continue to be influenced primarily by the number of projects and the related R&D personnel requirements, development and regulatory approval path, and expected timing and nature of costs for each project.

In fiscal 2009, we recorded other operating expenses of $4,100. We expensed acquired in-process R&D costs of $3,500 related to our acquisition of the assets of Pegasus, as it was determined the related projects had no alternative future use. We also recorded an impairment charge of $600 related to identifiable intangible assets related to our fiscal 2007 acquisition of the 4Closure^tm Surgical Fascia Closure System (“4Closure”) following an impairment analysis. This analysis was performed as a result of a delay in the expected third quarter of fiscal 2009 re-launch and re-brand of the product, combined with actual revenues since acquisition not meeting projected expectations. No such other operating expenses were recorded in fiscal 2008.

We recorded operating income from continuing operations of $4,002 in fiscal 2009, a decrease of $3,192 compared to operating income of $7,194 in fiscal 2008. Interest income was $920 in fiscal 2009 compared with $2,077 in fiscal 2008, with the current year decrease primarily due to lower investment yields. Additionally in fiscal 2009, we sold our auction rate securities (“ARS”), which had a par value of $9,000, for $7,650, realizing a loss on sale of $1,350.

We recorded income tax expense of $866 in fiscal 2009 at an effective rate of 24.2% of pretax income. Our current year effective tax rate was comprised of a tax rate of 27.3% on operations and interest income and a 35.3% tax benefit on the capital loss of $1,350 incurred upon the sale of our ARS. In fiscal 2008, we recorded income tax expense of $3,106 at an effective rate of 33.5% on continuing operations. Our fiscal 2009 effective tax rate on operations and interest income was lower than the prior-year due to a decrease in pretax income in fiscal 2009 as compared to fiscal 2008, higher permanent differences that reduce taxes, and a lower overall rate for state taxes. The lower state tax rate was primarily due to a change in state apportionment factors caused by the current expected mix of our product sales by state. As of October 31, 2009, we recorded $367 in net current deferred income tax assets and $2,022 in net long-term deferred income tax assets.

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During fiscal 2008, we recorded a net gain on sale of our interventional business of $5,340 which reflected a pre-tax gain of $11,423 and a tax provision of $6,083. Approximately $4,100 of book basis goodwill had a tax basis of $0, thereby resulting in a higher gain for tax purposes. Additionally in fiscal 2008, we recorded a net loss related to our discontinued operations of $20. Included within the net loss from discontinued operations was an operating loss of $30 and a benefit from income taxes of $10.

Operating Results — Fiscal 2008 ($ in thousands except per share data)

Net revenue increased 32% during fiscal 2008 to $49,800 from $37,691 in fiscal 2007. Our operating income was $7,194 in fiscal 2008, compared to $2,468 in fiscal 2007. The increase in profitability was due to higher revenues and gross margins, partially offset by increased operating expenses. Net income from continuing operations for fiscal 2008 was $6,165, or 48 cents per diluted share, up from $3,292, or 26 cents per diluted share during fiscal 2007.

Net income in fiscal 2008, including the gain on sale of discontinued operations and operating results from discontinued operations, was $11,485 or 90 cents per diluted share, as compared to $3,810, or 30 cents per diluted share in fiscal 2007.

The following table summarizes our net revenue by product group and geography for fiscal 2008 and fiscal 2007:

	2008		2007
Peri-Strips®	$	17,653	$	13,788
Veritas®		4,468		1,296
Tissue-Guard		14,477		12,137
Microsurgery		7,749		5,439
Surgical tools and other		5,453		5,031
Total	$	49,800	$	37,691
Domestic	$	42,190	$	32,063
International		7,610		5,628
Total	$	49,800	$	37,691

The increase in net revenue in fiscal 2008 compared to fiscal 2007 was primarily due to the following:

•  Incremental worldwide units sold (inclusive of new product introductions) and product mix changes increased revenue approximately $10,100; and

•  Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenues by approximately $2,000.

We believe the increase in worldwide units sold was primarily attributable to increasing effectiveness of our expanded direct sales force growing domestic product sales, as well as improved international sales as a result of product realignment based upon distributor call points. In addition, revenues increased due to the fiscal 2007 introduction of products into new markets, most notably Veritas into the hernia and general surgery markets and PSD Veritas into the European market.

Worldwide net revenue from Peri-Strips was $17,653 in fiscal 2008, an increase of 28% from $13,788 in fiscal 2007. The increase was driven by our direct sales force growing product sales and the increased international revenue resulting from the introduction of PSD Veritas into the European market, which began during the third quarter of fiscal 2007.

Revenue from Veritas was $4,468, an increase of $3,172 or 245% as compared to $1,296 in fiscal 2007. The increase was driven by the introduction of Veritas into the U.S. hernia, reconstructive and general surgery markets.

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Tissue-Guard revenue increased $2,340 or 19% to $14,477 in fiscal 2008 from $12,137 in the last fiscal year. A 12% increase in worldwide Tissue-Guard units sold combined with various worldwide hospital list price increases for certain of our products in fiscal 2008 were the primary drivers of the increase.

Revenue from microsurgery was $7,749 in fiscal 2008, an increase of $2,310 or 42% from $5,439 in fiscal 2007. The increase was attributable to the expansion of the direct sales force focused on microsurgery, which has driven incremental unit growth across all products. The revenue growth was led by worldwide Coupler unit sales, which increased 41% in fiscal 2008 compared to fiscal 2007, as well as revenue from the S&T instrument product line.

Our gross margin increased four percentage points to 69% in fiscal 2008 from 65% during fiscal 2007, due primarily to the following factors:

•  Higher average list selling prices for certain of our products benefited the fiscal 2008 gross margin by approximately two percentage points.

•  Favorable sales mix (both product and geographic) benefited the fiscal 2008 gross margin by approximately one percentage point.

•  Improved utilization of production resources and increased production efficiencies improved the fiscal 2008 gross margin by approximately one percentage point.

SG&A expense during fiscal 2008 was $23,702, an increase of $4,420 or 23% from SG&A expense of $19,282 in fiscal 2007. As a percentage of net revenue, SG&A expense was 48% in fiscal 2008 as compared to 51% in fiscal 2007. The SG&A increase was driven by $3,640 of incremental sales and marketing costs, primarily attributable to the expansion of our direct sales force (which began in the third quarter of fiscal 2007 and was completed in the first quarter of fiscal 2008), various product initiatives and increased sales meeting, convention and related activities in fiscal 2008. The remainder of the increase was driven by increased general and administrative investment in new business development and technology.

R&D expense totaled $3,248 during fiscal 2008, an increase of $628 or 24% from fiscal 2007, driven by increased project activity during fiscal 2008, which were primarily focused on expanding the indications for use of Veritas, improving the delivery system for our Peri-Strips products and advancing the technology of the Coupler.

We recorded operating income from continuing operations of $7,194 in fiscal 2008, an improvement of $4,726 compared to operating income of $2,468 in fiscal 2007. Interest income was $2,077 in fiscal 2008, essentially flat compared with $2,092 in fiscal 2007. While we had a significantly higher investment balance due to the fiscal 2008 sale of our interventional business, lower market interest rates in fiscal 2008 have resulted in essentially flat interest income in fiscal 2008.

We recorded a provision for income taxes in fiscal 2008 of $3,106 at an effective tax rate of 33.5%. In fiscal 2007, we recorded income tax expense of $1,268 at an effective rate of 28%. Our effective tax rate for fiscal 2008 was closer to the statutory federal tax rate due to a lower proportion of permanent items relative to taxable income in fiscal 2008 as compared to fiscal 2007. As of October 31, 2008, we recorded $147 in net current deferred income tax liabilities and $330 in net long-term deferred income tax assets.

During fiscal 2008, we recorded a net gain on sale of our interventional business of $5,340 which reflected a pre-tax gain of $11,423 and a tax provision of $6,083. Approximately $4,100 of book basis goodwill had a tax basis of $0, thereby resulting in a higher gain for tax purposes. Additionally in fiscal 2008, we recorded a net loss related to our discontinued operations of $20. Included within the net loss from discontinued operations was an operating loss of $30 and a benefit from income taxes of $10.

Liquidity and Capital Resources ($ in thousands)

Cash, cash equivalents and investments totaled $60,749 as of October 31, 2009, a decrease of $14,039 as compared to cash, cash equivalents, investments and restricted cash of $74,788 as of October 31, 2008. Included in the above, we have $5,926 of investments classified as non-current as of October 31, 2009. Working capital at October 31, 2009 and October 31, 2008 was $63,885 and $62,097, respectively. We have

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no long-term debt. We currently expect our cash on hand and cash from operations to be sufficient to cover both of our short-and long-term operating requirements, subject however, to numerous variables, including acquisition opportunities, research and development priorities and the growth and profitability of the business.

The decrease in cash, cash equivalents and investments in fiscal 2009 was primarily due to the use of cash of $12,319 related to the acquisition of substantially all of the assets of Pegasus in the third quarter of fiscal 2009. Additionally, we used cash of $11,018 to repurchase 716,237 shares of our common stock in fiscal 2009. The use of cash was partially offset by cash provided by operating activities of $9,794 in fiscal 2009.

Operating activities provided cash of $9,794 in fiscal 2009, as compared to providing cash of $1,421 during fiscal 2008. Fiscal 2009 net income of $2,706 included $6,986 in non-cash expenses, with the most significant of these non-cash items being $3,500 in acquired in-process R&D expense and the $1,350 loss on ARS sale. Working capital changes provided cash of $102 in fiscal 2009, driven by increased accrued income taxes of $2,085, partially offset by $953 in cash used for increased accounts receivable to support higher revenue levels. Cash flow from operating activities from continuing operations was approximately $5,700 in fiscal 2008, while operating cash flows from discontinued operations used cash of approximately $4,300 during fiscal 2008.

Investing activities used cash of $30,786 during fiscal 2009 compared to cash provided of $42,720 during fiscal 2008. In fiscal 2009, we used cash of $12,319 for the acquisition of substantially all of the assets of Pegasus. We also used cash of $19,821 towards the net purchase short- and long-term municipal bonds as part of our investment strategy, as compared to net proceeds from the sale of investments of $16,563 in the prior year. Additionally in fiscal 2009, $2,950 of cash was provided by the release from escrow of our restricted cash pertaining to our sale of the interventional business. We also recorded $1,156 in purchases of property, plant and equipment in fiscal 2009, compared to purchases of $990 in fiscal 2008. Additionally in fiscal 2008, we recorded $30,440 in proceeds from the sale of the interventional business.

Financing activities used cash of $10,040 during fiscal 2009. $11,018 of cash was used to repurchase 716,237 shares of common stock, partially offset by $978 of proceeds from equity-based compensation plans. Financing activities used cash of $6,824 during fiscal 2008. $8,549 of cash was used to repurchase 504,167 shares of common stock, partially offset by $1,725 of proceeds from equity-based compensation plans.

In October 2009, we sold our ARS, which had a par value of $9,000, for $7,650, recording a loss on sale of $1,350. Should a regulatory or other settlement occur during the 24 months subsequent to the date of ARS sale in which the Company would have otherwise been eligible to tender any of its ARS, the Company will be entitled to an additional payment of the amount the Company would have received in such settlement that is in excess of the amount of sales proceeds received by the Company up to the securities par value. We are presently not aware of any regulatory or other settlement involving ARS in which we would be eligible to participate, nor do we expect any such settlement in the future.

The following table summarizes our contractual obligations and operating leases. For more information, see Note 8 to our Consolidated Financial Statements. Our commitments under these obligations are as follows for the fiscal year ending October 31:

	< 1 Year		1-3 Years		3-5 Years		5 < Years		Total
Operating leases	$	1,022	$	2,001	$	862	$	—	$	3,885

Inflation

We believe inflation has not had a material effect on our operations or financial condition.

Foreign Currency Transactions

Substantially all of our foreign transactions are negotiated, invoiced and paid in U.S. dollars. Fluctuations in currency exchange rates in other countries may therefore influence the demand for our products by changing the price of our products as denominated in the currency of the countries in which the products are sold.

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Recent Accounting Standards ($ in thousands)

In June 2009, the Financial Accounting Standards Board (“FASB”) issued and established its Accounting Standards Codification (“ASC”) as the exclusive authoritative reference for nongovernmental U.S. Generally Accepted Accounting Principles (“GAAP”) for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretative releases, which are also authoritative for SEC registrants. Accordingly, the Company has adopted the ASC effective for its fourth quarter 2009 financial reporting. All references in this Annual Report on Form 10-K to U.S. GAAP principles have been changed to reference the relevant topic from the FASB ASC. The adoption did not have a material impact on the Company’s consolidated financial statements.

Effective November 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), related to the Company’s financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets and liabilities.

Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

ASC 820 also provides guidance for determining the fair value of a financial asset when the market for that asset is not active, and for determining fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate when a transaction is not orderly. The adoption of ASC 820 did not have a material impact on the Company’s financial condition or results of operations.

The effective date for certain aspects of ASC 820 was deferred and are currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. The effects of these remaining aspects of ASC 820 are to be applied by the Company to fair value measurements prospectively beginning November 1, 2009. The adoption of the remaining aspects of ASC 820 is not expected to have a material impact on its financial condition or results of operations.

Effective November 1, 2008, the Company adopted certain aspects of ASC 825, Financial Instruments (“ASC 825”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The Company has not elected the fair value option for any financial assets or liabilities as of October 31, 2009. The adoption of ASC 825 did not have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued ASC 805, Business Combinations (“ASC 805”). ASC 805 changes how a reporting enterprise will account for the acquisition of a business. ASC 805 will apply prospectively to business combinations with an acquisition date on or after November 1, 2009. The adoption of ASC 805 is not expected to have a material impact on the Company’s financial condition or results of operations, however future acquisitions would be accounted for under this guidance.

In May 2009, the FASB issued ASC 855, Subsequent Events (“ASC 855”), which provides guidance on management’s assessment of subsequent events. The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. ASC 855 is not expected to significantly change practice because its guidance is similar to that in U.S. auditing literature, which the Company relied on previously for guidance on assessing and disclosing subsequent events. ASC 855 is effective for the Company for interim periods and fiscal years beginning after May 1, 2009. The Company has evaluated its financial statements as of October 31, 2009 for subsequent events through January 5, 2010, the date the financial

27

statements were available to be issued. Other than the November 12, 2009 settlement with W.L. Gore & Associates, Inc., the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

Critical Accounting Policies ($ in thousands)

Investments:  Our investments consist of tax-exempt municipal bond investments. Our investment policy seeks to manage these assets to achieve our goal of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. We account for all of our investments as “available-for-sale” and report these investments at fair value, with unrealized gains and losses excluded from earnings and reported in “Accumulated Other Comprehensive Income (Loss),” a component of shareholders’ equity. At October 31, 2009, we recorded an unrealized gain on other investments of $92, which was reflected as Accumulated Other Comprehensive Income (Loss) at October 31, 2009. At October 31, 2008, the Company recorded an unrealized loss of $2,429 on the valuation of its ARS, along with an unrealized gain on other investments of $22, which was reflected as a net Accumulated Other Comprehensive Loss of $2,407 at October 31, 2008.

We review our investments for impairment to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders’ equity. Such unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. We recorded a loss on sale of ARS of $1,350 in our consolidated statement of operations for the year ended October 31, 2009. See Note 6 to the consolidated financial statements included in this report on Form 10-K for additional investment information.

Accounts Receivable:  Credit is extended based on evaluation of a customer’s financial condition, historical sales and payment history. Generally, collateral is not required. Accounts receivable are generally due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Indefinite-lived Intangible Assets:  Indefinite-lived intangible assets consist of goodwill, which is carried at cost. The Company accounts for goodwill under ASC 350, Intangibles, Goodwill and Other (“ASC 350”), which prohibits the amortization of indefinite-lived intangible assets, and requires that these assets are reviewed annually for impairment, and between annual test dates in certain circumstances. We typically perform our annual impairment test for goodwill in the fourth quarter of each fiscal year, or more often as circumstances require. In assessing the recoverability of goodwill, estimates of market capitalization and other factors are made to determine the fair value of the respective assets. If these estimates change in the future, we may be required to record impairment charges for these assets. ASC 350 requires us to compare the fair value of the Company to its carrying amount to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the Company is less than their carrying value. If the carrying amount of the goodwill exceeds their fair value, an impairment loss is recognized.

Definite-lived Intangible Assets:  Definite-lived intangible assets consist of patents, trademarks, developed technology, non-competes and licenses, which are carried at amortized cost. The Company reviews its definite-lived intangible assets whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses recoverability by reference to future cash flows from the products underlying these intangible assets.

Revenue Recognition:  Our policy is to ship products to customers on FOB shipping point terms. We recognize revenue when the product has been shipped to the customer, when there is evidence that the customer has agreed to purchase the products, delivery and performance have occurred, the price and terms of

28

sale are fixed and collection of the receivable is expected. All amounts billed to customers in a sales transaction related to shipping and handling are classified as net revenue. Our sales policy does not allow sales returns.

Inventories:  Inventories, which are comprised of raw materials, work in process and finished goods, are valued at the lower of cost, first-in, first-out (“FIFO”) or market. Overhead costs are applied to work in process and finished goods based on annual estimates of production volumes and overhead spending. These estimates are reviewed and assessed for reasonableness on a quarterly basis and adjusted as needed. The estimated value of excess, slow-moving and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value is established by us on a quarterly basis through review of inventory on hand and assessment of future product demand, anticipated release of new products into the market, historical experience and product expiration.

Stock-Based Compensation:  The Company accounts for stock based payment awards in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). The Company recognizes stock-based compensation based on certain assumption inputs within the Black-Scholes Model. These assumption inputs are used to determine an estimated fair value of stock based payment awards on the date of grant and require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation on a regular basis. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination.

Income Taxes:  We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes (“temporary differences”). Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. See Note 7 to the consolidated financial statements in this Report on Form 10-K for a summary of our temporary differences.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Derivative Instruments and Hedging Activities:  We may enter into derivative instruments or perform hedging activities. All derivatives are recognized on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in shareholders’ equity through other comprehensive income until the hedged item is recognized. It is our policy to enter into derivative transactions only to the extent true exposures exist. We do not enter into derivative transactions for speculative or trading purposes.

Item 7A — Quantitative and Qualitative Disclosures about Market Risk

We maintain financial instruments in cash and cash equivalents, investments and accounts receivable. We believe that the interest rate, credit and market risk related to these accounts is not significant. We manage the risk associated with these accounts through periodic reviews of the carrying value for non-collectability of assets and establishment of appropriate allowances in connection with our internal controls and policies. We may enter into derivative instruments or perform hedging activities. However, our policy is to only enter into contracts that can be designated as normal purchases or sales.

29

Item 8 — Financial Statements and Supplementary Data

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Synovis Life Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Synovis Life Technologies, Inc. and Subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended October 31, 2009. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synovis Life Technologies, Inc. and Subsidiaries as of October 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Synovis Life Technologies Inc. and Subsidiaries’ internal control over financial reporting as of October 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated January 5, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  Grant Thornton

Minneapolis, Minnesota

January 5, 2010

30

Board of Directors and Shareholders
Synovis Life Technologies, Inc.

We have audited Synovis Life Technologies, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of October 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Synovis Life Technologies, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Synovis Life Technologies, Inc. and Subsidiaries as of October 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows and financial statement schedule for each of the three years in the period ended October 31, 2009, and our report dated January 5, 2010 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/  Grant Thornton

Minneapolis, Minnesota

January 5, 2010

31

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Fiscal Years Ended
	October 31,
	2009			2008			2007
	(In thousands, except
	per share data)
Net revenue	$	58,211		$	49,800		$	37,691
Cost of revenue		16,444			15,656			13,321
Gross margin		41,767			34,144			24,370
Operating expenses:
Selling, general and administrative		29,867			23,702			19,282
Research and development		3,798			3,248			2,620
Other		4,100			—			—
Operating expenses		37,765			26,950			21,902
Operating income		4,002			7,194			2,468
Interest income		920			2,077			2,092
Loss on sale of investments		(1,350	)		—			—
Income from continuing operations before provision for income taxes		3,572			9,271			4,560
Provision for income taxes		866			3,106			1,268
Net income from continuing operations		2,706			6,165			3,292
Discontinued operations:
Income (loss) from operations of discontinued business, net of tax (benefit) provision of ($10) and $297, respectively		—			(20	)		518
Gain on sale of discontinued operations, net of taxes of $6,083		—			5,340			—
Net income	$	2,706		$	11,485		$	3,810
Basic earnings per share:
— Continuing operations	$	0.23		$	0.50		$	0.27
— Discontinued operations		—			0.43			0.04
Basic earnings per share	$	0.23		$	0.93		$	0.31
Diluted earnings per share:
— Continuing operations	$	0.23		$	0.48		$	0.26
— Discontinued operations		—			0.42			0.04
Diluted earnings per share	$	0.23		$	0.90		$	0.30
Weighted average common shares outstanding:
— Basic		11,588			12,395			12,225
— Diluted		11,827			12,721			12,528

The accompanying notes are an integral part of these consolidated financial statements

32

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

	As of October 31,
	2009		2008
	(In thousands, except
	share and per
	share data)
ASSETS
Current assets:
Cash and cash equivalents	$	15,863	$	46,895
Restricted cash		—		2,950
Short-term investments		38,960		5,598
Accounts receivable, net		6,925		6,071
Inventories		7,724		5,733
Deferred income tax asset, net		367		—
Other current assets		1,755		2,390
Total current assets		71,594		69,637
Investments, net		5,926		19,345
Property, plant and equipment, net		3,719		2,931
Goodwill		3,618		3,283
Other intangible assets, net		6,841		1,875
Deferred income tax asset, net		2,022		330
Total assets	$	93,720	$	97,401
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,962	$	1,325
Accrued expenses		5,747		6,068
Deferred income tax liability, net		—		147
Total current liabilities		7,709		7,540
Total liabilities		7,709		7,540
Commitments and contingencies (Note 8)		—		—
Shareholders’ equity:
Preferred stock: authorized 5,000,000 shares of $0.01 par value; none issued or outstanding as of October 31, 2009 and 2008		—		—
Common stock: authorized 20,000,000 shares of $0.01 par value; issued and outstanding, 11,398,874 and 12,018,670 as of October 31, 2009 and 2008, respectively		114		120
Additional paid-in capital		63,132		72,181
Accumulated other comprehensive income (loss)		92		(2,407	)
Retained earnings		22,673		19,967
Total shareholders’ equity		86,011		89,861
Total liabilities and shareholders’ equity	$	93,720	$	97,401

The accompanying notes are an integral part of these consolidated financial statements

