10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

or

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

For the transition period from              to             

Commission file number 001-33753

GENOPTIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0840570
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)
1811 Aston Avenue, Carlsbad California	92008
(Address of principal executive offices)	(Zip Code)

(760) 268-6200

(Registrant’s telephone number, including area code)

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

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	The NASDAQ Global Select 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 ¨ 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 Act. Yes ¨ 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.

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

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

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $542 million, based on the closing price of the registrant’s common stock on The NASDAQ Global Market of $31.99 per share on June 30, 2009.

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 17,360,097, as of February 18, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2010 Annual Meeting of Stockholders to be held on June 1, 2010, are incorporated herein by reference into Part III of this Annual Report on Form 10-K. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.

GENOPTIX, INC.

FORM 10-K—ANNUAL REPORT

For the Fiscal Year Ended December 31, 2009

Table of Contents

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	20
Item 1B.	Unresolved Staff Comments	44
Item 2.	Properties	44
Item 3.	Legal Proceedings	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	45
Item 6.	Selected Financial Data	47
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 8.	Financial Statements and Supplementary Data	67
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	96
Item 9A.	Controls and Procedures	96
Item 9B.	Other Information	98
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	99
Item 11.	Executive Compensation	99
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	99
Item 13.	Certain Relationships and Related Transactions, and Director Independence	99
Item 14.	Principal Accounting Fees and Services	99
PART IV
Item 15.	Exhibits and Financial Statement Schedules	100
Signatures
Exhibit 10.35
Exhibit 10.36
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

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PART I

Forward-Looking Statements

The information in this Annual Report on Form 10-K contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, or SEC.

Forward-looking statements include, but are not limited to, statements about:

• the expected reimbursement levels from governmental payors and private insurers;

• application of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws, Health Insurance Portability and Accountability Act of 1996, or HIPAA, including amendments thereto by the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, regulations, state medical privacy laws, federal and state false claims laws and corporate practice of medicine laws, to our business and the services we provide;

• regulatory developments in the United States;

• our ability to maintain our license under Clinical Laboratory Improvement Amendments of 1988, or CLIA;

• our ability to expand our operations and increase our market share;

• our ability to expand our service offerings by adding new testing capabilities;

• our ability to compete with other clinical diagnostic laboratories;

• our expected growth in revenues and profitability;

• the ability of Cartesian Medical Group, Inc., or Cartesian, to hire and retain an adequate number of highly trained hematopathologists;

• our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;

• our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure; and

• the accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements.

These forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report on Form 10-K. You should read this Annual Report on Form 10-K, and the documents that we reference in this Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect.

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Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Item 1.    Business.

Overview

We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists, or hem/oncs. Our highly trained group of hematopathologists, or hempaths, utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patient’s condition, aiding hem/oncs in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.

Our key service offerings, COMPASS^SM and CHART^®, are designed to meet the specific needs of community-based hem/oncs. Our COMPASS service offering includes the determination by our hempaths of the appropriate diagnostic tests to be conducted and the performance of these tests. We then evaluate, synthesize and summarize the results into an easy to read comprehensive report, and our hempaths are available to interpret these results jointly with the hem/onc, giving them the benefit of our expertise and analytical experience. Our CHART service offering combines multiple COMPASS assessments and analyses of disease progression after intervening clinical action, providing the hem/onc with a valuable diagnostic tool to track both a patient’s disease and response to the hem/onc’s prescribed treatment regimen over time.

Our revenue growth rate reflects the value of our differentiated service offerings to these community-based hem/oncs. Our revenues increased 59% to $184.4 million for the year ended December 31, 2009, up from $116.2 million for the year ended December 31, 2008. Income from operations increased 102% to $53.8 million for the year ended December 31, 2009 up from $26.6 million for the year ended December 31, 2008, despite our increased investment in personnel, associated employee related costs and facility expansion costs.

Management has continued efforts to ensure that office and laboratory space is appropriate to accommodate the necessary capacity requirements to meet our current and expanding business. Specifically, as of December 31, 2009, we occupied approximately 116,000 square feet of office and laboratory space in two separate facilities. In June 2009, we entered into a lease agreement for approximately 44,000 square feet of space in Carlsbad, California to be used for laboratory space. This facility is currently undergoing improvements and is expected to be ready for our use in the second quarter of 2010. In January 2010, we entered into a purchase agreement to acquire this facility and related land. Additionally, in January 2010 we entered into a lease agreement for approximately 33,000 square feet of space in Carlsbad, California to be used as a customer service and support facility. This facility will be undergoing tenant improvements and is expected to be ready for our use in the second quarter of 2010. When we complete the improvements for the additional space, we expect to have approximately 193,000 square feet of total available office and laboratory space in Carlsbad, California. See further discussion of these transactions within Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We were incorporated in Delaware in January 1999. Our principal executive offices are located at 1811 Aston Avenue, Carlsbad, California 92008 and our telephone number is (760) 268-6200. Our corporate website address is www.genoptix.com to which we regularly post copies of our press releases, as well as additional information about us. We do not incorporate the information contained on, or accessible through, our website into this Annual Report on Form 10-K, and you should not consider it part of this Annual Report on Form 10-K. Unless the context indicates otherwise, as used in this Annual Report on Form 10-K, the terms “Genoptix,” “Genoptix Medical Laboratory,” “we,” “us” and “our” refer to Genoptix, Inc., a Delaware corporation, Cartesian and Genoptix, PR LLC, our wholly-owned subsidiary located in Puerto Rico. Genoptix, Inc. does business as Genoptix Medical Laboratory and Genoptix Clinical Laboratory.

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We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other information with the SEC. The public may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at www.sec.gov, where the SEC maintains reports, proxy and information statements and other information regarding Genoptix and other issuers that file electronically with the SEC. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make copies available to the public free of charge through our website at www.genoptix.com. We also regularly post on our corporate website copies of our press releases as well as additional information about us. Interested persons can subscribe on our website to email alerts that are sent automatically when we issue press releases, file our reports with the SEC or certain other information is available.

Segment and Geographic Information

We identify our operating segments based on business activities, management responsibility and geographical location. For all periods presented, we operated in a single business segment. For 2009, less than 1% of our revenue was generated outside of the United States and related territories.

Our Approach

Our customer-centric service model enables us to deliver what we believe is superior value to our hem/onc customers and distinguishes us from other diagnostic service providers.

Once a hem/onc notifies us about a blood or bone marrow specimen to be analyzed, we arrange for its prompt pick-up and transport to our laboratory for analysis. Samples are tracked real time throughout transport, substantially reducing the risk of sample loss. After receiving the specimen in our state-of-the-art laboratory, one of our hempaths conducts a detailed review of all documents and materials relating to the patient case. The hempath then determines the acuity and urgency of the patient case and whether immediate intervention may be required by the hem/onc, and confirms that the appropriate tests are ordered and conducted. We then assign the entire patient case to a single hempath, who interprets and integrates all test results.

By ordering our COMPASS service offering, the hem/onc authorizes our hempath to determine the appropriate diagnostic tests to be performed, and our hempath then integrates patient history and previous and current test results into a comprehensive diagnostic report. As part of our CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time.

Our clinical services coordinators, or CSCs, work with the hempath responsible for the patient case to ensure the quality, completeness and consistency of the report. A detailed report including results of all tests performed is delivered either through eCOMPASS, our secure web-based patient reporting system, by facsimile, courier or mail, direct interface into our customer’s information system or printer, or personally over the telephone, based upon the preference of the ordering hem/onc. In addition, our hempath responsible for the patient case is clearly identified and readily available to discuss any aspect of the patient case with the ordering hem/onc.

We believe this integrated approach provides a key service to community-based hem/oncs and enables us to capitalize on a large, unmet market opportunity.

Market Overview and Opportunity

We focus on marketing our specialized diagnostic services to community-based hem/oncs treating malignancies of the blood and bone marrow, and other forms of cancer. According to the National Cancer Institute, or NCI, and the Surveillance Epidemiology and End Results, or SEER, Cancer Statistics Review; there

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were more than 850,000 patients in the United States living with malignancies or pre-malignant diseases of the blood and bone marrow in 2009, with more than 150,000 new cases being diagnosed each year. A 2008 survey by the American Medical Association, or AMA, reports that these patients are served through approximately 12,500 practicing hem/oncs, and that approximately 76% of these hem/oncs practice in the community setting. According to the AMA, from 1998 to 2008, the number of practicing hem/oncs grew at an annual rate of approximately 3.7%, significantly outpacing the approximately 2.3% overall annual growth in physicians in the United States.

In order for hem/oncs to make the correct diagnosis, choose or modify appropriate therapeutic regimens and monitor the effectiveness of these regimens, they require highly specialized diagnostic services. Serial blood and bone marrow examinations are typically performed to follow the progress of the disease and the patient’s response to therapy. The typical bone marrow case consists of histopathology, flow cytometry, molecular testing and cytogenetic assessments. In 2009, approximately 50% of our patient cases consisted of bone marrow cases and the other 50% consisted primarily of peripheral blood-based cases. Based on our experience to-date and Medicare reimbursement rates that were effective as of January 1, 2009 for these procedures, the average bone marrow case generates service revenues of at least $3,000. The typical blood-based case does not require the same degree of complexity as a bone marrow case and generally consists of only one or more of the assessments typically performed in a bone marrow case, or a Circulating Tumor Cell, or CTC, test. Based on our experience to-date and Medicare reimbursement rates that were effective as of January 1, 2009 for these procedures, blood-based cases generate service revenues ranging from approximately $100 per case up to $3,000 per case or more, depending upon the tests included in each case. Based upon estimates from the Centers for Medicare and Medicaid Services, or CMS, we believe there are more than 375,000 bone marrow procedures performed annually in the United States, each of which includes at least one bone marrow test, and that the bone marrow testing market alone represents approximately $1.0 billion opportunity annually. In addition, based upon our patient case mix and the number of people diagnosed with malignancies and pre-malignancies of the blood and bone marrow each year, we believe there are more than 250,000 of our kind of blood-based tests performed annually in the United States.

The market for specialized laboratory services for both bone marrow and blood-based testing has historically been served by hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories, each of which has its own strengths, but none of which exclusively focuses on the specific needs of community-based hem/oncs. Our service offerings, which are based on a comprehensive assessment of a specific patient case by using sophisticated diagnostic technologies, have been specifically built around these unmet needs of the community-based hem/oncs, and, we believe, address their need for specialized diagnostic services of complex, individual patient cases.

Our Competitive Strengths

Personalized and Comprehensive Approach Focused on the Specific Diagnostic Needs of Community-Based Hem/Oncs

Our entire process from specimen collection to delivery of a comprehensive diagnostic report is tailored to the specific needs of the community-based hem/onc. Upon arrival of a specimen at our facilities, one of our hempaths conducts a detailed review of the patient case, determines its acuity and urgency and whether immediate intervention may be required, and ensures that the appropriate tests are ordered and conducted. We then assign the entire patient case to a single hempath, who interprets and integrates all test results. In our COMPASS and CHART service offerings, our hempath integrates patient history and current and previous test results into a comprehensive summary diagnosis. As part of our CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. In addition, our hempath responsible for the patient case is clearly identified and readily available to the ordering hem/onc to personally discuss any aspect of the patient case. We believe that this approach better serves the specific needs of community-based hem/oncs by providing a differentiated, specialized and integrated service and key diagnostic tools that enable them to provide better patient care.

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Differentiated Value Proposition Through COMPASS and CHART Service Offerings

Our key service offerings, COMPASS and CHART, are specifically designed to address the unmet needs of community-based hem/oncs. Our COMPASS service offering involves the determination by our hempaths of the appropriate diagnostic tests to be conducted and the performance of these tests. We then evaluate, synthesize and summarize the results into an easy to read comprehensive report, and our hempaths are available to interpret these results jointly with the hem/onc, giving them the benefit of our expertise and analytical experience. Our CHART service offering combines multiple COMPASS assessments and analyses of disease progression after intervening clinical action, providing the hem/onc with a diagnostic tool to track both a patient’s disease and response to the hem/onc’s prescribed treatment regimen. We believe our COMPASS and CHART service offerings facilitate efficient and effective patient care by providing hem/oncs with a clear, concise and actionable diagnosis rather than just providing individual test results.

Highly Trained and Specialized Personnel

Our highly trained and specialized sales representatives, hempaths and CSCs are an important factor in providing our services and enabling our growth.

Our sales representatives are highly experienced, with strong technical knowledge and an extensive understanding of the community-based hem/onc’s practice. Each of our sales representatives typically has a four-year Bachelor of Science or Arts degree, preferably in the biological sciences, a three-to five-year history selling diagnostic services or specialty pharmaceuticals directly to hem/oncs, and has completed extensive in-house sales training programs, including training on applicable regulatory and compliance issues.

Our extensive staff of hempaths has over 210 years of combined hematopathology expertise. Their credentials and substantial experience with highly challenging diagnoses permits them to collaboratively discuss difficult cases in a manner typically found in an academic setting.

Our CSCs are an integral component of our focus on quality and are responsible for the review and quality of every test report before it is sent to the customer. All of our CSCs have a minimum of a Bachelor of Science or Arts degree in the biological sciences or substantial relevant industry experience.

We believe our highly trained and specialized national sales force focused exclusively on community-based hem/oncs, combined with the expertise of our hempaths and the quality assurance provided by our CSCs, results in a higher quality, customer-friendly service offering to community-based hem/oncs.

Experienced Management Team and Metric Driven Culture

We are led by Tina S. Nova, Ph.D., our president and chief executive officer. In addition to her work with us, Dr. Nova has been involved in the co-founding of three life science companies, two of which completed initial public offerings, or IPOs, and one of which was acquired. As our chief executive officer, Dr. Nova leads an experienced executive management team with an average of more than 22 years of healthcare industry, financial, legal or operational experience. Our management team has created a culture of accountability throughout the organization in which we track the performance of our services real time and use our extensive internal systems and processes to continuously measure the performance of our business operations. For example, we track and measure the daily average speed for answering calls, the percentage of calls answered live, the average turn around time for each of our services and general customer buying patterns, including cases per month, frequency of orders and tests per case. We believe that our metric driven culture results in higher quality services, increased customer satisfaction and improved productivity.

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Our Growth Strategy

Our objective is to become the leading specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hem/oncs and to continue to capitalize on our diagnostic service offerings to increase our market share, revenues and profitability, while meeting the needs of our community-based hem/onc customers. In furtherance of this objective, our growth strategy has the following key elements:

Expand Our Organization and Infrastructure

Based on case volume and the estimated total number of blood and bone marrow procedures nationwide, we estimate our current market share for bone marrow procedures at approximately 7% and that the U.S. bone marrow testing market alone represents an approximately $1.0 billion opportunity. For the foreseeable future, we intend to continue to grow our market share by increasing our personnel, including sales personnel, hempaths, CSCs, scientists, laboratory technicians and administrative employees, as well as expanding our facility and information systems infrastructure. These continued investments will enable us to visit more hem/oncs more frequently and inform them more fully of our service offerings, while maintaining our existing relationships with hem/oncs and current high standards of customer service. As our name becomes more recognized and our existing sales force becomes more established in its markets, we believe that our sales force productivity should increase and the time it takes new field sales representatives to reach their full potential and the average cost per sale should decrease. Additionally, as we have grown and become a larger enterprise, we have continued efforts to strengthen our organizational structure through planned investment in key mid-level management personnel in the areas of laboratory operations, sales, marketing, business development, customer service and administration.

Management has continued efforts to ensure that office and laboratory space is appropriate to accommodate the necessary capacity requirements to meet our current and expanding business. Specifically, as of December 31, 2009, we occupied approximately 116,000 square feet of office and laboratory space in two separate facilities. In June 2009, we entered into a lease agreement for approximately 44,000 square feet of space in Carlsbad, California to be used for laboratory space. This facility is currently undergoing improvements and is expected to be ready for our use in the second quarter of 2010. In January 2010, we entered into a purchase agreement to acquire this facility and related land. Additionally, in January 2010 we entered into a lease agreement for approximately 33,000 square feet of space in Carlsbad, California to be used as a customer service and support facility. This facility will be undergoing tenant improvements and is expected to be ready for our use in the second quarter of 2010. See further discussion of these transactions within Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe that our current facilities, including those currently undergoing improvements, are adequate for our needs for the immediate future. When we complete the improvements for the additional space, we expect to have approximately 193,000 square feet of total available office and laboratory space in Carlsbad, California. We believe that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

Expand Service Offerings to Hem/Oncs

We intend to continue to be among the first to market with new technologies and innovations as the standard of care for the diagnosis and treatment of malignancies of the blood and bone marrow and other forms of cancer evolves. We believe that by continuously enhancing and supplementing our service offerings, we will further strengthen our relationships with hem/oncs and expand our revenue opportunities. For example, we believe we were the first commercial laboratory to offer a comprehensive assessment of a patient case through our COMPASS service offering; the first commercial laboratory to offer mutation testing for Janus Kinase 2, a new molecular diagnostic test for a subtype of leukemia; the first commercial laboratory to offer molecular testing for the MPL W515 L/K mutation used in characterizing another leukemia subtype. In addition, through our CHART service offering, we believe we are currently the only commercial laboratory with the capability of consistently

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offering a specific product which provides an analysis of disease progression over time after intervening clinical action. Over the next few years, we anticipate a number of additional blood-based assays for liquid and solid tumors will become available. We intend to pursue being one of the first laboratories to commercialize these new assays for the community-based hem/onc market segment.

In 2009, we launched three additional solid tumor assays, K-RAS Mutation Analysis, B-RAF Mutation Analysis and EGFR Amplification Analysis and solid tumor evaluation, to enable us to further benefit our hem/onc customers. K-RAS Mutation Analysis and EGFR Amplification Analysis are based upon formalin-fixed, paraffin-embedded, or FFPE, tissue blocks. These samples are blocks of tumor-containing tissue that remain from the original patient biopsy or other prior diagnostic work-up. They have a nearly perpetual shelf life as the cells are fixed and practically permanently preserved. FFPE tissue has therefore become useful as a tissue source for various modern, molecular–based testing technologies such as PCR and certain cytogenetic assays. The K-RAS Mutation Analysis assay assists hem/oncs with certain therapy choices for treatment of colorectal and non-small cell lung cancer. The EGFR Amplification Analysis assay assists hem/oncs in identifying patients who are likely candidates for certain epidermal growth factor receptor, or EGFR, targeted cancer therapies. B-RAF Mutation Analysis is helpful in the management of colorectal cancer. B-RAF Mutation Analysis identifies mutations in the B-RAF gene as an indicator of less than favorable prognosis.

In January 2010, we launched our newest service offering, NexCourse ^SM , a comprehensive molecular evaluation for colorectal carcinoma. NexCourse offers physician directed case management and expands our COMPASS and CHART service approaches to solid tumor indications. NexCourse provides a comprehensive diagnostic service for solid tumor testing and indicates whether or not a patient is likely to respond to certain treatments, and which treatments may be ineffective or toxic. NexCourse provides our hem/onc customers with a consultation report that provides actionable results in a concise, patient-specific and correlated report with clinically relevant information to assist them with treatment decisions.

These new offerings provide us the opportunity to enhance our service offerings to our hem/onc customers to serve a broader array of cancer patients. Although these assays are technically demanding, we believe these additional service offerings will provide our hem/onc customers with diagnostic tools that provide clearer direction on what were previously very difficult medical dilemmas.

Pursue Additional Collaborations and Acquisitions to Supplement Our Business

We intend to opportunistically pursue additional collaborations with pharmaceutical companies and acquisitions or in-licensing of businesses, products or technologies that will enable us to accelerate the implementation of our strategic plan and to increase the number of hem/onc customers we serve and/or expand the services we provide to them, including by way of investments in other companies, licensing of technology, co-development arrangements, collaborations, asset purchases and other similar transactions. For example, we currently provide specialized testing services and access to our hempaths through collaborations with select pharmaceutical companies. We expect these collaborations to continue to grow over time, which we believe will improve our financial performance and name recognition and reputation among hem/oncs, and potentially provide us with early access to new technologies available for commercialization. We expect annual revenues from these collaborations to remain at approximately 1% of our total annual revenues in 2010.

Our Services

Our key service offerings include COMPASS and CHART. Test requisitions for more than half of the patient samples we processed for the years ended December 31, 2009, 2008 and 2007 included our COMPASS or CHART service offerings. We introduced CHART in the first quarter of 2007 and believe that it provides significant value to hem/oncs in their efforts to evaluate the effectiveness of the prescribed treatment regimen

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over time. The following diagnostic services and non-proprietary technologies, each of which include professional interpretation by our hempaths and utilize complex and sophisticated instrumentation operated by highly trained personnel, can be ordered individually or, for hematomalignancies, as part of our COMPASS or CHART service offerings:

• Histopathology—expert microscopic evaluation of blood or bone marrow material in order to identify the nature and extent of disease;

• Flow Cytometry—a quantitative method to characterize the maturation level of cells and measure the type and amount of leukemia/lymphoma via automated assessment of cellular surface characteristics;

• Cytogenetics—a suite of methods designed to reveal changes and/or abnormalities at the level of the chromosome in order to identify malignant processes and to assist in the prognosis of a malignancy;

• Molecular—a quantitative method to follow progression of disease and response to therapy at the genetic level (DNA and RNA); and

• CTC—identification and enumeration of tumor cells circulating in the blood of metastatic breast, colon and prostate cancer patients.

Sales and Marketing

We believe our sales and marketing approach distinguishes us from our competitors. Most of our sales representatives have a four-year Bachelor of Science or Arts degree, primarily in the biological sciences, and a three-to five-year history selling diagnostic services or niche pharmaceuticals directly to hem/oncs. Each of them has completed extensive in-house sales training programs, including training on applicable regulatory and compliance issues. We have organized our sales force and customer-facing commercial teams into regional business units, led by regional directors and district managers, all working together to coordinate the sales, service and support personnel for that particular region. We believe this regional business unit model allows us to add additional sales and support resources to a particular territory while maintaining our existing relationships with community-based hem/oncs and a high level of management control.

Each of our field sales representatives receives a base salary commensurate with his or her years of experience and sales commissions based upon actual sales performance against his or her territory-specific sales budget. We also offer periodic promotional sales contests in which each sales representative may receive various incentives.

We have an extensive field sales force that has increased to 80 and now operate out of 32 states nationwide as of February 18, 2010. They focus exclusively on community-based hem/oncs and their office staff. Our increased field sales representatives have enabled us to penetrate more accounts over a wider geographic area, increase our customer base and further focus our field sales representatives on in-person customer visits. Our sales force productivity has increased primarily as a result of enhanced recognition in the market, smaller geographies per sales representative, price increases, expanded service offerings and efficiencies realized from a more experienced sales force, which included expanding our sales management team to 19 as of February 18, 2010. We intend to hire additional field sales representatives throughout the United States and anticipate that we will eventually have field sales representatives in nearly all of the 48 contiguous states. Currently, there are several geographic regions in which one sales representative services community-based hem/onc customers in several states and we intend to hire additional field sales representatives in these areas. We expect to continue to focus our marketing and selling efforts on community-based hem/oncs and their office staff. Our sales representatives are highly experienced, with strong technical knowledge and an extensive understanding of the community-based hem/onc’s practice. They concentrate on a geographic area determined by the size and number of practicing community-based hem/oncs in that area. Selling efforts are conducted through visits to community-based hem/onc offices. Our field sales representatives inform the hem/oncs and their office staff of the value of our service offerings to assist them in making vital decisions concerning the treatment of malignancies of the

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blood and bone marrow, and other forms of cancer. Our field sales representatives are skilled in probing the unmet needs of the community-based hem/onc and their office staff with regard to specialized diagnostic services and discussing the features and benefits of our service offerings. Additionally, our field sales representatives provide follow-up sales and service calls to the community-based hem/onc office to ensure we are continuing to meet their needs and expectations for our service offerings, and to explore the possibility of other opportunities for the community-based hem/onc to use our specialized diagnostic services. This approach allows our field sales representatives to build and enhance relationships with our customers, helping us to better understand their needs and develop new service offerings. Further, we have grown our regionally based team of managed care account executives, who will continue to build relationships with our payors. We believe the expansion of our sales force in the future will enable us to visit more hem/oncs more frequently and inform them more fully of our service offerings, while maintaining our relationships with hem/oncs and current high standards of customer service.

We have developed an extensive library of sales and marketing materials to support our sales efforts. Our marketing materials are targeted at three distinct decision makers with respect to our services: community-based hem/oncs; office staff and medical assistants; and patients. Materials for hem/oncs focus on education and description of our differentiated and unique workflow as applied to the diagnosis of hematomalignancies. This includes detailed descriptions of how we manage patient cases as compared to traditional laboratory services providers, updates on new diagnostic technologies and synopses from recent medical meetings regarding malignancies of the blood and bone marrow, and other forms of cancer. Materials for office staff and medical assistants focus on practice workflow issues and highlight proper sample preparation, as well as basic information on new diagnostic technologies. We also offer field-based training for medical assistants advising them on the proper technique for making blood and bone marrow smears to ensure we receive optimal specimens. Our marketing materials for patients address, in simple terms, questions about the technologies used to diagnose disease and concerns about billing and insurance issues.

Competition

As a specialized diagnostic service provider, we rely extensively on our high quality of service to attract and retain community-based hem/oncs and other healthcare professionals as our customers. We compete primarily based on the quality of testing, reporting and information systems, reliability in patient sample transport, reputation in the medical community and access to our highly qualified hempaths and new technologies and tests as they become available. Our primary competitors include hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories.

Hospital Pathologists. Pathologists located within a hospital have traditionally provided most of the diagnostic services required by community-based hem/oncs. These pathologists typically rely on close interaction with the treating physician, including face-to-face contact if necessary. However, only very large hospitals tend to retain hempaths on staff, and most general pathologists do not have the expertise in hematology/oncology necessary to perform all the specialized services required by hem/oncs.

Esoteric Testing Laboratories. Esoteric testing laboratories typically are specialized regional centers focused on servicing hospitals and hospital-based pathologists, oftentimes maintaining a staff of hempaths on site that can provide support in the interpretation of certain results. The business models of these laboratories tend to be focused on the efficient delivery of individual tests rather than the comprehensive assessments of specific cases, and their target groups tend to be hospital pathologists as opposed to community-based hem/oncs.

National Reference Laboratories. National reference laboratories typically offer a full suite of tests for a variety of medical professionals including general practitioners, hospitals and pathologists. This emphasis on providing a broad product portfolio of commoditized tests at the lowest possible price tends to limit these laboratories’ ability to handle highly complex samples requiring special attention, such as bone marrow specimens. In addition, national reference laboratories tend not to provide ready access to a medical professional for interpretation of test results or a specialized focus on the needs of community-based hem/oncs.

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Academic Laboratories. Academic laboratories generally provide state-of-the-art technology and expertise. These laboratories are typically pursuing multiple activities and goals such as research and education or are committed to their own hospitals. This limits the attractiveness of academic laboratories to outside hem/oncs, who tend to have focused specialized needs.

Examples of our competitors include Genzyme Corporation, Quest Diagnostics Incorporated, Laboratory Corporation of America and Bio-Reference Laboratories, Inc. We believe that we can continue to effectively compete in our industry based on our differentiated services that offer community-based hem/oncs the technical expertise of an esoteric testing laboratory, the customer intimacy of a hospital pathologist and the state-of-the-art technology of an academic laboratory, while maintaining a specialized service focus that is not typically available from national reference laboratories that cover a broad range of medical specialties. We believe that our customer-focused and highly trained and knowledgeable sales force will continue to effectively differentiate our services from those of our competitors.

Quality Assurance

We consider the quality of our diagnostic services to be of critical importance, and we have established a comprehensive quality assurance program for our laboratory designed to drive accurate and timely test results and to ensure the consistent high quality of our testing services. In addition to the compulsory proficiency programs and external inspections required by CMS and other regulatory agencies, we have developed a variety of internal systems and procedures to emphasize, monitor and continuously improve the quality of our operations.

External Proficiency/Accreditations

We participate in numerous externally-administered quality surveillance programs, and our laboratory is accredited by the College of American Pathology, or CAP.

The CAP accreditation program involves both unannounced on-site inspections of the laboratory and participation in CAP’s ongoing proficiency testing program for all testing categories. CAP is an independent non-governmental organization of board-certified pathologists which accredits, on a voluntary basis, laboratories nationwide, and which has been accredited by CMS to inspect clinical laboratories to determine adherence to the CLIA standards. A laboratory’s receipt of accreditation by CAP satisfies the Medicare requirement for participation in proficiency testing programs administered by an external source, one of Medicare’s primary requirements for reimbursement eligibility. Our most recent CAP inspection was successfully completed in October 2008.

Internal Quality Control

We maintain internal quality controls by running samples with known diagnosis at the same time as patient samples are submitted for testing. We also have an extensive, internally administered program of blind sample proficiency testing (i.e., the testing laboratory does not know the sample being tested is a quality control sample). In addition, our CSCs are an integral component of our focus on quality—they are responsible for the review and quality of every test report before it is sent to the hem/onc customer and work with the hempath responsible for the report to ensure its quality, completeness and consistency. All of our CSCs have a minimum of a Bachelor of Science or Arts degree in the biological sciences or substantial relevant industry experience.

Information Systems

We have developed and implemented management information systems that support our operations as well as strategically position us for long-term growth in light of what we anticipate to be evolving market trends. We believe our information systems are secure and robust, and we maintain an off-site backup of all our data and

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e-mail systems on a regular basis. We track the performance of our services real time and provide our customers with progress reports upon request. We have also created extensive systems and processes to measure the performance of our business operations via daily monitoring of several hundred individual variables that provide insight on quality, productivity, profitability, performance-to-plan, customer buying patterns, customer communications, market share, suppliers and reimbursement. In addition, we provide our hem/onc customers with secure web-based patient reporting through eCOMPASS, which provides HIPAA compliant, encrypted notification of report availability via e-mail, remote access to reports, various search capabilities, the ability to print reports on demand, interfaces to electronic medical record systems, access to all previous patient reports for a particular patient and updates on testing services.

Billing and Reimbursement

Billing

Billing for diagnostic services is generally highly complex. We have implemented customer-friendly-billing processes that permit direct billing of third party payors and that accept all payor policies for “in-network” providers in those states where this type of treatment is permitted. Our billing system generates contractual adjustments for each case at the time it is billed, based on the applicable fee schedule associated with the patient’s insurance plan. This billing model is designed to reduce the complexity of billing arrangements that are typical in our industry and to minimize errors in processing and administrative burdens on our hem/onc customers. However, depending on our billing arrangement with each third party payor and applicable law, we are often obligated to bill in the specific manner prescribed by the various payors, such as private insurance companies, managed care companies, governmental payors such as Medicare and Medicaid, physicians, hospitals and employer groups, each of which may have different billing requirements. Additionally, the audit requirements we must meet to ensure compliance with applicable laws and regulations as well as our internal compliance policies and procedures add further complexity to the billing process. Other factors that complicate billing include:

• variability in coverage and information requirements among various payors;

• missing, incomplete or inaccurate billing information provided by ordering physicians;

• billings to payors with whom we do not have contracts;

• disputes with payors as to which party is responsible for payment;

• disputes with payors as to the appropriate level of reimbursement; and

• collection of patient receivables from copays, coinsurance or deductibles.

Billing for diagnostic services in connection with governmental payor programs is subject to numerous federal and state regulations and other requirements, resulting in additional costs to us. These additional costs include those related to: (1) increased complexity in our billing due to the additional procedures and processes required by governmental payor programs; (2) training and education of our employees and customers; (3) compliance and legal costs; and (4) costs related to, among other factors, medical necessity denials and the absence of advance beneficiary notices.

We are focused on carefully preparing claim submissions to minimize missing or incorrect information to facilitate billing and claims processing, and we have an internal billing and collections department that is devoted to mitigating unpaid claims. Our allowance for doubtful accounts has been provided for at the rate of approximately 2% and 3% of revenues for the years ended December 31, 2009 and 2008, respectively. Our days sales outstanding, or DSO, averaged 56 days in 2009, which was consistent with 56 days in 2008. As of December 31, 2009 and 2008, our DSO was 62 days and 53 days, respectively. The increase in our DSO as of December 31, 2009, pertains primarily to the timing of payments relating to certain contracted payors. We expect to maintain our average DSO levels into 2010 as we continue to pursue improvements to our collection procedures and work with our payors to ensure timely processing of reimbursement payments.

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Reimbursement

We provide diagnostic services primarily to community-based hem/oncs; however, our diagnostic service revenues may come from several sources. Depending on the billing arrangement and applicable law, the party that reimburses us for our services may be (1) the authorized party (such as a hospital, another laboratory or an employer) who ordered the testing service or otherwise referred the services to us, (2) a third party who provides coverage to the patient, such as an insurance company, managed care organization or a governmental payor program or (3) the patient. For the years ended December 31, 2009 and 2008, we derived approximately 59% and 60%, respectively, of our revenues from private insurance, including managed care organizations and other healthcare insurance providers, 40% and 38%, respectively, from Medicare and Medicaid and 1% and 2%, respectively, from other sources.

Because a large percentage of our revenue is derived from the Medicare program, the coverage and reimbursement rules are significant to our operations. As a Medicare-participating laboratory based in California, we bill the Medicare program’s California contractor and are subject to that contractor’s local coverage and reimbursement policies.

The Medicare Modernization Act of 2003, or MMA, mandated creation of Medicare Administrative Contractors, or MACs, replacing the current system of fiscal intermediary and carrier contractors who oversee fee-for-service claims for the Medicare Part A and Part B programs. In November 2007, CMS awarded the MAC Jurisdiction 1 (California, Hawaii, Nevada, American Samoa, Guam and the Northern Mariana Islands) to Palmetto GBA. The full transition to Palmetto GBA occurred effective September 2, 2008. Regulations became effective in 2003 which required MAC’s to issue local coverage determinations, or LCD’s, instead of local medical review policies, or LMRP’s. An LCD is a decision by a fiscal intermediary, or FI, carrier or MAC, on a local geographic basis (depending on the jurisdiction of the contractor), regarding whether an item or service is reasonable and necessary. The rules required MAC’s, over a 2-year period, to convert all existing LMRP’s into LCDs, placing only the “reasonable and necessary” provisions of the LMRP in the LCD. The remaining information (benefit category, statutory exclusion and coding provisions) was to be left in the LMRP or deleted. New LCD’s related to our specialized diagnostic services were introduced as a result of the consolidation of LCD’s and LMRP’s. In our experience with the current contractor, however, we have found their local coverage and reimbursement policies to be generally similar to those of its predecessor.

Reimbursement under the Medicare program for our specialized diagnostic services is subject to both the national Medicare clinical laboratory fee schedule and physician fee schedule. Both schedules are typically updated annually and subject to geographic adjustments. The physician fee schedule is designed to set compensation rates for those medical services provided to Medicare beneficiaries who require a degree of physician supervision. Outpatient clinical diagnostic laboratory tests are traditionally paid according to the clinical laboratory fee schedule. However, although the clinical laboratory fee schedule is generally the only basis of payment that can be made by the Medicare program with respect to most clinical laboratories, certain laboratory tests performed by physicians are exempt from the clinical laboratory fee schedule and are paid under the physician fee schedule. As a result, most of the services provided by us are reimbursed under the physician fee schedule.

The clinical laboratory fee schedule sets the maximum amount payable under Medicare for each specific laboratory billing code. We bill the program directly and must accept the scheduled amount as payment in full for covered tests performed on behalf of Medicare beneficiaries. Those services reimbursed under the clinical laboratory fee schedule generally do not result in coinsurance amounts but may result in beneficiary deductible responsibility. Payment under the clinical laboratory fee schedule has been limited from year-to-year by Congressional action such as imposition of national limitation amounts and freezes on the otherwise applicable annual consumer price index, or CPI, updates. Although the CPI update of the clinical laboratory fee schedule has been frozen since 2004 by the Medicare Prescription Drug Improvement and Modernization Act of 2003, after July 1, 2009, the freeze on the clinical laboratory fee schedule was updated using the percentage increase for the CPI from the previous 12-month (measured July through June) period minus 0.5%. On July 15, 2009, the

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CPI for 2009 was released and it showed a year over year decline of 1.4%. This implies that clinical laboratories will receive a 1.9% rate decrease from Medicare in 2010 as compared to the 4.5% rate increase that the laboratories experienced under the 2009 clinical laboratory fee schedule. The payment amounts under the Medicare clinical laboratory fee schedule are important not only for our reimbursement under Medicare, but also because the schedule often establishes the payment amounts set by other third party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients. As a result, in light of the anticipated reduction in the clinical laboratory fee schedule, certain third party payors may also reduce reimbursement amounts.

For the many anatomic pathology services we provide, we are reimbursed separately under the Medicare physician fee schedule and beneficiaries are responsible for applicable coinsurance and deductible amounts. The amounts paid under the physician fee schedule are based on geographically adjusted relative value units, or RVUs, for each procedure or service, adjusted by a budget neutrality adjustor, and multiplied by an annually determined conversion factor. Historically, the formula used to calculate the fee schedule conversion factor resulted, or would have resulted, in significant decreases in payment levels. However, in every year from 2004 through 2009, Congress has intervened to freeze or increase the conversion factor. Additionally, the U.S. House of Representatives passed legislation in November 2009, which would have increased Medicare payment rates for physicians by 1.2% and implemented a new formula for determining the growth rate in fees payable under the physician fee schedule. The U.S. Senate did not pass similar legislation, however.

As published in the November 25, 2009 Physician Fee Schedule Final Rule, the update to the conversion factor would have resulted in a 21.2% reduction to the conversion factor for 2010 in the absence of Congressional intervention. Subsequently, on December 19, 2009, Congress enacted the Department of Defense Appropriations Act of 2010, which provided a two-month 0% update to the 2010 Medicare physician fee schedule effective only for dates of service from January 1, 2010 through February 28, 2010. It remains to be seen whether Congress will enact legislation to revise the formula which determines the annual update to the conversion factor and payment rates, or if, once again, it will pass additional legislation to delay the payment reductions, including an implementation of a short-term extension of the February 28, 2010 date.

The payment amounts under the Medicare fee schedules are important not only for our reimbursement under Medicare, but also because the schedules often establish the payment amounts set by other third party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for laboratory services furnished to Medicaid recipients.

In any case, future Congressional action is uncertain and future methodological changes may result in reductions or increases to the Medicare physician fee schedule. Reductions in Medicare’s reimbursement rates for pathology services, for which we currently are paid under the Medicare physician fee schedule, would reduce the amount we receive for a substantial number of our specialized diagnostic tests. Because the vast majority of our diagnostic services currently are reimbursed under the physician fee schedule, changes to this fee schedule could result in a greater impact on our revenues than changes to the Medicare clinical laboratory fee schedule.

Governmental Regulation

Clinical Laboratory Improvement Amendments of 1988 and State Regulation

As a diagnostic service provider, we are required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Under CLIA, we are required to hold a certificate applicable to the type of work we perform and to comply with certain CLIA-imposed standards. CLIA regulates virtually all clinical laboratories by requiring they be certified by the federal government and comply with various operational, personnel, facilities administration, quality and proficiency requirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. CLIA does not preempt state laws that are more stringent than federal law.

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To renew our CLIA certificate, which expires February 3, 2011, we are subject to survey and inspection every two years to assess compliance with program standards, and may be subject to additional random inspections. Standards for testing under CLIA are based on the level of complexity of the tests performed by the laboratory. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. Our laboratory holds a CLIA certificate to perform high complexity testing. If a laboratory is certified as “high complexity” under CLIA, the laboratory may obtain analyte specific reagents, or ASRs, which are used to develop in-house diagnostic tests known as “home brews.”

CLIA compliance and certification is also a prerequisite to be eligible to bill for services provided to governmental payor program beneficiaries.

In addition to CLIA requirements, we are subject to various state laws. CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law. As a result, a number of states, including California, have implemented their own more stringent laboratory regulatory schemes. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls or prescribe record maintenance requirements. Our laboratory is licensed and accredited by the appropriate state agencies in the states in which we do business.

Federal and State Laws Regarding Patient Information Privacy and Security

Federal Laws

Under the administrative simplification provisions of HIPAA, the U.S. Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of protected health information, or PHI, used or disclosed by healthcare providers and other covered entities. Three principal regulations with which we are currently required to comply have been issued in final form under HIPAA: privacy regulations, security regulations and standards for electronic transactions.

The privacy regulations cover the use and disclosure of PHI by healthcare providers. These regulations also set forth certain rights that an individual has with respect to his or her PHI maintained by a healthcare provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. We have also implemented policies, procedures and standards to comply appropriately with the final HIPAA security regulations, which establish requirements for safeguarding the confidentiality, integrity and availability of PHI, which is electronically transmitted or electronically stored. The privacy regulations contain significant fines and other penalties for wrongful use or disclosure of PHI. We have implemented practices and procedures to meet the requirements of the HIPAA privacy regulations and state privacy laws.

In addition, we have taken necessary steps to comply with HIPAA’s standards for electronic transactions, which establish standards for common healthcare transactions. In particular, we have completed conversion of our electronic fee-for-service claim transactions and our electronic fee-for-service remittance transactions to the final HIPAA transaction standards for electronic transmissions, including electronic transactions and code sets used for billing claims, remittance advices, enrollment and eligibility.

We have also taken necessary steps to comply with HIPAA regulations on adoption of national provider identifiers, or NPIs. These regulations require the adoption of the national provider identifier as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions. We were required either to comply with this standard by May 23, 2007, or to implement contingency plans for an additional twelve-month period through May 23, 2008. During this period, CMS did not impose penalties on covered entities who implemented contingency plans provided they made reasonable and diligent efforts to become compliant with the rule. We applied for and received our NPI number, as well as, updated our billing system with the NPIs of our customer hem/oncs to ensure compliance with these CMS filing and processing requirements.

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Further, the HITECH Act requires HIPAA covered entities, such as clinical laboratories, to provide notification to affected individuals and to the Secretary of Health and Human Services, or the Secretary, following discovery of a breach of unsecured PHI. Unsecured PHI is PHI that is not secured through the use of a technology or methodology specified by the Secretary in published guidance. In some cases, the HITECH Act requires covered entities to provide notification to the media of breaches. In the case of a breach of unsecured PHI at or by a business associate of a covered entity, the Act requires the business associate to notify the covered entity of the breach. The HITECH Act requires the Secretary to post on the Department of Health and Human Services’ website a list of covered entities that experience breaches of unsecured PHI involving more than 500 individuals. Regulations implementing these provisions of the HITECH Act became effective for covered entities on September 23, 2009, although the Secretary announced that it would forego issuing sanctions against any covered entity that discovers a breach prior to February 22, 2010 and fails to provide the required notification. The HITECH Act made other changes relating to the HIPAA privacy and security rules, including, among others, establishing that, effective February 17, 2010, the security and privacy rules apply directly to business associates and, consequently, that a business associate’s violation of the rules may result in government enforcement action directly against the business associate.

Another development concerns the Red Flags Rule, which the Federal Trade Commission issued on May 23, 2002 and requires financial institutions and creditors with covered accounts to have identity theft prevention programs in place to identify, detect and respond to patterns, practices or specific activities that could indicate identity theft. A creditor includes any entity that regularly extends, renews or continues credit or which defers payment for goods or services. Since we routinely extend credit by billing for our services after such services are provided, we meet the definition of a “creditor” under the Red Flags Rule. Accordingly, we developed a written program designed to identify and detect the relevant warning signs – or “red flags” – of identity theft and described appropriate responses to prevent and mitigate identity theft in order to comply with the Red Flags Rule. In accordance with the Red Flags Rule, our program is managed by senior employees and includes appropriate staff training and provides for appropriate oversight.

The Federal Trade Commission has delayed enforcement of the Red Flags Rule several times. Enforcement of the regulations are currently scheduled for June 1, 2010.

State Laws

The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, we are required to comply with both HIPAA privacy regulations and varying state privacy and security laws. The Confidentiality of Medical Information Act, or CMIA, is California’s comprehensive statutory scheme governing the disclosure of medical information by providers of health care. Certain aspects of the CMIA are more stringent than the requirements of HIPAA, particularly with regard to the form used to obtain authorization to disclose a patient’s medical information and the disclosure of genetic test results. In addition, other provisions of California law require providers of health care to establish and implement appropriate administrative, technical and physical safeguards to protect the privacy of a patient’s medical information in order to reasonably safeguard confidential medical information from any unauthorized access or unlawful access, use or disclosure. Significant administrative penalties may be imposed for violation of any of these requirements. We have implemented policies and procedures to comply with all California laws governing the disclosure and protection of patient medical information and we utilize an authorization form that is compliant with California’s more stringent requirements, when necessary.