33

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

										Accumulated
							Additional			Other
	Common Stock						Paid-In			Comprehensive			Retained
	Shares			Par Value			Capital			Income (Loss)			Earnings		Total
	(In thousands, except share data)
Balance as of October 31, 2006		12,101,253			121			75,132			—			4,672		79,925
Stock option exercises, including tax benefit		250,283			3			2,562			—			—		2,565
Employee Stock Purchase Plan activity		7,766			—			114			—			—		114
Stock-based compensation expense		—			—			539			—			—		539
Net and comprehensive income		—			—			—			—			3,810		3,810
Balance as of October 31, 2007		12,359,302			124			78,347			—			8,482		86,953
Stock option exercises, including tax benefit		158,635			1			1,789			—			—		1,790
Employee Stock Purchase Plan activity		4,900			—			80			—			—		80
Repurchase of the Company’s common stock		(504,167	)		(5	)		(8,544	)		—			—		(8,549	)
Stock-based compensation expense		—			—			509			—			—		509
Comprehensive Income:
Net unrealized loss on investments		—			—			—			(2,407	)		—		(2,407	)
Net income		—			—			—			—			11,485		11,485
Comprehensive income		—			—			—			—			—		9,078
Balance as of October 31, 2008		12,018,670		$	120		$	72,181		$	(2,407	)	$	19,967	$	89,861
Stock option exercises, including tax benefit		89,376			1			927			—			—		928
Employee Stock Purchase Plan activity		7,065			—			98			—			—		98
Repurchase of the Company’s common stock		(716,237	)		(7	)		(11,011	)		—			—		(11,018	)
Stock-based compensation expense		—			—			937			—			—		937
Comprehensive Income:
Net unrealized gain on investments		—			—			—			2,499			—		2,499
Net income		—			—			—			—			2,706		2,706
Comprehensive income		—			—			—			—			—		5,205
Balance as of October 31, 2009		11,398,874		$	114		$	63,132		$	92		$	22,673	$	86,011

The accompanying notes are an integral part of these consolidated financial statements

34

SYNOVIS LIFE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Fiscal Years Ended
	October 31,
	2009			2008			2007
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,706		$	11,485		$	3,810
Adjustments to reconcile net income to net cash provided by operating activities:
Acquired in-process research and development expense		3,500			—			—
Loss on sale of investments		1,350			—			—
Impairment of intangible assets		600			—			—
Gain on sale of interventional business		—			(5,340	)		—
Depreciation and amortization of property, plant and equipment		1,017			1,897			3,905
Amortization of intangible assets		539			462			482
Amortization of investment premium, net		1,027			187			17
Loss (gain) on sale or disposal of manufacturing equipment		25			10			(5	)
Provision for uncollectible accounts		149			134			94
Stock-based compensation		937			509			539
Tax benefit from stock option exercises		48			145			424
Deferred income taxes		(2,206	)		644			73
Changes in operating assets and liabilities:
Accounts receivable		(953	)		(627	)		(2,118	)
Inventories		62			(634	)		(1,392	)
Other current assets		677			(1,447	)		631
Accounts payable		637			(381	)		480
Accrued expenses		(321	)		(5,623	)		1,579
Net cash provided by operating activities		9,794			1,421			8,519
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(1,156	)		(990	)		(1,747	)
Investments in identifiable intangible assets		(105	)		(46	)		(68	)
Purchase of assets of Pegasus Biologics, Inc.		(12,319	)		—			—
Proceeds from sale of interventional business		—			30,440			—
Decrease (increase) in restricted cash		2,950			(2,950	)		—
Purchase of 4Closuretm Surgical Fascia Closure System		—			—			(2,056	)
Purchases of investments		(43,226	)		(60,019	)		(46,546	)
Redemptions of investments		23,405			76,582			42,355
Other		(335	)		(297	)		(187	)
Net cash (used in) provided by investing activities		(30,786	)		42,720			(8,249	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans		823			1,429			1,880
Repurchase of the Company’s common stock		(11,018	)		(8,549	)		—
Excess tax benefit of stock option exercises		155			296			375
Net cash (used in) provided by financing activities		(10,040	)		(6,824	)		2,255
Net change in cash and cash equivalents		(31,032	)		37,317			2,525
Cash and cash equivalents at beginning of year		46,895			9,578			7,053
Cash and cash equivalents at end of year	$	15,863		$	46,895		$	9,578

The accompanying notes are an integral part of these consolidated financial statements

35

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Business Description and Summary of Significant Accounting Policies (in thousands):

Synovis Life Technologies, Inc. develops, manufactures and markets mechanical and biological products used by several surgical specialties for the repair of soft tissue damaged or destroyed by disease or injury. The company’s products are designed to reduce risks and/or facilitate critical surgeries, improve patient outcomes and reduce healthcare costs. Our products serve a wide array of medical markets, including general surgery, bariatric, vascular, cardiac, thoracic, neurological, microsurgery, orthopedic and woundcare.

As discussed in Note 3 to our consolidated financial statements, the Company completed the sale of substantially all of the assets of its interventional business on January 31, 2008. The pre-tax gain on the sale totaled $11,423. Income taxes recorded on the gain were $6,083, resulting in a net gain of $5,340. The Company also recorded a net loss related to the operation of discontinued operations in fiscal 2008 of $20.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued and established its Accounting Standards Codification (“ASC”) as the exclusive authoritative reference for nongovernmental U.S. Generally Accepted Accounting Principles (“GAAP”) for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretative releases, which are also authoritative for SEC registrants. Accordingly, the Company has adopted the ASC effective for its fourth quarter 2009 financial reporting. All references in this Annual Report on Form 10-K to U.S. GAAP principles have been changed to reference the relevant topic from the FASB ASC. The adoption did not have a material impact on the Company’s consolidated financial statements.

Basis of Consolidation:  The consolidated financial statements include the accounts of Synovis Life Technologies, Inc. and its wholly owned subsidiaries, after elimination of intercompany accounts and transactions.

Use of Estimates:  The preparation of consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents:  Cash and cash equivalents consist of cash and highly liquid investments purchased with an original maturity of three months or less when purchased. These investments are carried at cost, which approximates fair value. Cash amounts typically are in excess of federally insured limits.

Investments:  Our investments consist of tax-exempt municipal bond investments. Our investment policy is to seek to manage these assets to achieve our goal of preserving principal, maintaining adequate liquidity at all times, and maximizing returns subject to our investment guidelines. We account for all of our investments as “available-for-sale” and report these investments at fair value, with unrealized gains and losses excluded from earnings and reported in “Accumulated Other Comprehensive Income,” a component of shareholders’ equity.

We review our investments for impairment to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders’ equity. Such unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. See Note 6 to the consolidated financial statements included in this report on Form 10-K for additional investment information.

Accounts Receivable:  Credit is extended based on evaluation of a customer’s financial condition, historical sales and payment history. Generally, collateral is not required. Accounts receivable are generally due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including

36

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Inventories:  Inventories, which are comprised of raw materials, work in process and finished goods, are valued at the lower of cost, first-in, first-out (“FIFO”) or market. Overhead costs are applied to work in process and finished goods based on annual estimates of production volume and overhead spending. These estimates are reviewed and assessed for reasonableness on a quarterly basis and adjusted if so needed. The estimated value of excess, slow-moving and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value is established on a quarterly basis through review of inventory on hand and assessment of future product demand, anticipated release of new products into the market, historical experience and product expiration.

Property, Plant and Equipment:  Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the related assets. Furniture, fixtures and computer equipment are depreciated over a 3 to 7 year life, and manufacturing equipment is depreciated over a 5 to 10 year life. Amortization of leasehold improvements is recorded on a straight-line basis over the life of the related facility leases or the estimated useful life of the assets, whichever is shorter. Major replacements and improvements are capitalized and maintenance and repairs, which do not improve or extend the useful lives of the respective assets, are charged to operations. The asset and related accumulated depreciation or amortization accounts are adjusted for asset retirements and disposals with the resulting gain or loss, if any, recorded in the Consolidated Statements of Operations at the time of disposal. The Company’s long-lived depreciable assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. Impairment losses are recorded whenever indicators of impairment are present.

Indefinite-lived Intangible Assets:  Indefinite-lived intangible assets consist of goodwill, which is carried at cost. The Company accounts for goodwill under ASC 350, Intangibles, Goodwill and Other (“ASC 350”), which prohibits the amortization of indefinite-lived intangible assets, and requires that these assets are reviewed annually for impairment, and between annual test dates in certain circumstances. We typically perform our annual impairment test for goodwill in the fourth quarter of each fiscal year, or at other periods as circumstances require. In assessing the recoverability of goodwill, estimates of market capitalization and other factors are made to determine the fair value of the respective assets. If these estimates change in the future, we may be required to record impairment charges for these assets. ASC 350 requires us to compare the fair value of the Company to its carrying amount to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the Company is less than their carrying value. If the carrying amount of the goodwill exceeds their fair value, an impairment loss is recognized.

Definite-lived Intangible Assets:  Definite-lived intangible assets consist of patents, trademarks, developed technology, non-competes and licenses, which are carried at amortized cost. The Company reviews its definite-lived intangible assets whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses recoverability by reference to future cash flows from the products underlying these intangible assets.

Revenue Recognition:  Our policy is to ship products to customers on FOB shipping point terms. We recognize revenue when the product has been shipped to the customer, when there is evidence that the customer has agreed to purchase the products, delivery and performance have occurred, the price and terms of sale are fixed and collection of the receivable is expected. All amounts billed to customers in a sales transaction related to shipping and handling are classified as net revenue. Our sales policy does not allow sales returns.

37

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shipping and Handling:  The Company records all amounts billed to customers in a sales transaction related to shipping and handling as net revenue. The Company records costs related to shipping and handling in cost of revenue.

Derivative Instruments and Hedging Activities:  The Company may enter into derivative instruments or perform hedging activities. All derivatives are recognized on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in shareholders’ equity through other comprehensive income until the hedged item is recognized. It is the Company’s policy to enter into derivative transactions only to the extent true exposures exist. The Company does not enter into derivative transactions for speculative or trading purposes.

Research and Development:  Research and development costs are expensed as incurred.

Stock-Based Compensation:  The Company accounts for stock based payment awards in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). The Company recognizes stock-based compensation based on certain assumption inputs within the Black-Scholes Model. These assumption inputs are used to determine an estimated fair value of stock based payment awards on the date of grant and require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation on a regular basis. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. See Note 9 for additional stock-based compensation information.

Income Taxes:  We account for income taxes using the asset and liability method. The asset and liability method provides that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes (“temporary differences”). Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. See Note 7 to the consolidated financial statements in this Report on Form 10-K for a summary of our temporary differences.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Net Earnings (Loss) Per Share:  Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding, while diluted EPS is computed based on the weighted average number of common shares outstanding adjusted by the weighted average number of additional shares that would have been outstanding had the potential dilutive common shares been issued. Potential dilutive shares of common stock include stock options and other stock-based awards granted under the Company’s stock-based compensation plans, when their impact is not anti-dilutive. See Note 10 for additional earnings per share information.

Reclassifications:  Certain reclassifications have been made to the fiscal 2007 and fiscal 2008 consolidated financial statements to conform with the fiscal 2009 presentation. These reclassifications had no effect on net income or earnings per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recent Accounting Standards:

Effective November 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), related to the Company’s financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets and liabilities.

Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

ASC 820 also provides guidance for determining the fair value of a financial asset when the market for that asset is not active, and for determining fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate when a transaction is not orderly. The adoption of ASC 820 did not have a material impact on the Company’s financial condition or results of operations.

The effective date for certain aspects of ASC 820 was deferred and are currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. The effects of these remaining aspects of ASC 820 are to be applied by the Company to fair value measurements prospectively beginning November 1, 2009. The adoption of the remaining aspects of ASC 820 is not expected to have a material impact on its financial condition or results of operations. See Note 6 to the consolidated financial statements in this Report on Form 10-K for additional investment information.

Effective November 1, 2008, the Company adopted certain aspects of ASC 825, Financial Instruments (“ASC 825”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The Company has not elected the fair value option for any financial assets or liabilities as of October 31, 2009. The adoption of ASC 825 did not have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued ASC 805, Business Combinations (“ASC 805”). ASC 805 changes how a reporting enterprise will account for the acquisition of a business. ASC 805 will apply prospectively to business combinations with an acquisition date on or after November 1, 2009. The adoption of ASC 805 is not expected to have a material impact on the Company’s financial condition or results of operations, however future acquisitions would be accounted for under this guidance.

In May 2009, the FASB issued ASC 855, Subsequent Events (“ASC 855”), which provides guidance on management’s assessment of subsequent events. The new standard clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. ASC 855 is not expected to significantly change practice because its guidance is similar to that in U.S. auditing literature, which the Company relied on previously for guidance on assessing and disclosing subsequent events. ASC 855 is effective for the Company for interim periods and fiscal years beginning after May 1, 2009. The Company has evaluated its financial statements as of October 31, 2009 for subsequent events through January 5, 2010, the date the financial statements were available to be issued. Other than the November 12, 2009 settlement with W.L. Gore & Associates, Inc., the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   Acquisition of Businesses (in thousands):

On July 17, 2009, the Company, through its wholly-owned subsidiary Synovis Orthopedic and Woundcare, Inc., (“Ortho & Wound”) completed the acquisition of substantially all of the assets of Pegasus Biologics, Inc., a Delaware corporation (“Pegasus”), from Comerica Bank (“Comerica”) pursuant to a Foreclosure Sale Agreement with Comerica dated as of July 2, 2009 (the “Foreclosure Sale Agreement”). The acquisition resulted from a sealed bid auction process after Pegasus effectively ceased operations when attempts to raise additional operating capital were unsuccessful. Pegasus, a privately held medical device company based in Irvine, California, focused on the development of advanced biological solutions for soft tissue repair.

Synovis paid $12,100 in cash to Comerica for the assets transferred. Synovis purchased the assets on an “as is,” “where is” basis and without recourse, subject to the representations and warranties provided for in the Foreclosure Sales Agreement.

Operating results for Ortho & Wound from July 17, 2009 to October 31, 2009 are included in the Consolidated Statement of Operations for the fiscal year ended October 31, 2009. The assets acquired in the transaction are included in the Company’s Consolidated Balance Sheet as of October 31, 2009 and the purchase transaction has been included in the Consolidated Statement of Cash Flows for the fiscal year ended October 31, 2009.

The Company accounted for the acquisition of substantially all of the assets of Pegasus under the purchase method of accounting. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired based on the Company’s determination of fair value at the acquisition date, and are consolidated with those of the Company. The purchase price allocation was based upon preliminary estimates of the fair value of the assets acquired. Determination of fair value required the use of significant assumptions and estimates, including but not limited to, expected utilization of acquired inventory, future expected cash flows and applicable discount rates. The Company used the income approach to determine the fair value of the acquired intangible assets. The purchase price allocation will be finalized once the Company has all the necessary information to complete its estimate, but no later than one year from the acquisition date.

The following provides further information on the preliminary purchase price allocations:

Purchase Price

Cash payment	$	12,100
Acquisition related costs		219
Total consideration	$	12,319

Preliminary Purchase Price Allocation

Accounts receivable	$	50
Inventory		2,053
Other current assets		42
Property and equipment		674
Identifiable intangible assets
— Developed technology		6,000
— Acquired in-process research and development		3,500
Assets acquired	$	12,319

In accordance with GAAP, the Company expensed the acquired in-process research and development costs of $3,500 in fiscal 2009. This expense was recorded as “other” operating expense in the Consolidated Statement of Operations. The Company assigned an eleven year weighted average amortization period to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

identifiable developed technology assets. As the Company assigned the entire purchase price to tangible and identifiable intangible assets, none of the preliminary purchase price was allocated to goodwill.

Pro Forma Results of Operations:

The following unaudited pro forma financial information presents a summary of consolidated results of operations of the Company as if the acquisition of the assets of Pegasus had occurred at the beginning of the earliest period presented. The unaudited pro forma results presented below assume the in-process research and development expense of $3,500 occurred as of November 1, 2006. Annual amortization expense of $545 related to acquired developed technology is reflected on a pro rata basis in each of the periods presented. The historical consolidated financial information has been adjusted to give effect to pro forma events that are directly attributable to the acquisition and are factually supportable. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed at the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of the Company after completion of the acquisition.

The following provides unaudited pro forma financial information for the fiscal years ended October 31, 2009, 2008 and 2007, assuming the Company consummated the purchase of the assets from Pegasus as of November 1, 2006:

	Fiscal Year			Fiscal Year		Fiscal Year
	Ended			Ended		Ended
	October 31,			October 31,		October 31,
	2009			2008		2007
Net revenue	$	61,853		$	58,924	$	45,014
Net income (loss)	$	(1,886	)	$	2,070	$	(4,120	)
Net income (loss) per share — basic	$	($0.16	)	$	$0.17	$	($0.33	)
Net income (loss) per share — diluted	$	($0.16	)	$	$0.17	$	($0.33	)

In April 2007, the Company purchased the 4Closure^tm Surgical Fascia Closure System (“4Closure System”) from Fascia Closure Systems, LLC. The 4Closure System is a device and operating method for closure of punctures in the fascia, a layer of connective tissue on the inner surface of the chest or abdominal wall, following laparoscopic procedures which use larger diameter operating ports or trocars. The device is authorized for sale in the United States and has a patent pending. The purchase price was a cash payment of $2,000 plus certain additional milestone payments of $500 each to be paid upon achieving cumulative net sales of the 4Closure System equal to $2,500, $5,000, $7,500, $10,000 and $12,500. In addition, a royalty payment will be paid in the amount of 5 percent of net sales of the 4Closure System through April 2019.

Approximately $1,000 of the original purchase price was allocated to identifiable intangible assets to be amortized on a straight-line basis over an estimated average useful life of nine years. The remaining amount of the purchase price was recorded as goodwill. Additional milestone payments to the seller will be recorded as additional goodwill when earned.

Operating results of the 4Closure System from April 3, 2007 are included in the Consolidated Statement of Operations for the fiscal years ended October 31, 2009, 2008 and 2007.

Pro forma combined financial information for the fiscal year ended October 31, 2007 have not been provided as the historical operating results of Fascia Closure Systems, LLC are not considered significant in relation to the Company’s results for the period then ended.

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SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.   Discontinued Operations (in thousands):

On January 31, 2008, the Company sold substantially all of the assets of Synovis’ interventional business to Heraeus Vadnais, Inc. and its related entities (“Heraeus”), pursuant to an Asset Purchase Agreement dated January 8, 2008. Synovis’ interventional business developed and manufactured metal and polymer components and assemblies used in or with implantable or minimally invasive devices for cardiac rhythm management, neurostimulation, vascular and other procedures, and had facilities located in Lino Lakes, Minnesota and Dorado, Puerto Rico. The decision to sell the interventional business resulted from the Company’s determination to focus its attention and resources on opportunities in its surgical markets.

The primary terms of the sale included the following:

•  Heraeus paid Synovis $30,440 in cash (the “Purchase Price”) for substantially all of the assets (including receivables, inventory, fixed assets and intellectual property) and assumed certain operating liabilities of the interventional business. This was comprised of an initial payment of $29,500 on January 31, 2008, plus a working capital adjustment payment of $940, which was received by the Company during our second quarter of fiscal 2008.

•  $2,950 of the Purchase Price was placed in escrow until July 31, 2009 to cover certain post-closing covenants and potential indemnification obligations. The escrow amount is included in our net gain from the sale, and was recorded as restricted cash on our balance sheet as of October 31, 2008.

The Company recorded a pretax gain of $11,423 and a provision for income taxes of $6,083, resulting in a net gain on sale of $5,340. The net gain was computed as follows:

Carrying values of net assets transferred to Heraeus:

Accounts receivable	$	3,186
Inventories		4,843
Other assets		208
Property, plant and equipment		6,381
Other intangible assets		4,269
Accounts payable and accrued liabilities		(479	)
Total	$	18,408
Cash proceeds received from Heraeus, including escrow	$	30,440
Net assets sold		(18,408	)
Transaction costs		(609	)
Pre-tax gain on sale of discontinued operations		11,423
Tax provision for gain on sale of discontinued operations		6,083
Net gain on sale of discontinued operations	$	5,340

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SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating results related to the divested operations for fiscal 2008 and fiscal 2007 have been reclassified and are presented in the Company’s consolidated statements of operations as discontinued operations, as summarized below:

	For the Fiscal Years Ended
	October 31,
	2008			2007
Net revenue	$	7,907		$	30,183
Cost of revenue		6,361			23,265
Gross margin		1,546			6,918
Operating expenses		1,576			6,103
Operating income (loss) from discontinued operations		(30	)		815
Provision for (benefit from) income taxes		(10	)		297
Net income (loss) from discontinued operations	$	(20	)	$	518

4.   Supplemental Financial Statement Information (in thousands):

We operate as one segment as a developer, manufacturer and seller of medical devices.

	As of October 31,
	2009			2008
Accounts receivable, net:
Trade receivables	$	7,269		$	6,341
Allowance for doubtful accounts		(344	)		(270	)
	$	6,925		$	6,071
Inventories:
Finished goods	$	2,793		$	1,660
Work in process		3,573			2,932
Raw materials		1,358			1,141
	$	7,724		$	5,733
Property, plant and equipment, net:
Furniture, fixtures, and computer equipment	$	3,180		$	3,204
Manufacturing equipment		5,071			4,427
Leasehold improvements		3,110			2,889
Equipment in process		697			489
Accumulated depreciation and amortization		(8,339	)		(8,078	)
	$	3,719		$	2,931
Accrued expenses:
Payroll, employee benefits and related taxes	$	3,081		$	3,282
Accrued income taxes		1,128			—
Accrued stock repurchases		198			1,154
Other accrued expenses		1,340			1,632
	$	5,747		$	6,068

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Supplemental Cash Flow Information:  Income tax payments made by the Company totaled $850, $8,599 and $566 for the years ended October 31, 2009, 2008 and 2007, respectively. Income tax refunds received by the Company totaled $118, $95 and $32 for the years ended October 31, 2009, 2008 and 2007, respectively.

The following table summarizes the Company’s amortizable intangible assets as of:

	October 31, 2009
					Weighted
	Gross				Average
	Carrying		Accumulated		Amortization
	Amount		Amortization		Period
Patents and trademarks	$	1,187	$	600		13	.9 years
Developed technology		7,418		1,283		10	.8 years
Non-competes and other		634		612		5	.7 years
Licenses		100		3		11	.0 years
Total	$	9,339	$	2,498

	October 31, 2008
					Weighted
	Gross				Average
	Carrying		Accumulated		Amortization
	Amount		Amortization		Period
Patents and trademarks	$	1,182	$	515		13	.8 years
Developed technology		1,952		945		10	.0 years
Non-competes and other		700		499		5	.6 years
Total	$	3,834	$	1,959

In fiscal 2009, the Company recorded $6,000 in developed technology related to the acquisition of the assets of Pegasus. Subsequent to the acquisition, we paid cash consideration of $100 for license rights related to acquired product manufacturing processes.

In fiscal 2009, the Company recorded an impairment charge of $600 as an other operating expense related to identifiable intangible assets related to our fiscal 2007 acquisition of the 4Closure^tm Surgical Fascia Closure System (“4Closure”) following an impairment analysis. A discounted cash flows impairment analysis was performed as a result of a delay in the expected third quarter of fiscal 2009 re-launch and re-brand of the product, combined with actual revenues since acquisition not meeting expectations.

Amortization expense for the intangible assets listed above was $539, $437 and $376 in fiscal 2009, 2008 and 2007, respectively. The Company’s estimated amortization expense for each of the next five years is expected to be approximately $800 per year based on the current amortizable intangible assets owned by the Company.