Massachusetts adopted Information Security, or InfoSec, Regulation on September 22, 2008, that require businesses, wherever located, that store or use information about Massachusetts residents, to implement comprehensive information security programs by January 1, 2010. The purposes of the Massachusetts regulations are to ensure the security and confidentiality of healthcare records, to protect against threats to the security or integrity of such records, and to prevent unauthorized access to and use of the records to prevent fraud and identity theft. The regulations require each covered business to “develop, implement, maintain and monitor a

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comprehensive written information security program” that applies to records that contain Massachusetts’ residents’ personal information. Before Massachusetts adopted its new regulations, only California had a statute or regulation that required all business to adopt information security practices. California’s information security mandate is vague. It states only that “a business that owns or licenses personal information about a California resident shall implement and maintain reasonable security procedures and practices appropriate to the nature of the information, to protect the personal information from unauthorized access, destruction, use, modification, or disclosure.” The Massachusetts regulations are detailed and specific. To comply with the Massachusetts regulations, businesses that own, license, store or maintain paper or electronic records that include personal information of Massachusetts residents have to implement comprehensive security measures. As a healthcare provider, we are obligated to comply with the above laws. We believe that we have created policies and procedures in compliance with the above laws including the encryption of patient information transmitted electronically.

Federal and State Fraud and Abuse Laws

The federal healthcare program Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under a governmental payor program. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests, and providing anything at less than its fair market value. The Anti-Kickback Statute is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, the U.S. Department of Health and Human Services has issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain provisions, which, if met, will assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. The penalties for violating the Anti-Kickback Statute can be severe. These sanctions include criminal penalties and civil sanctions, including fines, imprisonment and possible exclusion from the Medicare and Medicaid programs. Many states have also adopted statutes similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only governmental payor programs.

In addition to the administrative simplification regulations discussed above, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from governmental payor programs.

Finally, another development affecting the healthcare industry is the increased use of the federal False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity, who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payor program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government by submitting a false claim to the federal government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. In addition, various states have enacted false claim laws analogous to the

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federal False Claims Act, although many of these state laws apply where a claim is submitted to any third party payor and not merely a governmental payor program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from $5,500 to $11,000 for each separate false claim.

Physician Referral Prohibitions

Under a federal law directed at “self-referral,” commonly known as the “Stark Law,” there are prohibitions, with certain exceptions, on Medicare and Medicaid payments for laboratory tests referred by physicians who personally, or through a family member, have an investment interest in, or a compensation arrangement with, the clinical laboratory performing the tests. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed and possible exclusion from participation in federal governmental payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states, including California, also have anti- “self-referral” and other laws that are not limited to Medicare and Medicaid referrals.

Like the Anti-Kickback Statute, the Stark Law is broad in its application to health care transactions and arrangements. Accordingly, the Stark Law contains many exceptions, which protect certain arrangements and transactions from the Stark Law penalties. Unlike the Anti-Kickback Statute’s safe harbors, if an arrangement or transaction does not meet a Stark Law exception’s requirements, the arrangement or transaction at issue will be deemed to be out of compliance with the Stark Law and, in turn, will be subject to the Stark Law’s penalties.

Corporate Practice of Medicine

Numerous states, including California, have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging physicians to practice medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. This prohibition is generally referred to as the prohibition against the corporate practice of medicine. Violation of this prohibition may result in civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensing proceedings. All of the hempaths who we utilize in connection with providing our specialized diagnostic services are employed by Cartesian. Cartesian is a California professional corporation we formed in April 2005 for the purpose of providing professional medical services in conjunction with the diagnostic services that we provide. On December 31, 2005, we entered into the Clinical Laboratory Professional Services Agreement, or PSA, with Cartesian pursuant to which these hempaths provide professional services to us. See “Cartesian Medical Group, Inc.” for more information.

State Laboratory Licensing

In addition to our CLIA certification, licensure is required and maintained for our laboratory under certain state laws. Such laws establish standards for the day-to-day operation of a clinical laboratory, physical facilities requirements, equipment requirements, training and skills required of personnel and quality control. In addition, certain state laws mandate proficiency testing, which involves testing of specimens that have been specifically prepared for testing at our laboratory. We maintain a current license in good standing with each state that requires us to obtain licensure to accept specimens. We are in compliance with applicable licensing laws.

We may become aware from time to time of other states that require out of state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states do have such requirements or will have such requirements in the future. If we identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as to how we should comply with such requirements.

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Other Regulatory Requirements

Our laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste and biohazardous waste, including chemical, biological agents and compounds, blood and bone marrow samples and other human tissue. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste. Historically, our costs associated with handling and disposal of such wastes have not been material.

The Occupational Safety and Health Administration, or OSHA, has established extensive requirements relating to workplace safety for healthcare employers, including requirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposure through needle stick or similar penetrating injuries.

Pursuant to its authority under the federal Food, Drug and Cosmetic Act, or FDCA, the U.S. Food and Drug Administration, or FDA, has regulatory responsibility over instruments, test kits, reagents and other devices used to perform diagnostic testing by laboratories such as ours. Specifically, the manufacturers and suppliers of ASRs, which we obtain for use in diagnostic tests, are subject to regulation by the FDA and are required to, among other things, register their establishments with the FDA, to conform manufacturing operations to the FDA’s Quality System Regulation, or QSR, and to comply with certain reporting and other record keeping requirements. The FDA also regulates the sale or distribution, in interstate commerce, of products classified as medical devices under the FDCA, including in vitro diagnostic test kits. Such devices must undergo premarket review by the FDA prior to commercialization unless the device is of a type exempted from such review by statute or pursuant to the FDA’s exercise of enforcement discretion. For instance, diagnostic tests that are developed and validated by a laboratory for use in examinations the laboratory performs itself are called “home brew” tests. The FDA maintains that it has authority to regulate the development and use of “home brews” as medical devices, but to date has decided not to exercise its authority with respect to most “home brew” tests as a matter of enforcement discretion. The FDA regularly considers the application of additional regulatory controls over the sale of ASRs and the development and use of “home brews” by laboratories such as ours.

Compliance Program

Because compliance with government rules and regulations is a significant concern throughout our industry, in part due to evolving interpretations of these rules and regulations, we have established a compliance program that is overseen by our Compliance Committee. Our Compliance Committee consists of certain members of our board of directors, and our management provides periodic reports on compliance operations to the Compliance Committee.

We seek to conduct our business in compliance with all statutes and regulations applicable to our operations. To this end, we conduct both internal and external in-depth reviews of procedures, personnel and facilities to ensure regulatory compliance throughout our operations. We provide periodic and comprehensive training programs to our personnel, which are intended to promote the strict observance of our policies designed to ensure compliance with the statutes and regulations applicable to our operations.

Intellectual Property Rights

Our intellectual property consists primarily of trademarks, service marks and trade secrets. The designations Genoptix, COMPASS, CHART, eCOMPASS and NexCourse are our principal marks. We have registered trademarks for Genoptix, CHART, eCOMPASS and NexCourse and have currently applied with the U.S. Patent and Trademark Office, or USPTO, for registration in our field of use for our other principal marks. We maintain a program to protect our marks and will institute legal action where necessary to prevent others from using and/or registering confusingly similar marks in our field of use.

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Insurance

We maintain liability insurance for our products and services. As a general matter, providers of diagnostic services may be subject to lawsuits alleging negligence or other similar legal claims. Some of these suits involve claims for substantial damages. Any professional liability litigation could also adversely impact our customer base and reputation. Although management cannot predict the outcome of any claims made against us, management does not anticipate that the ultimate outcome of any such proceedings or claims will have a material adverse effect on our financial condition but may be material to our results of operations and cash flows in the period in which the impact of such claims is determined or the claims are paid. Similarly, although we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs, we cannot assure you that we will be able to do so.

Employees

As of February 18, 2010, we employed 440 employees, including Cartesian employees and 7 part-time employees, all of whom are engaged in either specimen preparation, regulatory affairs, legal, development, business and corporate development, sales and marketing, quality assurance and control or administration. None of our employees are subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

Our future success is highly dependent on our ability to attract and retain qualified employees, in particular, field sales representatives, key management and hempaths employed by Cartesian. We believe we offer competitive compensation and benefits.

Cartesian Medical Group, Inc.

California prohibits general corporations from engaging in the practice of medicine pursuant to both statutory and common-law principles commonly known as the corporate practice of medicine doctrine. Courts have interpreted this doctrine to prohibit non-professional corporations from employing physicians to who provide professional services. The hempaths who work with us at our laboratory are not our employees but are employees of Cartesian, a California professional corporation. Throughout this Annual Report on Form 10-K, when we refer to “our hempaths” or words of similar import, we are referring to the physicians employed by Cartesian and working at our facility as directed by Cartesian.

We have contracted with Cartesian to provide hematopathology and other pathology services to us as an independent contractor pursuant to the PSA between us and Cartesian. Pursuant to the PSA, Cartesian’s hempaths work in our Carlsbad laboratory where we provide all necessary equipment, supplies, space, non-physician staffing and other support services to those physicians. The physicians employed by Cartesian work exclusively for Cartesian, which exclusively contracts with us for the professional services we require to provide our specialized diagnostic services. Cartesian has not entered into any professional services agreement with any other party and may not use our laboratory facility to provide professional services to any other party without our prior consent. We formed Cartesian in April 2005. Cartesian has no other employees. We are highly dependent on these hempaths to provide our specialized diagnostic services and we would be unable to provide these services without them.

Pursuant to the PSA, Cartesian has assigned to us its rights to collect and receive all payments for its professional services. We, and not Cartesian, are the contracting party for all of our specialized diagnostic services. We bill for services on Cartesian’s behalf in accordance with a fee schedule set by Cartesian. Substantially all of our revenues result from our having been assigned the right to bill and collect for the professional services provided by the hempaths employed by Cartesian. Our revenues from services not performed by Cartesian were less than 5% of our revenues for the years ended December 31, 2009, 2008 and 2007. In turn, we pay Cartesian professional service fees equal to the monthly aggregate of all Cartesian

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physician salary and benefit costs. Additionally, we reimburse Cartesian for expenses incurred for payment of physician dues, subscriptions, medical licenses and continuing medical education. We also provide both general business and professional liability insurance coverage to Cartesian and its physicians. Each physician is entitled to standard Cartesian employee benefits and the opportunity to be granted awards of our common stock and options to purchase our common stock.

Our PSA with Cartesian provides for a one-year term that is automatically renewed on a yearly basis. During the term of the PSA, Cartesian is obligated to seek our approval before it provides similar medical services to other laboratories, hospitals or healthcare facilities. We are not obligated to approve the provision of services by Cartesian to others, and any such approval is subject to a good faith determination by us that Cartesian’s provision of such services does not interfere with Cartesian’s obligations under the PSA or interfere with or negatively impact our business.

Pursuant to the terms of the PSA, Cartesian is solely and exclusively in control of all aspects of the practice of medicine and the provision of medical services to us. The PSA requires that Cartesian and the physicians provide quality services to us. If the physicians fail to provide quality services, we have the ability to terminate the PSA for material breach by Cartesian. This mechanism allows us to ensure that Cartesian and the physicians provide services in accordance with our quality control program. Because we are not a California professional corporation, we are prohibited from exercising the control exerted by Cartesian over the physicians. To the best of our knowledge, none of the state medical boards or courts in jurisdictions in which we provide our specialized diagnostic services has taken the position that arrangements such as that which exists between Cartesian and us violate the corporate practice of medicine prohibitions. Any such determination would be fact-specific and based upon the facts and circumstances of the particular situation.

Item 1A.    Risk Factors.

You should consider carefully the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other public filings in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks Relating to Our Business Operations

Reimbursement levels for our specialized diagnostic services are subject to continuing change and any reductions in reimbursement levels would decrease our revenues and adversely affect our results of operations and financial condition.

Reimbursement to healthcare providers, such as specialized diagnostic service providers like us, is subject to continuing change in policies by governmental payors, such as Medicare and Medicaid, private insurers, including managed care organizations and other private payors, such as hospitals and private medical groups. Reimbursement from governmental payors is subject to statutory and regulatory changes, retroactive rate adjustments and administrative rulings and other policy changes, all of which could materially decrease the range of services for which we are reimbursed or the reimbursement rates we are paid.

Reimbursement under the Medicare program for our specialized diagnostic services is subject to both the national Medicare clinical laboratory fee schedule and physician fee schedule. Both schedules are typically updated annually and subject to geographic adjustments. The physician fee schedule is designed to set compensation rates for those medical services provided to Medicare beneficiaries who require a degree of physician supervision. Outpatient clinical diagnostic laboratory tests are traditionally paid according to the clinical laboratory fee schedule. However, although the clinical laboratory fee schedule is generally the only basis of payment that can be made by the Medicare program with respect to most clinical laboratories, certain

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laboratory tests performed by physicians are exempt from the clinical laboratory fee schedule and are paid under the physician fee schedule. As a result, most of the services provided by us are reimbursed under the physician fee schedule.

The clinical laboratory fee schedule sets the maximum amount payable under Medicare for each specific laboratory billing code. We bill the program directly and must accept the scheduled amount as payment in full for covered tests performed on behalf of Medicare beneficiaries. Those services reimbursed under the clinical laboratory fee schedule generally do not result in coinsurance amounts but may result in beneficiary deductible responsibility. Payment under the clinical laboratory fee schedule has been limited from year-to-year by Congressional action such as imposition of national limitation amounts and freezes on the otherwise applicable annual CPI updates. Although the CPI update of the clinical laboratory fee schedule has been frozen since 2004 by the MMA, after July 1, 2009, the freeze on the clinical laboratory fee schedule was updated using the percentage increase for the CPI from the previous 12-month period (measured July thru June) minus 0.5%. On July 15, 2009, the CPI for 2009 was released and it showed a year-over-year decline of 1.4%. This implies that clinical laboratories will receive a 1.9% rate decrease from Medicare in 2010 as compared to the 4.5% rate increase that the laboratories experienced under the 2009 clinical laboratory fee schedule. The payment amounts under the Medicare clinical laboratory fee schedule are important not only for our reimbursement under Medicare, but also because the schedule often establishes the payment amounts set by other third party payors. For example, state Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients. As a result, in light of the anticipated reduction in the clinical laboratory fee schedule, certain third party payors may also reduce reimbursement amounts.

For the many anatomic pathology services we provide, we are reimbursed separately under the Medicare physician fee schedule and beneficiaries are responsible for applicable coinsurance and deductible amounts. The amounts paid under the physician fee schedule are based on geographically adjusted RVUs for each procedure or service, adjusted by a budget neutrality adjustor, and multiplied by an annually determined conversion factor. Historically, the formula used to calculate the fee schedule conversion factor resulted, or would have resulted, in significant decreases in payment levels. However, in every year from 2004 through 2009 Congress has intervened multiple times to freeze or increase the conversion factor. Additionally, the U.S. House of Representatives passed legislation in November 2009, which would have increased Medicare payment rates for physicians by 1.2% and implemented a new formula for determining the growth rate in fees payable under the physician fee schedule. The U.S. Senate did not pass similar legislation, however.

As published in the November 25, 2009 Physician Fee Schedule Final Rule, the update to the conversion factor would have resulted in a 21.2% reduction to the conversion factor for 2010 in the absence of Congressional intervention. Subsequently, on December 19, 2009, Congress enacted the Department of Defense Appropriations Act of 2010, which provided a two-month 0% update to the 2010 Medicare physician fee schedule effective only for dates of service from January 1, 2010 through February 28, 2010. It remains to be seen whether Congress will enact legislation to revise the formula which determines the annual update to the conversion factor and payment rates, or if, once again, it will pass additional legislation to delay the payment reductions, including an implementation of a short-term extension of the February 28, 2010 date. It is also possible that no action will be taken and the 21.2% reduction in payments will be implemented.

In any case, future Congressional action is uncertain and future methodological changes may result in reductions or increases to the Medicare physician fee schedule. Reductions in Medicare’s reimbursement rates for pathology services, for which we currently are paid under the Medicare physician fee schedule, would reduce the amount we receive for a substantial number of our specialized diagnostic tests. Because the vast majority of our diagnostic services currently are reimbursed under the physician fee schedule, changes to this fee schedule could result in a greater impact on our revenues than changes to the Medicare clinical laboratory fee schedule.

Additionally, as part of the final rule with comment period, CMS has implemented changes in the practice expense RVU amounts used to calculate reimbursement for procedures billed under the physician fee schedule, including many of the procedures we perform. The implementation of these proposed changes to the physician

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fee schedule (assuming the 21.2% reduction to the conversion factor discussed above is not implemented for 2010), in conjunction with the proposed clinical fee schedule rate decrease discussed above, are estimated to result in an approximate 1% reduction in the 2010 Medicare reimbursement per case.

The MMA mandated creation of Medicare Administrative Contractors, or MACs, replacing the system of fiscal intermediaries who oversee fee-for-service claims for the Medicare Part A and Part B programs. In November 2007, CMS awarded the MAC Jurisdiction 1 (California, Hawaii, Nevada, American Samoa, Guam and the Northern Mariana Islands) to Palmetto GBA. The full transition to Palmetto GBA occurred effective September 2, 2008. The MAC stated methodology for consolidation and transition of LCD, was based on the principal of “least restrictive.” New LCD’s related to our specialized diagnostic services were introduced as a result of the consolidation process, while others were retired, which may result in reductions to, delays in or denials for reimbursement for the services offered. Additionally, the transition from a fiscal intermediary to a MAC is in a very early stage and may result in delays in or denials for reimbursement that could have an adverse impact on us and our results of operations.

Effective January 1, 2009, CMS implemented Phase VIII Medically Unlikely Edits, or MUEs. CMS developed MUEs to place limits on certain Medicare billing codes in order to reduce the paid claims error rate for Medicare Part B claims. An MUE value is the maximum units of service that a provider may be paid for a single beneficiary on a single date of service.

Several of the MUEs pertain to procedures that we perform. In response to concerns from the laboratory industry, effective April 1, 2009, CMS temporarily suspended certain MUEs for pathology, cytopathology, and molecular diagnostics services. If in the future CMS implements these edits or some other MUEs related to our services, it could inhibit our ability to be reimbursed for services that we report. However, if it is medically reasonable and necessary to provide units of service in excess of an MUE, we may be able to modify such claims in order to be fully reimbursed.

Other policy changes may include competitive bidding by clinical laboratories for the provision of services to the Medicare program, which was the subject of a CMS demonstration project in Carlsbad, California, pursuant to the requirements of the MMA. The implementation of the demonstration project was delayed due to a federal preliminary injunction and The Medicare Improvements for Patients and Providers Act of 2008, or MIPPA, subsequently repealed the competitive bidding demonstration project. If later implemented, competitive bidding could decrease our reimbursement rates for clinical laboratory tests.

In addition, some private insurers and other third party payors link their rates to Medicare’s reimbursement rates and a reduction in Medicare reimbursement rates for clinical laboratory and pathology services could result in a corresponding reduction in the reimbursements we receive from such third party payors. Any reductions in reimbursement levels for our specialized diagnostic services would decrease our revenues and adversely affect our results of operations and financial condition.

Operating as a non-contracting provider with certain payors may adversely affect our results of operations and financial condition and contracting with those payors may be disadvantageous to us.

We are currently considered a “non-contracting provider” by a number of third party payors because we have not entered into a specific contract to provide our specialized diagnostic services to their insured patients at specified rates of reimbursement. We were generally subject to reimbursement as a non-contracting provider for approximately half of our revenues for the years ended December 31, 2009, 2008 and 2007. Use of a non-contracting provider typically results in greater coinsurance or copayment requirements for the patient, unless we elect to treat them as “in-network” in accordance with applicable law, which results in decreased revenues because we do not generally collect the full applicable “out-of-network” patient coinsurance or copayment obligations. In instances where we are prohibited by law from treating these patients as “in-network,” thus requiring them to pay additional costs or copayments, such patients may express concern about these

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additional costs to their hem/onc. As a result, that hem/onc may reduce or avoid prescribing our services for such patients, which would adversely affect our results of operations and financial condition.

Should any of the third party payors with whom we are not contracted insist that we enter into a contract for the specialized diagnostic services we provide, the resulting contract may contain pricing and other terms that are materially less favorable to us than the terms under which we currently operate. If reimbursement from a particular payor increases, there is heightened risk that such a third party payor will insist that we enter into contractual arrangements that contain less favorable terms. If we refuse to enter into a contract with such a third party payor, they may refuse to cover and reimburse us for our services, which may lead to a decrease in case volume and a corresponding decrease in our revenues. If we contract with such a third party payor, although our case volume may increase as a result of the contract, our revenues per case under the contractual agreement and our gross margins may decrease. We expect that over time we increasingly will enter into contractual arrangements with such third party payors. The overall net result of contracting with third party payors may adversely affect our business, results of operations and financial condition.

Changes in regulations, payor policies or contracting arrangements with payors or changes in other laws, regulations or policies may adversely affect coverage or reimbursement for our specialized diagnostic services, which may decrease our revenues and adversely affect our results of operations and financial condition.

Governmental payors, private insurers and other private payors have implemented and will continue to implement measures to control the cost, utilization and delivery of healthcare services, including clinical laboratory and pathology services. Congress has from time to time considered and implemented changes to laws and regulations governing healthcare service providers, including specialized diagnostic service providers. These changes have adversely affected and may in the future adversely affect coverage for clinical laboratory and pathology services, including the specialized diagnostic services we provide. In addition, as a result of the recent administration’s focus on healthcare reform, there is risk that the Federal government may implement changes in laws and regulations governing healthcare service providers, including measures to control costs or reductions in reimbursement levels, which may have an adverse impact on our business. We also believe that healthcare professionals, including hem/oncs, will not use our services, if as a result of these measures, third party payors do not provide adequate coverage and reimbursement for them is lacking. These changes in federal, state, local and third party payor regulations or policies may decrease our revenues and adversely affect our results of operations and financial condition.

For approximately half of our revenues for the years ended December 31, 2009, 2008 and 2007, we were generally subject to reimbursement as a non-contracting provider and payments to us as a non-contracting provider can be changed by third party payors at any time. We will continue to be a non-contracting provider until such time as we enter into contracts with third party payors for whom we are not currently contracted. We estimate contractual allowances with respect to revenues from third party payors with whom we are not currently contracted. During the years ended December 31, 2009, 2008, and 2007 we recorded positive changes in prior period accounting estimates to reduce contractual allowances, which increased our revenues by $7.4 million, $3.3 million, and $792,000, respectively. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to our collection processes, as well as increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods and changes in reimbursement policies by certain payors. Because a substantial portion of our revenue is from third party payors with whom we are not currently contracted, it is likely that we will be required to make positive or negative adjustments to accounting estimates with respect to contractual allowances in the future (as we have made in each of the last several quarters and annual reporting periods), which, may adversely affect our results of operations, our credibility with financial analysts and investors and our stock price. Although, during the past several periods we have recorded favorable changes in accounting estimates resulting in net increases in our revenues, it is possible that future adjustments may be less favorable and may result in net decreases in our revenues, which would adversely affect our results of operations.