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SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.  Supplemental Net Revenue Information (in thousands):

The following table summarizes net revenues by product line for the fiscal years ended October 31:

Net Revenues by Product Line:	2009		2008		2007
Peri-Strips	$	19,384	$	17,653	$	13,788
Veritas		8,757		4,468		1,296
Tissue-Guard		15,806		14,477		12,137
Microsurgery		8,668		7,749		5,439
Surgical Tools and Other		5,596		5,453		5,031
Total	$	58,211	$	49,800	$	37,691

Substantially all of the Company’s international net revenues are negotiated, invoiced and paid in U.S. dollars. The following table summarizes net revenues by geographic area for the years ended October 31:

Net Revenues by Geographic Area:	2009		2008		2007
United States	$	49,290	$	42,190	$	32,063
Europe		6,094		5,346		3,879
Asia and Pacific region		963		1,019		668
Canada		817		699		643
Other		1,047		546		438
Total	$	58,211	$	49,800	$	37,691

6.   Investments (in thousands):

The following table summarizes the Company’s cash, cash equivalents and investments at October 31, 2009 and 2008:

	October 31, 2009
					Estimated
	Amortized		Unrealized		Fair
	Cost		Gain		Value
Cash	$	1,752	$	—	$	1,752
Money Market Funds		14,111		—		14,111
Municipal Bonds		44,794		92		44,886
Total	$	60,657	$	92	$	60,749
Cash and cash equivalents	$	15,863		—	$	15,863
Short-term investments		38,879		81		38,960
Long-term investments		5,915		11		5,926
Total	$	60,657	$	92	$	60,749

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	October 31, 2008
						Estimated
	Amortized		Unrealized Gain			Fair
	Cost		(Loss)			Value
Cash	$	3,498	$	—		$	3,498
Money Market Funds		28,510		—			28,510
Variable Rate Demand Notes		17,837		—			17,837
Municipal Bonds		18,350		22			18,372
Auction Rate Securities		9,000		(2,429	)		6,571
Total	$	77,195	$	(2,407	)	$	74,788
Cash and cash equivalents	$	46,895		—		$	46,895
Restricted cash		2,950		—			2,950
Short-term investments		5,582		16			5,598
Long-term investments		21,768		(2,423	)		19,345
Total	$	77,195	$	(2,407	)	$	74,788

At October 31, 2009, the Company’s long-term municipal bond investments mature in fiscal 2011.

The Company utilizes a pricing service to estimate fair value measurements for its short- and long-term municipal bond investments. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.

The fair value estimates provided by the pricing service for the Company’s municipal bond investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for the Company’s investments were determined based on Level 2 inputs at October 31, 2009.

In October 2009, the Company sold its auction rate securities, which had a par value of $9,000, for $7,650, realizing a loss on sale of $1,350. Should a regulatory or other settlement occur during the 24 months subsequent to the date of the ARS sale in which the Company would have otherwise been eligible to tender any of its ARS, the Company will be entitled to an additional payment of the amount the Company would have received in such settlement that is in excess of the amount of sales proceeds received by the Company up to the securities par value. The right to receive an additional payment qualifies as a derivative. The fair value estimate for this derivative was based on Level 3 inputs, including a probability assessment of such a settlement occurring, and the present value of such a settlement based on discounted cash flows. Based on these estimates, the Company has assessed the fair value at $0 as of October 31, 2009.

At October 31, 2008, the Company recorded an unrealized loss of $2,429 on the valuation of its ARS, along with an unrealized gain on other investments of $22, which was reflected as a net Accumulated Other Comprehensive Loss of $2,407 at October 31, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.  Income Taxes (in thousands):

Provision For (Benefit From) Income Taxes:

	For the Fiscal Years Ended October 31,
	2009			2008		2007
Current:
Federal	$	2,752		$	2,509	$	1,076
State		320			96		66
		3,072			2,605		1,142
Deferred:
Federal		(2,016	)		351		298
State		(190	)		150		(172	)
		(2,206	)		501		126
Total	$	866		$	3,106	$	1,268

Reconciliation of Effective Income Tax Rate:

	For the Fiscal Years Ended October 31,
	2009			2008			2007
Income before income taxes	$	3,572		$	9,271		$	4,560
Statutory federal rate		1,215			3,245			1,550
State taxes, net of federal benefit		112			228			123
Tax exempt interest		(169	)		(147	)		(265	)
Other permanent differences		(117	)		(45	)		142
Research and development credits		(175	)		(175	)		(282	)
Provision for income taxes	$	866		$	3,106		$	1,268

Components of Deferred Income Tax Assets and Liabilities:

	As of October 31,
	2009		2008
Inventory	$	273	$	304
Deferred gain on sale due to escrow		—		(550	)
Other, net		94		99
Net current deferred income tax assets (liabilities)		367		(147	)
Depreciation		253		182
Stock-based compensation book expense		360		252
Intangible asset amortization		1,382		(104	)
Temporary impairment of investments		—		885
Other, net		27		—
Valuation allowance		—		(885	)
Net long-term deferred income tax assets		2,022		330
Net deferred income tax assets	$	2,389	$	183

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SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A net income tax payable of $1,128 was recorded at October 31, 2009, as compared to a net income tax receivable of $957 at October 31, 2008. A tax benefit of $203, $441 and $799 related to the exercise of stock options was recorded to additional paid-in capital in fiscal 2009, 2008 and 2007, respectively.

As of October 31, 2008, the Company recorded a valuation allowance for the deferred tax asset related to the temporary impairment of investments as the impairment was recorded to other comprehensive income (loss). In fiscal 2009, the investments that were temporarily impaired at October 31, 2008 were sold and the loss was realized. As a result, the Company’s valuation allowance for deferred income taxes decreased $885 in fiscal 2009. Management expects to fully utilize all other remaining net deferred tax assets against future taxable income.

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or changes in the tax law. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

The Company is subject to income taxes in the U.S. Federal jurisdiction, Minnesota, Puerto Rico and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the fiscal years ended before October 31, 2005. The Company is currently under examination for the years ended October 31, 2008 and 2007 by the Internal Revenue Service. The Company expects the examination to be concluded within the next 12 months, and this conclusion may have an impact upon the recognition of unrecognized tax benefits.

At October 31, 2009, the Company had unrecognized tax benefits of $435. If recognized, these benefits would favorably impact the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance as of November 1, 2007	$	401
Increases for current period tax positions		42
Decreases for lapses in applicable statute of limitations		(56	)
Balance as of October 31, 2008	$	387
Increases for current period tax positions		48
Decreases for lapses in applicable statute of limitations		—
Balance as of October 31, 2009	$	435

Our policy is to include interest and penalties related to our tax contingencies in income tax expense.

8.   Commitments and Contingencies (in thousands):

Operating Leases:  The Company is committed under non-cancelable operating leases for its office and production facilities. At October 31, 2009, the remaining terms on the leases range from three to five years. In addition to base rent charges, the Company also pays apportioned real estate taxes and common costs on its St. Paul, MN and Irvine, CA leased facilities. The Company has an option to renew its St. Paul, MN lease prior to December 31, 2013 for an additional three or five years at fair market value. Total facilities rent expense, including real estate taxes and common costs, was $1,200, $1,038 and $1,032 for the fiscal years ended October 31, 2009, 2008 and 2007, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of October 31, 2009, future minimum lease payments, excluding real estate taxes and common costs, due under existing non-cancelable operating leases are as follows:

Fiscal Years Ended October 31,
2010	$	1,022
2011		1,020
2012		981
2013		741
2014		121
	$	3,885

Royalties:  The Company incurred royalty expense, primarily related to revenue from Peri-Strips, of approximately $753, $696 and $604 for the years ended October 31, 2009, 2008 and 2007, respectively, which is included in cost of revenue. The Company is also obligated to pay royalties related to our Ortho & Wound products of 2% to 4% on Ortho & Wound revenue, depending upon the surgical indication for which the products are used. The Ortho & Wound minimum annual royalty expense is $135.

Other Commitments:  The Company was obligated to pay an earnout to the sole selling shareholder of a previous acquisition up to a cumulative total of $1,350 based on 5% of related product revenues through 2010 which will be recorded as additional goodwill. Such payments were approximately $304, $333 and $230 for the years ended October 31, 2009, 2008 and 2007, respectively. The full earnout target of $1,350 was achieved as of October 31, 2009.

9.   Shareholders’ Equity (in thousands except share and per share data):

Authorized Shares:  The Company’s authorized capital stock consists of 20,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

Shareholder Rights Agreement:  On June 1, 2006, the Company’s board of directors declared a dividend distribution of one common stock purchase right for each outstanding share of the Company’s common stock, payable to shareholders of record at the close of business on June 11, 2006. The description and terms of the rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of June 1, 2006, between the Company and American Stock Transfer & Trust Company, as Rights Agent. The Rights Agreement was approved by the shareholders at the Company’s 2007 Annual Meeting of Shareholders.

Upon certain acquisition events set forth in the Rights Agreement, each holder of a right other than certain “acquiring persons,” will have the right to receive upon exercise for a purchase price equal to ten times the purchase price of the right, shares of Company common stock (or in certain circumstances, cash, property or other securities) having a market value equal to 20 times the purchase price.

Stock-Based Compensation:  The Company’s current stock-based compensation plans consist of its 2006 Stock Incentive Plan, as amended (the “2006 Plan”), and an Employee Stock Purchase Plan (“ESPP”). Under the 2006 Plan, the Company is authorized to issue up to 1,500,000 shares of its common stock, plus certain shares becoming available under its prior 1995 Stock Incentive Plan or issued or assumed by the Company in certain merger or acquisition transactions, pursuant to incentive awards granted under the plan. At October 31, 2009, 1,002,495 shares remained available for grant under the 2006 Plan. Under the ESPP, the Company is authorized to sell and issue up to 300,000 shares of its common stock to its employees. At October 31, 2009, a total of 12,330 shares remained available for issuance under the ESPP.

The 2006 Plan was approved by the Company’s shareholders in February 2006, and an increase in the number of shares available for issuance was approved by the Company’s shareholders in March 2009. The 2006 Plan permits the Company to grant incentive stock options, non-qualified stock options and other share-based awards to eligible recipients for up to 1,500,000 shares of its common stock, plus the number of shares

49

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

or awards outstanding under our prior 1995 Stock Incentive Plan as of its expiration which are subsequently cancelled or forfeited. The grant price of an option under the 2006 Plan may not be less than the fair market value of the common stock subject to the option as of the grant date. The term of any options granted under the 2006 Plan may not exceed seven years from the date of grant. As of October 31, 2009, 724,422 stock options have been granted under the 2006 Plan.

The Company recognizes expense related to the fair value of our stock-based compensation awards using the provisions of ASC 718. The Company recognized compensation expense for stock options on a straight-line basis over the requisite service period of all stock-based compensation awards granted to, but not yet vested. Total stock-based compensation expense included in the Company’s statements of operations for the years ended October 31, 2009, 2008 and 2007 was $937 ($804, net of tax), $509 ($405, net of tax) and $539 ($450, net of tax), respectively.

The Company estimated the fair values of its stock options using the Black-Scholes option-pricing model. The Black-Scholes option valuation weighted average assumptions used in the valuation of stock options for the fiscal years ended October 31, 2009, 2008 and 2007 were as follows:

	2009	2008	2007
Risk-free rate(1)	1.1%	2.7%	4.6%
Expected dividend yield	None	None	None
Expected stock volatility(2)	50%	46%	50%
Expected life of stock options(3)	3.0 years	2.8 years	3.5 years
Fair value per option	$4.30 — $7.41	$5.21 — $6.39	$3.08 — $5.53
Forfeiture rate	8%	8%	8%

(1)	Based on the U.S Treasury Strip interest rates whose term is consistent with the expected life of the stock options.
(2)	Expected stock price volatility is based on the Company’s historical volatility over a period generally consistent with the expected term of our stock options.
(3)	Expected life of stock options is estimated based on historical experience.

As of October 31, 2009, there was $433 of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of approximately one year.

Stock Options:  The exercise price of each stock option equals 100% of the market price of the Company’s stock on the date of grant and has a maximum term ranging from 7 to 10 years. Stock options granted to non-employee directors and employees generally vest ratably over two or three years. A summary of the status of the Company’s stock options for the years ended October 31 is as follows:

	2009					2008					2007
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		689,761		$	9.32		906,538		$	8.84		683,916		$	9.24
Granted		161,880			15.24		28,682			18.75		533,860			7.58
Exercised		(89,376	)		8.12		(158,635	)		8.50		(250,283	)		7.05
Cancelled		(25,889	)		17.39		(86,824	)		8.93		(60,955	)		9.59
Outstanding at end of year		736,376		$	10.48		689,761		$	9.32		906,538		$	8.84
Options exercisable at end of year		661,201		$	9.95		513,625		$	9.56		539,557		$	9.70

50

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total intrinsic value of options exercised during the fiscal year ended October 31, 2009, 2008 and 2007 was $737, $1,631 and $1,871, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of October 31, 2009 was $1,897.

The following table summarizes information about stock options outstanding at October 31, 2009:

					Weighted				Weighted
					Average				Average
			Weighted		Remaining				Exercise
	Number of		Average		Contractual		Number of		Price of
	Options		Exercise		Life		Options		Exercisable
Range of Prices	Outstanding		Price		(Years)		Exercisable		Options
$ 6.00 – $ 7.50		337,301	$	7.48		1.99		337,301	$	7.48
8.27 – 10.92		190,513		10.21		2.22		190,513		10.21
12.45 – 21.45		208,562		15.59		3.83		133,387		15.80
$ 6.00 – $21.45		736,376	$	10.48		2.57		661,201	$	9.95

Employee Stock Purchase Plan:  The Company sponsors an ESPP under which 300,000 shares of common stock were reserved for future issuance. The ESPP was established to enable employees of the Company to invest in Company stock through payroll deductions. Shares are available to employees to purchase shares of stock at a price equal to 95% of the fair market value of the stock on the last day of each offering period. There were 7,065, 4,900 and 7,766 shares purchased through the ESPP in fiscal 2009, 2008 and 2007, respectively.

Repurchase of Common Shares:  On May 28, 2008, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,000,000 shares of its common stock. This program was completed on January 9, 2009. The share repurchase was funded using the Company’s existing cash balances and occurred in the open market, in accordance with Securities and Exchange Commission regulations. The timing and extent to which the Company bought back shares depended upon market conditions and other corporate considerations.

From inception of the program on May 28, 2008 through its completion on January 9, 2009, the Company used $16,675 to repurchase 1,000,000 shares at an average price of $16.68 per share. The following table presents the total number of shares repurchased from May 28, 2008 through January 9, 2009, the average price paid per share and the number of shares that were purchased:

					Total Number		Maximum
					of Shares		Number
					Purchased		of Shares That
					as Part of		May Yet Be
	Total		Average		Publicly		Purchased
	Number		Price		Announced		Under the
	of Shares		Paid per		Plan or		Plan
Period	Purchased		Share		Program		or Program
May 1, 2008 — May 31, 2008		—	$	—		—		1,000,000
June 1, 2008 — June 30, 2008		87,585	$	17.82		87,585		912,415
October 1, 2008 — October 31, 2008		416,582	$	16.77		504,167		495,833
November 1, 2008 — November 30, 2008		145,833	$	16.67		650,000		350,000
December 1, 2008 — December 31, 2008		294,801	$	16.02		944,801		55,199
January 1, 2009 — January 31, 2009		55,199	$	17.61		1,000,000		—
Total		1,000,000	$	16.68

On September 29, 2009, the Company announced that its Board of Directors had authorized the Company to repurchase up to 500,000 shares of its common stock. The share repurchase is funded using the Company’s existing cash balances and may occur either in the open market or through private transactions from time to

51

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

time, in accordance with Securities and Exchange Commission regulations. The timing and extent to which the Company may buy back shares depends upon market conditions and other corporate considerations. The repurchase plan does not have an expiration date.

From inception of the program on September 29, 2009 through October 31, 2009, the Company used $2,893 to repurchase 220,404 shares at an average price of $13.12 per share. The following table presents the total number of shares repurchased from September 29, 2009 through October 31, 2009, the average price paid per share and the number of shares that were purchased and the maximum number of shares that may yet be purchased at October 31, 2009, pursuant to our stock repurchase program:

					Total Number		Maximum
					of Shares		Number of
					Purchased		Shares That
					as Part of		May Yet Be
	Total		Average		Publicly		Purchased
	Number		Price		Announced		Under the
	of Shares		Paid per		Plan or		Plan
Period	Purchased		Share		Program		or Program
September 29, 2009 — September 30, 2009		43,968	$	13.75		43,968		456,032
October 1, 2009 — October 31, 2009		176,436	$	12.97		220,404		279,596
Total		220,404	$	13.12

10.   Earnings Per Share (in thousands):

The following table sets forth the computation of basic and diluted shares outstanding for the fiscal years ended October 31:

	2009		2008		2007
Numerator:
Net income from continuing operations	$	2,706	$	6,165	$	3,292
Denominator:
Denominator for basic earnings per share — weighted average common shares		11,588		12,395		12,225
Effect of dilutive securities:
Shares associated with option plans		239		326		303
Dilutive potential common shares		239		326		303
Denominator for diluted earnings per share — weighted average common shares and dilutive potential common shares		11,827		12,721		12,528

Stock options outstanding with exercise prices greater than the average market price of the Company’s common stock totaled 178, 33 and 50 options for fiscal years ended October 31, 2009, 2008 and 2007, respectively.

11.   Employee Benefit Plan (in thousands):

Salary Reduction Plan:  The Company sponsors a salary reduction plan for all eligible U.S. employees who qualify under Section 401(k) of the Internal Revenue Code. Employees may contribute up to 100% of their annual compensation, subject to annual limitations. At its discretion, the Company may make matching contributions equal to a percentage of the salary reduction or other discretionary amount for each plan. In fiscal 2009, 2008 and 2007, the Company made discretionary matching contributions to employee participants in the plan of $164, $131 and $107, respectively.

52

SYNOVIS LIFE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12.   Comprehensive Income (in thousands):

The following table summarizes the components of comprehensive income for the fiscal year ended October 31, 2009 and fiscal 2008. Comprehensive income equaled net income in the fiscal year ended October 31, 2007.

	Fiscal Year Ended		Fiscal Year Ended
	October 31,		October 31,
	2009		2008
Net income	$	2,706	$	11,485
Unrealized gain on investments		70		22
Unrealized gain (loss) on ARS		2,429		(2,429	)
Other accumulated comprehensive gain (loss)		2,499		(2,407	)
Comprehensive income	$	5,205	$	9,078

13.   Quarterly Information (in thousands except per share data):

	First		Second		Third			Fourth
Fiscal 2009 (unaudited)	Quarter		Quarter		Quarter			Quarter
Net revenue	$	13,414	$	14,755	$	15,032		$	15,010
Gross margin		9,441		10,679		10,775			10,872
Operating income (loss)		2,240		2,774		(1,654	)		642
Net income (loss)	$	1,663	$	2,082	$	(4,874	)	$	3,835
Basic earnings (loss) per share:	$	0.14	$	0.18	$	(0.42	)	$	0.33
Diluted earnings (loss) per share:	$	0.14	$	0.18	$	(0.42	)	$	0.33

	First			Second		Third		Fourth
Fiscal 2008 (unaudited)	Quarter			Quarter		Quarter		Quarter
Net revenue	$	11,306		$	12,413	$	13,366	$	12,715
Gross margin		7,621			8,403		9,195		8,925
Operating income		1,283			1,397		2,278		2,236
Net income from continuing operations		1,195			1,301		1,760		1,909
Discontinued operations, net of tax
Gain on sale of discontinued operations		5,340			—		—		—
Income (loss) from discontinued operations		(20	)		—		—		—
Net income	$	6,515		$	1,301	$	1,760	$	1,909
Basic earnings per share:
Continuing operations	$	0.10		$	0.10	$	0.14	$	0.15
Discontinued operations		0.43			0.00		0.00		0.00
Net income	$	0.53		$	0.10	$	0.14	$	0.15
Diluted earnings per share:
Continuing operations	$	0.09		$	0.10	$	0.14	$	0.15
Discontinued operations		0.42			0.00		0.00		0.00
Net income	$	0.51		$	0.10	$	0.14	$	0.15

Quarterly calculations of net earnings per share are made independently during the fiscal year.

53

Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A — Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There was no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management’s authorization. The design, monitoring and revision of the system of internal accounting controls involves, among other things, management’s judgments with respect to the relative cost and expected benefits of specific control measures. The effectiveness of the control system is supported by the selection, retention and training of qualified personnel and an organizational structure that provides an appropriate division of responsibility and formalized procedures. The system of internal accounting controls is periodically reviewed and modified in response to changing conditions. Designated Company employees regularly monitor the adequacy and effectiveness of internal accounting controls.

In addition to the system of internal accounting controls, management maintains corporate policy guidelines that help monitor proper overall business conduct, possible conflicts of interest, compliance with laws and confidentiality of proprietary information. The guidelines are documented in the Synovis Code of Business Conduct and Ethics and are reviewed on a periodic basis with all employees of the Company.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains control monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that the Company’s system of internal control over financial reporting was effective as of October 31, 2009. Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued a report, included herein, on the Company’s internal control over financial reporting.

ITEM 9B — Other information

None.

54

PART III

Item 10 — Directors, Executive Officers and Corporate Governance

(a) Directors of the Registrant:

The information under the captions “Election of Directors — Information About Nominees” and “Election of Directors — Other Information About Nominees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(b) Executive Officers of the Registrant:

Information concerning Executive Officers of the Company is included under the caption “Executive Officers of the Registrant” in Item 4A in this report.

(c) Compliance with Section 16(a) of the Exchange Act:

The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(d) Audit Committee and Audit Committee Financial Expert:

The information under the caption “Election of Directors — Information About the Board and its Committees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(e) Code of Ethics:

We have adopted a Code of Ethics that applies to our Chief Executive Officer and all senior financial officers. A copy of the Code of Ethics has been posted on our website at www.synovislife.com.

(f) Policy for Nominees:

The Company’s policy for nominating Board candidates is discussed under the caption “Election of Directors — Information About the Board and its Committees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference. No material changes to the nominating process have occurred.

Item 11 — Executive Compensation

The information under the captions “Compensation Committee Report,” “Director Compensation,” “Compensation Discussion and Analysis” and “Executive Compensation” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

Item 13 — Certain Relationships and Related Transactions, and Director Independence

The information under the captions “Related Person Relationships and Transactions,” “Election of Directors — Other Information About Nominees” and “Election of Directors — Information About the Board and its Committees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

Item 14 — Principal Accountant Fees and Services

(a) Audit Fees:

The information under the caption “Fees of Independent Auditors — Audit Fees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

55

(b) Audit-Related Fees:

The information under the caption “Fees of Independent Auditors — Audit-Related Fees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(c) Tax Fees:

The information under the caption “Fees of Independent Auditors — Tax Fees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(d) All Other Fees:

The information under the caption “Fees of Independent Auditors — All Other Fees” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

(e) Fees of Independent Auditors — Pre-Approval Policies:

The information under the caption “Fees of Independent Auditors — Pre-Approval Policies” in the Registrant’s 2010 Proxy Statement is incorporated herein by reference.

PART IV

Item 15 — Exhibits, Financial Statement Schedule

(a) List of documents filed as part of this Report:

1) Financial Statements, Related Notes and Report of Independent Registered Public Accounting Firm:

The following financial statements are included in this report on the pages indicated:

	Page
•  Reports of Grant Thornton LLP		30-31
•  Consolidated Statements of Operations for the years ended October 31, 2009, 2008 and 2007		32
•  Consolidated Balance Sheets as of October 31, 2009 and 2008		33
•  Consolidated Statements of Shareholders’ Equity for the years ended October 31, 2009, 2008 and 2007		34
•  Consolidated Statements of Cash Flows for the years ended October 31, 2009, 2008 and 2007		35
•  Notes to Consolidated Financial Statements		36-53

2) Exhibits:

The exhibits to this Report on Form 10-K are listed in the Exhibit Index on pages E-1 to E-2 of this Report.

The Company will furnish a copy of any exhibit to a shareholder who requests a copy in writing to the Company. Requests should be sent to: Chief Financial Officer, Synovis Life Technologies, Inc., 2575 University Avenue W., St. Paul, Minnesota 55114-1024.

The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report of Form 10-K pursuant to Item 15(b):

A. 1995 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended October 31, 1998 (File No. 0-13907)).

B. Employee Stock Purchase Plan, as amended October 11, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2005 (File No. 0-13907)).

56

C. Form of Change in control agreement dated December 12, 2008 between the           Company and Richard Kramp, Brett Reynolds, David Buche, Michael Campbell, Timothy Floeder, Mary Frick and Daniel Mooradian (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated December 17, 2008 (File No. 0-13907)).

D. Summary of fiscal 2010 Non-Employee Director Compensation (filed herewith           electronically).

E. Summary of fiscal 2010 Named Executive Officer Compensation (filed herewith electronically).

F. 2004 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the period ended April 30, 2004 (File No. 0-13907)).

G. 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.23 to the Company’s Report on Form 10-K for the period ended October 31, 2006 (File No. 0-13907)).

H. Form of Incentive Stock Option Agreement under 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2009 (File No. 0-13907)).

I. Form of Non-Statutory Stock Option Agreement under 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.25 to the Company’s Report on Form 10-K for the period ended October 31, 2006 (File No. 0-13907)).

(b) Exhibits:

The response to this portion of Item 15 is included as a separate section of this Report on Form 10-K on pages E-1 to E-2.

57

SCHEDULE II

SYNOVIS LIFE TECHNOLGIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

	Balance at		Charged to				Balance
	Beginning		Cost and				at End of
Description	of Period		Expenses		Deductions		Period
Allowance for doubtful accounts:
Year ended October 31, 2009	$	270,000	$	149,000	$	75,000	$	344,000
Year ended October 31, 2008		173,000		133,000		36,000		270,000
Year ended October 31, 2007		557,000		104,000		488,000		173,000

58

SIGNATURES

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

Synovis Life Technologies, Inc.

By  /s/  Richard W. Kramp

Richard W. Kramp,

President and Chief Executive Officer

(Principal Executive Officer)

Dated: January 5, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on January 5, 2010 by the following persons on behalf of the registrant and in the capacities indicated.

/s/  Richard W. Kramp Richard W. Kramp	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/  Brett A. Reynolds Brett A. Reynolds	Vice President of Finance, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer)
/s/  Timothy M. Scanlan Timothy M. Scanlan	Chairman, Board of Directors
/s/  William G. Kobi William G. Kobi	Director
/s/  Karen Gilles Larson Karen Gilles Larson	Director
/s/  Mark F. Palma Mark F. Palma	Director
/s/  Richard W. Perkins Richard W. Perkins	Director
/s/  John D. Seaberg John D. Seaberg	Director
/s/  Sven A. Wehrwein Sven A. Wehrwein	Director

59

SYNOVIS LIFE TECHNOLOGIES, INC.

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K

For the Year Ended October 31, 2009

2	.1	Asset Purchase Agreement among Heraeus Vadnais, Inc., Heraeus Materials Caribe, Inc., and Heraeus Materials S.A., as Buyers, and Synovis Interventional Solutions, Inc., Synovis Caribe, Inc. and Synovis Life Technologies, Inc., as Seller Parties, dated as of January 8, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated January 8, 2008 (File No. 0-13907)).
2	.2	Foreclosure Sale Agreement by and between Comerica Bank and Synovis Surgical Sales, Inc., a wholly-owned subsidiary of Synovis Life Technologies, Inc., dated as of July 2, 2009 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated July 2, 2009 (File No. 0-13907)) (Schedules and Exhibits have been omitted; however copies thereof will be furnished to the Securities and Exchange Commission upon request).
3	.1	Restated Articles of Incorporation of the Company, as amended, (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1997 (File No. 0-13907)).
3	.2	Amendment to Restated Articles of Incorporation of the Company, as amended, dated March 20, 1997 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1997 (File No. 0-13907)).
3	.3	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to Form 8-K filed on October 5, 2007 (File No. 0-13907)).
3	.4	Amendment to Restated Articles of Incorporation, effective May 1, 2002, regarding the Company name Change from ’Bio-Vascular, Inc.’ to ’Synovis Life Technologies, Inc.’ (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2002 (File No. 0-13907)).
4	.1	Form of common stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form 10 (File No. 0-13907)).
4	.2	Rights Agreement, dated as of June 1, 2006, between Synovis Life Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent, including exhibits thereto (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A dated June 1, 2006 (File No. 0-13907)).
4	.3	Restated Articles of Incorporation of the Company, as amended (see Exhibit 3.1).
4	.4	Amendment to Restated Articles of Incorporation of the Company, as amended, dated March 20, 1997 (see Exhibit 3.2).
4	.5	Amended and Restated Bylaws of the Company (see Exhibit 3.3).
4	.6	Amendment to Restated Articles of Incorporation, effective May 1, 2002 (see Exhibit 3.4).
10	.1	1995 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report of Form 10-K for the year ended October 31, 1998 (File No. 0-13907)).
10	.2	Employee Stock Purchase Plan, as amended October 11, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2005 (File No. 0-13907)).
10	.3	Change in control agreement dated December 12, 2008 between the Company and Richard Kramp, Brett Reynolds, David Buche, Michael Campbell, Timothy Floeder, Mary Frick and Daniel Mooradian (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated December 17, 2008 (File No. 0-13907)).
10	.4	Acquisition Agreement and Plan of Reorganization by and among the Company, MCA Acquisition, Inc., Medical Companies Alliance, Inc. and Michael K. Campbell, dated July 6, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 2001 (File No. 0-13907)).
10	.5	Lease Agreement effective August 1, 1995 between the Company and CSM Investors, Inc. (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended October 31, 1995 (File No. 0-13907)).

E-1

10	.6	First Amendment to Lease Agreement effective August 1, 1995 between the Company and CSM Investors, Inc., dated September 19, 2002 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the period ended October 31, 2002 (File No. 0-13907)).
10	.7	Second Amendment to Lease Agreement effective August 1, 1995 between the Company and CSM Investors, Inc., dated January 1, 2004 (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the period ended October 31, 2008 (File No. 0-13907)).
10	.8	Third Amendment to Lease Agreement effective August 1, 1995 between the Company and CSM Investors, Inc., dated August 1, 2005 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report in Form 10-K for the period ended October 31, 2005 (file No. 0-13907)).
10	.9	2004 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q for the period ended April 30, 2004 (File No. 0-13907)).
10	.10	Summary of fiscal 2010 Non-Employee Director Compensation (filed herewith electronically).
10	.11	Summary of fiscal 2010 Named Executive Officer Compensation (filed herewith electronically).
10	.12	2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s QuarterlyReport on Form 10-Q for the quarter ended April 30, 2009 (File No. 0-13907)).
10	.13	Form of Incentive Stock Option Agreement under 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended October 31, 2006 (File No. 0-13907)).
10	.14	Form of Non-Statutory Stock Option Agreement under 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the period ended October 31, 2006 (File No. 0-13907)).
10	.15	Fourth Amendment to Lease Agreement effective August 1, 1995 between Company and CSM Investors, Inc., dated August 4, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated August 5, 2008 (File No. 0-13907)).
10	.16	Lease agreement effective July 17, 2009 between the Company and the Irvine Group (filed herewith electronically).
21	.1	List of Subsidiaries of the Company (filed herewith electronically).
23	.1	Consent of Grant Thornton LLP (filed herewith electronically).
31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith electronically).
31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith electronically).
32	.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (filed herewith electronically).

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EX-10.10

Exhibit 10.10

Non-Employee Directors’ Cash Compensation

In fiscal 2010, non-employee directors of Synovis Life Technologies, Inc. (the “Company”) will receive cash compensation as outlined in the table below:

	Compensation Rate
	Fiscal 2010
Monthly Board member retainer	$	1,500
Fee per Board meeting attended	$	1,250
Fee per Audit Committee meeting attended	$	1,000	(1)
Fee per Compensation Committee meeting attended	$	1,000	(1)
Fee per Governance Committee meeting attended	$	1,000	(1)
Fee per Investment Review Committee meeting attended	$	500
Annual stipend for Chairman of the Board	$	4,000
Annual stipend for Audit Committee Chair	$	3,000
Annual stipend for Compensation Committee Chair	$	2,000

(1) The Chairs of the Audit, Compensation and Governance Committees of the Board of Directors (the “Board”) of the Company will receive 1.5 times the meeting fee for each committee meeting to reflect the work and preparation required as chair for such meetings.

Directors who are otherwise employees of the Company do not receive any additional compensation for their service on the Board or any of its committees.

Non-Employee Directors’ Equity Compensation

On November 2, 2009, non-qualified stock options to purchase shares of the Company’s common stock listed below, at an exercise price of $12.00 per share (the closing price of a share of the Company’s common stock on the date of the grant), were awarded to each non-employee director of the Company under the Company’s 2006 Stock Incentive Plan:

Name	Options Granted
Timothy M. Scanlan		30,000
William G. Kobi		30,000
Karen Gilles Larson		30,000
Mark F. Palma		30,000
Richard W. Perkins		30,000
John D. Seaberg		30,000
Sven A. Wehrwein		30,000

Such options vest in increments of one-third on October 31, 2010, 2011 and 2012, respectively, and expire four years following the vest date.

EX-10.11

Exhibit 10.11

Summary of Fiscal 2010 Named Executive Officer Compensation

Set forth below is a summary of fiscal 2010 compensation arrangements between Synovis Life Technologies, Inc. (the “Company”) and certain of its executive officers who are expected to constitute the Company’s “named executive officers” (defined in Regulation S-K Item 402(a)(3)) for fiscal 2010. All of the Company’s executive officers are at-will employees whose compensation and employment status may be changed at any time in the discretion of the Company’s Board of Directors, subject only to the terms of the Management Change in Control Agreements between the Company and these executive officers (the forms of which have been filed or incorporated by reference as exhibits to the Company’s annual report on Form 10-K).

Base Salary

Effective November 1, 2009, the following executive officers are scheduled to receive the following annual base salaries in their current positions:

Name and Current Position	Base Salary
Richard W. Kramp	$	375,032
(President and Chief Executive Officer)
David A. Buché	$	232,875
(Vice President and Chief Operating Officer of Synovis Surgical Innovations)
Brett A. Reynolds	$	215,721
(Vice President of Finance and Chief Financial Officer)
Mary L. Frick	$	196,596
(Vice President of Regulatory Affairs, Clinical Affairs and Quality)
Timothy M. Floeder	$	192,920
(Vice President of Corporate Development)

Annual Cash Incentive Compensation

For fiscal 2010, the Company’s named executive officers are eligible to receive annual cash incentive compensation up to 5% of their base salary based upon an evaluation by the Company’s Compensation Committee of the Board of Directors of the individual executive officer’s performance and achievement of specific individual objectives during the period. For fiscal 2010, the Compensation Committee also established an incentive cash compensation program based upon achievement of Company financial performance goals. Additional cash incentive compensation may be awarded at the discretion of the Compensation Committee for performance or achievement above individual goals.

Stock Options

On November 2, 2009, non-qualified stock options to purchase shares of the Company’s common stock, at an exercise price of $12.00 per share (the closing price of a share of the Company’s

common stock on the date of the grant), were awarded to each of the following executive officer under the Company’s 2006 Stock Incentive Plan as follows:

Name	Options Granted
Richard W. Kramp		90,000
David A. Buché		24,000
Brett A. Reynolds		21,000
Mary L. Frick		18,000
Timothy M. Floeder		18,000

Such options vest in increments of one-third on October 31, 2010, 2011 and 2012, respectively, and expire four years following the vest date.

Benefits

The Company provides medical, dental and life and disability insurance benefits as well as a 401(k) retirement plan and a stock purchase plan to its executive officers. The same benefits are available to all Company employees.

EX-10.16

Exhibit 10.16

LEASE

BETWEEN

THE IRVINE COMPANY LLC

AND

SYNOVIS LIFE TECHNOLOGIES, INC.

LEASE

     THIS LEASE is made as of 21^st day of July, 2009, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company, hereafter called “Landlord,” and SYNOVIS LIFE TECHNOLOGIES, INC., a Minnesota corporation, hereafter called “Tenant.”

ARTICLE 1. BASIC LEASE PROVISIONS

     Each reference in this Lease to the “Basic Lease Provisions” shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease.

1.	Tenant’s Trade Name: Synovis Life Technologies, Inc.
2.	Premises: The Premises are more particularly described in Section 2.1 and consist of space located in two (2) separate buildings, commonly known as:

4 Jenner Street, Suite 180, Irvine, California, comprised of 9,135 rentable square feet (the “4 Jenner Premises”); and

6 Jenner Street, Suite 150, Irvine, California, comprised of 5,692 rentable square feet (the “6 Jenner Premises”)

	Project Description: Jenner Business Park (as shown on Exhibit Y to this Lease)
3.	Use of Premises: General office, manufacturing, warehouse and laboratory for medical device company
4.	Commencement Date: September 1, 2009
5.	Expiration Date: August 31, 2012
6.	Basic Rent for the 4 Jenner Premises:

Months of Term	Monthly Rate Per	Monthly Basic Rent (rounded to the
or Period	Rentable Square Foot	nearest dollar)
1-12	$1.25	$11,419.00
13-24	$1.30	$11,876.00
25-36	$1.35	$12,332.00

Basic Rent for the 6 Jenner Premises:

Months of Term	Monthly Rate Per	Monthly Basic Rent (rounded to the
or Period	Rentable Square Foot	nearest dollar)
1-12	$1.25	$7,115.00
13-24	$1.30	$7,400.00
25-36	$1.35	$7,684.00

7.	Expense Recovery Period: Every twelve month period during the Term (or portion thereof during the first and last Lease years) ending June 30.
8.	Floor Area of Premises: approximately 14,827 rentable square feet, comprised of the following:

4 Jenner Premises — approximately 9,135 rentable square feet

6 Jenner Premises — approximately 5,692 rentable square feet

Floor Area of Buildings:

4 Jenner Building — approximately 37,313 rentable square feet

6 Jenner Building — approximately 30,243 rentable square feet

9.	Security Deposit: $21,818.00
10.	Broker(s): Irvine Realty Company (“Landlord’s Broker”) and None (“Tenant’s Broker”)
11.	Parking: 60 unreserved vehicle parking spaces in accordance with the provisions set forth in Exhibit F to this Lease.

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12. Address for Payments and Notices:

LANDLORD	TENANT
Payment Address:
THE IRVINE COMPANY LLC	SYNOVIS LIFE TECHNOLOGIES, INC.
Department #6438	6 Jenner Street, Suite 150
Los Angeles, CA 90084-6438	Irvine, CA 92618
Attn: Senior Vice President, Property Operations           Irvine Office Properties	Attn: General Manager
Notice Address:	Notice Address:
THE IRVINE COMPANY LLC	SYNOVIS LIFE TECHNOLOGIES, INC.
550 Newport Center Drive	6 Jenner Street, Suite 150
Newport Beach, CA 92660	Irvine, CA 92618
Attn: Senior Vice President, Property Operations           Irvine Office Properties	Attn: General Manager
with a copy of notices to:	with a copy of notices to:
THE IRVINE COMPANY LLC	SYNOVIS LIFE TECHNOLOGIES, INC.
550 Newport Center Drive	2575 University Avenue W
Newport Beach, CA 92660	St. Paul, MN 55114
Attn: Vice President Operations           Irvine Office Properties, Technology Portfolio	Attn: Chief Financial Officer

13. Additional Provisions. The provisions of EXHIBIT G attached hereto are hereby incorporated into and made a part of this Lease.

LIST OF LEASE EXHIBITS:

Exhibit A	Description of Premises
Exhibit B	Operating Expenses
Exhibit C	Utilities and Services
Exhibit D	Tenant’s Insurance
Exhibit E	Rules and Regulations
Exhibit F	Parking
Exhibit G	Additional Provisions
Exhibit H	Landlord’s Disclosures
Exhibit I	[Intentionally Deleted]
Exhibit J	Hazardous Material Survey Form
Exhibit X	Work Letter
Exhibit Y	Project Description

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ARTICLE 2. PREMISES

     2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord: (i) the premises shown on EXHIBIT A attached hereto (the “4 Jenner Premises”), and (ii) the premises shown on EXHIBIT A attached hereto (the “6 Jenner Premises”). Collectively, the 4 Jenner Premises and the 6 Jenner Premises are herein referred to as the “Premises”. The Premises contain approximately the floor area set forth in Item 8 of the Basic Lease Provisions (the “Floor Area”). The 4 Jenner Premises are located within a building located at 4 Jenner Street (the “4 Jenner Building”), and the 6 Jenner Premises are located within a building located at 6 Jenner Street (the “6 Jenner Building”). Collectively the 4 Jenner Building and the 6 Jenner Building are herein referred to as the “Buildings”, and individually as a “Building”. The 4 Jenner Building and the 6 Jenner Building are a portion of the project shown in EXHIBIT Y and which is a portion of the project described in Item 2 (the “Project”). Landlord and Tenant stipulate and agree that the Floor Area of Premises set forth in Item 8 of the Basic Lease Provisions is correct and shall not be subject to re-measurement during the Term of this Lease. This Lease includes the phone and data cabling and security systems (the “Cabling Equipment”) installed in the Premises as of the Commencement Date of this Lease, which is leased to Tenant in an “as is” condition, and which shall be maintained and repaired during the Term of this Lease at Tenant’s sole cost and expense.

     2.2. ACCEPTANCE OF PREMISES. Tenant’s lease of the Premises shall be on an “as is” basis without further alteration, addition or improvement to the Premises whatsoever, except for those items to be completed by Landlord within the 6 Jenner Premises defined in the Work Letter attached as EXHIBIT X hereto. Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project or the suitability or fitness of either for any purpose, except as set forth in this Lease, including without limitation, in Section 2 of Exhibit G attached to this Lease. Tenant acknowledges that the flooring materials which may be installed within portions of the Premises located on the ground floor of the Building may be limited by the moisture content of the Building slab and underlying soils. Subject to Landlord’s obligations expressly provided in this Lease, the taking of possession or use of the Premises by Tenant shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects.

ARTICLE 3. TERM

     3.1. GENERAL. The Term of this Lease (“Term”) shall commence (“Commencement Date”) on the date set forth in Item 4 of the Basic Lease Provisions, and shall expire on the date (the “Expiration Date”) set forth in Item 5 of the Basic Lease Provisions.

     3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on or before the Commencement Date set forth in Item 4 of the Basic Lease Provisions, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any resulting loss or damage. However, Tenant shall not be liable for any rent until the Premises are actually delivered to Tenant, except that if Landlord’s failure to deliver possession of the Premises to Tenant is attributable to any action or inaction by Tenant (a “Tenant Delay”), then the Premises shall be deemed ready for occupancy, and Landlord shall be entitled to full performance by Tenant (including the payment of rent), as of the date Landlord would have been able to deliver the Premises to Tenant but for the Tenant’s Delay(s).

     Notwithstanding anything to the contrary contained in this Section 3.2, if for any reason other than Tenant Delay(s), the actual Commencement Date has not occurred by October 1, 2009 (the “Outside Date”), then Tenant may, by written notice to Landlord given at any time thereafter but prior to the actual occurrence of the Commencement Date, elect to terminate this Lease; provided, however, that if the Commencement Date occurs within 10 business days after delivery to Landlord of Tenant’s termination notice, this Lease shall continue in full force and effect. If the Commencement Date has not occurred within 10 business days after the date of delivery of Tenant’s termination notice, then this Lease shall terminate as of the 10^th business day after delivery of the termination notice, and Landlord shall promptly return to Tenant any prepaid rent and/or Security Deposit delivered to Landlord.

ARTICLE 4. RENT AND OPERATING EXPENSES

     4.1. BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without abatement, deduction or offset (except as otherwise expressly provided in this Lease), a Basic Rent for the Premises in the total amount shown (including subsequent adjustments, if any) in Item 6 of the Basic Lease Provisions (the “Basic Rent”). If the Commencement Date is other than the first day of a calendar month, any rental adjustment shown in Item 6 shall be deemed to occur on the first day of the next calendar month following the specified monthly anniversary of the Commencement Date. The Basic Rent shall be due and payable in advance commencing on the Commencement Date and continuing thereafter on the first day of each successive calendar

3

month of the Term, and shall be prorated for any partial month. No demand, notice or invoice shall be required. An installment in the amount of 1 full month’s Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions and 1 month’s estimated Tenant’s Share of Operating Expenses shall be delivered to Landlord concurrently with Tenant’s execution of this Lease and shall be applied against the Basic Rent and Operating Expenses first due hereunder; the next installment of Basic Rent shall be due on the first day of the second calendar month of the Term, which installment shall, if applicable, be appropriately prorated to reflect the amount prepaid for that calendar month.

     4.2. OPERATING EXPENSES. Tenant shall pay Tenant’s Share of Operating Expenses in accordance with Exhibit B of this Lease.

     4.3. SECURITY DEPOSIT. Concurrently with Tenant’s delivery of this Lease, Tenant shall deposit with Landlord the sum, stated in Item 9 of the Basic Lease Provisions (the “Security Deposit”), to be held by Landlord as security for the full and faithful performance of Tenant’s obligations under this Lease, to pay any rental sums, including without limitation such additional rent as may be owing under any provision hereof, and to maintain the Premises as required by Sections 7.1 and 15.3, or any other provision of this Lease. Upon any breach of the foregoing obligations by Tenant, which breach continues beyond the applicable notice and cure period, Landlord may apply all or part of the Security Deposit as full or partial compensation. If any portion of the Security Deposit is so applied, Tenant shall within 5 days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. In no event may Tenant utilize all or any portion of the Security Deposit as a payment toward any rental sum due under this Lease. Any unapplied balance of the Security Deposit shall be returned to Tenant or, at Landlord’s option, to the last assignee of Tenant’s interest in this Lease within 30 days following the termination of this Lease and Tenant’s vacation of the Premises. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any similar or successor laws now or hereafter in effect, in connection with Landlord’s application of the Security Deposit to prospective rent that would have been payable by Tenant but for the early termination due to Tenant’s Default (as defined herein).

ARTICLE 5. USES

     5.1. USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions and for no other use whatsoever. The uses prohibited under this Lease shall include, without limitation, use of the Premises or a portion thereof for (i) offices of any agency or bureau of the United States or any state or political subdivision thereof; (ii) offices or agencies of any foreign governmental or political subdivision thereof; or (iii) schools, temporary employment agencies or other training facilities which are not ancillary to corporate, executive or professional office use. Tenant shall not do or permit anything to be done in or about the Premises which will materially interfere with the rights or quiet enjoyment of other occupants of the Building or the Project, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises or the Project. Tenant shall not perform any work or conduct any business whatsoever in the Project other than inside the Premises. Subject to the express provisions of this Lease to the contrary, Tenant shall comply at its expense with all present and future laws, ordinances and requirements of all governmental authorities that pertain specifically to Tenant or to its use of the Premises, including without limitation all federal and state occupational health and safety and handicap access requirements, whether or not Tenant’s compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises.