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Our inability to obtain and retain new customers, or increase the tests ordered or specimens submitted by existing customers, could adversely affect our business and financial condition.

To offset efforts by third party payors to control the cost, utilization and delivery of healthcare services, we need to obtain and retain new customers. In addition, a reduction in tests ordered or specimens submitted by existing customers, without offsetting growth in our customer base, would impact our ability to successfully grow and have a material adverse impact on our net revenues and profitability. We compete primarily on the basis of the quality of testing, reporting and information systems, reputation in the medical community, and ability to employ qualified personnel. Our inability to successfully compete in these areas could result in the loss of customers and could adversely impact our ability to obtain and retain new customers and successfully grow our business.

Increased competition, including from competitors replicating our key service offerings in the future and the failure to provide a higher quality of service than that of our competitors could adversely affect our revenues and profitability.

The laboratory services industry generally is intensely competitive both in terms of service and price and it continues to undergo significant consolidation, permitting larger clinical laboratory service providers to increase cost efficiencies and change service levels, resulting in more intense competition. Most of our existing competitors and many potential competitors have substantially greater financial, sales, marketing, logistical and laboratory resources, more experience in dealing with third party payors for the services we provide and greater market penetration, purchasing power and marketing budgets, as well as more experience in providing diagnostic services.

As a specialized diagnostic service provider, we rely extensively on our high quality of service to attract and retain community-based hem/oncs and other healthcare professionals as our customers at the expense of our larger competitors. We compete primarily on the basis of the quality of testing, reporting and information systems, reliability in patient sample transport, reputation in the medical community, access to our highly qualified hempaths and our ability to expand our service offerings to our core hem/onc customers. For example, we generally provide treating hem/oncs with telephonic access on an almost real-time basis to the specific hempath that generates a report and analysis on the specific patient. Our failure to provide services superior to the laboratories with which we compete could adversely affect our revenues and profitability.

Because we do not rely on our intellectual property portfolio to impede others from copying our business, there are no significant barriers to entry into our business and new or existing laboratories could replicate our key service offerings and business model and enter our market to compete with us with relatively low upfront investments, which could adversely affect our business and prospects.

We are highly dependent on Cartesian for the services of our hempaths and any significant difficulties in recruiting or retaining these highly trained hempaths could adversely affect our revenues and results of operations.

Our business is highly dependent on the availability of hempaths, who provide professional services to us through Cartesian and we would be unable to provide our specialized diagnostic services without them. Cartesian is actively recruiting additional hempaths to work with us as we continue to expand our business. There are currently approximately 1,500 hempaths licensed in the United States and only approximately 75 new hempaths receive board certification in the United States each year. Our PSA with Cartesian is automatically renewed on a yearly basis but may be terminated by us at any time on 60 days’ prior written notice and either party may terminate the PSA upon the other party’s uncured material breach. We have not used the services of any hempaths from any entity other than Cartesian and we do not believe there is another organization operating in our geographic region that would be able to provide us with comparable professional services. Should Cartesian be unable to retain the hempaths that provide professional services to us, or if Cartesian fails in its efforts to

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recruit additional hempaths to provide us professional services, our ability to maintain and grow our business may be impaired. In addition, Cartesian may be required to offer higher compensation to hempaths in connection with recruitment and retention efforts and these increased compensation expenses would be reflected in the amount we pay to Cartesian through the PSA. We may be unable to recover these increased expenses through price increases or reimbursements for our diagnostic services. In addition, if Cartesian were to experience significant turnover in hempaths, our ability to perform our specialized diagnostic services and our revenues and results of operations could be adversely affected.

We must hire and retain qualified sales representatives to grow our sales.

Our ability to retain existing customers for our specialized diagnostic services and attract new customers is dependent upon retaining existing field sales representatives and hiring new field sales representatives, which is an expensive and time-consuming process. We face intense competition for qualified sales personnel and our inability to hire or retain an adequate number of field sales representatives could limit our ability to maintain or expand our business and increase sales. Even if we are able to increase our sales force, our new sales personnel may not commit the necessary resources or provide sufficient high quality service and attention to hem/oncs to effectively market and sell our specialized diagnostic services. If we are unable to maintain and expand our marketing and sales networks or if our sales personnel do not perform to our high standards, we may be unable to maintain or grow our existing business and our results of operations and financial condition will likely suffer accordingly.

Our sales personnel have developed and maintain close relationships with a number of healthcare professionals. In particular, our sales force focuses its efforts on developing relationships with community-based hem/oncs and other healthcare professionals who are decision makers in their offices. Our sales depend on the use of our specialized diagnostic services by these community-based hem/oncs and other healthcare professionals and successful marketing of our services depends on educating these community-based hem/oncs and other healthcare professionals as to the distinctive characteristics, benefits, high quality and value of our specialized diagnostic services as compared to those of our competitors.

If a sales representative ceases employment, we risk the loss of customer goodwill based on the impairment of relationships developed between the sales representative and the healthcare professionals for whom the sales representative was responsible. This is particularly a risk if the representative goes to work for a competitor, as the healthcare professionals that are our customers may choose to use a competitor’s services based on their relationship with the departed sales representative.

If we fail to attract and retain key management and other personnel, we may be unable to successfully maintain or develop our business.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, laboratory and other personnel. For example, we are highly dependent on the operational and financial expertise of our executive officers. The loss of the services of any of our executive officers, particularly Tina S. Nova, Ph.D., our president and chief executive officer, could impede our growth. In particular, our executive officers currently perform most of our policy-making functions, are in charge of our principal business units, divisions and functions and are solely responsible for most of our key decisions. We are also dependent on our key employees and consultants, who are important to our business and assist and support our executive officers in implementing and executing these officers’ key decisions. If we lose any of our executive officers or key employees and consultants, other of these individuals may be required to fulfill his or her duties and spend time finding a replacement. We may not be able to find suitable replacements and our business may be harmed as a result. We do not maintain “key woman” or “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ our executive officers and key employees on an at-will basis and their employment can be terminated by them or us at any time.

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Our industry has experienced a high rate of turnover of management personnel in recent years. In addition to the intense competition for qualified personnel in the healthcare industry, the San Diego area is characterized by a high cost of living, particularly for housing. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our operational objectives, our revenue growth and our ability to implement our business strategy.

We may experience difficulties in managing our growth and our growth rate may decline.

Our revenues have grown to $184.4 million for the year ended December 31, 2009, up from $116.2 million and $59.3 million for the years ended December 31, 2008 and 2007, respectively. This growth has put significant pressure on our systems and operations. As of December 31, 2009, we employed 429 employees, including Cartesian employees and 7 part-time employees. Our current organization, and our systems and facilities currently in place, may not be adequate to support our future growth. In order to effectively manage our operations and any significant growth, we may need to:

• scale our internal infrastructure, including expansion of our laboratory facilities, while continuing to provide quality services on a timely basis to community-based hem/oncs and other customers;

• maintain and strengthen our relationships with our hem/onc customers as we increase the number of our sales and marketing personnel and increase our presence in the various geographic markets we serve;

• attract and retain sufficient numbers of talented employees and consultants, including sales personnel, hempaths, clinical service coordinators, scientists, laboratory technicians and administrative employees, to handle the increasing number of tests we are requested to conduct;

• manage our relationship with Federal Express to ensure its ability to handle increasing sample transport and deliveries;

• manage our relationships with third parties for the provision of certain services and the manufacture and supply of certain test kits, reagents and other laboratory materials;

• continue to enhance our compliance and quality assurance systems; and

• continue to improve our operational, financial and management controls and reporting systems and procedures.

If we are not able to successfully implement the tasks necessary to further expand our operations, our business, including the quality of our services and our billing, reimbursement, compliance and quality assurance systems, our results of operations and our financial results could be adversely affected. In addition, as our revenues grow, our period over period growth rate will likely decline.

We are continuing to expand our infrastructure by establishing additional laboratory space and implementing additional backup systems, which, among other things, could divert our resources and may cause our margins to suffer.

As of December 31, 2009, we occupied approximately 116,000 square feet of office and laboratory space in two separate facilities in Carlsbad, California. In June 2009, we entered into a lease agreement for approximately 44,000 square feet of space in Carlsbad, California to be used for office and laboratory operations. This facility is currently undergoing improvements and is expected to ready for our use in the second quarter of 2010. In January 2010, we entered into a purchase agreement to acquire this facility and related land. The lease agreement related to this facility terminated upon the closing of this purchase. In January 2010, we entered into a lease agreement for approximately 33,000 square feet of space in Carlsbad, California to be used as a customer service and support facility. This facility will be undergoing improvements and is expected to be ready for our use in the

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second quarter of 2010. When we complete the tenant improvements for the additional space, we expect to have approximately 193,000 square feet of total available office and laboratory space in Carlsbad, California. For further discussion of these transactions see Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Although, we believe that our current facilities, including those currently undergoing improvements, are adequate for our needs for the immediate future and that suitable additional space will be available as needed to accommodate expansion of our operations on commercially reasonable terms there is no guarantee that adequate additional space will be available as needed on terms acceptable to us. In addition, although all our facilities are currently in close proximity, there may be logistical issues that arise by virtue of separating these departments from the rest of our operations, including issues related to information systems integration and connectivity speed.

Moreover, in order to better serve our expanding nationwide customer base, to create a backup to our current laboratory facility and to gain additional referrals for our specialized diagnostic services, we may replicate our current California-based operations in a geographically different location in the future. In order to perform improvements on the newly leased facilities in Carlsbad, California and to later establish a backup laboratory facility in another region, we will be required to spend considerable time and resources securing adequate space, constructing the facility, obtaining the federal, state and local certifications required by all applicable laws and regulations, recruiting and training employees and establishing the additional operational, logistical and administrative infrastructure necessary to support a facility. Even after the new laboratory facility is operational, it may take time for us to derive the same economies of scale as in our existing facility. Moreover, we may suffer reduced economies of scale in our existing laboratory facility as we seek to balance the amount of work allocated to each laboratory facility. Similarly, we may invest in new backup systems in order to prevent the interruption in our current systems, which may be costly and would take time and resources to implement. Each expansion of our facilities or systems could divert resources, including the focus of our management, away from our current business. As we expand into other locations, including limited international expansion, there will be enhanced potential for logistical or other issues, including regulatory compliance issues and issues that may be specific to particular foreign countries. In addition, each expansion of our facilities may increase our costs and potentially decrease operating margins, both of which would, individually or in the aggregate, negatively impact our business, financial condition and results of operations. We will need to continue to expand our managerial, operational, financial, sales, marketing and other infrastructure in order to adequately manage our business and provide support for our services. In addition, to the extent our service levels in our existing or new facilities suffer, this may adversely impact our business, financial condition and results of operations.

If our Carlsbad facilities become inoperable, we will be unable to perform our specialized diagnostic services and our business will be harmed.

We currently do not have redundant laboratory or administrative facilities. We perform all of our diagnostic testing in our laboratory facility located in Carlsbad, California. Carlsbad is situated on or near earthquake fault lines and is located in an area that has experienced severe wildfires during the past several years. In addition, we do not have redundant systems for all of our business processes. Our facilities, the equipment we use to perform our tests and services and our other business process systems would be costly to replace and could require substantial time to repair or replace. The facilities may be harmed or rendered inoperable by natural or people-made disasters, including earthquakes, wildfires, floods, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to perform our tests for some period. In addition, such events may temporarily interrupt our ability to receive specimens or materials from our suppliers and to have access to our various systems necessary to operate our business. For example, in late 2007 we experienced a power outage at our Carlsbad laboratory facility and the evacuation of our facilities as a result of severe wildfires. Although our backup generator and other backup procedures and systems allowed us to continue our operations without material interruption, we cannot assure you that similar incidents will not adversely affect our business in the future. The inability to perform our tests and services would result in the loss of customers and harm our reputation and we may be unable to regain those customers in the future. Our

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insurance carriers and insurance policies covering damage to our property and the disruption of our business may become financially unstable or may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

In the event our current operating laboratory facility is damaged or destroyed, we would need to engage a third party to perform laboratory testing services on our behalf. In order to rely on a third party to perform these testing services, we could only use another facility with established state licensure and CLIA accreditation. We cannot assure you that we would be able to find another CLIA-certified facility, or that another laboratory would be willing to perform the necessary tests for us on commercially reasonable terms. Finding a new laboratory that meets the required state licensure and CLIA accreditation standards or developing new systems necessary to operate our business under these circumstances would be time-consuming and costly and result in delays in our ability to provide our specialized diagnostic services or to provide the same level of quality in our services as we currently provide, which would harm our reputation and adversely affect our business, results of operations and financial condition.

We incur financial risk related to collections.

Substantially all of our revenues are derived from specialized diagnostic services for which we bill on a fee-for-service basis. Billing for diagnostic services is a complex process and we bill many different payors such as insurance companies, governmental payor programs and patients, each of which has different billing requirements. Although we have experienced favorable trends in the collection of accounts receivable and related reductions to our provisions for doubtful accounts, we face risks in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles for accounts receivable, including reimbursements by third party payors, such as Medicare, Medicaid and other governmental payor programs, hospitals, private insurance plans and managed care organizations. As a result of the current economic climate, we may face increased risks in our collection efforts, which could adversely affect our business. In addition, increases in write-offs of doubtful accounts (particularly in response to increases in personal bankruptcies), delays in receiving payments or potential retroactive adjustments and penalties resulting from audits by payors could adversely affect our business, results of operations and financial condition. As of December 31, 2009 and 2008, we had an allowance for doubtful accounts of $5.4 million and $4.1 million, respectively, which we reduced by $1.9 million and $664,000, respectively, for write-offs, net of recoveries.

We or our suppliers and/or manufacturers may be subject to litigation relating to, among other things, payor and customer disputes, regulatory actions, professional liability, intellectual property, employee-related matters, product liability and other potential claims, which could adversely affect our business.

We or our suppliers and/or manufacturers may become subject in the ordinary course of business to material litigation related to, among other things, payor or customer disputes, professional liability, regulatory actions, intellectual property, employee-related matters, product liability and other potential claims, as well as investigations and audits by governmental agencies and governmental payors relating to the specialized diagnostic services we provide or other aspects of our business. Responding to these types of claims, investigations or audits, regardless of their merit, could result in significant expense and divert the time, attention and resources of our management. Legal actions could result in substantial monetary damages, fines and penalties as well as significant harm to our reputation with community-based hem/oncs and other healthcare professionals and with payors, which could adversely affect our business, financial condition and results of operations.

We, Cartesian and/or our hempaths may be sued, or may be added as an additional party, under physician liability or other liability law for acts or omissions by our hempaths, laboratory personnel, CSCs, and other employees and consultants, including but not limited to being sued for misdiagnoses or liabilities arising from the professional interpretations of test results. We, Cartesian and/or our hempaths may periodically become involved as defendants in medical malpractice and other lawsuits and are subject to the attendant risk of substantial damage awards, in particular in connection with our COMPASS service offering. Our hempaths are insured for

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medical malpractice risks on a claims-made basis under traditional professional liability insurance policies. We also maintain general liability insurance that covers certain claims to which we may be subject. Our general insurance does not cover all potential liabilities that may arise, including governmental fines and penalties that we may be required to pay, liabilities we may incur under indemnification agreements and certain other uninsurable losses that we may suffer. It is possible that future claims will not be covered by or will exceed the limits of our insurance coverage.

We and the suppliers and manufacturers of the diagnostic tests we perform, which are critical to the performance of our specialized diagnostic services, may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our diagnostic tests infringe the intellectual property rights of these third parties. In such event, we could no longer have access to, we may be prohibited from marketing or performing, or we may be subject to liabilities or litigations relating to such diagnostic tests unless we obtained a license from such third party. A license may not be available to us on acceptable terms, if at all. If we are unable to license diagnostic tests that are important to our specialized diagnostic services, our business, financial condition and results of operations may be adversely affected.

We rely on a limited number of third parties for manufacture and supply of all of our laboratory instruments, tests and materials, including consumables, and we may not be able to find replacement suppliers or manufacturers in a timely manner in the event of any disruption, which could adversely affect our business.

We rely on third parties for the manufacture and supply of all of our laboratory instruments, equipment and materials, including consumables such as reagents and disposable test kits, that we need to perform our specialized diagnostic services and rely on a limited number of suppliers for certain laboratory materials and some of the laboratory equipment with which we perform our diagnostic services. We do not have long-term contracts with our suppliers and manufacturers that commit them to supply equipment and materials to us. Certain of our suppliers provide us with analyte specific reagents, or ASRs, which serve as building blocks in the diagnostic tests we conduct in our laboratory. These suppliers are subject to regulation by the U.S. Food and Drug Administration, or FDA, and must comply with federal regulations related to the manufacture and distribution of ASR products. Because we cannot ensure the actual production or manufacture of such critical equipment and materials, or the ability of our suppliers to comply with applicable legal and regulatory requirements, we may be subject to significant delays caused by interruption in production or manufacturing. If any of our third party suppliers or manufacturers were to become unwilling or unable to provide this equipment or these materials in required quantities or on our required timelines, we would need to identify and acquire acceptable replacement sources on a timely basis. While we have developed alternate sourcing strategies for the equipment and materials we use, we cannot be certain that these strategies will be effective and even if we were to identify other suppliers and manufacturers for the majority of equipment and materials we need to perform our specialized diagnostic services, there can be no assurance that we will be able to enter into agreements with such suppliers and manufacturers or otherwise obtain such items on a timely basis or on acceptable terms, if at all. If we encounter delays or difficulties in securing necessary laboratory equipment or materials, including consumables, we would face an interruption in our ability to perform our specialized diagnostic services and experience other disruptions that would adversely affect our business, results of operations and financial condition.

Performance issues, service interruptions or price increases by our shipping carrier could adversely affect our business, results of operations and financial condition and harm our reputation and ability to provide our specialized diagnostic services on a timely basis.

Expedited, reliable shipping is essential to our operations. One of our marketing strategies entails highlighting the reliability of our point-to-point transport of patient samples.

We rely almost exclusively on a single carrier, Federal Express, for reliable and secure point-to-point transport of patient bone marrow and other samples to our laboratory and enhanced tracking of these patient

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samples. Federal Express has tailored some of its systems and processes to meet our specific needs in providing high quality services to our hem/onc customers. In our specialty diagnostic field, patient samples more often than not include bone marrow biopsies, which are both technically difficult for a physician to obtain and extremely uncomfortable for patients to endure. Should Federal Express encounter delivery performance issues such as loss, damage or destruction of a sample, it would be difficult to replace our patient samples in a timely manner and such occurrences may damage our reputation and lead to decreased referrals from physicians for our specialized diagnostic services and increased cost and expense to our business. In addition, any significant increase in shipping rates or fuel surcharges could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions by delivery services we use would adversely affect our ability to receive and process patient samples on a timely basis.

If Federal Express or we were to terminate our relationship, we would be required to find another party to provide expedited, reliable point-to-point transport of our patient samples. There are only a few other providers of such nationwide transport services and there can be no assurance that we will be able to enter into arrangements with such other providers on acceptable terms, if at all. Finding a new provider of transport services would be time-consuming and costly and result in delays in our ability to provide our specialized diagnostic services. Even if we were to enter into an arrangement with such provider, there can be no assurance that they will provide the same level of quality in transport services currently provided to us by Federal Express. If the new provider does not provide the required quality and reliable transport services, it could adversely affect our business, reputation, results of operations and financial condition.

Proprietary trademarks, service marks, trade secrets and unpatented expertise are very important to our business.

We use numerous trademarks and service marks to identify the products and services we offer, some of which have been registered with the U.S. Patent and Trademark Office, or USPTO, and others of which are undergoing USPTO review. In addition, we are seeking registration of the name Genoptix in additional fields of use. We cannot guarantee that any of the trademarks or service marks for which we have applied for registration will be granted. Moreover, should a third party challenge one or more of our trademarks or service marks, we cannot guarantee that we would prevail in that challenge. Despite the use of our trademarks or service marks in connection with our services, we are not the sole person entitled to use the names COMPASS or CHART in every category in the United States. For example, third parties have registered the name COMPASS in the United States in the medical field and other categories. None of these third parties has contacted us with a claim that our COMPASS trademark infringes their rights. We cannot guarantee that a third party with rights in a COMPASS or CHART trademark, or in another trademark we use, will not assert those rights against us in the future, by opposing one of our trademark applications, petitioning to cancel one of our trademark registrations, or filing suit against us for trademark infringement seeking damages and/or an injunction to stop us from using our mark.

Although we have taken steps to protect our trade secrets and unpatented expertise, including entering into confidentiality agreements with third parties and confidential information and inventions agreements with employees, consultants and advisors, third parties may still be able to obtain this information or we may be unable to protect our rights. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented expertise is expensive and time-consuming and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and expertise and we would not be able to prevent their use.

Guidelines, recommendations and studies published by various organizations can reduce the use of our diagnostic tests and may adversely affect our business.

Professional societies, practice management groups, private health and science foundations, and organizations involved with various malignancies of the blood and bone marrow, and other forms of cancer may publish guidelines, recommendations or studies to the healthcare and physician communities from time to time.

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Recommendations of government agencies or these other groups and organizations may discuss matters such as efficiency, quality, cost-effectiveness, reputation and the use of related testing. These organizations have made recommendations about our testing services and the testing services of our competitors in the past. Recommendations, guidelines or studies that are followed by community-based hem/oncs could lead to a reduction in the use of our diagnostic tests which would adversely affect our business, results of operations and financial condition. In addition, our success also depends on our ability to educate community-based hem-oncs and third party payors about the value of our highly specialized diagnostic services. If these education efforts are not effective, then we may not be able to increase the sales of our existing diagnostic tests or successfully introduce new testing services to the market.

If technological innovation or prophylactic treatments were to reduce the need to conduct diagnostic testing on blood and bone marrow samples or allow our customers or other third parties to perform specialized diagnostic services similar to ours, our business, prospects, results of operations and financial condition could be adversely affected.