     5.2. SIGNS. Tenant shall have the non-exclusive right to one (1) exterior “building top” sign on the 4 Jenner Building for Tenant’s name and graphics in a location designated by Landlord, subject to Landlord’s right of prior approval that such exterior signage is in compliance with the Signage Criteria (defined below), which approval shall not be unreasonably withheld or conditioned. Except as provided in the foregoing and except for Landlord’s standard lobby directory signage and standard suite signage identifying Tenant’s name and/or logo, Tenant shall have no right to maintain signs in any location in, on or about the Premises, the Building or the Project and shall not place or erect any signs that are visible from the exterior of the Building. The size, design, graphics, material, style, color and other physical aspects of any permitted sign shall be subject to Landlord’s written determination, as reasonably determined by Landlord prior to installation, that signage is in compliance with any covenants, conditions or restrictions encumbering the Premises and Landlord’s signage program for the Project, as in effect from time to time and approved by the City in which the Premises are located (“Signage Criteria”). Prior to placing or erecting any exterior signs, Tenant shall obtain and deliver to Landlord a copy of any applicable municipal or other governmental permits and approvals. Tenant shall be responsible for all costs of any permitted sign, including, without limitation, the fabrication, installation, maintenance and removal thereof and the cost of any permits therefor, except that Landlord shall

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pay for the initial installation costs only for the standard suite signage and the lobby directory signage. If Tenant fails to maintain its sign in good condition, or if Tenant fails to remove same upon termination of this Lease and repair and restore any damage caused by the sign or its removal, Landlord may do so at Tenant’s expense. Landlord shall have the right to temporarily remove any signs in connection with any repairs or maintenance in or upon the Building, but such removal shall be limited to the minimal amount of time reasonably necessary to complete the same. The term “sign” as used in this Section shall include all signs, designs, monuments, displays, advertising materials, logos, banners, projected images, pennants, decals, pictures, notices, lettering, numerals or graphics. Tenant’s exterior signage rights under this Section 5.2 belong solely to Synovis Life Technologies, Inc., a Minnesota corporation, and in the case of a Permitted Transfer only, to such subtenant or assignee under this Lease, and any other attempted assignment or transfer of such rights shall be void and of no force and effect.

     5.3 HAZARDOUS MATERIALS.

          (a) For purposes of this Lease, the term “Hazardous Materials” means (i) any “hazardous material” as defined in Section 25501(o) of the California Health and Safety Code, (ii) hydrocarbons, polychlorinated biphenyls or asbestos, (iii) any toxic or hazardous materials, substances, wastes or materials as defined pursuant to any other applicable state, federal or local law or regulation, and (iv) any other substance or matter which may result in liability to any person or entity as a result of such person’s possession, use, storage, release or distribution of such substance or matter under any statutory or common law theory.

          (b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord, which consent may be given or withheld in Landlord’s sole and absolute discretion. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises a reasonable quantity of standard office products that may contain Hazardous Materials (such as photocopy toner, “White Out”, and the like), provided however, that (i) Tenant shall maintain such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant’s storage, use and disposal of all such products. Landlord may place such reasonable conditions as Landlord deems appropriate with respect to Tenant’s use, storage and/or disposal of any Hazardous Materials requiring Landlord’s consent. Tenant understands that Landlord may utilize a third party environmental consultant to assist in determining conditions of approval in connection with the storage, generation, release, disposal or use of those Hazardous Materials by Tenant on or about the Premises requiring Landlord’s consent, and Tenant agrees that the reasonable costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder within thirty (30) days after demand. In addition, Landlord may utilize a third party environmental consultant to conduct periodic inspections of the storage, generation, use, release and/or disposal of Hazardous Materials by Tenant on and from the Premises and, in the event such inspections reveal that Tenant is in violation of its obligations under this Section with respect to the storage, generation, release, disposal or use of Hazardous Materials, Tenant shall bear the reasonable costs incurred by Landlord in connection with such inspections.

          (c) Prior to the execution of this Lease, Tenant shall complete, execute and deliver to Landlord a Hazardous Material Survey Form (the “Survey Form”) in the form of Exhibit J attached hereto. The completed Survey Form shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. On each anniversary of the Commencement Date until the expiration or sooner termination of this Lease, Tenant shall disclose to Landlord in writing the names and amounts of all Hazardous Materials which were stored, generated, used, released and/or disposed of on, under or about the Premises for the twelve-month period prior thereto, and which Tenant desires to store, generate, use, release and/or dispose of on, under or about the Premises for the succeeding twelve-month period. In addition, to the extent Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant shall promptly provide Landlord with complete and legible copies of all the following environmental documents relating thereto: reports filed pursuant to any self-reporting requirements; permit applications, permits, monitoring reports, emergency response or action plans, workplace exposure and community exposure warnings or notices and all other reports, disclosures, plans or documents (even those which may be characterized as confidential) relating to water discharges, air pollution, waste generation or disposal, and underground storage tanks for Hazardous Materials; orders, reports, notices, listings and correspondence (even those which may be considered confidential) of or concerning the release, investigation, compliance, cleanup, remedial and corrective actions, and abatement of Hazardous Materials; and all complaints,

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pleadings and other legal documents filed by or against Tenant related to Tenant’s storage, generation, use, release and/or disposal of Hazardous Materials. Except to the extent required by law or legal process, Landlord shall use its commercially reasonable efforts to keep any of the foregoing documents and reports, which are not a matter of public information and which are delivered by Tenant with a confidentiality requirement, confidential and shall not disclose same to third parties other than its consultants, attorneys and lenders.

          (d) Landlord and its agents shall have the right, but not the obligation, to inspect, sample and/or monitor the Premises and/or the soil or groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith Tenant shall provide Landlord with full access to all facilities, records and personnel related thereto upon reasonable prior notice and with a Tenant escort, which Tenant agrees to make reasonably available. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under, from or about the Premises caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord’s other rights and remedies under this Lease, to immediately enter upon the Premises without notice and to discharge Tenant’s obligations under this Section 5.3 at Tenant’s expense, including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant’s business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant’s expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises.

          (e) If the presence of any Hazardous Materials on, under, from or about the Premises or the Project caused or permitted by Tenant or its agents, employees, subtenants, contractors, licensees or invitees results in (i) injury to any person, (ii) injury to or any contamination of the Premises or the Project, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and the Project and any other affected real or personal property owned by Landlord to the “Required Condition” (as hereinafter defined), and to remedy or repair any such injury or contamination, including without limitation, any cleanup, remediation, removal, disposal, neutralization or other treatment of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord’s prior written consent shall not be unreasonably withheld, conditioned or delayed, take any remedial action in response to the presence of any Hazardous Materials on, under, from or about the Premises or the Project or any other affected real or personal property owned by Landlord or enter into any similar agreement, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord’s prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under, from or about the Premises or the Project or any other affected real or personal property owned by Landlord (i) imposes an immediate threat to the health, safety or welfare of any individual and (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord’s consent before taking such action. As used herein, “Required Condition” shall mean returning the Premises and the Project and any other directly affected real or personal property owned by Landlord to a condition that is both (A) required by applicable federal, state or local law, regulation or order, including without limitation, performing any required cleanup, remediation, removal, disposal, neutralization or other treatment of Hazardous Materials, and (B) wherein Landlord’s marketability, use and leasing of the Premises and the Project as commercial properties shall not be materially impaired. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys reasonably acceptable to Landlord) Landlord and any successors to all or any portion of Landlord’s interest in the Premises and the Project and any other real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation attorneys’ fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, generation, storage, treatment, release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building or the Project and any other real or personal property owned by Landlord caused or permitted by Tenant, its agents, employees, subtenants, contractors, licensees or invitees. Such indemnity obligation shall specifically include, without limitation, the cost of any required or necessary repair, restoration, cleanup or detoxification of the Premises, the Building and the Project and any other real or personal property owned by Landlord, the preparation of any closure or other required plans, whether such action is required or necessary during the Term or after the expiration of this Lease and any loss of rental due to the inability to lease the Premises or any portion of the Building or Project as a result of such Hazardous Materials, the remediation thereof or any repair, restoration or cleanup related thereto. If it is at any time discovered that Tenant or its agents, employees, subtenants, contractors, licensees or invitees may have caused or permitted the release of any Hazardous Materials on,

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under, from or about the Premises, the Building or the Project or any other real or personal property owned by Landlord, Tenant shall, at Landlord’s request, immediately prepare and submit to Landlord a comprehensive plan, subject to Landlord’s approval, specifying the actions to be taken by Tenant to return the Premises, the Building or the Project or any other real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord’s approval of such plan, Tenant shall, at its expense, and without limitation of any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup, remediate and/or remove all such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this Section 5.3(e) shall expressly survive the expiration or sooner termination of this Lease.

          (f) Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, certain facts relating to Hazardous Materials at the Project known by Landlord to exist as of the date of this Lease, as more particularly described in Exhibit H attached hereto. Tenant shall have no liability or responsibility with respect to the Hazardous Materials facts described in Exhibit H, nor with respect to any Hazardous Materials which were not caused or permitted by Tenant, its agents, employees, subtenants, contractors, licensees or invitees. Notwithstanding the preceding two sentences, Tenant agrees to notify its agents, employees, subtenants, contractors, licensees, and invitees of any exposure or potential exposure to Hazardous Materials at the Premises that Landlord brings to Tenant’s attention. Tenant hereby acknowledges that this disclosure satisfies any obligation of Landlord to Tenant pursuant to California Health & Safety Code Section 25359.7, or any amendment or substitute thereto or any other disclosure obligations of Landlord.

ARTICLE 6. LANDLORD SERVICES

     6.1. UTILITIES AND SERVICES. Landlord and Tenant shall be responsible to furnish those utilities and services to the Premises to the extent provided in Exhibit C, subject to the conditions and payment obligations and standards set forth in this Lease. Landlord shall not be liable for any failure to furnish any services or utilities when the failure is the result of any accident or other cause beyond Landlord’s reasonable control, nor shall Landlord be liable for damages resulting from power surges or any breakdown in telecommunications facilities or services. Landlord’s temporary inability to furnish any services or utilities shall not entitle Tenant to any damages, relieve Tenant of the obligation to pay rent or constitute a constructive or other eviction of Tenant, except that Landlord shall diligently attempt to restore the service or utility promptly. Notwithstanding the foregoing, if the Premises, or a material portion of the Premises, are made untenantable for a period in excess of 5 consecutive business days as a result of a service interruption that is reasonably within the control of Landlord to correct and through no fault of Tenant and for reasons other than as contemplated in Article 11, then Tenant, as its sole remedy, shall be entitled to receive an abatement of rent payable hereunder during the period beginning on the 6^th consecutive business day of the service interruption and ending on the day the service has been restored. Tenant shall comply with all rules and regulations which Landlord may reasonably establish for the provision of services and utilities, and shall cooperate with all reasonable conservation practices established by Landlord. Landlord shall at all reasonable times have free access to all electrical and mechanical installations of Landlord.

     6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate and maintain all Common Areas within the Building and the Project in good condition and repair and otherwise in a manner consistent with comparable projects owned by Landlord in the vicinity of the Project. The term “Common Areas” shall mean all areas within the Building and other buildings in the Project which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, hallways and interior stairwells not located within the premises of any tenant, common electrical rooms, entrances and lobbies, elevators, and restrooms not located within the premises of any tenant.

     6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with Rules and Regulations described in Article 17 below. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain or permit any use or occupancy, except as otherwise provided in this Lease or in Landlord’s rules and regulations; provided, however, that no such use or restraint shall materially impair Tenant’s use and enjoyment of the same, or materially interfere with Tenant’s access to the Premises or other rights granted in this Lease. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant’s operations. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of prescriptive rights, or for any other reasonable purpose; provided that such closure

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shall be limited to the minimal amount of time reasonably necessary to complete same. Landlord’s temporary closure of any portion of the Common Areas for such purposes shall not deprive Tenant of reasonable access to the Premises.

     6.4. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building or the Project or to the attendant fixtures, equipment and Common Areas, and such change shall not entitle Tenant to any abatement of rent or other claim against Landlord. No such change shall materially impair Tenant’s use and enjoyment of the Premises, nor materially interfere with Tenant’s access to the Premises or the Common Areas.

ARTICLE 7. REPAIRS AND MAINTENANCE

     7.1. TENANT’S MAINTENANCE AND REPAIR. Subject to Articles 6, 7.2, 11 and 12, Tenant at its sole expense shall make all repairs necessary to keep the Premises and all improvements and fixtures therein in good condition and repair, excepting ordinary wear and tear. Notwithstanding Section 7.2 below, Tenant’s maintenance obligation shall include without limitation all appliances, interior glass, doors, door closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment and other equipment installed in the Premises and all Alterations constructed by Tenant pursuant to Section 7.3 below, together with any supplemental HVAC equipment servicing only the Premises. All repairs and other work performed by Tenant or its contractors shall be subject to the terms of Sections 7.3 and 7.4 below. Alternatively, should Landlord or its management agent agree to make a repair on behalf of Tenant and at Tenant’s request, Tenant shall promptly reimburse Landlord as additional rent for all reasonable costs incurred (including the standard supervision fee) within 30 days following submission of an invoice.

     7.2. LANDLORD’S MAINTENANCE AND REPAIR. Subject to Section 7.2 and Articles 6, 11 and 12, Landlord shall provide service, maintenance and repair with respect to the heating, ventilating and air conditioning (“HVAC”) equipment of the Building (exclusive of any supplemental HVAC equipment servicing only the Premises) and shall maintain in good repair the Common Areas, roof, foundations, footings, the exterior surfaces of the exterior walls of the Building (including exterior glass), and the structural, electrical, mechanical and plumbing systems of the Building (including elevators, if any, serving the Building). Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord’s affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section 7.2 shall limit Landlord’s right to reimbursement from Tenant for maintenance, repair costs and replacement costs as provided elsewhere in this Lease. Notwithstanding any provision of the California Civil Code or any similar or successor laws to the contrary, Tenant understands that it shall not make repairs at Landlord’s expense or by rental offset. Except as provided in Section 11.1 and Article 12 below, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the Premises, nor shall any related activity by Landlord constitute an actual or constructive eviction; provided, however, that in making repairs, alterations or improvements, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant’s business in the Premises. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932, and Sections 1941 and 1942 of the California Civil Code, or any similar or successor laws now or hereafter in effect. Except to the extent expressly excluded from the definition of Project Costs as set forth in Exhibit B, all costs of any maintenance, repairs and replacements on the part of Landlord provided hereunder shall be considered part of Project Costs.

     7.3. ALTERATIONS. Tenant shall make no alterations, additions, decorations, or improvements (collectively referred to as “Alterations”) to the Premises without the prior written consent of Landlord. Landlord’s consent shall not be unreasonably withheld, conditioned or delayed, as long as the proposed Alterations do not affect the structural, electrical or mechanical components or systems of the Building, are not visible from the exterior of the Premises, do not change the basic floor plan of the Premises, and utilize only Landlord’s building standard materials (“Standard Improvements”). Landlord may impose, as a condition to its consent, any requirements that Landlord in its reasonable discretion may deem reasonable or desirable, including but not limited reasonable requirements as to the manner, time, and contractor for performance of the work. Without limiting the generality of the foregoing, Tenant shall use Landlord’s designated mechanical and electrical contractors for all Alterations work affecting the mechanical or electrical systems of the Building. Should Tenant perform any Alterations work that would necessitate any ancillary Building modification or other expenditure by Landlord, then Tenant shall promptly fund the cost thereof to Landlord. Tenant shall obtain all required permits for the Alterations and shall perform the work in compliance with all applicable laws, regulations and ordinances with contractors reasonably acceptable to Landlord, and except for cosmetic

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Alterations not requiring a permit, Landlord shall be entitled to a supervision fee in the amount of 5% of the cost of the Alterations. In no event shall Tenant prosecute any work that results in picketing or labor demonstrations in or about the Building or Project. Any request for Landlord’s consent shall be made in writing and shall contain architectural plans describing the work in detail reasonably satisfactory to Landlord. Landlord may elect to cause its architect to review Tenant’s architectural plans (except in the case of strictly cosmetic Alterations), and the reasonable cost of that review shall be reimbursed by Tenant. Should the Alterations proposed by Tenant and consented to by Landlord change the floor plan of the Premises, then Tenant shall, at its expense, furnish Landlord with as-built drawings and CAD disks compatible with Landlord’s systems. Alterations shall be constructed in a good and workmanlike manner using materials of a quality reasonably approved by Landlord, and Tenant shall ensure that no Alteration materially impairs any Building system or Landlord’s ability to perform its obligations hereunder. Unless Landlord otherwise agrees in writing, all Alterations affixed to the Premises, including without limitation all Tenant Improvements constructed pursuant to the Work Letter (except as otherwise provided in the Work Letter), but excluding moveable trade fixtures and furniture, shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term, except that Landlord may, by notice to Tenant given at least 30 days prior to the Expiration Date, require Tenant to remove by the Expiration Date, or sooner termination date of this Lease, all or any Alterations (including without limitation all telephone and data cabling) installed either by Tenant or by Landlord at Tenant’s request (collectively, the “Required Removables”), and to replace any non-Standard Improvements with the applicable Standard Improvements. Tenant, at the time it requests approval for a proposed Alteration, may request in writing that Landlord advise Tenant whether the Alteration or any portion thereof, is a Required Removable. Within 10 days after receipt of Tenant’s request, Landlord shall advise Tenant in writing as to which portions of the subject Alterations are Required Removables. In connection with its removal of Required Removables, Tenant shall repair any damage to the Premises arising from that removal and shall restore the affected area to its pre-existing condition, reasonable wear and tear excepted.

     7.4. MECHANIC’S LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause any such lien to be released by posting a bond in accordance with California Civil Code Section 3143 or any successor statute. In the event that Tenant shall not, within 30 days following the imposition of any lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other available remedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. All expenses so incurred by Landlord, including Landlord’s attorneys’ fees, shall be reimbursed by Tenant promptly following Landlord’s demand, together with interest from the date of payment by Landlord at the maximum rate permitted by law until paid. Tenant shall give Landlord no less than 20 days’ prior notice in writing before commencing construction of any kind on the Premises so that Landlord may post and maintain notices of nonresponsibility on the Premises.

     7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to make repairs and renovations as reasonably deemed necessary by Landlord, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the final twelve months of the Term or when an uncured Default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Except in emergencies or to provide Building services, Landlord shall provide Tenant with reasonable prior verbal notice of such entry and shall use reasonable efforts to minimize any interference with Tenant’s use of the Premises. In the event the Landlord requires entry into any controlled environment within the Premises, Landlord will so notify Tenant and take such precautions prior to entry as Tenant may reasonably request, including, without limitation, accompaniment by a Tenant escort, which Tenant agrees to provide.

ARTICLE 8. [INTENTIONALLY DELETED]

ARTICLE 9. ASSIGNMENT AND SUBLETTING

     9.1. RIGHTS OF PARTIES.

          (a) Except as otherwise specifically provided in this Article 9, Tenant may not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant’s interest in this Lease, or permit the Premises to be occupied by anyone other than Tenant (each, a “Transfer”), without Landlord’s prior written consent, which consent shall not unreasonably be withheld or conditioned in accordance with the provisions of Section 9.1(b). For purposes of this Lease, references to any subletting, sublease or variation thereof shall be deemed to apply not only to a sublease effected directly by Tenant, but also to a sub-subletting or an assignment of subtenancy by a subtenant at any level. Except as otherwise specifically

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provided in this Article 9, no Transfer (whether voluntary, involuntary or by operation of law) shall be valid or effective without Landlord’s prior written consent and, at Landlord’s election, such a Transfer shall constitute a material default of this Lease. Landlord shall not be deemed to have given its consent to any Transfer by any other course of action, including its acceptance of any name for listing in the Building directory.

          (b) Except as otherwise specifically provided in this Article 9, if Tenant or any subtenant hereunder desires to transfer an interest in this Lease, Tenant shall first notify Landlord in writing and shall request Landlord’s consent thereto. Tenant shall also submit to Landlord in writing: (i) the name and address of the proposed transferee; (ii) the nature of any proposed subtenant’s or assignee’s business to be carried on in the Premises; (iii) the terms and provisions of any proposed sublease or assignment (including without limitation the rent and other economic provisions, term, improvement obligations and commencement date); (iv) reasonable evidence that the proposed assignee or subtenant will comply with the requirements of Exhibit D to this Lease; and (v) any other information reasonably requested by Landlord and reasonably related to the Transfer. Landlord shall not unreasonably withhold or condition its consent, provided: (1) the use of the Premises will be consistent with the provisions of this Lease and with Landlord’s commitment to other tenants of the Building and Project; (2) the proposed subtenant or assignee demonstrates that it is financially responsible by submission to Landlord of a balance sheet of the proposed subtenant or assignee as of a date within 90 days of the request for Landlord’s consent and current statements of income or profit and loss of the proposed subtenant or assignee; (3) the proposed assignee or subtenant is neither an existing tenant or occupant of the Building or Project with whom Landlord has been actively negotiating to expand or relocate within the Building or Project nor a prospective tenant with whom Landlord has been actively negotiating to become a tenant at the Building or Project; and (4) the proposed transferee is not an SDN (as defined below) and will not impose additional burdens or security risks on Landlord. If Landlord consents to the proposed Transfer, then the Transfer may be effected within 90 days after the date of the consent upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord’s consent as set forth in this Section 9.1(b). Landlord shall approve or disapprove any requested Transfer within 15 business days following receipt of Tenant’s written notice and the information set forth above. Except in connection with a Permitted Transfer (as defined below), if Landlord approves the Transfer Tenant shall pay a transfer fee of $1,000.00 to Landlord concurrently with Tenant’s execution of a Transfer consent prepared by Landlord.

          (c) Notwithstanding the provisions of Subsection (b) above, and except in connection with a “Permitted Transfer” (as defined below), in lieu of consenting to a proposed assignment or subletting, Landlord may elect to terminate this Lease in its entirety in the event of an assignment, or terminate this Lease as to the portion of the Premises proposed to be subleased with a proportionate abatement in the rent payable under this Lease, such termination to be effective on the date that the proposed sublease or assignment would have commenced. Landlord may thereafter, at its option, assign or re-let any space so recaptured to any third party, including without limitation the proposed transferee identified by Tenant.

          (d) Should any Transfer occur, Tenant shall, except in connection with a Permitted Transfer, promptly pay or cause to be paid to Landlord, as additional rent, 50% of any amounts paid by the assignee or subtenant, however described and whether funded during or after the Lease Term, to the extent such amounts are in excess of the sum of (i) the scheduled Basic Rent payable by Tenant hereunder (or, in the event of a subletting of only a portion of the Premises, the Basic Rent allocable to such portion as reasonably determined by Landlord) and all other recurring rent amounts due from Tenant hereunder, and (ii) the direct out-of-pocket costs, as evidenced by third party invoices provided to Landlord, incurred by Tenant to effect the Transfer, which costs shall be amortized over the remaining Term of this Lease or, if shorter, over the term of the sublease.