In order for hem/oncs to arrive at the correct diagnosis, choose or modify appropriate therapeutic regimens and monitor the effectiveness of these regimens, they currently require highly specialized diagnostic services that analyze blood and bone marrow samples. We focus our diagnostic efforts primarily on specific malignancies of the blood and bone marrow. Serial blood and bone marrow examinations are often performed to follow the progress of the disease and the patient’s response to therapy. Technological innovations or other advances in medicine that result in the creation of enhanced diagnostic tools may enable other clinical laboratories, hospitals, physicians or other medical providers, or patients, to provide specialized diagnostic services similar to ours in a more patient-friendly, efficient or cost-effective manner than is currently possible such as point-of-care tests which physicians can perform in their offices or highly specialized tests that can be performed by hospitals in their own laboratories. Although the CLIA accreditation process and compliance costs make it difficult for many physicians to operate clinical laboratories in their offices, manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care tests and equipment to physicians. Advances in technology or medicine may also result in a cure or prophylactic treatment for some of the diseases on which we focus which could reduce or eliminate the need to obtain and analyze blood and bone marrow samples. This could substantially reduce or eliminate our market opportunity and adversely affect our business, prospects, results of operations and financial condition.

Failure in our information systems, or IS, telephone or other systems could significantly disrupt our operations and adversely affect our business and financial condition.

IS and telephone systems are used extensively in virtually all aspects of our business, including laboratory testing, sales, billing, customer service, logistics and management of medical data. The success of our business depends on the ability to obtain, process, analyze, maintain and manage this data and periodically enhance our IS, telephone and other systems to facilitate the continued growth of our business. Our management relies on our information systems because:

• patient samples must be received, tracked and processed on a timely basis;

• test results must be monitored and reported on a timely basis;

• billings and collections for all customers must be managed efficiently and accurately;

• third party ancillary billing services require proper tracking and reporting;

• pricing and other information related to our services is needed by our sales force and other personnel in a timely manner to conduct business;

• centralized procurement and test inventory management systems are required for effective test inventory management;

• regulatory compliance requires proper tracking and reporting; and

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• proper recordkeeping is required for operating our business, regulatory compliance, managing employee compensation and other personnel matters.

Our business, results of operations and financial condition may be adversely affected if, among other things:

• our IS, telephone or other systems are interrupted or fail for an extended length of time;

• services relating to our IS, telephone or other systems are not kept current;

• our IS, telephone or other systems become unable to support expanded operations and increased levels of business;

• services provided by one or more of our vendors fail to operate within the expected technical parameters;

• information is lost or unable to be restored or processed; or

• information security is breached.

Our success depends, in part, on the continued and uninterrupted performance of our IS, telephone and other systems, which are vulnerable to damage from a variety of sources, including telecommunications or network failures, computer viruses, natural disasters and physical or electronic break-ins. We are especially vulnerable to losses of patient information, which could result in violations of federal and state privacy laws. Despite the precautionary measures we have taken to prevent breakdowns in our IS and telephone systems, sustained or repeated system failures that interrupt our ability to process test orders, deliver test results or perform tests in a timely manner or that cause us to lose patient information could adversely affect our business, results of operations and financial condition.

We may experience difficulty in identifying, acquiring or in-licensing and integrating third parties’ products, services, businesses and technologies into our current infrastructure or otherwise expanding our service offerings and we may not be able to successfully execute on and integrate such products, services, businesses or technologies, which could disrupt our business and adversely affect our results of operations and financial condition.

An important part of our business strategy is to opportunistically expand our service offerings and pursue additional technologies, collaborations and acquisitions that will enable us to accelerate the implementation of our strategic plan and to increase the number of customers we serve and the specialized diagnostic services we provide to those customers, including by way of investments in other companies, expansion into new markets, licensing of technology, co-development arrangements, collaborations, asset purchases or other similar transactions. For example, we currently outsource select specialized services that we offer and we may in the future seek to acquire the necessary capabilities to provide these services internally. We may seek to expand our services and technologies, on an opportunistic basis and as resources allow, by acquiring or in-licensing products, services, businesses or technologies that we believe are a strategic fit with our business and growth plans. Future acquisitions or in-licensing of products, services, businesses or technologies, however, may entail numerous operational and financial risks including:

• exposure to unknown liabilities;

• disruption of our business and diversion of our management’s time and attention;

• the availability of financing to pay for these transactions;

• incurrence of substantial debt or dilutive issuances of securities to pay for these transactions;

• higher than expected acquisition, in-licensing and integration costs;

• increased amortization expenses;

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• difficulties in and costs of combining the operations and personnel of any acquired or in-licensed products, services, businesses or technologies with our operations and personnel;

• increased regulatory, compliance and litigation risk;

• expenses associated with maintaining, defending and enforcing, and other associated risks with, acquired or licensed intellectual properties or technologies;

• impairment of relationships with key suppliers or customers of any acquired or in-licensed products, services, businesses or technologies due to changes in management and ownership;

• inability to retain key employees of any acquired or in-licensed products, services, businesses or technologies; and

• inability to obtain appropriate coverage and reimbursement for these new services and technologies.

Finally, we may devote resources to potential acquisitions, expansion efforts, in-licensing or collaboration opportunities that are never completed, acquired by others, or fail to realize the anticipated benefits of such efforts. We may not be able to successfully expand our service offerings to our community-based hem/onc customers and successfully provide them with new technologies and innovations. If we are unable to acquire or in-license new products, services, business or technologies to expand our specialized laboratory services, our testing methods may become outdated when compared to our competitors and testing volume and revenue may be adversely affected. Any of these matters could disrupt our business and adversely affect our growth prospects, results of operations and financial condition, and reputation with our customers.

We may fail in our attempts to expand our service offerings by adding new testing capabilities.

We may commit substantial efforts, funds and other resources to developing commercially successful service offerings. A high rate of failure is inherent in the development of new specialized testing services. There is no assurance that our efforts to develop these new service offerings will be commercially successful. Failure can occur at any point in the development process, including after significant funds have been invested.

Promising new diagnostic tests may fail to reach the market or may have only limited commercial success because of the failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. Even if we successfully develop new specialized testing services or enhancements or new generations of our existing diagnostic tests, they may be quickly rendered obsolete by changing customer preferences or changing industry standards. New developments may not be accepted quickly by community-based hem/oncs because of, among other things, entrenched patterns of clinical practice or uncertainty over third party payor reimbursement. We cannot state with certainty when or whether any of our new diagnostic tests under consideration will be launched, whether we will be able to develop, license or otherwise acquire new specialized tests, or whether any diagnostic tests will be commercially successful. Failure to launch successful new specialized testing services or new developments for existing tests may cause our diagnostic tests to become obsolete.

We use biological and hazardous materials that require considerable expertise and expense for handling, storage or disposal and may result in claims against us.

We work with hazardous materials, including chemicals, biological agents and compounds, blood and bone marrow samples and other human tissue, that could be dangerous to human health and safety or the environment. Our operations also produce hazardous and biohazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair business efforts. If we do not comply with applicable regulations, we may be subject to fines and penalties.

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In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. Our general liability insurance and/or workers’ compensation insurance policy may not cover damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources and our operations could be suspended or otherwise adversely affected.

We have a limited operating history and we are unable to predict with certainty whether we will be able to continue our revenue growth and become increasingly profitable.

We are a relatively early stage company with a limited operating history. We did not commence selling our specialized diagnostic services until the third quarter of 2004 and only became profitable in the first quarter of 2007. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a longer history of successfully commercializing specialized diagnostic services.

We incurred losses in each full fiscal year from inception to 2006, and have recovered our maximum accumulated deficit as of December 31, 2006 of $55.3 million, resulting in accumulated earnings of $20.0 million as of December 31, 2009. This is compared to an accumulated deficit of $10.6 million as of December 31, 2008. Although we have continued to increase our revenues and profitability, there is no guarantee that we will be able to continue our revenue growth and maintain or increase our profitability. It is possible that we may incur operating losses in the future as we expand our infrastructure, increase selling expenses and general and administrative expenses or if we are unable to continue to maintain or increase our revenues or control expenses. Because of the numerous risks and uncertainties associated with our growth prospects, sales and marketing and other efforts and other factors, we are unable to predict with certainty whether we will be able to maintain our strong revenue growth and remain profitable or predict the extent of our future profitability or losses.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us.

In addition to our employees, we engage the services of consultants to assist us with certain aspects of our business. Many of these employees or consultants were previously employed at or may have previously been or are currently providing consulting services to, other clinical laboratories or diagnostics companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that we or these employees or consultants have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Relating to Regulatory and Compliance Matters

We conduct business in a heavily regulated industry and changes in regulations or violations of regulations may, directly or indirectly, reduce our revenues, adversely affect our results of operations and financial condition and harm our business.

The clinical laboratory testing industry is highly regulated and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. In particular, there is risk of healthcare reform or other legislative activity in the near term, which may result in changes in the regulatory or payor environment that may adversely affect our business. Areas of the regulatory environment that may affect our ability to conduct business include, without limitation:

• federal and state laws applicable to billing and claims payment and/or regulatory agencies enforcing those laws and regulations;

• federal and state laboratory anti-mark-up laws;

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• federal and state anti-kickback laws;

• federal and state false claims laws;

• federal and state self-referral and financial inducement laws, including the Stark Law;

• coverage and reimbursement levels by Medicare, Medicaid, other governmental payors and private insurers;

• restrictions on reimbursements for our services;

• federal and state laws governing laboratory testing, including CLIA;

• federal and state laws governing the development, use and distribution of diagnostic medical tests known as “home brews”;

• HIPAA, including expansion and amendments thereto by the HITECH Act and analogous state laws;

• federal and state regulation of privacy, security and electronic transactions;

• state laws regarding prohibitions on the corporate practice of medicine;

• state laws regarding prohibitions on fee-splitting;

• federal, state and local laws governing the handling and disposal of medical and hazardous waste;

• the Federal Trade Commission’s “Red Flags Rule,” which requires creditors to comply with regulations regarding the prevention of identity theft, and state laws relating to identity theft;

• OSHA rules and regulations; and

• changes to other federal, state and local laws, including tax laws.

These laws and regulations are extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. While we believe that we are currently in material compliance with applicable laws and regulations, a determination that we have violated these laws or regulations, or the public announcement that we are being investigated or audited for possible violations of these laws or regulations, would adversely affect our business, prospects, results of operations and financial condition. In addition, a significant change in any of these laws or regulations may require us to change our business model in order to maintain compliance as a result of such change, which could reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations and financial condition.

In August 2009, the Internal Revenue Service, or IRS, commenced an examination of our U.S. federal income tax return for the tax year ended December 31, 2007. To date, there have been no proposed adjustments communicated to management. While we believe we are adequately reserved, if the examination results in an unfavorable outcome, there could be a material impact on the financial results in the period the outcome is determined.

We are subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are 2006 for federal income taxes and 2004 for state income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amounts.

If we fail to comply with healthcare fraud and abuse laws that govern, among other things, sales and marketing, billing and claims processing practices, we could face substantial penalties and our business, results of operations and financial condition could be adversely affected.

We are subject to various state and federal healthcare fraud and abuse laws and regulations, including, but not limited to:

• the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, in exchange for

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or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under governmental payor programs such as Medicare and Medicaid;

• the federal False Claims Act that prohibits individuals or entities from knowingly presenting, or causing to be presented to the federal government, claims for payment that are false or fraudulent and knowingly concealing or knowingly improperly avoiding or decreasing an obligation to pay or transmit money to the federal government;

• HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

• the HITECH Act, which requires covered entities, such as clinical laboratories, following discovery of a breach of unsecured PHI, to provide notification to affected individuals and the Secretary and other measures depending on the number of individuals, whose unsecured PHI has been breached;

• the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services reimbursed by Medicare or Medicaid if the physician (or a member of the physician’s family) has a financial relationship with the entity and which also prohibits the submission of any claim for reimbursement for designated health services furnished pursuant to a prohibited referral; and

• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third party payor, including commercial insurers.

Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a clinical laboratory’s participation in or reimbursement from governmental payor programs, criminal fines and imprisonment. Although we endeavor to comply in all material respects with these rules and regulations, our sales and marketing, billing and claims processing practices may not, in all cases, meet all of the criteria for safe harbor protection or exemptions from liability under these laws. For example, in most cases, patients who utilize service providers that are not participants in a preferred provider network are subject to increased financial obligations in the form of greater coinsurance or copayment requirements. For approximately half of our revenues for the years ended December 31, 2009, 2008 and 2007, we were generally subject to reimbursement as a non-contracting provider. In order to maintain our competitiveness with other clinical laboratories, except as required by applicable laws, we frequently accept third party insurance payment as payment in full and, in turn, waive all or a part of a patient’s coinsurance obligations such that the patient’s financial burden is no greater than if their physician would have selected an “in-network” provider to perform their laboratory services. A successful challenge to our practice of accepting third party insurance payments as payment in full under the laws discussed above could adversely affect our business, results of operations and financial condition.

In addition, certain federal Anti-Kickback Statute safe harbors and certain exceptions to the Stark Law exist to promote the adoption of electronic health records, or EHR Systems, by physician offices. These safe harbors/exceptions may be modified or eliminated and may not provide adequate protection for companies relying on such provisions. Should we choose to rely on these safe harbors/exceptions to assist any physician customers with the purchase of an EHR System, we may not, in all cases, meet all of the necessary criteria for protection. In addition to the added cost of providing EHR System assistance to physician practices, a successful challenge to any potential reliance on the safe harbors and exceptions could adversely affect our business, operations and reputation.

Our failure to comply with governmental payor regulations could result in our being excluded from participation in Medicare, Medicaid or other governmental payor programs, which would decrease our revenues and adversely affect our results of operations and financial condition.

Reimbursement from Medicare and Medicaid accounted for approximately 40%, 38%, and 38% of our revenues for the years ended December 31, 2009, 2008 and 2007, respectively. The Medicare program is administered by CMS, which, like the states that administer their respective state Medicaid programs, imposes

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extensive and detailed requirements on diagnostic services providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims and how we provide our specialized diagnostic services. Our failure to comply with applicable Medicare, Medicaid and other governmental payor rules could result in our inability to participate in a governmental payor program, our returning funds already paid to us, civil monetary penalties, criminal penalties and/or limitations on the operational function of our laboratory. If we were unable to receive reimbursement under a governmental payor program, a substantial portion of our revenues would be lost, which would adversely affect our results of operations and financial condition.

Our business could be harmed by future interpretations of clinical laboratory mark-up prohibitions.

Our laboratory currently uses the services of outside reference laboratories to provide certain complementary laboratory services to those services provided directly by our laboratory. Although Medicare policies do not prohibit certain independent-laboratory-to-independent-laboratory referrals and subsequent mark-up for services, California and other states have rules and regulations that prohibit or limit the mark-up of these laboratory-to-laboratory services. A challenge to our charge-setting procedures under these rules and regulations could have a material adverse effect on our business, results of operations and financial condition.

Our business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, the law or regulations of CLIA or those of other state or local agencies.

We are subject to CLIA, which is administered by CMS and extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally approved accreditation agency. CLIA is designed to ensure the quality and reliability of clinical laboratories by mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The sanction for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties. If a laboratory is certified as “high complexity” under CLIA, the laboratory may obtain ASRs, which are used to develop in-house diagnostic tests known as “home brews.” We received our CLIA accreditation certificate as a “high complexity” laboratory in mid-2004. To renew this certificate, we are subject to survey and inspection every two years as well as the possibility of unannounced inspections at any time. Our CLIA accreditation was renewed in February 2009 and expires on February 3, 2011.

We are also subject to regulation of laboratory operations under state clinical laboratory laws. State clinical laboratory laws may require that laboratories and/or laboratory personnel meet certain qualifications, implement certain quality controls or require maintenance of certain records. For example, California requires that we maintain a license to conduct testing in California and California law establishes standards for our day-to-day laboratory operations, including the training and skill required of laboratory personnel and quality control. Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could adversely affect our business and results of operations.

Certain of our specialized diagnostic tests take advantage of the “home-brew” exception from the FDA review and any changes to the FDA’s policies with respect to this exception could adversely affect our business and results of operations.

Clinical laboratory diagnostic tests that are developed and validated by a laboratory for use in examinations the laboratory performs itself are called “home brew” tests. The FDA maintains that it has authority to regulate the development and use of “home brews” as diagnostic medical devices under the Federal Food, Drug and Cosmetic Act but to date has decided not to exercise its authority with respect to most “home brew” tests as a matter of enforcement discretion. A substantial portion of our specialized diagnostic tests are “home brew” tests

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for which we have not obtained the FDA premarket clearance or approval. In addition, manufacturers and suppliers of ASRs, which we obtain for use in our “home brews,” are required to register with the FDA, to conform manufacturing operations to the FDA’s Quality System Regulation and to comply with certain reporting and other recordkeeping requirements. The FDA regularly considers the application of additional regulatory controls over the sale of ASRs and the development and use of “home brews” by laboratories such as ours. As a result of recent industry events, it is possible the FDA may look at the sale and use of “home brew” tests with heightened scrutiny or modify their regulatory approach with respect to “home brew” tests. We cannot predict the extent of the FDA’s future regulation and policies with respect to “home brew” tests and there can be no assurance that the FDA will not require us to obtain premarket clearance or approval for certain diagnostic tests that we perform. Any such premarket clearance requirements could restrict or delay our ability to provide our specialized diagnostic services and may adversely affect our business and results of operations.

Failure to comply with the HIPAA security and privacy regulations and other state regulations may increase our operational costs.

The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of protected health information, or PHI, by health plans and healthcare providers, in addition to setting standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including:

• the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, to obtain payments for services and healthcare operations activities;

• a patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;

• the content of notices of privacy practices for PHI; and

• administrative, technical and physical safeguards required of entities that use or receive PHI electronically.

We have implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent. Therefore, we are required to comply with both federal privacy regulations and varying state privacy laws. The federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information.

The HITECH Act was signed into law on February 17, 2009, as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act imposes stiffer penalties for HIPAA privacy and security violations. The HITECH Act also mandates that the United States Department of Health and Human Services investigate any complaints that are preliminarily determined to involve potential willful neglect. The HITECH Act heightens HIPAA enforcement by authorizing state attorney generals to file suit on behalf of their residents. Courts will be able to award damages, costs and attorneys’ fees related to violations of HIPAA.

Our business could be materially harmed by future interpretation or implementation of state laws regarding prohibitions on the corporate practice of medicine.

The manner in which licensed physicians can be organized to perform and bill for medical services is governed by state laws and regulations. Under the laws of some states, including California, business corporations generally are not permitted to employ physicians or to own corporations that employ physicians or

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to otherwise exercise control over the medical judgments or decisions of physicians. All of the hempaths that we utilize in connection with providing our specialized diagnostic services are employed by Cartesian. Cartesian is a California professional corporation formed for the purpose of providing professional medical services in conjunction with the diagnostic services that we provide. On December 31, 2005, we entered into the PSA with Cartesian, pursuant to which these hempaths provide professional services to us. Prior to that time, we employed these hempaths, which could result in the potential assertion by regulatory authorities that we were engaged in the corporate practice of medicine.

We believe that we currently are in compliance in all material respects with the laws governing the corporate practice of medicine in California. If regulatory authorities or other parties were to assert that we were engaged in the corporate practice of medicine currently or prior to December 31, 2005, or if California laws governing the corporate practice of medicine were to change, we could be required to restructure our contractual and other arrangements and we and/or our hempaths could be subject to civil or criminal penalties. In addition, the provision of our specialized diagnostic services, which rely heavily on the professional services provided by our hempaths, could be interrupted or suspended, which would adversely affect our business, results of operations and financial condition.

Risks Relating to Our Finances and Capital Requirements

Negative conditions in the global credit markets and financial services and other industries may impair the liquidity of a portion of our investment portfolio or may otherwise adversely affect our business.

All of our investment securities are classified as available-for-sale and therefore reported on the balance sheet at market value. Our investment securities consist of municipal securities, government-sponsored enterprise securities, corporate debt securities, U.S. treasury securities, certificates of deposit and a single auction rate security, or ARS.

As of December 31, 2009, we held a single ARS with a cost basis of $4.9 million. The ARS is classified as a long-term investment security at fair value of $3.8 million, net of a temporary impairment of $1.1 million due to the illiquidity of the investment security (See Note 3, Fair Value Measurements, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K). ARS are collateralized debt instruments with long-term contractual maturities that are structured with short-term holding periods. They provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined intervals, typically every 7 to 35 days. The length of each holding period is determined at the original issuance of the ARS. We can sell at each auction at par, assuming there are buyers for the ARS at such auction. In order for the auction to be successful, demand in the marketplace must meet or exceed the supply. If an auction is unsuccessful, the interest rate on the security resets at a predetermined auction failure rate. An investor can continue to hold the investment security until the next auction date or attempt to sell in the secondary market, usually at a sizable discount.

The ARS in our investment securities portfolio consists of debt issued by a municipality that is also underwritten by an insurance agency. The ARS auctions began failing in February 2008. As of December 31, 2009, the ARS was rated “BAA1” by Moody’s Investors Service and “A” by Standard & Poor’s based on the underwriter’s guarantee. Although unsuccessful, the last auction occurred on September 10, 2008, prior to the bankruptcy of the broker/dealer that managed the auction. The funds associated with this security will not be accessible until the issuer restructures the debt, a buyer is found outside of the auction process, or the ARS matures in 2038. As such, we have recorded a temporary impairment of approximately $1.1 million as of December 31, 2009. In the meantime, the issuer continues to pay the interest as scheduled and has had two partial redemptions and shows no indication that it will be unable to meet its current obligations. We do not need to access these funds for operational purposes for the foreseeable future. Based on our ability to access our cash and cash equivalents and short-term investment securities and our expected operating cash flows, we do not anticipate that the temporary illiquidity of this investment will affect our ability to execute our current business plan.

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In addition to the sustained weakness in the global credit markets, the financial services industry and the U.S. capital markets, the U.S. economy as a whole has been experiencing a period of substantial turmoil and uncertainty characterized by unprecedented intervention by the U.S. federal government and the failure, bankruptcy, or sale of various financial and other institutions. The impact of these events on our business and the severity of the current economic crisis are uncertain. It is possible that the state of the global credit markets, the U.S. capital markets, the financial services industry and the U.S. economy may adversely affect our business, vendors and prospects as well as our liquidity and financial condition. More specifically, our insurance carriers and insurance policies covering all aspects of our business may become financially unstable or may not be sufficient to cover any or all of our losses and may not continue to be available to us on acceptable terms, or at all. Governmental payors private insurers and other private payors, from which we receive a substantial portion of our revenue, may delay payment or be unable to satisfy their reimbursement obligations as a result of the current economic crisis. A decrease in reimbursement would likely have a negative impact on the use of our specialized laboratory services and our revenue. The current tightening of global credit may create a delay or disruption in the performance or satisfaction of commitments to us by the vendors we rely on for the manufacture and supply of our laboratory instruments, equipment and materials, which could adversely affect our business.

We may need to raise additional capital in the future, which may not be available on favorable terms or at all, which may cause dilution to our existing stockholders or require us to be subject to certain restrictions.

We may need to raise additional capital in the future to fund the continued expansion of our business. Although we have become profitable over the past several years, our operations have consumed substantial amounts of cash since inception. To date, our sources of cash have been primarily limited to our initial public offering, private placements of preferred stock and debt, and more recently cash flow from operations. We expect to continue to spend substantial amounts of capital to grow our business. To fund such growth, we may raise additional funds through public or private equity offerings or debt financings. We do not know if we will be able to continue to generate cash flow from operations or if we will be able to obtain additional financing on favorable terms, if at all (particularly in light of the difficult current financing environment and weak economic conditions). If we cannot raise funds on acceptable terms, if and when needed, we may not be able to maintain or grow our business at the rate that we currently anticipate and respond to competitive pressures or unanticipated capital requirements, or we may be required to reduce operating expenses, which could significantly harm our business, financial condition and results of operations. In addition, to the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership in our company will be diluted.

We expect to continue to incur significant costs as a result of operating as a public company and our management expects to continue to devote substantial time to public company compliance programs.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and The NASDAQ Stock Market, or NASDAQ, in the past several years have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices and substantial changes in executive compensation disclosure. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate our business. Our management and other personnel continue to devote a substantial amount of time to these compliance programs and other programs related to being a public company, such as investor relations, risk management (including securing director and officer liability insurance) and monitoring of public company reporting obligations. These rules and regulations will continue to cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

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The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting. In particular, each year we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal significant deficiencies or material weaknesses in our internal control over financial reporting. We incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. If we are not able to comply with the ongoing requirements of Section 404, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be significant deficiencies or material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Future changes in financial accounting standards or practices, or existing taxation rules or practices, may cause adverse unexpected revenue or expense fluctuations and affect our reported results of operations.

A change in accounting standards or practices, or a change in existing taxation rules or practices, can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. For example, in September 2008, the State of California passed a law, effective January 1, 2008, to suspend California net operating losses for two-years pertaining to certain corporations doing business within California. This net operating loss suspension had no impact on our income tax benefit, as reported. However, this does require us to pay income tax associated with our taxable income for the tax years 2008 and 2009, which our California deferred net operating loss otherwise would have reduced. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. Our effective tax rate can also be impacted by changes in estimates of prior year items, the outcome of audits by federal, state and foreign jurisdictions and changes in overall levels of income before income tax. Furthermore, changes in accounting rules, such as increased use of fair value measures, changes in accounting principles generally accepted in the U.S. and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards could potentially have a significant effect on our reported results.

Risks Relating to the Securities Markets and Investment in Our Common Stock

There may not be a viable public market for our common stock.

We cannot predict the extent to which investor interest in our company will continue to sustain an active trading market for our stock on The NASDAQ Global Select Market or any other stock market or how liquid any such market might remain. If an active public market is not sustained, it may be difficult for our stockholders to sell their shares of common stock at a price that is attractive to them, or at all.

Fluctuations in our operating results and market volatility may affect our stock price.

The market price of our common stock is volatile and may fluctuate significantly in response to a number of factors, many of which we cannot control, including:

• changes in coverage and/or reimbursement guidelines and amounts;

• variations in deductible and coinsurance amounts;

• changes in regulations affecting the healthcare or diagnostic services industry;

• failure to comply with applicable regulations;

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• changes in the payor mix or the mix or cost of our specialized diagnostic services;

• the timing and volume of patient orders and the timing and cost of our sales and marketing campaigns;

• repurchase of shares or issuance of dividends;

• changes in contracted status with third party payors;

• changes in compensation expense and other expenses that result in changes in our operating results;

• increased investigative or enforcement initiatives by governmental and other third party payors;

• additions or departures of key personnel;

• recommendations and studies published by various organizations with respect to our services or those offered by our competitors;

• variations in our quarterly operating results, including the number of business days in each quarter;

• seasonality and volume declines due to adverse weather conditions and holidays;

• changes in our accounting estimates;

• changes in our DSO level;

• changes in securities analysts’ estimates of our financial performance;

• announcements of acquisitions or other strategic transactions by us or our competitors;

• announcements of new products or services offered by us or our competitors;

• fluctuations in stock market prices and trading volumes of similar companies or in the broader markets generally;

• changes in economic conditions, in the global credit markets and financial services and other industries and the U.S. federal government response to developments in the economy and such markets and industries;

• sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

• the acquisition of our common stock and related public disclosure by certain stockholders, including those that have a reputation for engaging in stockholder activism;

• uncertainty with respect to the reasons for changes in the trading volume or the market price of our common stock;

• any litigation in which we become involved;

• fluctuations in security market indices of which we may be included now or in the future;

• discussion of us or our stock price by the general media, online investor communities, financial industry or medical press;

• changes in federal or state tax laws; and

• impairment of any of our assets, including our investment securities.

Due to these factors, stockholders may not be able to sell their shares of our common stock at favorable prices or at all.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as amended, may delay or prevent an acquisition of us or a change in our management. These provisions include a

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classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

If our executive officers, directors and largest stockholders choose to act together, they may be able to control our operations and act in a manner that advances their interests and not necessarily those of other stockholders.

As of February 18, 2010, our executive officers, directors, and holders of 5% or more, based on available information, of our outstanding common stock beneficially owned approximately 45% of our common stock. As a result, these stockholders, acting together, may be able to exert control or influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders and they may act in a manner that advances their interests and not necessarily those of other stockholders.

Future sales of our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As a result of the provisions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and Rule 701 under the Securities Act, substantially all of the outstanding shares of our common stock are available for sale in the public market, subject, in the case of shares of our common stock held by affiliates, to volume limitations, manner of sale requirements and certain other requirements. We also registered all shares of common stock that we may issue under our equity compensation plans. As a result, approximately 1.2 million shares are eligible for sale upon the exercise of vested options and release of specific RSUs outstanding as of February 18, 2010. These shares can be freely sold in the public market upon issuance, subject to our window period and insider trading policies, if applicable.

We have never paid dividends on our capital stock and because we do not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, of our common stock may be the sole source of gain on an investment in our stock.

We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Furthermore, to the extent we incur indebtedness in the future; the loan documents governing such indebtedness may restrict our ability to pay dividends. As a result, we anticipate that capital appreciation, if any, of our common stock may be our stockholders’ sole source of gain for the foreseeable future.

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of diagnostic companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often

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been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because clinical laboratory service companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention and resources, which could adversely affect our business.

If we are not the subject of securities analyst reports or if any securities analyst downgrades our common stock or our sector, the price of our common stock could be negatively affected.

Securities analysts may publish reports about us or our industry containing information about us that may affect the trading price of our common stock. There are many publicly traded companies active in the healthcare industry, which may mean it will be less likely that we receive analysts’ coverage, which in turn could affect the price of our common stock. In addition, if a securities or industry analyst downgrades the outlook for our stock or one of our competitors’ stocks or chooses to terminate coverage of our stock, the trading price of our common stock may also be negatively affected.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Our primary administrative offices and clinical laboratories are located in Carlsbad, California. As of December 31, 2009, we occupied approximately 116,000 square feet of office and laboratory space in two separate facilities. Our leases on these properties expire between 2012 and 2014, excluding one 60-month extension option on the lease for our administrative offices and one 30-month extension option on the lease for our laboratory facility. In June 2009, we entered into a lease agreement for approximately 44,000 square feet of space in Carlsbad, California to be used for office and laboratory operations. This facility is currently undergoing improvements and is expected to ready for our use in the second quarter of 2010. In January 2010, we entered into a purchase agreement to acquire this facility and related land.

In January 2010, we entered into a lease agreement for approximately 33,000 square feet of space in Carlsbad, California to be used as a customer service and support facility. The lease includes a 60-month term with an option for a 60-month extension. The facility will be undergoing improvements and is expected to be ready for our use in the second quarter of 2010. When we complete the improvements for the additional space, we expect to have approximately 193,000 square feet of total available office and laboratory space in Carlsbad, California. See further discussion of these transactions within Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We believe that our current facilities, including those currently undergoing improvements, are adequate for our needs for the immediate future. We believe that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

Item 3.    Legal Proceedings.

None.

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

None.

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PART II

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

Market Information

Our common stock is traded on the NASDAQ Global Select Market under the symbol “GXDX.” During 2008 and 2009 our common stock was traded on the NASDAQ Global Market. On January 4, 2010, our common stock commenced trading on the NASDAQ Global Select Market. The following table sets forth the high and low sales prices for our common stock, as reported on the NASDAQ Global Market for the periods indicated. The closing price of our common stock on December 31, 2009 was $35.53.

	2009
Quarter Ended	High		Low
December 31	$	38.13	$	33.61
September 30		35.35		26.13
June 30		33.37		24.58
March 31		35.89		24.15
	2008
Quarter Ended		High		Low
December 31	$	41.71	$	26.03
September 30		39.79		25.28
June 30		32.49		22.76
March 31		37.88		20.41

As of February 18, 2010, there were approximately 53 holders of record of our common stock. This number of record holders was determined based on our shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors. Furthermore, to the extent we incur additional indebtedness in the future, the loan documents governing such indebtedness may restrict our ability to pay dividends.

Recent Sales of Unregistered Securities

Issuer Purchases of Equity Securities

The following table provides information with respect to purchases made by us of shares of our common stock during the quarter ended December 31, 2009:

Period	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Value Paid by the Company		Maximum Number of Shares that May Yet Be Purchased Under the Plan
December 1, 2009 through December 31, 2009	500	$	30.23	$	15,113	—
November 1, 2009 through November 30, 2009	—		—		—	—
October 1, 2009 through October 31, 2009	—		—		—	—
Total	500	$	30.23	$	15,113	—

(1) The shares repurchased by us during the months listed above represent 375 shares that were repurchased from our directors who elected, at the time of grant and pursuant to the terms of their Restricted Stock Unit Award Agreements under our 2007 Equity Incentive Plan, to sell us shares of our common stock underlying said RSUs, at a price per share equal to the fair market value of a share of our common stock on the vesting date, for the purpose of satisfying the tax obligation created by the vesting of such RSUs and 125 shares that were repurchased under our 2001 Equity Incentive Plan, with right to early exercise.

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Performance Graph⁽¹⁾

The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since October 30, 2007, which is the date our common stock first began trading on the NASDAQ Global Market, to two indices: the NASDAQ Composite Index and NASDAQ Healthcare Index. The graph assumes an initial investment of $100 on October 30, 2007. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.

	Performance Graph Values						Closing Price
	GXDX		NASDAQ Composite Index		NASDAQ Health Care Index		GXDX		NASDAQ Composite Index		NASDAQ Health Care Index
10/30/2007	$	100	$	100	$	100	$	25.35	$	2,816.71	$	258.58
12/31/2007		121		94		95		30.70		2,652.28		245.92
6/30/2008		124		81		90		31.55		2,292.98		231.77
12/31/2008		134		56		79		34.08		1,577.03		204.13
6/30/2009		126		65		81		31.99		1,835.04		209.68
12/31/2009		140		81		92		35.53		2,269.15		237.87

(1) This section is not “soliciting material,” is not deemed “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

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Item 6.    Selected Financial Data.

The selected financial data set forth below is derived from our audited consolidated financial statements for the five years ended December 31, 2009 and may not be indicative of future operating results. The following selected financial data should be read in conjunction with our consolidated financial statements and notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K.

	Years Ended December 31,
Statement of Operations Data	2009(1)		2008(1)			2007(2)			2006			2005
	(in thousands, except per share data)
Revenues	$	184,378	$	116,170		$	59,332		$	24,018		$	5,193
Cost of revenues		69,200		45,931			24,106			13,131			5,189
Gross profit		115,178		70,239			35,226			10,887			4
Operating expenses:
Sales and marketing		31,296		20,065			11,649			6,264			4,225
General and administrative		28,710		22,313			9,976			6,930			3,782
Research and development		1,362		1,233			559			1,080			1,105
Impairment and lease exit costs		—		—			—			542			—
Total operating expenses		61,368		43,611			22,184			14,816			9,112
Income (loss) from operations		53,810		26,628			13,042			(3,929	)		(9,108	)
Interest and other income		1,554		3,038			1,103			554			227
Interest expense		—		—			(353	)		(384	)		(291	)
Income (loss) before income taxes		55,364		29,666			13,792			(3,759	)		(9,172	)
Income tax expense (benefit)(3)		24,730		(1,690	)		439			—			—
Net income (loss)	$	30,634	$	31,356		$	13,353		$	(3,759	)	$	(9,172	)
Net income (loss) per share(4):
Basic	$	1.80	$	1.91		$	1.20		$	(33.74	)	$	(111.33	)
Diluted	$	1.71	$	1.78		$	0.78		$	(33.74	)	$	(111.33	)
Shares used to compute net income (loss) per share(4):
Basic		16,978		16,399			2,756			111			82
Diluted		17,954		17,653			4,246			111			82
Dividends declared per share(5)	$	—	$	—		$	—		$	—		$	—

	December 31,
Balance Sheet Data	2009		2008		2007		2006		2005
	(in thousands)
Cash, cash equivalents and short-term investments	$	140,994	$	102,938	$	85,460	$	3,865	$	8,926
Working capital		161,325		115,236		88,979		4,293		8,451
Total assets		197,455		144,445		97,832		10,202		12,714
Long-term debt, net of current portion		—		—		—		1,262		2,136
Total stockholders’ equity		179,504		132,219		90,605		4,065		7,524

(1) During the years ended December 31, 2009 and 2008, we recorded positive changes in prior period accounting estimates to reduce contractual allowances, which increased our revenues by $7.4 million and $3.3 million, respectively. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to our collection processes, as well as increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods and changes in reimbursement policies by certain payors. See Note 1, Revenue

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Recognition, and Allowance for Doubtful Accounts, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

(2) During the year ended December 31, 2007, we recorded positive changes in prior period accounting estimates to reduce contractual allowances and allowance for doubtful accounts, which increased our revenues by $792,000 and decreased general and administrative expenses by $666,000, respectively. These positive changes in accounting estimates were the result of continued improvements to our collection processes, as well as favorable experience in the collection of previously reserved accounts receivable for services rendered in prior periods and changes in reimbursement policies by certain payors. See Note 1, Revenue Recognition, and Allowance for Doubtful Accounts, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

(3) The income tax expense for the year ended December 31, 2009 was $24.7 million, as compared to the income tax benefit for the year ended December 31, 2008 of $1.7 million. As of December 31, 2007, we had $14.9 million in net deferred tax assets that were offset entirely by a valuation allowance, as we were unable to conclude, at that time, that it was “more likely than not” that such deferred tax assets would be realized. In 2008, although realization was not assured, we believed it was “more likely than not” that we would be able to realize our net deferred tax assets through the ordinary course of business and expected future taxable income. Therefore, during the year ended December 31, 2008, we recorded a $14.9 million tax benefit representing the release of the valuation allowance against the net deferred tax assets. For the year ended December 31, 2007, income tax expense was reduced by the usage of net operating losses and other credits, resulting primarily in alternative minimum taxes. During the years ended December 31, 2006 and 2005, there were no tax liabilities due to net losses during each period.

(4) There is a lack of comparability in the basic and diluted net income (loss) per share amounts between the periods presented herein prior to 2008 and any future periods. See Note 1 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for the pro forma basic and diluted net income (loss) per share calculations. For the year ended December 31, 2007, $10.0 million of our net income of $13.3 million was allocated to preferred stockholders for purposes of calculating net income per share pursuant to the terms of the preferred stock, resulting in $3.3 million of net income allocable to common stockholders. See Note 1 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the method and amounts used in the computation of the per share amounts. In November 2007, our preferred stock converted into 11.0 million shares of our common stock upon completion of our initial public offering, or IPO. Prior to our IPO, net income (loss) per share was computed as required by ASC Topic 260, Earnings Per Share, which established standards regarding the computation of earnings per share, or EPS, by companies that have issued securities other than common stock that contractually entitle the holder to participate in our dividends and earnings. ASC Topic 260 requires earnings for the period, after deduction of preferred stock dividends, to be allocated between the common and preferred stockholders based on their respective rights to receive dividends, whether or not declared. Basic net income (loss) per share is then calculated by dividing income allocable to common stockholders (after the reduction for any preferred stock dividends assuming current income for the period had been distributed) by the weighted average number of shares of common stock outstanding, net of shares subject to repurchase by us.

(5) We have never declared or paid any cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors. Furthermore, to the extent we incur additional indebtedness in the future, the loan documents governing such indebtedness may restrict our ability to pay dividends.

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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 in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, 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 certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hem/oncs. Our highly trained group of hempaths utilizes sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patient’s condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, and other forms of cancer.

We were organized in 1999, and we began offering specialized diagnostic services in the third quarter of 2004. Our key service offerings include COMPASS and CHART. By ordering our COMPASS service offering, the hem/onc authorizes our hempath to determine the appropriate diagnostic tests to be performed, and our hempath then integrates patient history and previous and current test results into a comprehensive diagnostic report. As part of our CHART service offering, the hem/onc also receives a detailed assessment of a patient’s disease progression over time. Test requisitions for more than half of the patient samples we processed for the years ended December 31, 2009, 2008 and 2007, included our COMPASS or CHART service offerings.

We estimate that the U.S. bone marrow testing market alone represents approximately a $1.0 billion opportunity annually and that our current market share for bone marrow procedures is approximately 7%. Our objective is to continue to increase our market share, revenues and profits at a rate significantly faster than the overall growth rate market for blood and bone marrow testing services by continuing to provide and expand our high quality, community-based hem/onc focused specialized diagnostic services. In furtherance of this objective, our growth strategy has the following key elements:

• expand our organization and infrastructure by increasing our personnel, particularly in sales, to enable us to visit more hem/oncs on a more frequent basis and, in time, to expand into new markets;

• hiring and retaining Cartesian hempaths and additional laboratory resources to continue to provide high-quality, specialized diagnostic services;

• expand service offerings to hem/oncs by being first to market with new technologies and innovations;

• leverage our existing infrastructure to increase operating efficiencies by taking advantage of economies of scale and volume discounts, where possible; and

• pursue additional collaborations and acquisitions to supplement our business.

As a specialized diagnostic service provider, we rely extensively on our high quality of service to promote and maintain our relationships with our community-based hem/oncs. We compete primarily based on the quality of testing, reporting and information systems, reliability in patient sample transport, reputation in the medical community and access to our highly qualified hempaths. Our primary competitors include hospital pathologists, esoteric testing laboratories, national reference laboratories and academic laboratories.

Our revenues consist primarily of payments or reimbursements received from governmental payors, such as Medicare and Medicaid; private insurers, including managed care organizations; and private payors, such as hospitals, patients, and others for the specialized diagnostic services rendered to our hem/onc customers. Our revenues are affected by changes in customer and case volume, case complexity, specimen type, payor mix, contractual allowances and reimbursement rates.

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Additionally, billing for diagnostic services is highly complex. Depending on our billing arrangement with each third party payor and applicable law, we are often obligated to bill in the specific manner prescribed by the various payors, each of which may have different billing requirements. Billing for diagnostic services in connection with governmental payor programs is subject to numerous federal and state regulations and other requirements, resulting in additional costs to us. We report revenues from contracted payors, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, the published fee schedules. We report revenues from non-contracted payors, including certain insurance companies and individuals, based on the amount expected to be collected. We estimate amounts to be collected based on our historical collection experience.

We believe the key challenges in being able to continue to increase our market share, revenues and profits are our ability to continue to hire and retain qualified field sales representatives, key management and other personnel, Cartesian’s ability to hire and retain hempaths, changes in reimbursement levels for our specialized diagnostic services, changes in regulations, payor policies and contracting arrangements with payors, increased competition from competitors attempting to replicate our key service offerings or provide other services that compete with ours, our ability to scale our internal infrastructure, our ability to maintain and strengthen our relationships with our hem/onc customers and our ability to continue to improve our operational, financial and management controls, and reporting systems and procedures.

To address these challenges, our management is focused upon expanding our sales organization as the primary driver for our continued growth while maintaining our existing hem/onc customer relationships. Our management tracks and measures the general buying patterns of our hem/onc customers (including cases per month, revenues and cost of revenues per case and turn-around-time per case) and is focused on adding additional sales management and sales representatives in key markets to enhance our penetration in those markets. Our management is also engaged in ensuring Cartesian is focused on recruiting, hiring and retaining hempaths to provide the professional services component to support continued growth. Management measures the levels and timeliness of reimbursement from third party payors and reviews on a monthly basis the levels of receivables and average time for collections, as well as cost and margin trends to ensure that investments in our infrastructure and personnel are in line with current sales levels.

We intend to opportunistically pursue additional collaborations with pharmaceutical companies and acquisitions or in-licensing of businesses, products or technologies that will enable us to accelerate the implementation of our strategic plan and to increase the number of hem/onc customers we serve and/or expand the services we provide to them, by way of investments in other companies, licensing of technology, co-development arrangements, collaborations, asset purchases and other similar transactions. For example, we currently provide specialized testing services and access to our hempaths through collaborations with select pharmaceutical companies. We expect these collaborations to grow over time, which we believe will improve our financial performance and name recognition and reputation among hem/oncs, and potentially provide us with early access to new technologies available for commercialization. We expect annual revenues from these collaborations to remain at approximately 1% of our total revenues in 2010.