          (e) The sale of all or substantially all of the assets of Tenant (other than bulk sales in the ordinary course of business), the merger or consolidation of Tenant, the sale of Tenant’s capital stock, or any other direct or indirect change of control of Tenant, including, without limitation, change of control of Tenant’s parent company or a merger by Tenant or its parent company, shall be deemed a Transfer within the meaning and provisions of this Article. Notwithstanding the foregoing, Tenant may assign this Lease to a successor to Tenant by merger, consolidation or the purchase of substantially all of Tenant’s assets, or assign this Lease or sublet all or a portion of the Premises to an Affiliate (defined below), without the consent of Landlord but subject to the provisions of Section 9.2, provided that all of the following conditions are satisfied (a “Permitted Transfer”): (i) Tenant is not then in Default hereunder; (ii) Tenant gives Landlord written notice at least 10 days before such Permitted Transfer; and (iii)  the successor entity resulting from any merger or consolidation of Tenant or the sale of all or substantially all of the assets of Tenant, has a net worth (computed in accordance with generally accepted accounting principles, except that intangible assets such as goodwill, patents, copyrights, and trademarks shall be excluded in the calculation (“Net Worth”)) at the time of the

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Permitted Transfer that is at least equal to the Net Worth of Tenant immediately before the Permitted Transfer. Tenant’s notice to Landlord shall include reasonable information and documentation evidencing the Permitted Transfer and showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant’s successor shall sign and deliver to Landlord a commercially reasonable form of assumption agreement. “Affiliate” shall mean an entity controlled by, controlling or under common control with Tenant.

     9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant, or any successor-in-interest to Tenant hereunder, of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3, for any act or omission by an assignee or subtenant. Each assignee, other than Landlord, shall be deemed to assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant’s obligations, under this Lease. Such joint and several liability shall not be discharged or impaired by any subsequent modification or extension of this Lease. No transfer shall be binding on Landlord unless any document memorializing the transfer is delivered to Landlord, both the assignee/subtenant and Tenant deliver to Landlord an executed consent to transfer instrument prepared by Landlord and consistent with the requirements of this Article, and the assignee/subtenant independently complies with all of the insurance requirements of Tenant as set forth in Exhibit D and reasonable evidence thereof is delivered to Landlord. The acceptance by Landlord of any payment due under this Lease from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any transfer. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease. In addition to the foregoing, no change in the status of Tenant or any party jointly and severally liable with Tenant as aforesaid (e.g., by conversion to a limited liability company or partnership) shall serve to abrogate the liability of any person or entity for the obligations of Tenant, including any obligations that may be incurred by Tenant after the status change by exercise of a pre-existing right in this Lease.

     9.3. SUBLEASE REQUIREMENTS. Any sublease, license, concession or other occupancy agreement entered into by Tenant shall be subordinate and subject to the provisions of this Lease, and if this Lease is terminated during the term of any such agreement, Landlord shall have the right to: (i) treat such agreement as cancelled and repossess the subject space by any lawful means, or (ii) require that such transferee attorn to and recognize Landlord as its landlord (or licensor, as applicable) under such agreement. Landlord shall not, by reason of such attornment or the collection of sublease rentals, be deemed liable to the subtenant for the performance of any of Tenant’s obligations under the sublease. If Tenant is in Default (hereinafter defined) of its monetary obligations under this Lease, Landlord is irrevocably authorized to direct any transferee under any such agreement to make all payments under such agreement directly to Landlord (which Landlord shall apply towards Tenant’s obligations under this Lease) until such monetary Default is cured. Tenant hereby irrevocably authorizes and directs any transferee, upon receipt of a written notice from Landlord stating that a monetary Default exists in the performance of Tenant’s obligations under this Lease, to pay to Landlord all sums then and thereafter due under the sublease. No collection or acceptance of rent by Landlord from any transferee shall be deemed a waiver of any provision of Article 9 of this Lease, an approval of any transferee, or a release of Tenant from any obligation under this Lease, whenever accruing. In no event shall Landlord’s enforcement of any provision of this Lease against any transferee be deemed a waiver of Landlord’s right to enforce any term of this Lease against Tenant or any other person.

ARTICLE 10. INSURANCE AND INDEMNITY

     10.1. TENANT’S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D. Certificate(s) of that insurance must be delivered to Landlord prior to the Commencement Date.

     10.2. LANDLORD’S INSURANCE. Landlord shall provide the following types of insurance, with or without deductible and in amounts and coverages as may be determined by Landlord in its discretion: property insurance, subject to standard exclusions (such as, but not limited to, earthquake and flood exclusions), covering the Building or Project. In addition, Landlord may, at its election, obtain insurance coverages for such other risks as Landlord or its Mortgagees may from time to time deem appropriate, including earthquake and commercial general liability coverage. Landlord shall not be required to carry insurance of any kind on any tenant improvements or Alterations in the Premises installed by Tenant or its contractors or otherwise removable by Tenant (collectively, “Tenant Installations”), or on any trade fixtures, furnishings, equipment, interior plate glass, signs or items of personal property in the Premises, and Landlord shall not be obligated to repair or replace any of the foregoing items should damage occur. All proceeds of insurance maintained by Landlord upon the Building and Project shall be the property of Landlord, whether or not Landlord is obligated to or elects to make any repairs.

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     10.3. JOINT INDEMNITY.

          (a) To the fullest extent permitted by law, but subject to Section 10.5 below, Tenant shall defend, indemnify and hold harmless Landlord, its agents, lenders, and any and all affiliates of Landlord, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date from Tenant’s use or occupancy of the Premises, the Building or the Common Areas, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, subtenants, vendors, contractors, invitees or licensees in or about the Premises, the Building or the Common Areas, or from any Default in the performance of any obligation on Tenant’s part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, subtenants, vendors, contractors, invitees or licensees. Landlord may, at its option, require Tenant to assume Landlord’s defense in any action covered by this Section 10.3(a) through counsel reasonably satisfactory to Landlord. Notwithstanding the foregoing, Tenant shall not be obligated to indemnify Landlord against any liability or expense to the extent such liability or expense: (i) is ultimately determined to have been caused by the sole negligence or willful misconduct of Landlord, its agents, contractors or employees, or (ii) is covered by Landlord’s indemnity obligations set forth in Section 10.3(b) below.

          (b) To the fullest extent permitted by law, but subject to Section 10.5 below, Landlord shall defend, indemnify and hold harmless Tenant, its agents, lenders, and any and all affiliates of Tenant, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date from any default by Landlord of its obligations under this Lease or from the active negligence or willful misconduct of Landlord, its employees, agents or contractors, in connection with the maintenance or repair of the Common Areas of the Project. Tenant may, at its option, require Landlord to assume Tenant’s defense in any action covered by this Section 10.3(b) through counsel reasonably satisfactory to Tenant. Notwithstanding the foregoing, Landlord shall not be obligated to indemnify Tenant against any liability or expense to the extent such liability or expense: (i) is ultimately determined to have been caused by the sole negligence or willful misconduct of Tenant, its agents, employees, subtenants, vendors, contractors, invitees or licensees, or (ii) is covered by Tenant’s indemnity obligations set forth in Section 10.3(a) above.

     10.4. LANDLORD’S NONLIABILITY. Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord, its employees and agents for loss of or damage to any property, or any injury to any person, resulting from any condition including, but not limited to, acts or omissions (criminal or otherwise) of third parties and/or other tenants of the Project, or their agents, employees or invitees, fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injury results from conditions arising in the Premises or in other portions of the Building, except to the extent of the gross negligence or willful misconduct of Lanldord, its agents or any and all affiliated of Landlord in connection with the foregoing (but subject to Section 10.5 below). It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Should Tenant elect to receive any service from a concessionaire, licensee or third party tenant of Landlord, Tenant shall not seek recourse against Landlord for any breach or liability of that service provider. Notwithstanding anything to the contrary contained in this Lease, in no event shall Landlord be liable for Tenant’s loss or interruption of business or income (including without limitation, Tenant’s consequential damages, lost profits or opportunity costs), or for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building or the Project and of defects in any improvements or equipment.

     10.5. WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant each hereby waives all rights of recovery against the other on account of loss and damage occasioned to the property of such waiving party to the extent that the waiving party is entitled to proceeds for such loss and damage under any property insurance policies carried or otherwise required to be carried by this Lease; provided however, that the foregoing waiver shall not apply to the extent of Tenant’s express obligation to pay deductibles under any such policies and this Lease. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any property insurance policies, even though such loss or damage might be occasioned by the negligence of such party, its agents, employees, contractors or invitees. The foregoing waiver by Tenant shall also inure to the benefit of Landlord’s management agent for the Building.

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ARTICLE 11. DAMAGE OR DESTRUCTION

     11.1. RESTORATION.

          (a) If the Building of which the Premises are a part is damaged as the result of an event of casualty, then subject to the provisions below, Landlord shall repair that damage as soon as reasonably possible unless Landlord reasonably determines that: (i) the Premises have been materially damaged and there is less than 1 year of the Term remaining on the date of the casualty; (ii) any Mortgagee (defined in Section 13.1) requires that the insurance proceeds be applied to the payment of the mortgage debt; or (iii) proceeds necessary to pay the full cost of the repair are not available from Landlord’s insurance, including without limitation earthquake insurance. Should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in the “Casualty Notice” (as defined below), and this Lease shall terminate as of the date of delivery of that notice.

          (b) As soon as reasonably practicable following the casualty event but not later than 60 days thereafter, Landlord shall notify Tenant in writing (“Casualty Notice”) of Landlord’s election, if applicable, to terminate this Lease. If this Lease is not so terminated, the Casualty Notice shall set forth the anticipated period for repairing the casualty damage. If the anticipated repair period exceeds 270 days and if the damage is so extensive as to reasonably prevent Tenant’s substantial use and enjoyment of the Premises, then either party may elect to terminate this Lease by written notice to the other within 30 days following delivery of the Casualty Notice.

          (c) In the event that neither Landlord nor Tenant terminates this Lease pursuant to Section 11.1(a) or (b), Landlord shall repair all material damage to the Premises or the Building as soon as reasonably possible and this Lease shall continue in effect for the remainder of the Term. Upon notice from Landlord, Tenant shall assign or endorse over to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant’s insurance with respect to any Tenant Installations which Tenant shall have elected to restore (in its discretion), provided if the estimated cost to repair such Tenant Installations exceeds the amount of insurance proceeds received by Landlord from Tenant’s insurance carrier, the excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlord’s commencement of repairs. Within 15 days of demand, Tenant shall also pay Landlord for any additional excess costs that are determined during the performance of the repairs to such Tenant Installations.

          (d) From and after the date of the casualty event, the rental to be paid under this Lease shall be abated in the same proportion that the Floor Area of the Premises that is rendered unusable by the damage from time to time bears to the total Floor Area of the Premises.

          (e) The provisions of this Section 11.1(e) shall not be deemed to require Landlord to repair any Tenant Installations, fixtures and other items that Tenant is obligated to insure pursuant to Exhibit D or under any other provision of this Lease.

     11.2. LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law.

ARTICLE 12. EMINENT DOMAIN

     Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a “Taking”). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Project which would have a material adverse effect on Landlord’s ability to profitably operate the remainder of the Building. The terminating party shall provide written notice of termination to the other party within 45 days after it first receives notice of the Taking. The termination shall be effective as of the effective date of any order granting possession to, or vesting legal title in, the condemning authority. If this Lease is not terminated, Basic Rent and Tenant’s Share of Operating Expenses shall be appropriately adjusted to account for any reduction in the square footage of the Building or Premises. All compensation awarded for a Taking shall be the property of Landlord and the right to receive compensation or proceeds in connection with a Taking are expressly waived by Tenant; provided, however, Tenant may file a separate claim for Tenant’s personal property and Tenant’s reasonable relocation expenses, provided the filing of the claim does not diminish the amount of Landlord’s award. If only a part of the Premises is subject to a Taking and this Lease is not terminated, Landlord, with reasonable diligence, will restore the remaining portion of the Premises as nearly as practicable to the condition immediately prior to the Taking. Tenant agrees that the provisions of this Lease shall govern any Taking and shall accordingly supersede any contrary statute or rule of law.

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ARTICLE 13. SUBORDINATION; ESTOPPEL CERTIFICATE

     13.1. SUBORDINATION. Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the Project, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a “Mortgage”). The party having the benefit of a Mortgage shall be referred to as a “Mortgagee”. This clause shall be self-operative, but within 20 days after request from Landlord or a Mortgagee, Tenant shall execute a commercially reasonable subordination and attornment agreement in favor of the Mortgagee, provided such agreement provides a non-disturbance covenant benefiting Tenant. Alternatively, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request, Tenant, without charge, shall attorn to any successor to Landlord’s interest in this Lease in the event of a foreclosure of any mortgage. Tenant agrees that any purchaser at a foreclosure sale or lender taking title under a deed in lieu of foreclosure shall not be responsible for any act or omission of a prior landlord, shall not be subject to any offsets or defenses Tenant may have against a prior landlord, and shall not be liable for the return of the Security Deposit not actually recovered by such purchaser nor bound by any rent paid in advance of the calendar month in which the transfer of title occurred; provided that the foregoing shall not release the applicable prior landlord from any liability for those obligations. Tenant acknowledges that Landlord’s Mortgagees and their successors-in-interest are intended third party beneficiaries of this Section 13.1. Nothing contained in the foregoing provisions of this Section 13.1, however, shall relieve any Mortgagee from responsibility for those obligations of “Landlord” under this Lease which are to be performed subsequent to such Mortgagee taking title to or possession of the Premises, provided that Tenant shall give a “new” notice of default to such Mortgagee in connection with any default of such obligations, and such Mortgagee shall be thereafter afforded the benefit of the applicable “cure” rights pursuant to Section 14.5 of this Lease.

     13.2. ESTOPPEL CERTIFICATE. Tenant shall, within 20 days after receipt of a written request from Landlord, execute and deliver a commercially reasonable estoppel certificate in favor of those parties as are reasonably requested by Landlord (including a Mortgagee or a prospective purchaser of the Building or the Project). Without limitation, such estoppel certificate may include a certification as to the status of this Lease, the existence of any Defaults and the amount of rent that is due and payable.

ARTICLE 14. DEFAULTS AND REMEDIES

     14.1. TENANT’S DEFAULTS. In addition to any other event of default set forth in this Lease, the occurrence of any one or more of the following events shall constitute a “Default” by Tenant:

          (a) The failure by Tenant to make any payment of rent required to be made by Tenant, as and when due, where the failure continues for a period of 5 business days after written notice from Landlord to Tenant. For purposes of these default and remedies provisions, the term “additional rent” shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease.

          (b) The assignment, sublease, encumbrance or other Transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord unless otherwise authorized in Article 9 of this Lease.

          (c) The discovery by Landlord that any financial statement provided by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially false.

          (d) Except where a specific time period is otherwise set forth for Tenant’s performance in this Lease (in which event the failure to perform by Tenant within such time period shall be a Default), the failure or inability by Tenant to observe or perform any of the covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section 14.1(d),where the failure continues for a period of 30 days after written notice from Landlord to Tenant. However, if the nature of the failure is such that more than 30 days are reasonably required for its cure, then Tenant shall not be deemed to be in Default if Tenant commences the cure within 30 days, and thereafter diligently pursues the cure to completion.

          (e) Tenant or any Guarantor becomes insolvent, makes a transfer in fraud of creditors, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts when due or forfeits or loses its right to conduct business.

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          The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law, and Landlord shall not be required to give any additional notice under California Code of Civil Procedure Section 1161, or any successor statute, in order to be entitled to commence an unlawful detainer proceeding.

     14.2. LANDLORD’S REMEDIES.

          (a) Upon the occurrence of any Default by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies:

               (i) Landlord may terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant:

                    (1) The worth at the time of award of the unpaid Rent which had been earned at the time of termination;

                    (2) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided;

                    (3) 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 loss that Tenant proves could be reasonably avoided;

                    (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant’s default, including, but not limited to, the cost of recovering possession of the Premises, commissions and other expenses of reletting, including necessary repair, renovation, improvement and alteration of the Premises for a new tenant, reasonable attorneys’ fees, and any other reasonable costs; and

                    (5) At Landlord’s election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term “Rent” as used in this Lease shall be deemed to mean the Basic Rent and all other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease, including without limitation any sums that may be owing from Tenant pursuant to Section 4.2 of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the 24 month period immediately prior to Default, except that if it becomes necessary to compute such rental before the 24 month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in subparagraphs (1) and (2) above, the “worth at the time of award” shall be computed by allowing interest at the rate of 10% per annum. As used in subparagraph (3) above, the “worth at the time of award” shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%.

               (ii) Landlord may elect not to terminate Tenant’s right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord’s interests under this Lease, shall not constitute a termination of the Tenant’s right to possession of the Premises. In the event that Landlord elects to avail itself of the remedy provided by this subsection (ii), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord’s consent as are contained in this Lease.

          (b) The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time. No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any breach or Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord’s knowledge of the preceding breach or Default at the time of acceptance of rent, or (ii) a waiver of Landlord’s right to exercise any remedy available to Landlord by virtue of the breach or Default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant’s estate shall not waive or cure a Default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be

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deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord’s right to recover the balance of the rent or pursue any other remedy available to it. Tenant hereby waives any right of redemption or relief from forfeiture under California Code of Civil Procedure Section 1174 or 1179, or under any successor statute, in the event this Lease is terminated by reason of any Default by Tenant. No act or thing done by Landlord or Landlord’s agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord’s agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of the Lease or a surrender of the Premises.

     14.3. LATE PAYMENTS.

          (a) Any Rent due under this Lease that is not paid to Landlord within 5 days of the date when due shall bear interest at the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any Default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any rent due from Tenant shall not be received by Landlord or Landlord’s designee within 5 days after the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge for each delinquent payment equal to the greater of (i) 5% of that delinquent payment or (ii) $100.00; provided that Landlord shall waive the payment of said late charge for the initial delinquent payment of Basic Rent or Operating Expenses by Tenant. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant’s Default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies.

          (b) Following each second consecutive installment of Basic Rent that is not paid within 5 days following notice of nonpayment from Landlord, Landlord shall have the option (i) to require that beginning with the first payment of Basic Rent next due, Basic Rent shall no longer be paid in monthly installments but shall be payable quarterly 3 months in advance and/or (ii) to require that Tenant increase the amount, if any, of the Security Deposit by 100%. Should Tenant deliver to Landlord, at any time during the Term, 2 or more insufficient checks, the Landlord may require that all monies then and thereafter due from Tenant be paid to Landlord by cashier’s check.

     14.4. RIGHT OF LANDLORD TO PERFORM. If Tenant is in Default of any of its obligations under the Lease, Landlord shall have the right to perform such obligations. Tenant shall reimburse Landlord for the cost of such performance upon demand together with an administrative charge equal to 10% of the cost of the work performed by Landlord.

     14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform the obligation within 30 days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord’s obligation is such that more than 30 days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the 30 day period and thereafter diligently pursues the cure to completion. Tenant hereby waives any right to terminate or rescind this Lease as a result of any default by Landlord hereunder or any breach by Landlord of any promise or inducement relating hereto, and Tenant agrees that its remedies shall be limited to a suit for actual damages and/or injunction and shall in no event include any consequential damages, lost profits or opportunity costs. No payment of rent by Tenant with knowledge of any Landlord default shall constitute a waiver of such default.

     14.6. EXPENSES AND LEGAL FEES. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys’ fees, and all other reasonable costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts.

     14.7. WAIVER OF JURY TRIAL/JUDICIAL REFERENCE.

          (a) LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHT TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,

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PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.

          (b) In the event that the jury waiver provisions of Section 14.7(a) are not enforceable under California law, then the provisions of this Section 14.7(b) shall apply. It is the desire and intention of the parties to agree upon a mechanism and procedure under which controversies and disputes arising out of this lease or related to the Premises will be resolved in a prompt and expeditious manner. Accordingly, except with respect to actions for unlawful or forcible detainer or with respect to the prejudgment remedy of attachment, any action, proceeding or counterclaim brought by either party hereto against the other (and/or against its officers, directors, employees, agents or subsidiary or affiliated entities) on any matters whatsoever arising out of or in any way connected with this Lease, Tenant’s use or occupancy of the Premises and/or any claim of injury or damage, shall be heard and resolved by a referee under the provisions of the California Code of Civil Procedure, Sections 638 – 645.1, inclusive (as same may be amended, or any successor statute(s) thereto) (the “Referee Sections”). Any fee to initiate the judicial reference proceedings shall be paid by the party initiating such procedure; provided however, that the costs and fees, including any initiation fee, of such proceeding shall ultimately be borne in accordance with Section 14.6 above. The venue of the proceedings shall be in the county in which the Premises are located. Within 10 days of receipt by any party of a written request to resolve any dispute or controversy pursuant to this Section 14.7(b), the parties shall agree upon a single referee who shall try all issues, whether of fact or law, and report a finding and judgment on such issues as required by the Referee Sections. If the parties are unable to agree upon a referee within such 10 day period, then any party may thereafter file a lawsuit in the county in which the Premises are located for the purpose of appointment of a referee under California Code of Civil Procedure Sections 639 and 640, as same may be amended or any successor statute(s) thereto. If the referee is appointed by the court, the referee shall be a neutral and impartial retired judge with substantial experience in the relevant matters to be determined, from Jams/Endispute, Inc., the American Arbitration Association or similar mediation/arbitration entity. The proposed referee may be challenged by any party for any of the grounds listed in Section 641 of the California Code of Civil Procedure, as same may be amended or any successor statute(s) thereto. The referee shall have the power to decide all issues of fact and law and report his or her decision on such issues, and to issue all recognized remedies available at law or in equity for any cause of action that is before the referee, including an award of attorneys’ fees and costs in accordance with California law. The referee shall not, however, have the power to award punitive damages, nor any other damages which are not permitted by the express provisions of this lease, and the parties hereby waive any right to recover any such damages. The referee shall oversee discovery and may enforce all discovery orders in the same manner as any trial court judge, with rights to regulate discovery and to issue and enforce subpoenas, protective orders and other limitations on discovery available under California law; provided, however, that the referee shall limit discovery to that which is essential to the effective prosecution or defense of the action, and in no event shall discovery by either party include more than one non-expert witness deposition unless both parties otherwise agree. The reference proceeding shall be conducted in accordance with California law (including the rules of evidence), and in all regards, the referee shall follow California law applicable at the time of the reference proceeding. In accordance with Section 644 of the California Code of Civil procedure, the decision of the referee upon the whole issue must stand as the decision of the court, and upon the filing of the statement of decision with the clerk of the court, or with the judge if there is no clerk, judgment may be entered thereon in the same manner as if the action had been tried by the court. The parties shall promptly and diligently cooperate with one another and the referee, and shall perform such acts as may be necessary to obtain a prompt and expeditious resolution of the dispute or controversy in accordance with the terms of this Section 14.7(b). To the extent that no pending lawsuit has been filed to obtain the appointment of a referee, any party, after the issuance of the decision of the referee, may apply to the court of the county in which the Premises are located for confirmation by the court of the decision of the referee in the same manner as a petition for confirmation of an arbitration award pursuant to Code of Civil Procedure Section 1285 et seq. (as same may be amended or any successor statute(s) thereto).

     14.8 SATISFACTION OF JUDGMENT. The obligations of Landlord do not constitute the personal obligations of the individual partners, trustees, directors, officers, members or shareholders of Landlord or its constituent partners or members. Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only from the interest of Landlord in the Project and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord’s right, title or interest in the Project, including proceeds from insurance or condemnation, and no action for any deficiency may be sought or obtained by Tenant.