Management has continued efforts to ensure that office and laboratory space is adequate to accommodate the necessary capacity requirements to meet our current and expanding business needs. Specifically, during the year ended December 31, 2009, we entered new leases for a new facility with an additional approximately 44,000 square feet of space located in Carlsbad, California to be used for office and laboratory operations and an additional approximately 7,000 square feet of office space within our existing corporate headquarters to be used for administrative operations. Subsequent to the year ended December 31, 2009, we entered into a lease for a new facility with an additional approximately 33,000 square feet of office space in Carlsbad, California, into which we will relocate and expand our customer service and other support functions. Additionally, we entered into a purchase agreement to acquire the 44,000 square foot facility for which we had previously entered into a lease agreement in 2009. See further discussion of these transactions within Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We initiated improvements on the newly purchased facility in the fourth quarter of 2009. We will

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initiate tenant improvements on the new 33,000 square foot customer service and support facility in the first quarter of 2010. We expect improvements on both facilities to be complete and the facilities to be operational in the second quarter of 2010. Once complete, these new facility expansions will increase our laboratory and office space to approximately 193,000 square feet, increasing both cost of revenue and administrative expenses relating to incremental facilities costs. For the year ended December 31, 2009, total capital expenditures were $5.5 million. We expect total capital expenditures to be approximately $30.0 million for 2010 including approximately $22.0 million of costs associated with our newly acquired laboratory and customer service and support facilities and approximately $8.0 million for equipment, computers, furniture and the like, to support our growing operational needs. We believe our recent expansion efforts will be adequate to meet our needs for 2010. We are not currently anticipating the need to expand into a new facility located in a geographically different region in 2010, as previously contemplated.

Our most significant developments:

• Increased revenues by 59% to $184.4 million for the year ended December 31, 2009, up from $116.2 million for the year ended December 31, 2008.

• Increased the number of cases processed by 48% to approximately 57,000 for the year ended December 31, 2009, up from approximately 39,000 for the year ended December 31, 2008.

• Increased income from operations to $53.8 million for the year ended December 31, 2009, up from $26.6 million for the year ended December 31, 2008, despite our increased cost of sales, headcount and facility expense.

• Continued expansion efforts by adding approximately 84,000 square feet of space to be used for office and laboratory operations.

• Increased the number of Cartesian hempaths by 32% to 33 as of December 31, 2009, up from 25 as of December 31, 2008.

• Increased the number of field sales representatives by 46% to 80 as of December 31, 2009, up from 55 as of December 31, 2008.

• Increased total headcount by 53% to 429 employees, including Cartesian employees and 7 part-time employees, as of December 31, 2009, up from 281 employees, including 7 part-time employees, as of December 31, 2008.

• Increased the number of ordering doctors to approximately 1,250 for the year ended December 31, 2009, up from approximately 1,000 for the year ended December 31, 2008.

Consolidated Financial Statement Presentation

As of January 1, 2006, the date the PSA with Cartesian became effective, we determined we had a controlling financial interest in Cartesian and began to consolidate the results of Cartesian based on the criteria under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, Consolidations. All intercompany accounts have been eliminated in consolidation.

Seasonality

The majority of our testing volume is dependent on patient visits to hem/oncs’ offices and other healthcare providers. Volume of testing generally declines during the vacation seasons, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, volume of testing tends to decline due to adverse weather conditions, such as excessively hot or cold spells or hurricanes or tornados in certain regions, consequently reducing revenues and cash flows in any affected period. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, allowance for doubtful accounts, valuation of investment securities, long-lived assets, income taxes and stock-based compensation expense. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements. For a summary of all of our accounting policies, including the policies discussed below, see Note 1 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

We recognize revenues as required by ASC Topic 605, Revenue Recognition, when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

Our specialized diagnostic services are performed based on a written test requisition form and revenues are recognized once the diagnostic services have been performed, the results have been delivered to the ordering physician, the payor has been identified and eligibility and insurance have been verified. These diagnostic services are billed to various payors, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals, and individuals. We report revenues from contracted payors, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, the published fee schedules. We report revenues from non-contracted payors, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount expected to be collected from non-contracted payors is recorded as a contractual allowance to arrive at net revenues. The expected revenues from non-contracted payors are based on the historical collection experience of each payor or payor group, as appropriate. In each reporting period, we review our historical collection experience for non-contracted payors and adjust our expected revenues for current and subsequent periods accordingly. Because a substantial portion of our revenues is from third party payors with whom we are not currently contracted, it is likely that we will be required to make positive or negative adjustments to accounting estimates with respect to contractual allowances in the future, which may positively or adversely affect our results of operations. During the years ended December 31, 2009, 2008 and 2007, we recorded positive changes in prior year accounting estimates to reduce contractual allowances, which increased our revenues by $7.4 million, $3.3 million and $792,000, respectively. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to our collection processes, changes in reimbursement policies by certain payors and increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods.

Allowance for Doubtful Accounts

At the same time revenues are recognized, an allowance for doubtful accounts is recorded for estimated uncollectible amounts due from our contracted payors. The process for estimating the collection of receivables associated with our specialized diagnostic services involves significant assumptions and judgments. Specifically,

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the allowance for doubtful accounts is adjusted periodically, based upon an evaluation of historical collection experience with specific payors and other relevant factors. The realization cycle for certain governmental and managed care payors can be lengthy, involving denial, appeal and adjudication processes, and are subject to periodic adjustments that may be significant. Provision for doubtful accounts is charged to general and administrative expense. Accounts receivable are written off as uncollectible and deducted from our allowance for doubtful accounts after appropriate collection efforts have been exhausted. As of December 31, 2009 and 2008, we had an allowance for doubtful accounts of $5.4 million and $4.1 million, respectively, which we reduced by $1.9 million and $664,000, respectively, for write-offs, net of recoveries.

Prior to writing off an account receivable and in accordance with applicable regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and coinsurance amounts, in a consistent manner for all payor classes. We have established collection processes, which may include but are not limited to: (1) an automated process for identifying past due accounts; (2) specific follow-up activities at scheduled intervals; (3) monitoring of collection activities; and (4) forwarding significant past due accounts to collection agencies. Uncollectible account balances for all payor classes are generally written off after remaining unpaid for a period of 24 months. Occasionally, balances may be determined to be uncollectible prior to the passage of 24 months from the last billing date and are written off at the time of such determination.

Our allowance for doubtful accounts has been provided for at a rate of approximately 2% and 3% of revenues for the years ended December 31, 2009 and 2008, respectively.

The following tables present a summary of our outstanding accounts receivable balances:

	December 31, 2009
	< 60 Days		61-120 Days		121-180 Days		> 180 Days		Total
	(in thousands)
Commerical payors	$	12,648	$	4,691	$	1,614	$	932	$	19,885
Medicare/Medicaid		7,455		1,433		752		2,217		11,857
Self-pay		111		100		90		319		620
Other		656		34		36		6		732
Total accounts receivable	$	20,870	$	6,258	$	2,492	$	3,474		33,094
Less: allowance for doubtful accounts										(5,387	)
Accounts receivable, net									$	27,707
	December 31, 2008
	< 60 Days		61-120 Days		121-180 Days		> 180 Days		Total
	(in thousands)
Commerical payors	$	7,869	$	2,008	$	537	$	493	$	10,907
Medicare/Medicaid		4,566		942		579		1,720		7,807
Self-pay		106		111		62		218		497
Other		464		32		10		13		519
Total accounts receivable	$	13,005	$	3,093	$	1,188	$	2,444		19,730
Less: allowance for doubtful accounts										(4,126	)
Accounts receivable, net									$	15,604

We continually strive to improve our billing and collection systems and processes, which includes increasing the number of trained personnel dedicated to this effort. To assess our efforts, we continually monitor the DSO of our accounts receivable. Our DSO averaged 56 days in 2009, which was consistent with 56 days in 2008. As of December 31, 2009 and 2008, our DSO was 62 days and 53 days, respectively. The increase in our

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DSO as of December 31, 2009, pertains primarily to the timing of payments relating to certain contracted payors. We expect to maintain our average DSO levels into 2010 as we continue to pursue improvements to collection procedures and work with our payors to ensure timely processing of reimbursement payments.

Income Taxes

ASC Topic 740, Income Taxes, establishes a single model to address accounting for uncertain tax positions. ASC Topic 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements if that position is “more likely than not” to be sustained upon examination by taxing authorities, based on the technical merits of the position. ASC Topic 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. We have recognized no significant interest or penalties since the adoption of provisions within ASC Topic 740 in 2007. We recognized no significant interest or penalties during the year ended December 31, 2009.

As required by provisions within ASC Topic 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. A valuation allowance is established when it is “more likely than not” that the future realization of all or some of the deferred tax assets will not be achieved. As of December 31, 2009 and 2008, we no longer maintained a valuation allowance against deferred tax assets, as we concluded it meets the “more likely than not” threshold required under ASC Topic 740.

Due to the adoption of provisions within ASC Topic 718, Compensation, we recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we followed the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us.

Utilization of net operating loss carryforwards, credit carryforwards and certain deductions have been subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership have required us to limit the amount of net operating loss and research and development credit carryforwards that were previously available to offset future taxable income. We have had three “change in ownership” events that limit the utilization of net operating loss and credit carryforwards. The “change in ownership” events occurred in March 2000, December 2001 and March 2008 and resulted in annual net operating loss carryforward limitations of $63,000, $96,000 and $16.1 million, respectively. As a result of a net unrealized built-in gain from the March 2008 change in ownership, our net operating loss carryforward annual limitation of $16.1 million was increased to $39.7 million for each of the five years starting after the change in ownership. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examination from various taxing authorities.

Stock-based Compensation

We record stock-based compensation expense as required by ASC Topic 718. We grant share-based awards of stock options and RSUs to employees, directors and Cartesian doctors. We adopted ASC Topic 718 using the prospective approach, which applies to new awards and to awards modified, repurchased or cancelled after the required effective date.

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In addition, we allow qualified employees, excluding directors and Cartesian doctors, to participate in our employee stock purchase plan, or ESPP, which provides employees the opportunity to purchase our common stock at a 15% discount. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods and contains a look-back provision for determining the purchase price. We value and account for our ESPP as required by ASC Topic 718-50. The objective of the measurement process for ESPPs with a look-back option is to reasonably measure the fair value of the award at the grant date, the date at which there is a mutual understanding of the terms of the award in exchange for the services already rendered and the employee’s total contributions are known. At this time, we become contingently obligated to issue equity instruments to the employee. Typically, the grant date is the first business day of each offering period. Employee contributions are generally made through payroll deductions.

We previously granted equity instruments issued to non-employees, excluding Cartesian employees and directors, and recorded expense at the fair value over the related service period as required by ASC Topic 718 and periodically revalued the equity instruments as they vested. During the years ended December 31, 2009, 2008 and 2007, we recognized $12,000, $49,000 and $31,000, respectively, of non-employee stock-based compensation. We no longer grant these non-employee equity awards. All previously granted awards to these non-employees were fully vested, and all remaining expense was recognized during the year ended December 31, 2009.

We recognize stock-based compensation expense for options and RSUs over the vesting period using the straight-line method. The standard vesting period is four years for most stock option awards and three years for most RSU awards, but can range from one to four years in certain grants. We measure stock options and RSU equity awards based on fair value. In addition, we record stock-based compensation expense related to the ESPP as required by ASC Topic 718-50. The initial ESPP offering period extended from October 29, 2007 to June 30, 2008, with the first grant occurring in 2008 and continuing with new offerings each six months thereafter. We classify stock-based compensation expense amounts for all awards in the consolidated statements of operations based on the department to which the related employee reports.

We value RSU grants at their intrinsic value. In contrast, we use the Black-Scholes valuation model to estimate the grant date fair value of employee stock options and ESPP awards using the following weighted-average assumptions:

	Stock Options									ESPP
	Years Ended December 31,									Years Ended December 31,
	2009			2008			2007			2009			2008
Grant date fair value (per share)	$	15.64		$	14.63		$	10.78		$	11.22		$	14.61
Assumptions used:
Expected life of awards (years)		6.04			6.02			6.08			1.32			1.20
Risk-free interest rate		2.16	%		2.92	%		4.48	%		0.68	%		2.79	%
Volatility		50.12	%		51.35	%		56.71	%		47.97	%		37.50	%
Dividend yield		—			—			—			—			—
Forfeitures		7.00	%		7.00	%		7.00	%		—			—

We calculated the weighted-average expected life of options using the simplified method as prescribed by ASC Topic 718. This decision was based on the lack of relevant historical data due to our limited operating experience as a public company. We derived the risk-free interest rate assumption from the U.S. Treasury rates for U.S. Treasury zero-coupon bonds with maturities equal to the expected term of the award being valued. In addition, due to our limited historical data, the estimated volatility incorporates the historical volatility of comparable companies within our peer group with publicly available share prices. We based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future.

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We recognize stock-based compensation expense for options and RSUs over the vesting period using the straight-line method. The standard vesting period is four years for most stock option awards and three years for most RSU awards, but can range from one to four years in certain grants. We measure stock options and RSU equity awards based on fair value. In addition, we record stock-based compensation expense related to the ESPP as required by ASC Topic 718-50. The initial ESPP offering period extended from October 29, 2007 to June 30, 2008, with the first grant occurring in 2008 and continuing with new offerings each six months thereafter. We classify stock-based compensation expense amounts for all awards in the consolidated statements of operations based on the department to which the related employee reports.

The following tables present a summary of our stock-based compensation expense as recognized in the consolidated statements of operations:

	Year Ended December 31, 2009
	Options		RSUs		ESPP		Total
		(in thousands)
Cost of revenues	$	2,073	$	881	$	282	$	3,236
Sales and marketing		1,150		78		502		1,730
General and administrative		2,417		2,186		348		4,951
Research and development		—		—		—		—
	$	5,640	$	3,145	$	1,132	$	9,917

	Year Ended December 31, 2008
	Options		RSUs		ESPP		Total
		(in thousands)
Cost of revenues	$	1,058	$	459	$	770	$	2,287
Sales and marketing		465		—		1,260		1,725
General and administrative		1,307		1,033		665		3,005
Research and development		—		—		—		—
	$	2,830	$	1,492	$	2,695	$	7,017
	Year Ended December 31, 2007
	Options		RSUs		ESPP		Total
		(in thousands)
Cost of revenues	$	164	$	15	$	—	$	179
Sales and marketing		81		—		—		81
General and administrative		226		—		—		226
Research and development		54		—		—		54
	$	525	$	15	$	—	$	540

We expect stock-based compensation expense for 2010 to increase in absolute dollars but to decrease as a percentage of revenues based on new and additional stock option and RSU grants offset by increasing revenues.

Fair Value

The carrying value of certain of our financial instruments that are not measured at fair value on a recurring basis, including cash, cash equivalents, accounts receivable, accounts payable and accrued expenses and other assets and liabilities, are considered to be reasonable estimates of their respective fair values due to their short-term nature.

We value financial instruments that are measured at fair value on a recurring basis as required under ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for

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measuring fair value in accounting principles generally accepted in the U.S. and expands disclosures about fair value measurements. Furthermore, ASC Topic 825, Financial Instruments, permits entities the option to measure many financial instruments and certain other items at fair value. We have not specifically identified any financial instruments subject to measurement under ASC Topic 825.

As of December 31, 2009, we held a single ARS with a cost basis of $4.9 million. We have evaluated this security based on interest rate spreads, credit quality, underlying assets of the issuer and underwriter, likelihood of a successful auction or redemption in the near term and the ability of the issuer to restructure the debt in the current credit environment. We assumed that the issuer and underwriter would not be able to satisfy its debt obligation until the credit market would provide a debt restructuring opportunity (within the next 4 years) and applied a 1.0% liquidity discount. The issuer of the ARS continues to make interest payments as scheduled and has made two partial redemptions during the year ended December 31, 2009, of which we have benefited from one due to the lottery system used to distribute the redemption proceeds. This redemption resulted in cash proceeds to us of $75,000. As a result of our internal valuation, we have recorded a temporary impairment of approximately $1.1 million as of December 31, 2009 against a cost basis of $4.9 million, as compared to a temporary impairment of $1.2 million as of December 31, 2008 against a cost basis of $5.0 million. The unrealized loss, net of deferred tax, is included in accumulated other comprehensive loss. Due to the uncertainty related to the timing of liquidity in the ARS market in the near term, we classified this ARS investment security as a long-term asset on the balance sheet with a fair value of $3.8 million as of December 31, 2009 and 2008.

Results of Operations

The following table presents a summary of the consolidated statements of operations as a percentage of revenue:

	Years Ended December 31,
	2009		2008		2007
Revenues	100	%	100	%	100	%
Cost of revenues	38	%	40	%	41	%
Gross profit	62	%	60	%	59	%
Operating expenses:
Sales and marketing	17	%	17	%	20	%
General and administrative	16	%	19	%	17	%
Research and development	1	%	1	%	1	%
Total operating expenses	34	%	37	%	38	%
Income from operations	28	%	23	%	21	%
Interest income, net	1	%	3	%	2	%
Income before income taxes	29	%	26	%	23	%
Income tax expense (benefit)	13	%	(1	%)	1	%
Net income	16	%	27	%	22	%

Revenues

Revenues primarily consist of payments or reimbursements received from governmental payors, such as Medicare and Medicaid, private insurers, including managed care organizations, private payors, such as hospitals, patients and others for the specialized diagnostic services rendered to our hem/onc customers. Substantially all of our revenues result from our having been assigned the right to bill and collect for the professional services provided by the hempaths employed by Cartesian who work with us in our laboratory facility pursuant to our PSA with Cartesian. Our revenues from services not performed by Cartesian were less than 5% of our total revenues during each of the years ended December 31, 2009, 2008 and 2007.

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For the year ended December 31, 2009, we derived approximately 59% of our revenues from private insurance, including managed care organizations and other healthcare insurance providers; approximately 40% from Medicare and Medicaid; and the remaining approximate 1% from other sources. For the years ended December 31, 2008 and 2007, we derived approximately 60% of our revenues from private insurance, including managed care organizations and other healthcare insurance providers; 38% from Medicare and Medicaid; and the remaining 2% from other sources. Our revenues are affected by changes in customer and case volume, payor mix, contractual allowances and reimbursement rates. Billing and reimbursement for our specialized diagnostic services in connection with governmental payor programs are subject to numerous federal and state regulations and other billing requirements. Reimbursement under Medicare for our specialized diagnostic services is subject to a Medicare physician fee schedule, and to a lesser degree, a clinical laboratory fee schedule, both of which are typically updated annually. These billing and reimbursement arrangements are discussed more fully in the “Billing and Reimbursement” section contained in Item 1 of this Annual Report on Form 10-K.

	Years Ended December 31,						% Change
	2009		2008		2007		2009		2008
Revenues(1) (in thousands)	$	184,378	$	116,170	$	59,332	59	%	96	%
Number of cases		56,896		38,567		22,513	48	%	71	%
Revenues per case	$	3,241	$	3,012	$	2,635	8	%	14	%

(1) During the years ended December 31, 2009, 2008 and 2007, we recorded positive changes in prior period accounting estimates to reduce contractual allowances, which increased our revenues by $7.4 million, $3.3 million and $792,000, respectively. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to our collection processes, changes in reimbursement policies by certain payors and increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods. We intend to continue to seek opportunities to improve our billing and collections systems and processes, but these adjustments could fluctuate both favorably and unfavorably during future periods.

Revenues increased to $184.4 million for the year ended December 31, 2009 up from $116.2 million and $59.3 million for the years ended December 31, 2008 and 2007, respectively (in each case inclusive of the changes in prior period accounting estimates noted above). The increases of $68.2 million, or 59%, and $56.8 million, or 96%, for the years ended December 31, 2009 and 2008, respectively, over each preceding year, were primarily due to case volume increases of 48% and 71%, respectively, and revenue per case increases of $229, or 8%, and $377, or 14%, respectively. These increases were in part due to a net increase in 2009 and 2008 Medicare reimbursement rates for our key service offerings and better than expected collections primarily on our non-contracted business, as reflected by the favorable changes in accounting estimates that increased our revenues, as discussed above.

Case volumes increased primarily as a result of the 46% increase in the number of our field sales representatives from 55 as of December 31, 2008 to 80 as of December 31, 2009. Similarly, the number of field sales representatives increased 62% for the year ended December 31, 2008 over 2007. These increases in the number of our field sales representatives have enabled us to penetrate more accounts over a wider geographic area, increase our customer base and further focus our field sales representatives on in-person customer visits. Sales force productivity during the years ended December 31, 2009 and 2008 also increased primarily as a result of enhanced recognition in the market, smaller geographies per sales representative, price increases, expanded service offerings and efficiencies realized from a more experienced sales force, which included expanding our sales management team to 15 as of December 31, 2009, as compared to 10 and 2 as of December 31, 2008 and 2007, respectively.

Gross Profit

Gross profit consists of our revenues less cost of revenues. Cost of revenues consists of employee-related costs (salaries, bonus, fringe benefits and stock-based compensation) of our Cartesian hempaths, licensed

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technicians, CSCs, and other support personnel, as well as outside laboratory costs, laboratory supplies, logistic costs, depreciation and administrative-related costs allocated to cost of revenues. Our cost of revenues generally increases as our case volumes increase.

	Years Ended December 31,									% Change
	2009			2008			2007			2009		2008
Gross profit(1) (in thousands)	$	115,178		$	70,239		$	35,226		64	%	99	%
Gross profit %		62	%		60	%		59	%
Number of cases		56,896			38,567			22,513		48	%	71	%
Gross profit per case	$	2,024		$	1,821		$	1,565		11	%	16	%

(1) During the years ended December 31, 2009, 2008 and 2007, we recorded positive changes in prior period accounting estimates to reduce contractual allowances, which increased our revenues by $7.4 million, $3.3 million and $792,000, respectively. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to our collection processes, changes in reimbursement policies by certain payors and increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods. We intend to continue to seek opportunities to improve our billing and collections systems and processes, but these adjustments could fluctuate both favorably and unfavorably during future periods.

Gross profit as a percent of revenue increased to 62% for the year ended December 31, 2009, as compared to 60% and 59% the years ended December 31, 2008 and 2007, respectively. The increase in gross profit as a percentage of revenue for the years ended December 31, 2009 and 2008 of 2% and 1%, respectively, over each preceding year, resulted primarily from positive changes in prior period accounting estimates to reduce contractual allowances (in each case inclusive of the changes in prior period accounting estimates noted above) and increases in reimbursement. Cost of revenues increased due to growth in case volumes and higher employee-related costs associated with the cost of laboratory personnel and Cartesian physicians, as well as increased overhead from facilities expansion efforts. Overall, this resulted in increased gross profit per case of $203 for 2009, as compared to 2008, and increased gross profit per case of $256 for 2008, as compared to 2007.