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ARTICLE 15. END OF TERM

     15.1. HOLDING OVER. If Tenant holds over for any period after the Expiration Date (or earlier termination of the Term) without the prior written consent of Landlord, such tenancy shall constitute a tenancy at sufferance only and a Default by Tenant; such holding over with the prior written consent of Landlord shall constitute a month-to-month tenancy commencing on the 1^st day following the termination of this Lease and terminating 30 days following delivery of written notice of termination by either Landlord or Tenant to the other. In either of such events, possession shall be subject to all of the terms of this Lease, except that the monthly rental shall be 150% of the total monthly rental for the month immediately preceding the date of termination, subject to Landlord’s right to modify same upon 30 days notice to Tenant. The acceptance by Landlord of monthly hold-over rental in a lesser amount shall not constitute a waiver of Landlord’s right to recover the full amount due unless otherwise agreed in writing by Landlord. If Tenant fails to surrender the Premises upon the expiration of this Lease despite written demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claims made by any succeeding tenant relating to such failure to surrender. The foregoing provisions of this Section 15.1 are in addition to and do not affect Landlord’s right of re-entry or any other rights of Landlord under this Lease or at law.

     15.2. MERGER ON TERMINATION. The voluntary or other surrender of this Lease by Tenant, or a mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises.

     15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear, repairs which are Landlord’s obligation and loss by casualty or condemnation excepted, and shall remove or fund to Landlord the cost of removing all wallpapering and voice and/or data transmission cabling installed by or for Tenant, together with all personal property and debris, and shall perform all work required under Section 7.3 of this Lease and/or the Work Letter (if any ) attached hereto, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal and restore the affected area to its pre-existing condition, reasonable wear and tear excepted, provided that Landlord may instead elect to repair any structural damage at Tenant’s expense. If Tenant shall fail to comply with the provisions of this Section 15.3, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises. It is understood that Tenant shall remove the Cabling Equipment installed in the Premises as of the Commencement Date of this Lease upon the Expiration Date or earlier termination of this Lease, and shall repair the Premises resulting from such removal at its sole cost and expense.

ARTICLE 16. PAYMENTS AND NOTICES

     All sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth in Item 12 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent pursuant to Section 4.1, all payments shall be due and payable within 5 days after demand. All payments requiring proration shall be prorated on the basis of the number of days in the pertinent calendar month or year, as applicable. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered to the other party, at the address set forth in Item 12 of the Basic Lease Provisions, by personal service or electronic facsimile transmission, or by any courier or “overnight” express mailing service. Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. The refusal to accept delivery of a notice, or the inability to deliver the notice (whether due to a change of address for which notice was not duly given or other good reason), shall be deemed delivery and receipt of the notice as of the date of attempted delivery. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them.

ARTICLE 17. RULES AND REGULATIONS

     Tenant agrees to comply with the Rules and Regulations attached as Exhibit E, and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and/or Common Areas, provided that the same are enforced in a non-discriminatory manner and provided that the same are not

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inconsistent with the terms of this Lease. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease or any other act or conduct by any other tenant, and the same shall not constitute a constructive eviction hereunder. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant’s failure to keep and observe the Rules and Regulations shall constitute a default under this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling.

ARTICLE 18. BROKER’S COMMISSION

     The parties recognize as the broker(s) who negotiated this Lease the firm(s) whose name(s) is (are) stated in Item 10 of the Basic Lease Provisions, and agree that Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. It is understood that Landlord’s Broker represents only Landlord in this transaction and Tenant’s Broker (if any) represents only Tenant. Each party warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and agrees to indemnify and hold the other party harmless from any cost, expense or liability (including reasonable attorneys’ fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by the indemnifying party in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease.

ARTICLE 19. TRANSFER OF LANDLORD’S INTEREST

     In the event of any transfer of Landlord’s interest in the Premises, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that Tenant is duly notified of the transfer. Any funds held by the transferor in which Tenant has an interest, including without limitation, the Security Deposit, shall be turned over, subject to that interest, to the transferee. No Mortgagee to which this Lease is or may be subordinate shall be responsible in connection with the Security Deposit unless the Mortgagee actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership.

ARTICLE 20. INTERPRETATION

     20.1. NUMBER. Whenever the context of this Lease requires, the words “Landlord” and “Tenant” shall include the plural as well as the singular.

     20.2. HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation.

     20.3. JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease.

     20.4. SUCCESSORS. Subject to Sections 13.1 and 22.3 and to Articles 9 and 19 of this Lease, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section 20.4 is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease.

     20.5. TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.

     20.6. CONTROLLING LAW/VENUE. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. Should any litigation be commenced between the parties in connection with this Lease, such action shall be prosecuted in the applicable State Court of California in the county in which the Building is located.

     20.7. SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

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     20.8. WAIVER. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party’s consent to any subsequent act. No breach of this Lease shall be deemed to have been waived unless the waiver is in a writing signed by the waiving party.

     20.9. INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section 20.9 shall not operate to excuse Tenant from the prompt payment of Rent.

     20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding.

     20.11. QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant’s part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall have the right of quiet enjoyment and use of the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord.

     20.12. SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns.

ARTICLE 21. EXECUTION AND RECORDING

     21.1. COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement.

     21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation, limited liability company or partnership, each individual executing this Lease on behalf of the entity represents and warrants that he is duly authorized to execute and deliver this Lease and that this Lease is binding upon the corporation, limited liability company or partnership in accordance with its terms. Tenant shall, at Landlord’s request, deliver a certified copy of its organizational documents or an appropriate certificate authorizing or evidencing the execution of this Lease.

     21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant.

     21.4. RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a commercially reasonable “short form” memorandum of this Lease for recording purposes.

     21.5. AMENDMENTS. No amendment or mutual termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect.

     21.6. ATTACHMENTS. All exhibits, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease.

ARTICLE 22. MISCELLANEOUS

     22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Except to the extent

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disclosure is required by law, Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant’s financial, legal and space-planning consultants, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease or pursuant to legal requirement.

     22.2. TENANT’S FINANCIAL STATEMENTS. The application, financial statements and tax returns, if any, submitted and certified to by Tenant as an accurate representation of its financial condition have been prepared, certified and submitted to Landlord as an inducement and consideration to Landlord to enter into this Lease. The application and statements are represented and warranted by Tenant to be correct and to accurately and fully reflect Tenant’s true financial condition as of the date of execution of this Lease by Tenant. Tenant shall during the Term furnish Landlord with current annual financial statements accurately reflecting Tenant’s financial condition upon written request from Landlord within 10 business days following Landlord’s request; provided, however, that so long as Tenant is a publicly traded corporation on a nationally recognized stock exchange, the foregoing obligation to deliver the statements shall be waived.

     22.3. MORTGAGEE PROTECTION. No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of its obligations hereunder or to terminate this Lease shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to any Mortgagee of a Mortgage covering the Building whose address has been furnished to Tenant and (b) such Mortgagee is afforded a reasonable opportunity to cure the default by Landlord (which shall in no event be less than 60 days), including, if necessary to effect the cure, time to obtain possession of the Building by power of sale or judicial foreclosure provided that such foreclosure remedy is diligently pursued. Tenant shall comply with any written directions by any Mortgagee to pay Rent due hereunder directly to such Mortgagee without determining whether a default exists under such Mortgagee’s Mortgage.

     22.4. SDN LIST. Tenant hereby represents and warrants that neither Tenant nor any officer, director, employee, partner, member or other principal of Tenant (collectively, “Tenant Parties”) is listed as a Specially Designated National and Blocked Person (“SDN”) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control (OFAC). In the event Tenant or any Tenant Party is or becomes listed as an SDN, Tenant shall be deemed in breach of this Lease and Landlord shall have the right to terminate this Lease immediately upon written notice to Tenant.

LANDLORD:		TENANT:
THE IRVINE COMPANY LLC,		SYNOVIS LIFE TECHNOLOGIES, INC.,
a Delaware limited liability company		a Minnesota corporation
By	/s/ Steven M. Case	By /s/ Richard W. Kramp
	Steven M. Case
	Senior Vice President, Leasing, Office Properties	Printed Name Richard W. Kramp Title President / CEO
By	/s/ Tracy M. Perrelle	By /s/ Brett Reynolds
	Tracy M. Perrelle
	Vice President, Operations, Office Properties	Printed Name Brett Reynolds Title Vice President of Finance and CFO

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4 Jenner Street,
Suite 180

EXHIBIT A
1 of 2

6 Jenner Street,
Suite 150

EXHIBIT A
2 of 2

EXHIBIT B

Operating Expenses
(Net)

     (a) From and after the Commencement Date, Tenant shall pay to Landlord, as additional rent, Tenant’s Share of all Operating Expenses, as defined in Section (f) below, incurred by Landlord in the operation of the Building and the Project. The term “Tenant’s Share” means that portion of any Operating Expenses determined by multiplying the cost of such item by a fraction, the numerator of which is the Floor Area and the denominator of which is the total rentable square footage, as reasonably determined from time to time by Landlord, of (i) the Building, for expenses reasonably determined by Landlord to benefit or relate substantially to the Building rather than the entire Project, and (ii) all or some of the buildings in the Project, for expenses reasonably determined by Landlord to benefit or relate substantially to all or some of the buildings in the Project rather than any specific building. Landlord reserves the right to allocate to the entire Project any Operating Expenses which may benefit or substantially relate to a particular building within the Project in order to maintain greater consistency of Operating Expenses among buildings within the Project. In the event that Landlord reasonably determines that the Premises or the Building incur a non-proportional benefit from any expense, or is the non-proportional cause of any such expense, Landlord may reasonably allocate a greater percentage of such Operating Expense to the Premises or the Building. In the event that any management and/or overhead fee payable or imposed by Landlord for the management of Tenant’s Premises is calculated as a percentage of the rent payable by Tenant and other tenants of Landlord, then the full amount of such management and/or overhead fee which is attributable to the rent paid by Tenant shall be additional rent payable by Tenant, in full, provided, however, that Landlord may elect to include such full amount as part of Tenant’s Share of Operating Expenses.

     (b) Commencing prior to the start of the first full “Expense Recovery Period” of the Lease (as defined in Item 7 of the Basic Lease Provisions), and prior to the start of each full or partial Expense Recovery Period thereafter, Landlord shall give Tenant a written estimate of the amount of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period. Tenant shall pay the estimated amounts to Landlord in equal monthly installments, in advance, concurrently with payments of Basic Rent. If Landlord has not furnished its written estimate for any Expense Recovery Period by the time set forth above, Tenant shall continue to pay monthly the estimated Tenant’s Share of Operating Expenses in effect during the prior Expense Recovery Period; provided that when the new estimate is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any accrued estimated Tenant’s Share of Operating Expenses based upon the new estimate. Landlord may from time to time change the Expense Recovery Period to reflect a calendar year or a new fiscal year of Landlord, as applicable, in which event Tenant’s Share of Operating Expenses shall be equitably prorated for any partial year.

     (c) Within 180 days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement (a “Reconciliation Statement”) showing in reasonable detail the actual or prorated Tenant’s Share of Operating Expenses incurred by Landlord during such Expense Recovery Period, and the parties shall within 30 days thereafter make any payment or allowance necessary to adjust Tenant’s estimated payments of Tenant’s Share of Operating Expenses, if any, to the actual Tenant’s Share of Operating Expenses as shown by the Reconciliation Statement. Any delay or failure by Landlord in delivering any Reconciliation Statement shall not constitute a waiver of Landlord’s right to require Tenant to pay Tenant’s Share of Operating Expenses pursuant hereto; provided that Landlord shall not be entitled to collect any Operating Expenses from Tenant which were not billed to Tenant within 3 years following the end of the Expense Recovery Period during which such Operating Expenses were incurred. Any amount due Tenant shall be credited against installments next coming due under this Exhibit B, and any deficiency shall be paid by Tenant together with the next installment. Should Tenant fail to object in writing to Landlord’s determination of Tenant’s Share of Operating Expenses within 120 days following delivery of Landlord’s Reconciliation Statement, Landlord’s determination of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on Tenant for all purposes and any future claims by Tenant to the contrary shall be barred.

     (d) Even though this Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Tenant’s Share of Operating Expenses for the Expense Recovery Period in which this Lease terminates, Tenant shall within 30 days of written notice pay the entire increase over the estimated Tenant’s Share of Operating Expenses already paid. Conversely, any overpayment by Tenant shall be rebated by Landlord to Tenant not later than 30 days after such final determination. However, in lieu thereof, Landlord may deliver a reasonable estimate of the anticipated reconciliation amount to Tenant prior to the

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Expiration Date of the Term, in which event the appropriate party shall fund the amount by the Expiration Date.

     (e) If, at any time during any Expense Recovery Period, any one or more of the Operating Expenses are increased to a rate(s) or amount(s) in excess of the rate(s) or amount(s) used in calculating the estimated Tenant’s Share of Operating Expenses for the year, then the estimate of Tenant’s Share of Operating Expenses may be increased by written notice from Landlord for the month in which such rate(s) or amount(s) becomes effective and for all succeeding months by an amount equal to the estimated amount of Tenant’s Share of the increase. Landlord shall give Tenant written notice of the amount or estimated amount of the increase, the month in which the increase will become effective, Tenant’s Share thereof and the months for which the payments are due. Tenant shall pay the increase to Landlord as part of the Tenant’s monthly payments of estimated expenses as provided in paragraph (b) above, commencing with the month in which effective.

     (f) The term “Operating Expenses” shall mean and include all Project Costs, as defined in Section (g) below, and Property Taxes, as defined in Section (h) below.

     (g) The term “Project Costs” shall mean all expenses of operation, management, repair, replacement and maintenance of the Building and the Project, including without limitation all appurtenant Common Areas (as defined in Section 6.2 of the Lease), and shall include the following charges by way of illustration but not limitation: water and sewer charges; insurance premiums, deductibles, or reasonable premium equivalents or deductible equivalents should Landlord elect to self insure any risk that Landlord is authorized to insure hereunder; license, permit, and inspection fees; light; power; window washing; trash pickup; janitorial services to any interior Common Areas; heating, ventilating and air conditioning; supplies; materials; equipment; tools; reasonable fees for consulting services; access control/security costs, inclusive of the reasonable cost of improvements made to enhance access control systems and procedures; establishment of reasonable reserves for replacements and/or repairs; costs incurred in connection with compliance with any laws or changes in laws applicable to the Building or the Project; the cost of any capital improvements or replacements (other than tenant improvements for specific tenants) to the extent of the amortized amount thereof over the useful life of such capital improvements or replacements (or, if such capital improvements or replacements are anticipated to achieve a cost savings as to the Operating Expenses, any shorter estimated period of time over which the cost of the capital improvements or replacements would be recovered from the estimated cost savings) calculated at a market cost of funds, all as determined by Landlord, for each year of useful life or shorter recovery period of such capital expenditure whether such capital expenditure occurs during or prior to the Term; costs associated with the maintenance of an air conditioning, heating and ventilation service agreement, and maintenance of an intrabuilding network cable service agreement for any intrabuilding network cable telecommunications lines within the Project, and any other maintenance, repair and replacement costs associated with such lines; capital costs associated with a requirement related to demands on utilities by Project tenants, including without limitation the cost to obtain additional phone connections; labor; reasonably allocated wages and salaries, fringe benefits, and payroll taxes for administrative and other personnel directly applicable to the Building and/or Project, including both Landlord’s personnel and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 7.2, 10.2, and Exhibits C and F of the Lease; and reasonable overhead and/or management fees for the professional operation of the Project. It is understood and agreed that Project Costs may include competitive charges for direct services (including, without limitation, management and/or operations services) provided by any subsidiary, division or affiliate of Landlord.

     (h) The term “Property Taxes” as used herein shall include any form of federal, state, county or local government or municipal taxes, fees, charges or other impositions of every kind (whether general, special, ordinary or extraordinary) related to the ownership, leasing or operation of the Premises, Building or Project, including without limitation, the following: (i) all real estate taxes or personal property taxes levied against the Premises, the Building or Project, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and/or the Project, and any improvements, fixtures and equipment and other property of Landlord located in the Building and/or the Project, (iii) all assessments and fees for public improvements, services, and facilities and impacts thereon, including without limitation arising out of any Community Facilities Districts, “Mello Roos” districts, similar assessment districts, and any traffic impact mitigation assessments or fees; (iv) any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, and (v) taxes based on the receipt of rent (including gross receipts or sales taxes applicable to the receipt of rent), and (vi) costs and expenses incurred in contesting the amount or validity of any Property Tax by appropriate proceedings. Notwithstanding the foregoing, general net income or franchise taxes imposed against Landlord shall be excluded.

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     (i) Notwithstanding anything to the contrary contained in this Exhibit B, Operating Expenses shall not include Landlord’s costs of any of the following: (1) leasing commissions and costs of marketing; (2) the cost of any alterations, additions, changes or decorations that are made in order to prepare rentable space for a particular tenant, whether new or continued, except any alterations, additions, changes or decorations to Common Areas; (3) payments of principal and interest on any mortgages, deeds of trust or other encumbrances upon the Building; (4) the cost of any items for which Landlord is directly and actually reimbursed by insurance proceeds, condemnation awards or by a tenant of the Building (except by way of the reimbursement of Operating Expenses in clauses similar to this Lease); (5) wages, salaries or other compensation paid to executive employees of Landlord ranking above the level of property manager or portfolio engineer; (6) costs associated with the operation of the business of the entity which constitutes Landlord, which costs are not directly related to maintaining, operating, managing, repairing or replacing the Common Areas or the Building (by way of example, the formation of the entity, internal accounting and legal matters, including but not limited to preparation of tax returns and financial statements and gathering of data therefor), costs of defending any lawsuits unrelated to maintaining, operating, managing, repairing or replacing the Common Areas or the Building, and costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Building; (7) any expense representing an amount paid for products or services (other than overall property management) to a person or entity related to or affiliated with Landlord to the extent such expense is in excess of the fair market value of such services and products; (8) costs of remediation of Hazardous Materials which are (i) in or on the Building as of the date of this Lease and which are classified as Hazardous Materials as of the date of this Lease under laws in effect as of the date of this Lease, or (ii) which are subsequently brought onto the Building by Landlord or with the express consent of Landlord and which are on the date of their introduction on to the Building classified as Hazardous Materials under laws in effect as of the date of such introduction, excluding in the case of both (i) and (ii) above, lawful use and disposition of reasonable quantities of supplies used in the ordinary course of operation and maintenance of like buildings; (9) franchise, documentary transfer, inheritance or capital stock taxes or taxes imposed upon or measured by the income or profits of Landlord; (10) any accrued and unfunded pension for any personnel; (11) any rent, additional rent, imposition or other charge payable under any ground lease (including any “sandwich” lease) or sublease to or assumed by Landlord; (12) accounting fees, other than those incurred in connection with the operation of the Project and the preparation of statements required pursuant to the provisions of this Lease and similar provisions of other leases of space in the Building; (13) costs and expenses (including court costs, attorneys’ fees and disbursements) related to or arising under or in connection with disputes with tenants, any lessor under a lease or any holder of a mortgage or disputes which result in punitive damages being assessed against Landlord, or disputes relating to claims of personal injury or property damage; (14) the cost of any work or services performed or other expenses incurred in connection with installing, operating and maintaining any observatory, broadcasting facility or any athletic or recreational club; provided, however, that this exclusion shall not apply to the cost of HVAC, cleaning, cafeteria or other services furnished to an area of space leased to a tenant (other than Landlord or an affiliate of Landlord) and used by such tenant for such purposes; (15) costs incurred to correct any breach by Landlord of its obligations under this Lease; (16) late fees, penalties, interest charges or similar costs incurred by Landlord; (17) unrecovered expenses resulting directly from the gross negligence or willful misconduct of Landlord, its agents, servants or employees; or (18) costs incurred due to violation by Landlord of any laws, rules, regulations or ordinances applicable to the Building.

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EXHIBIT C

UTILITIES AND SERVICES

     Tenant shall be responsible for and shall pay promptly, directly to the appropriate supplier, all charges for electricity metered to the Premises, telephone, telecommunications service, janitorial service, interior landscape maintenance and all other utilities, materials and services furnished directly to Tenant or the Premises or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord represents and warrants that it has granted the necessary easements to the various utility companies as necessary for Tenant to use such services from the Premises. Landlord shall make a reasonable determination of Tenant’s proportionate share of the cost of water, gas, sewer, refuse pickup and any other utilities and services that are not separately metered to the Premises and services, and Tenant shall pay such amount to Landlord, as an item of additional rent, within 10 days after delivery of Landlord’s statement or invoice therefor. Alternatively, Landlord may elect to include such cost in the definition of Project Costs in which event Tenant shall pay Tenant’s proportionate share of such costs in the manner set forth in Section 4.2. Tenant shall also pay to Landlord as an item of additional rent, within 10 days after delivery of Landlord’s statement or invoice therefor, Landlord’s “standard charges” (as hereinafter defined, which shall be in addition to the electricity charge paid to the utility provider) for “after hours” usage by Tenant of each HVAC unit servicing the Premises. If the HVAC unit(s) servicing the Premises also serve other leased premises in the Building, “after hours” shall mean usage of said unit(s) before 6:00 A.M. or after 6:00 P.M. on Mondays through Fridays, before 9:00 A.M. or after 1:00 P.M. on Saturdays, and all day on Sundays and nationally-recognized holidays, subject to reasonable adjustment of said hours by Landlord. If the HVAC unit(s) serve only the Premises, “after hours” shall mean more than 66 hours of usage during any week during the Term. “After hours” usage shall be determined based upon the operation of the applicable HVAC unit during each of the foregoing periods on a “non-cumulative” basis (that is, without regard to Tenant’s usage or nonusage of other unit(s) serving the Premises, or of the applicable unit during other periods of the Term). As used herein, “standard charges” shall mean the following charges for each hour of “after hours” use (in addition to the applicable electricity charges paid to the utility provider) of the following described HVAC units: (i) $1.00 per hour for 1-5 ton HVAC units, (ii) $5.00 per hour for 6-10 ton HVAC units.

Notwithstanding the foregoing, the parties acknowledge and agree that electricity and janitorial services to the 6 Jenner Premises are controlled by Landlord and the cost thereof will be included in Operating Expenses.

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EXHIBIT D

TENANT’S INSURANCE

     The following requirements for Tenant’s insurance shall be in effect at the Building, and Tenant shall also cause any subtenant to comply with the requirements. Landlord reserves the right to adopt reasonable nondiscriminatory modifications and additions to these requirements. Tenant agrees to obtain and present evidence to Landlord that it has fully complied with the insurance requirements.

     1. Tenant shall, at its sole cost and expense, commencing on the date Tenant is given access to the Premises for any purpose and during the entire Term, procure, pay for and keep in full force and effect: (i) commercial general liability insurance with respect to the Premises and the operations of or on behalf of Tenant in, on or about the Premises, including but not limited to coverage for personal injury, contractual liability, independent contractors, broad form property damage, fire legal liability, products liability (if a product is sold from the Premises), and liquor law liability (if alcoholic beverages are sold, served or consumed within the Premises), which policy(ies) shall be written on an “occurrence” basis and for not less than $2,000,000 combined single limit (with a $50,000 minimum limit on fire legal liability) per occurrence for bodily injury, death, and property damage liability, or the current limit of liability carried by Tenant, whichever is greater, and subject to such increases in amounts as Landlord may determine from time to time; (ii) workers’ compensation insurance coverage as required by law, together with employers’ liability insurance coverage of at least $1,000,000; (iii) with respect to improvements, alterations, and the like required or permitted to be made by Tenant under this Lease, builder’s risk insurance, in an amount equal to the replacement cost of the work; (iv) insurance against fire, vandalism, malicious mischief and such other additional perils as may be included in a standard “special form” policy, insuring all Tenant Installations, trade fixtures, furnishings, equipment and items of personal property in the Premises, in an amount equal to not less than 90% of their actual replacement cost (with replacement cost endorsement), which policy shall also include business interruption coverage in an amount sufficient to cover 1 year of loss. Additionally, in the event Landlord consents to Tenant’s use, generation or storage of Hazardous Materials on, under or about the Premises pursuant to Section 5.3 of this Lease, Landlord shall have the continuing right to require Tenant, at Tenant’s sole cost and expense (provided the same is available for purchase upon commercially reasonable terms), to purchase insurance specified and approved by Landlord, with coverage not less than Five Million Dollars ($5,000,000.00), insuring (a) any Hazardous Materials shall be removed from the Premises, (b) the Premises shall be restored to a clean, healthy, safe and sanitary condition, and (c) any liability of Tenant, Landlord and Landlord’s officers, directors, shareholders, agents, employees and representatives, arising from such Hazardous Materials. In no event shall the limits of any policy be considered as limiting the liability of Tenant under this Lease.

     2. All policies of insurance required to be carried by Tenant pursuant to this Exhibit D shall be written by responsible insurance companies authorized to do business in the State of California and with a general policyholder rating of not less than “A-” and financial rating of not less than “VIII” in the most current Best’s Insurance Report. The deductible or other retained limit under any policy carried by Tenant shall be commercially reasonable, and Tenant shall be responsible for payment of such retained limit with full waiver of subrogation in favor of Landlord. Any insurance required of Tenant may be furnished by Tenant under any blanket policy carried by it or under a separate policy. A certificate of insurance, certifying that the policy has been issued, provides the coverage required by this Exhibit and contains the required provisions, together with endorsements acceptable to Landlord evidencing the waiver of subrogation and additional insured provisions required below, shall be delivered to Landlord prior to the date Tenant is given the right of possession of the Premises. Proper evidence of the renewal of any insurance coverage shall also be delivered to Landlord not less than thirty (30) days prior to the expiration of the coverage. In the event of a loss covered by any policy under which Landlord is an additional insured, Landlord shall be entitled to review a copy of such policy.

     3. Each policy evidencing insurance required to be carried by Tenant pursuant to this Exhibit shall contain the following provisions and/or clauses satisfactory to Landlord: (i) with respect to Tenant’s commercial general liability insurance, a provision that the policy and the coverage provided shall be primary and that any coverage carried by Landlord shall be excess of and noncontributory with any policies carried by Tenant, together with a provision including Landlord and any other parties in interest designated by Landlord as additional insureds; (ii) except with respect to Tenant’s commercial general liability insurance, a waiver by the insurer of any right to subrogation against Landlord, its agents, employees, contractors and representatives which arises or might arise by reason of any payment under the policy or by reason of any act or omission of Landlord, its agents, employees, contractors or representatives; and (iii) a provision that the insurer will not cancel the coverage provided by the policy without first giving Landlord 30 days prior written notice. Tenant shall also name Landlord as an additional insured on any excess or umbrella liability insurance policy carried by Tenant.

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     4. In the event that Tenant fails to procure, maintain and/or pay for, at the times and for the durations specified in this Exhibit D, any insurance required by this Exhibit D, or fails to carry insurance required by any governmental authority, and such failure continues for 30 days beyond notice and demand for cure, Landlord may at its election procure that insurance and pay the premiums, in which event Tenant shall repay Landlord all sums paid by Landlord, together with interest at the maximum rate permitted by law and any related costs or expenses incurred by Landlord, within 30 days following Landlord’s written demand to Tenant.

NOTICE TO TENANT: IN ACCORDANCE WITH THE TERMS OF THIS LEASE, TENANT MUST PROVIDE EVIDENCE OF THE REQUIRED INSURANCE TO LANDLORD’S MANAGEMENT AGENT PRIOR TO BEING AFFORDED ACCESS TO THE PREMISES.

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EXHIBIT E

RULES AND REGULATIONS

          This Exhibit sets forth the rules and regulations governing Tenant’s use of the Premises leased to Tenant pursuant to the terms, covenants and conditions of the Lease to which this Exhibit is attached and therein made part thereof. In the event of any conflict or inconsistency between this Exhibit and the Lease, the Lease shall control.

     1. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall, which may appear unsightly from outside the Premises.

     2. The walls, walkways, sidewalks, entrance passages, elevators, stairwells, courts and vestibules shall not be obstructed or used for any purpose other than ingress and egress of pedestrian travel to and from the Premises, and shall not be used for smoking, loitering or gathering, or to display, store or place any merchandise, equipment or devices, or for any other purpose. The walkways, sidewalks, entrance passageways, courts, vestibules and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant’s business unless such persons are engaged in illegal activities. Smoking is permitted outside the building and within the Project only in areas designated by Landlord. Neither Tenant nor its employees, agents, contractors, invitees or licensees shall bring any firearm, whether loaded or unloaded, into the Project at any time. No tenant or employee or invitee or agent of any tenant shall be permitted upon the roof of the Building without prior written approval from Landlord.

     3. No awnings or other projection shall be attached to the outside walls of the Building. No security bars or gates, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the express written consent of Landlord.

     4. Tenant shall not mark, nail, paint, drill into, or in any way deface any part of the Premises or the Building except to affix standard pictures or other wall hangings on the interior walls of the premises so long as they are not visible from the exterior of the building. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord in writing. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant.

     5. The toilet rooms, urinals, wash bowls and other plumbing apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. Any pipes or tubing used by Tenant to transmit water to an appliance or device in the Premises must be made of copper or stainless steel, and in no event shall plastic tubing be used for that purpose. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, caused it.

     6. Landlord shall direct electricians as to the manner and location of any future telephone wiring. No boring or cutting for wires will be allowed without the prior consent of Landlord. The locations of the telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord.

     7. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the permitted use of the Premises. No exterior storage shall be allowed at any time without the prior written approval of Landlord. The Premises shall not be used for cooking or washing clothes without the prior written consent of Landlord, or for lodging or sleeping or for any immoral or illegal purposes.

     8. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall not use, keep or permit to be used, or kept, any foul or obnoxious gas or substance in the Premises or permit or suffer the Premises to be used or occupied in any manner offensive or objectionable to Landlord or other occupants of this or neighboring buildings or premises by reason of any odors, fumes or gases.

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     9. No animals, except for seeing eye dogs, shall be permitted at any time within the Premises.

     10. Tenant shall not use the name of the Building or the Project in connection with or in promoting or advertising the business of Tenant, except as Tenant’s address, without the written consent of Landlord. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord’s reasonable opinion, tends to impair the reputation of the Project or its desirability for its intended uses, and upon written notice from Landlord any Tenant shall refrain from or discontinue such advertising.

     11. Canvassing, soliciting, peddling, parading, picketing, demonstrating or otherwise engaging in any conduct that unreasonably impairs the value or use of the Premises or the Project are prohibited and each Tenant shall cooperate to prevent the same. Landlord shall have full and absolute authority to regulate or prohibit the entrance to the Premises of any vendor, supplier, purveyor, petitioner, proselytizer or other similar person if, in the good faith judgment of Landlord, such person will be involved in general solicitation activities, or the proselytizing, petitioning, or disturbance of other tenants or their customers or invitees, or engaged or likely to engage in conduct which may in Landlord’s opinion distract from the use of the Premises for its intended purpose. Notwithstanding the foregoing, Landlord reserves the absolute right and discretion to limit or prevent access to the Buildings by any food or beverage vendor, whether or not invited by Tenant, and Landlord may condition such access upon the vendor’s execution of an entry permit agreement which may contain provisions for insurance coverage and/or the payment of a fee to Landlord.

     12. No equipment of any type shall be placed on the Premises which in Landlord’s opinion exceeds the load limits of the floor or otherwise threatens the soundness of the structure or improvements of the Building.

     13. Regular building hours of operation are from 6:00 AM to 6:00 PM Monday through Friday and 9:00 AM to 1:00 PM on Saturday. No air conditioning unit or other similar apparatus shall be installed or used by any Tenant without the prior written consent of Landlord.

     14. The entire Premises, including vestibules, entrances, parking areas, doors, fixtures, windows and plate glass, shall at all times be maintained in a safe, neat and clean condition by Tenant. All trash, refuse and waste materials shall be regularly removed from the Premises by Tenant and placed in the containers at the locations designated by Landlord for refuse collection. All cardboard boxes must be “broken down” prior to being placed in the trash container. All styrofoam chips must be bagged or otherwise contained prior to placement in the trash container, so as not to constitute a nuisance. Pallets must be immediately disposed of by tenant and may not be disposed of in the Landlord provided trash container or enclosures. Pallets may be neatly stacked in an exterior location on a temporary basis (no longer than 5 days) so long as Landlord has provided prior written approval. The burning of trash, refuse or waste materials is prohibited.

     15. Tenant shall use at Tenant’s cost such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require.

     16. All keys for the Premises shall be provided to Tenant by Landlord and Tenant shall return to Landlord any of such keys so provided upon the termination of the Lease. Tenant shall not change locks or install other locks on doors of the Premises, without the prior written consent of Landlord. In the event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to Landlord the costs thereof. Upon the termination of its tenancy, Tenant shall deliver to Landlord all the keys to lobby(s), suite(s) and telephone & electrical room(s) which have been furnished to Tenant or which Tenant shall have had made.

     17. No person shall enter or remain within the Project while intoxicated or under the influence of liquor or drugs. Landlord shall have the right to exclude or expel from the Project any person who, in the absolute discretion of Landlord, is under the influence of liquor or drugs.

     18. The moving of large or heavy objects shall occur only between those hours as may be designated by, and only upon previous written notice to, Landlord, and the persons employed to move those objects in or out of the Building must be reasonably acceptable to Landlord. Without limiting the generality of the foregoing, no freight, furniture or bulky matter of any description shall be received into or moved out of the lobby of the Building or carried in the elevator.

     19. Tenant shall not install equipment, such as but not limited to electronic tabulating or computer equipment, requiring electrical or air conditioning service in excess of that to be provided by Landlord under the Lease without prior written consent of Landlord.

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     20. Landlord may from time to time grant other tenants of the Project individual and temporary variances from these Rules, provided that any variance does not have a material adverse effect on the use and enjoyment of the Premises by Tenant.

     21. Landlord reserves the right to amend or supplement the foregoing Rules and Regulations and to adopt and promulgate additional rules and regulations applicable to the Premises. Notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to the Tenant.

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EXHIBIT F

PARKING

     Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 11 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking, at no additional charge to Tenant. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking of vehicles no larger than full size passenger automobiles, sport utility vehicles or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking within the Common Areas shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any area which would prohibit or impede the free flow of traffic within the Common Areas. There shall be no parking of any vehicles for longer than a forty-eight (48) hour period unless otherwise authorized by Landlord, and vehicles which have been abandoned or parked in violation of the terms hereof may be towed away at the owner’s expense. Nothing contained in this Lease shall be deemed to create liability upon Landlord for any damage to motor vehicles of visitors or employees, for any loss of property from within those motor vehicles, or for any injury to Tenant, its visitors or employees, unless ultimately determined to be caused by the sole active negligence or willful misconduct of Landlord. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking within the Common Areas. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; to restrict parking by tenants, their officers, agents and employees to employee parking areas; to enforce parking charges (by operation of meters or otherwise); and to do and perform such other acts in and to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Any person using the parking area shall observe all directional signs and arrows and any posted speed limits. In no event shall Tenant interfere with the use and enjoyment of the parking area by other tenants of the Project or their employees or invitees. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for longer than 48-hours, is prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas.

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EXHIBIT G

ADDITIONAL PROVISIONS

The following additional provisions shall be binding on Landlord and Tenant:

     1. CONTINGENCY. Tenant understands and agrees that the effectiveness of this Lease is contingent upon the mutual execution of a lease surrender and termination agreement for the Premises between Landlord and Pegasus Biologics, the current tenant in possession of the Premises. In the event this contingency is not satisfied by August 31, 2009, Tenant may, at its option by written notice to Landlord, terminate this Lease at any time thereafter but prior to the date the contingency is actually satisfied.

     2. LANDLORD’S RESPONSIBILITIES. Landlord shall correct, repair and/or replace any non-compliance of the Building and/or the Common Areas with all building permits and codes in effect and applicable as of the execution of this Lease, including without limitation, the provisions of Title III of the Americans With Disabilities Act (“ADA”). Said costs of compliance shall be Landlord’s sole cost and expense and shall not be part of Project Costs. Landlord shall correct, repair or replace any non-compliance of the Building and the Common Areas with any revisions or amendments to applicable building codes, including the ADA, becoming effective after the execution of this Lease, provided that the amortized cost of such repairs or replacements (amortized over the useful life thereof) shall be included as Project Costs payable by Tenant. All other ADA compliance issues which pertain to the Premises, including without limitation, in connection with Tenant’s construction of any Alterations or other improvements in the Premises and the operation of Tenant’s business and employment practices in the Premises, shall be the responsibility of Tenant at its sole cost and expense. The repairs, corrections or replacements required of Landlord or of Tenant under the foregoing provisions of this Section 2 shall be made promptly following notice of non-compliance from any applicable governmental agency.

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EXHIBIT H

LANDLORD’S DISCLOSURES

SPECTRUM

     The capitalized terms used and not otherwise defined in this Exhibit shall have the same definitions as set forth in the Lease. The provisions of this Exhibit shall supersede any inconsistent or conflicting provisions of the Lease.

     1. Landlord has been informed that the El Toro Marine Corps Air Station (MCAS) has been listed as a Federal Superfund site as a result of chemical releases occurring over many years of occupancy. Various chemicals including jet fuel, motor oil and solvents have been discharged in several areas throughout the MCAS site. A regional study conducted by the Orange County Water District has estimated that groundwaters beneath more than 2,900 acres have been impacted by Trichloroethlene (TCE), an industrial solvent. There is a potential that this substance may have migrated into the ground water underlying the Premises. The U.S. Environmental Protection Agency, the Santa Ana Region Quality Control Board, and the Orange County Health Care Agency are overseeing the investigation/cleanup of this contamination. To the Landlord’s current actual knowledge, the ground water in this area is used for irrigation purposes only, and there is no practical impediment to the use or occupancy of the Premises due to the El Toro discharges.

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EXHIBIT J

THE IRVINE COMPANY – INVESTMENT PROPERTIES GROUP

HAZARDOUS MATERIAL SURVEY FORM

     The purpose of this form is to obtain information regarding the use of hazardous substances on Investment Properties Group (“IPG”) property. Prospective tenants and contractors should answer the questions in light of their proposed activities on the premises. Existing tenants and contractors should answer the questions as they relate to ongoing activities on the premises and should update any information previously submitted.

     If additional space is needed to answer the questions, you may attach separate sheets of paper to this form. When completed, the form should be sent to the following address:

THE IRVINE COMPANY MANAGEMENT OFFICE
111 Innovation Drive
Irvine, CA 92617

     Your cooperation in this matter is appreciated. If you have any questions, please call your property manager at (949) 720-4400 for assistance.

1.	GENERAL INFORMATION.
	Name of Responding Company:	Synovis Life Technologies, Inc.
	Check all that apply:	Tenant        þ                             Contractor o
		Prospective o                             Existing    o
	Mailing Address: 6 Jenner Street, Suite 150, Irvine, CA 92618
	Contact person & Title: Keith Myers
	Telephone Number: 949-502-3240 ext 226
	Current TIC Tenant(s):
	Address of Lease Premises:
	Length of Lease or Contract Term:
	Prospective TIC Tenant(s):
	Address of Leased Premises: 6 Jenner, Suite 150, and 4 Jenner, Suite 180, Irvine, CA
	Address of Current Operations:

	Describe the proposed operations to take place on the property, including principal products manufactured or services to be conducted. Existing tenants and contractors should describe any proposed changes to ongoing operations.
	The design, development, manufacture and distribution of medical devices.
2.	HAZARDOUS MATERIALS. For the purposes of this Survey Form, the term “hazardous material” means any raw material, product or agent considered hazardous under any state or federal law. The term does not include wastes which are intended to be discarded.

2.1 Will any hazardous materials be used or stored on site?

Chemical Products                                     Yes þ No o

Biological Hazards/ Infectious Wastes      Yes o No þ

Radioactive Materials                                Yes o No þ

Petroleum Products                                    Yes o No þ

2.2 List any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g., bottles in storage closet on the premises).

	Location and Method
Hazardous Materials	of Storage	Quantity
Isopropanol	4 Jenner/Flammable Cabinet	<5 Gals
Hydrochloric Acid	4 Jenner/Corrosive Cabinet	2 Gals
Potassium Chloride	4 Jenner/Corrosive Cabinet	2 Gals

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2.3 Is any underground storage of hazardous materials proposed or currently conducted on the premises? Yes o No þ

If yes, describe the materials to be stored, and the size and construction of the tank. Attach copies of any permits obtained for the underground storage of such substances.

3. HAZARDOUS WASTE. For the purposes of this Survey Form, the term “hazardous waste” means any waste (including biological, infectious or radioactive waste) considered hazardous under any state or federal law, and which is intended to be discarded.

3.1 List any hazardous waste generated or to be generated on the premises, and indicate the quantity generated on a monthly basis.

	Location and Method
Hazardous Materials	of Storage	Quantity

3.2 Describe the method(s) of disposal (including recycling) for each waste. Indicate where and how often disposal will take place.

	Location and Method
Hazardous Materials	of Storage	Disposal Method

3.3	Is any treatment or processing of hazardous, infectious or radioactive wastes currently conducted or proposed to be conducted on the premise? Yes o No þ
	If yes, please describe any existing or proposed treatment methods.

3.4 Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations on the premises.

4. SPILLS

4.1	During the past year, have any spills or releases of hazardous materials occurred on the premises? Yes o No þ
	If so, please describe the spill and attach the results of any testing conducted to determine the extent of such spills.
4.2	Were any agencies notified in connection with such spills? Yes o No þ
	If so, attach copies of any spill reports or other correspondence with regulatory agencies.

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4.3	Were any clean-up actions undertaken in connection with the spills? Yes o No þ
	If so, briefly describe the actions taken. Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work.

5. WASTEWATER TREATMENT/DISCHARGE

5.1	Do you discharge industrial wastewater to:
	o storm drain?          þ sewer?
	o surface water?       o no industrial discharge
5.2	Is your industrial wastewater treated before discharge? Yes o No þ
	If yes, describe the type of treatment conducted.
5.3	Attach copies of any wastewater discharge permits issued to your company with respect to its operations on the premises.

6. AIR DISCHARGES.

6.1	Do you have any air filtration systems or stacks that discharge into the air? Yes o No þ
6.2	Do you operate any equipment that requires air emissions permits? Yes o No þ
6.3	Attach copies of any air discharge permits pertaining to these operations.

7. HAZARDOUS MATERIALS DISCLOSURES.

7.1	Does your company handle an aggregate of at least 500 pounds, 55 gallons or 200 cubic feet of hazardous material at any given time? Yes o No þ
7.2	Has your company prepared a Hazardous Materials Disclosure – Chemical Inventory and Business Emergency Plan or similar disclosure document pursuant to state or county requirements? Yes o No þ
	If so, attach a copy.
7.3	Are any of the chemicals used in your operations regulated under Proposition 65? NO
	If so, describe the procedures followed to comply with these requirements.
7.4	Is your company subject to OSHA Hazard Communication Standard Requirements? Yes o No þ
	If so, describe the procedures followed to comply with these requirements.

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8. ANIMAL TESTING.

8.1	Does your company bring or intend to bring live animals onto the premises for research or development purposes? Yes o No þ
	If so, describe the activity.
8.2	Does your company bring or intend to bring animal body parts or bodily fluids onto the premises for research or development purposes? Yes þ No o
	If so, describe the activity.
	Food grade meat by-products are used in the manufacture of medical devices and collagen products.

9. ENFORCEMENT ACTIONS, COMPLAINTS.

9.1	Has your company ever been subject to any agency enforcement actions, administrative orders, lawsuits, or consent orders/decrees regarding environmental compliance or health and safety? Yes o No þ
	If so, describe the actions and any continuing obligations imposed as a result of these actions.
9.2	Has your company ever received any request for information, notice of violation or demand letter, complaint, or inquiry regarding environmental compliance or health and safety? Yes o No þ
9.3	Has an environmental audit ever been conducted which concerned operations or activities on premises occupied by you? Yes o No þ
9.4	If you answered “yes” to any questions in this section, describe the environmental action or complaint and any continuing compliance obligation imposed as a result of the same.

SYNOVIS LIFE TECHNOLOGIES, INC.

A Minnesota corporation

By: /s/ Richard W. Kramp

Name: Richard W. Kramp

Title: President / CEO

Date: July 17, 2009

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EXHIBIT X

WORK LETTER

TENANT IMPROVEMENTS

     The tenant improvements work by Landlord shall consist of filling in the cased opening between Suite 100 and Suite 150 in the 6 Jenner Premises (the “Tenant Improvements”).

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Jenner Business Park

EXHIBIT Y

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EX-21.1

Exhibit 21.1

SYNOVIS LIFE TECHNOLOGIES, INC.
LIST OF SUBSIDIARIES OF THE COMPANY
FOR THE YEAR ENDED OCTOBER 31, 2009

Name of Subsidiary	Jurisdiction/State of Incorporation
(1) Synovis Interventional Solutions, Inc.	Minnesota
(2) Synovis Micro Companies Alliance, Inc.	Minnesota
(3) Bio-Vascular B.V., Breda	Netherlands
(4) Synovis Caribe	Puerto Rico
(5) Synovis Orthopedic and Woundcare, Inc.	Minnesota

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated January 5, 2010, with respect to the consolidated financial statements, schedule and internal control over financial reporting included in the Annual Report of Synovis Life Technologies, Inc. on Form 10-K for the year ended October 31, 2009. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Synovis Life Technologies, Inc. on Forms S-8 (File No. 333-162402, effective October 9, 2009; File No. 333-80259, effective June 9, 1999; File No. 333-14093, effective October 15, 1996; File No. 333-14137, effective October 15, 1996; File No. 333-144480, effective July 11, 2007; and File No. 333-130598, effective December 22, 2005).

/S/ Grant Thornton LLP
Minneapolis, Minnesota
January 5, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard W. Kramp, certify that:

1. I have reviewed this annual report on Form 10-K of Synovis Life Technologies, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 annual 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 annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and

d) disclosed in this annual report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

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

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

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

January 5, 2010

/s/ Richard W. Kramp

Richard W. Kramp

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Brett Reynolds, certify that:

1. I have reviewed this annual report on Form 10-K of Synovis Life Technologies, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 annual 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 annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and

d) disclosed in this annual report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

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

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

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

January 5, 2010

/s/ Brett Reynolds

Brett Reynolds

Vice-President of Finance,
Chief Financial Officer and Corporate Secretary

EX-32.1

Exhibit 32.1

CERTIFICATIONS UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned officers, Richard W. Kramp, Chief Executive Officer of Synovis Life Technologies, Inc., a Minnesota corporation (the “Company”), and Brett Reynolds, Chief Financial Officer of the Company, each hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i)	the Annual Report on Form 10-K of the Company for the fiscal year ended October 31, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 5, 2010	By:	/s/ Richard W. Kramp
	Name:	Richard W. Kramp
	Title:	Chief Executive Officer
Date: January 5, 2010	By:	/s/ Brett Reynolds
	Name:	Brett Reynolds
	Title:	Chief Financial Officer