We expect to experience downward pressure on our gross profit as a percentage of revenue in 2010 as we complete improvements on our newly acquired laboratory facility and make capital expenditures to purchase new laboratory equipment and hire additional laboratory technicians, support personnel and hempaths for these facilities (see Liquidity and Capital Resources in this management’s discussion and analysis of financial condition and results). Additionally, we expect that our cost of revenues will continue to increase, due to increased laboratory supplies, personnel, and logistic costs to support growing case volumes. These costs are expected to be partially offset by further leveraging of our fixed costs and efficiencies gained for improvements in our processes. Overall, we expect gross profit as a percentage of revenues, or gross margins, to be in the high 50% range for 2010.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of employee-related costs (salaries, commissions, fringe benefits, stock-based compensation and related training and travel costs for our sales personnel in the field) and administrative-related costs allocated to sales and marketing functions. As part of our growth strategy, we expect our sales and marketing expenses to increase as we hire additional field sales representatives and strengthen our organization with the addition of mid-level management and training personnel to more fully develop our sales territories. We currently expect to grow our field sales representatives to approximately 120 over the next two to three years.

We increased hiring efforts to significantly increase the number of field sales representatives during the fourth quarter of 2009, from 67 at the end of the third quarter to 80 as of December 31, 2009. These field sales representatives will increase our geographic reach and enhance our relations with existing customers.

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	Years Ended December 31,									% Change
	2009			2008			2007			2009		2008
Sales and marketing expenses (in thousands)	$	31,296		$	20,065		$	11,649		56	%	72	%
Sales and marketing expenses as a % of revenues		17	%		17	%		20	%

Sales and marketing expenses were $31.3 million for the year ended December 31, 2009, increasing 56% and 72% from $20.1 million and $11.6 million for the years ended December 31, 2008 and 2007, respectively. As a percentage of revenues, sales and marketing expenses for the years ended December 31, 2009 and 2008 remained consistent at 17%, as compared to a decrease from 20% for the year ended December 31, 2007, due to higher revenues and efficiencies that have been gained since 2007. The increases of $11.2 million and $8.4 million for the years ended December 31, 2009 and 2008, respectively, over each preceding year, were primarily due to incremental increases of $8.0 million and $7.4 million, respectively, for employee-related costs (including salaries, sales commissions, stock-based compensation expense and travel) and other cost increases due to the increased number of field sales representatives, sales managers and customer service personnel that we hired to drive and support our revenue growth. Facility and equipment costs related to sales and marketing increased incrementally by $1.6 million and $765,000 for the years ended December 31, 2009 and 2008, respectively, due to increased headcount and related facility allocations. Consulting costs increased incrementally by $1.0 million and $54,000, for the years ended December 31, 2009 and 2008, respectively, due to promotional activities during the year.

We anticipate sales and marketing expense will increase in 2010, both in total and as a percentage of revenues, due to additional headcount (including increases to salaries, sales commissions, stock-based compensation expense and travel) and additional marketing activities offset by increased revenues.

General and Administrative Expenses

General and administrative expenses relate to billing, finance, human resources and other administrative functions consisting of employee-related costs (including salaries, fringe benefits and stock-based compensation), professional services, depreciation and other costs allocated to general and administrative functions. In addition, the provision for doubtful accounts is included in general and administrative expenses. We anticipate increases in our general and administrative expenses as we add personnel; continue to comply with the reporting obligations applicable to publicly held companies; incur additional expenses associated with the expansion of our facilities into our newly leased office space and backup systems; and continue to build our corporate infrastructure to support our anticipated growth.

	Years Ended December 31,									% Change
	2009			2008			2007(1)			2009		2008
General and administrative expenses (in thousands)	$	28,710		$	22,313		$	9,976		29	%	124	%
General and administrative expenses as a % of revenues		16	%		19	%		17	%

(1) During the year ended December 31, 2007, we recorded positive changes in prior period accounting estimates to reduce the allowance for doubtful accounts, which decreased general and administrative expenses by $666,000. This positive change in accounting estimates was the result of continued improvements to our collection processes, as well as favorable experience in the collection of previously reserved accounts receivable for services rendered in prior periods and changes in reimbursement policies by certain payors. There were no similar changes in prior period accounting estimates during the years ended December 31, 2009 and 2008.

General and administrative expenses increased to $28.7 million for the year ended December 31, 2009, increasing 29% and 124% from $22.3 million and $10.0 million for the years ended December 31, 2008 and 2007, respectively (inclusive of the change in prior period accounting estimates noted above). The increases of $6.4 million and $12.3 million for the years ended December 31, 2009 and 2008, respectively, over each

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preceding year, were primarily due to incremental increases of $6.0 million and $6.3 million, respectively, for employee-related costs (including salaries, bonuses, stock-based compensation expense and travel). Employee-related costs increased as a result of a 43% increase in total general and administrative headcount to 93 as of December 31, 2009, up from 65 as of December 31, 2008, and from 36 as of December 31, 2007, in support of overall company growth. In addition, we have expanded our infrastructure by enhancing our IS and implementing finance initiatives to improve billing and support for our continued overall growth. The provision for doubtful accounts incrementally increased $2.5 million from December 31, 2007 to 2008; however, it remained flat into 2009 due to stronger than expected collections, resulting in a lowered provision for doubtful accounts as a percentage of revenue in 2009. Going forward, we expect our provision for doubtful accounts to approximate 2% of revenues. Legal and consulting expenses increased as a result of regulatory initiatives, corporate and business development, increased contract management and ongoing development and maintenance of our compliance programs. These incremental increases were offset by $1.8 million for the year ended December 31, 2009, due to allocations to cost of revenues and sales and marketing associated with our facility and equipment improvements and deployment of previously undeveloped space within our existing facility, as compared to an increase of expense of $528,000 from 2007 to 2008.

As a percentage of revenues, general and administrative expenses decreased to 16% for the year ended December 31, 2009 as compared to 19% and 17% in 2008 and 2007, respectively. The increase in general and administrative expenses we experienced in 2008 pertains to costs related to our first full year as a public company and increased support personnel costs due to our growth and various corporate initiatives, which were offset by a 96% increase in revenues for the same year. In comparison, the decrease to 16% for the year ended December 31, 2009 from 19% in 2008, resulted from higher revenues, lower provision for doubtful accounts and increased leverage of costs as we continued to grow. Although we anticipate total general and administrative expenses to increase in 2010, we expect to see a slight decline in general administrative expenses as a percentage of revenues.

Interest and Other Income

	Years Ended December 31,							% Change
	2009		2008		2007			2009		2008
	(in thousands)
Interest and other income	$	1,554	$	3,038	$	1,103		(49	%)	175	%
Interest expense	$	—	$	—	$	(353	)	0	%	(100	%)

Interest and other income decreased to $1.6 million for the year ended December 31, 2009, down from $3.0 million and up from $1.1 million for the years ended December 31, 2008 and 2007, respectively. The 2009 decrease is primarily the result of lower investment returns and the partial shift in our investment portfolio into tax exempt municipal securities that will be beneficial in lowering our effective tax rate. The 2008 increase was primarily due to increased cash and cash equivalents and investment securities from our IPO proceeds and cash provided by operations. We intend to continue to manage our investments to maximize our returns while minimizing our risk.

The decrease in interest expense is a result of our repayment of borrowings during the year ended December 31, 2007, in connection with our IPO. No new borrowings or related interest expense are expected.

Income Tax Expense (Benefit)

Income tax expense for the year ended December 31, 2009 was $24.7 million. The income tax benefit for the year ended December 31, 2008 was $1.7 million and income tax expense for the year ended December 31, 2007 was $439,000. We had $14.9 million in net deferred tax assets as of December 31, 2007 that were offset entirely by a valuation allowance, as we were unable to conclude, at that time, that it was “more likely than not” that such deferred tax assets would be realized. As of December 31, 2008, although realization was not assured,

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we believed it was “more likely than not” that we would be able to realize our net deferred tax assets through the ordinary course of business and expected future taxable income. Therefore, during the year ended December 31, 2008, we recorded a $14.9 million tax benefit representing the release of the valuation allowance against the net deferred tax assets. As of December 31, 2009, we had $7.2 million in net deferred tax assets.

As of December 31, 2009, we had federal tax net operating loss carryforwards of approximately $1.2 million and state tax net operating loss carryforwards of approximately $27.0 million. The federal and state net operating losses will begin to expire in 2019 and 2010, respectively. As of December 31, 2009, we had no federal research tax credit carryforwards and state research credit carryforwards of approximately $104,000, which do not expire.

Our taxable income for 2009 significantly utilized the remaining available federal net operating losses with any remaining deferred tax assets to be utilized in subsequent years. Due to our sustained profitability, our future effective tax rate will be approximately 44% of income before taxes. This rate is subject to the impact of nondeductible stock-based compensation expense offset by any tax deductions from disqualifying dispositions.

Liquidity and Capital Resources

The following tables present a summary of our liquidity and cash flows:

	December 31,
	2009			2008			2007
	(in thousands)
Cash, cash equivalents and short-term investments	$	140,994		$	102,938		$	85,460
Working capital	$	161,325		$	115,236		$	88,979
	Years Ended December 31,
	2009			2008			2007
	(in thousands)
Net cash provided by (used in):
Operating activities	$	37,670		$	28,155		$	13,105
Investing activities		(54,343	)		(44,739	)		(36,022	)
Financing activities		6,510			4,068			69,676
Net (decrease) increase in cash and cash equivalents	$	(10,163	)	$	(12,516	)	$	46,759

As of December 31, 2009, we had $141.0 million in cash, cash equivalents and short-term investments consisting of municipal securities, government-sponsored enterprise securities, corporate debt securities, U.S. treasury securities and certificates of deposit. We have established a policy and guidelines relating to diversification and maturities of our investment securities to minimize overall risk with the objectives of preserving principal and maintaining liquidity while maximizing our returns. Our certificates of deposit are fully insured by the Federal Deposit Insurance Corporation, or FDIC.

Our primary sources of cash are from trade accounts receivable and proceeds from common stock issuances. Collections of accounts receivable are impacted by the efficiency of our cash collections process as measured by the change in DSO. DSO can vary from period to period depending on the payment cycles and the mix of our payors. Our DSO averaged 56 days in 2009, which was consistent with 56 days in 2008. As of December 31, 2009 and 2008, our DSO was 62 days and 53 days, respectively. The increase in our DSO as of December 31, 2009, pertains primarily to the timing of payments relating to certain contracted payors. The decrease in our DSO we experienced as of December 31, 2008 was the result of continued improvements to our billing and collection systems and processes. We expect to maintain our average DSO levels into 2010 as we continue to pursue improvements to collection procedures and work with our payors to ensure timely processing of reimbursement payments.

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Our primary uses of cash are to fund operating expenses, income taxes, and the acquisition of property and equipment. Cash used to fund operating expenses is impacted by the timing of payments as reflected in the change in our outstanding accounts payable and accrued expenses. Acquisitions of property and equipment generally consist of cash payments for facility improvements and purchases of laboratory equipment and computer hardware and software. Income tax payments consist of federal and state payments of an approximately 45% effective tax rate, since the majority of our net operating losses and other credits have been exhausted. We expect our future effective tax rate will be approximately 44% of income before taxes.

We expect our capital expenditures to increase significantly during 2010. Specifically, we expect capital expenditures to be approximately $30.0 million for 2010 including approximately $14.0 million for improvements to our new facilities and $7.6 million to purchase the new facility and land (see Note 10, Subsequent Events, in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K). For the year ended December 31, 2009, capital expenditures totaled $5.5 million.

Cash Flows

Net cash provided by operating activities during the year ended December 31, 2009 was $37.7 million, as compared to $28.2 million and $13.1 million for the years ended December 31, 2008 and 2007, respectively. The increase was primarily due to changes in accounts receivable, accrued compensation and accrued income taxes. Our accounts receivable increased due to higher revenues from test volume increases and the increased selling price per test. The change in accrued compensation is due to additional headcount and the timing of our compensation payments. The increase in income taxes is due to our status as a fully taxable entity while sustaining continued profitability.

Net cash used in investing activities during the year ended December 31, 2009, was $54.3 million, as compared to $44.7 million and $36.0 million for the years ended December 31, 2008 and 2007, respectively. This was primarily due to the increase in the net purchases of investment securities of $13.7 million offset by a decrease in capital expenditures of $4.1 million.

Net cash provided by financing activities during the year ended December 31, 2009, was $6.5 million, as compared to $4.1 million and $69.7 million for the years ended December 31, 2008 and 2007, respectively. This was primarily due to net proceeds from the employee stock transactions and excess tax benefits related to disqualifying dispositions on stock-based compensation awards. The significant cash inflow from financing activities during the year ended December 31, 2007 represents proceeds from our initial public offering.

Liquidity Restrictions

As of December 31, 2009, we held a single ARS with a fair value of $3.8 million. The ARS had a cost basis of $4.9 million, which was net of a temporary impairment of $1.1 million as of December 31, 2009 due to the current illiquidity of the investment security. As such, we classified the ARS as a long-term investment security.

ARS are collateralized debt instruments with long-term contractual maturities that are structured with short-term holding periods. They provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined intervals, typically every 7 to 35 days. The length of each holding period is determined at the original issuance of the ARS. We can sell at each auction at par, assuming there are buyers for the ARS at such auction. In order for the auction to be successful, demand in the marketplace must meet or exceed the supply. If an auction is unsuccessful, the interest rate on the security resets at a predetermined auction failure rate. An investor can continue to hold the investment security until the next auction date or attempt to sell in the secondary market, usually at a sizable discount.

The ARS in our investment securities portfolio consists of debt issued by a municipality that is also underwritten by an insurance agency. The ARS auctions began failing in February 2008. As of December 31, 2009, the ARS was rated “BAA1” by Moody’s Investors Service and “A” by Standard & Poor’s based on the

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underwriter’s guarantee. Although unsuccessful, the last auction occurred on September 10, 2008, prior to the bankruptcy of the broker/dealer that managed the auction. The funds associated with this security will not be accessible until the issuer restructures the debt, a buyer is found outside of the auction process, or the ARS matures in 2038. As such, we have recorded a temporary impairment of approximately $1.1 million as of December 31, 2009. The issuer continues to pay the interest as scheduled and shows no indication that it will be unable to meet its current obligations. We do not need to access these funds for operational purposes for the foreseeable future. Because we do not need the current liquidity, we will hold the security until the auctions begin occurring, the issuer restructures the debt or until the contractual maturity date. Based on our ability to access our cash and cash equivalents and short-term investment securities and our expected operating cash flows, we do not anticipate that the temporary illiquidity of this investment will affect our ability to execute our current business plan.

As of December 31, 2009, we had total restricted cash of $270,000. Restricted cash consists of amounts held in a certificate of deposit to collateralize a standby letter of credit per the terms of an operating lease agreement. The standby letter of credit requirement expires in 2012, allowing for $90,000 annual reductions on June 30 of each year through 2012.

Capital Resources

We believe that our internal cash flows along with our existing cash, cash equivalents and short-term investments should be adequate to fund our planned growth and operating activities through at least the next 24 months.

Our future capital uses and requirements depend on numerous factors. These factors include but are not limited to the following:

• the current economy and financial markets;

• changes in regulations or payor policies, including reimbursement levels from governmental payors and private insurers, or contracting arrangements with payors or changes in other laws, regulations or policies; and

• the extent to which we expand our operations and increase our market share.

Over the next 12 months, we estimate the costs associated with expanding our operations to be approximately $30.0 million. This cost consists of the costs associated with our newly acquired laboratory facility and customer service and support facility of approximately $22.0 million and the costs associated with additional capital expenditures of approximately $8.0 million.

We may from time to time consider the acquisition of businesses and/or technologies complementary to our business. Such an acquisition could require significant additional capital resources. We could be required to raise additional equity or debt financing if we were to engage in a material acquisition in the future.

We may be required to or otherwise may (for strategic or other reasons) elect to raise additional funds through public or private equity offerings or debt financings. We do not know if we will be able to obtain additional financing on favorable terms, if at all (particularly in light of the difficult current financial environment and weak economic conditions). If we cannot raise funds on acceptable terms, if and when needed, we may not be able to maintain or grow our business at the rate that we currently anticipate and we may not be able to respond to competitive pressures or unanticipated capital requirements, or we may be required to reduce operating expenses, which would significantly harm our business, financial condition and results of operations.

As of December 31, 2009, we do not have any outstanding debt. We do not anticipate having to obtain any form of debt in the near future.

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Income Tax

As of December 31, 2009, most remaining and available federal and state income tax net operating losses and other credits have been utilized, which will result in increased income tax payments and decrease our cash flows from operations. As of December 31, 2009, we had federal and state tax net operating loss carryforwards of approximately $1.2 million and $27.0 million, respectively. However, California suspended the use of its state tax net operating loss carryforward until 2010, which will cause us to be fully taxed in California without the benefit of net operating losses in 2009. The federal and state net operating losses will begin to expire in 2019 and 2010, respectively. As of December 31, 2009, we had no federal research tax credit carryforwards and state research carryforwards of approximately $104,000, which do not expire.

Utilization of net operating loss carryforwards, credit carryforwards and certain deductions have been subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership have required us to limit the amount of net operating loss and research and development credit carryforwards that were previously available to offset future taxable income. We have had three “change in ownership” events that limit the utilization of net operating loss and credit carryforwards. The “change in ownership” events occurred in March 2000, December 2001 and March 2008 and resulted in annual net operating loss carryforward limitations of $63,000, $96,000 and $16.1 million, respectively. As a result of a net unrealized built-in gain from the March 2008 change in ownership, our net operating loss carryforward annual limitation of $16.1 million was increased to $39.7 million for each of the five years starting after the change in ownership. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examination from various taxing authorities.

In August 2009, the IRS commenced an examination of our U.S. federal income tax return for the tax year ended December 31, 2007. To date, there have been no proposed adjustments communicated to management. While we believe we are adequately reserved, if the examination results in an unfavorable outcome, there could be a material impact on the financial results in the period the outcome is determined.

We are subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are 2006 for federal income taxes and 2004 for state income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carry forward amount.

Contractual Obligations and Commitments

The following table presents a summary of our long-term contractual obligations and commitments as of December 31, 2009:

	Payments Due By Period
	Total		2010		2011		2012		2013		2014		Thereafter
	(in thousands)
Purchase obligations	$	557	$	401	$	79	$	50	$	27	$	—	$	—
Operating leases		15,764		3,694		3,736		3,090		2,410		2,578		256
	$	16,321	$	4,095	$	3,815	$	3,140	$	2,437	$	2,578	$	256

From time to time, we may enter into contracts with suppliers, manufacturers and other third parties under which we may be required to make payments. The table above does not reflect any future obligations that may arise due to further expansion of our laboratory facilities, including facility leasing costs, tenant improvements and other facility startup and infrastructure costs.

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Recent Accounting Pronouncements

See Note 1 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We have not engaged and do not expect to engage in any off-balance sheet activities.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.

Market Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk primarily in the area of changes in U.S. interest rates. We do not have any material foreign currency or other derivative financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities.

Interest Rate Risk

All of our investment securities are classified as available-for-sale and therefore reported on the balance sheet at fair value. Changes in the overall level of interest rates affect our interest income that is generated from our cash, cash equivalents and investment securities. If a 100 basis point change in overall interest rates were to occur in 2010, our interest income would change by approximately $723,000 in relation to amounts we would expect to earn assuming investment securities balances and types of investment securities are consistent with those as of December 31, 2009.

Concentration of Credit Risk

Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents with three financial institutions. Such cash balances, at times, may exceed FDIC limits. To date, we have not experienced any losses in such accounts.

66

Item 8.    Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Genoptix, Inc.

We have audited the accompanying consolidated balance sheets of Genoptix, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also 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 our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genoptix, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Genoptix Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

San Diego, California

February 25, 2010

67

GENOPTIX, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

	December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	27,945		$	38,108
Short-term investment securities		113,049			64,830
Accounts receivable, net of allowance for doubtful accounts of $5,387 and $4,126 at December 31, 2009 and 2008, respectively		27,707			15,604
Deferred tax asset		5,406			4,707
Other current assets		3,320			2,179
Total current assets		177,427			125,428
Property and equipment, net		13,826			12,189
Restricted cash		270			360
Long-term investment security		3,786			3,775
Long-term deferred tax asset		1,800			2,510
Other long-term assets		346			183
Total assets	$	197,455		$	144,445
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	8,322		$	6,580
Accrued compensation		4,667			3,006
Income tax payable		1,557			—
Deferred revenues		1,225			365
Deferred rent		331			241
Total current liabilities		16,102			10,192
Long-term deferred rent		1,732			1,955
Other long-term liabilities		117			79
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding at December 31, 2009 and 2008, respectively		—			—
Common stock, $0.001 par value; 100,000 shares authorized; 17,276 and 16,682 shares issued and outstanding at December 31, 2009 and 2008, respectively		17			17
Additional paid-in capital		160,064			143,616
Treasury stock, at cost; 1 and no shares held at December 31, 2009 and 2008, respectively		(25	)		—
Accumulated other comprehensive loss		(546	)		(774	)
Accumulated earnings (deficit)		19,994			(10,640	)
Total stockholders’ equity		179,504			132,219
Total liabilities and stockholders’ equity	$	197,455		$	144,445

See accompanying notes to consolidated financial statements.

68

GENOPTIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Years Ended December 31,
	2009		2008			2007
Revenues	$	184,378	$	116,170		$	59,332
Cost of revenues		69,200		45,931			24,106
Gross profit		115,178		70,239			35,226
Operating expenses:
Sales and marketing		31,296		20,065			11,649
General and administrative		28,710		22,313			9,976
Research and development		1,362		1,233			559
Total operating expenses		61,368		43,611			22,184
Income from operations		53,810		26,628			13,042
Interest and other income		1,554		3,038			1,103
Interest expense		—		—			(353	)
Income before income taxes		55,364		29,666			13,792
Income tax expense (benefit)		24,730		(1,690	)		439
Net income	$	30,634	$	31,356		$	13,353
Net income per share:(1)(2)
Basic	$	1.80	$	1.91		$	1.20
Diluted	$	1.71	$	1.78		$	0.78
Shares used to compute net income per share:(1)(2)
Basic		16,978		16,399			2,756
Diluted		17,954		17,653			4,246

(1) As a result of the conversion of the Company’s preferred stock into 11,032 shares of common stock upon completion of the Company’s initial public offering in November 2007, there is a lack of comparability in the basic and diluted net income per share amounts for the periods presented above. For calculations of the pro forma net income per share for the periods presented, see Note 1 in the accompanying notes to consolidated financial statements.

(2) For the year ended December 31, 2007, $10,036 of the Company’s net income of $13,353 was allocated to preferred stockholders for purposes of calculating net income per share pursuant to the terms of the preferred stock, resulting in $3,317 of net income allocable to common stockholders. See Note 1 in the accompanying notes to consolidated financial statements for an explanation of the method and amounts used in the computation of the per share amounts.

See accompanying notes to consolidated financial statements.

69

GENOPTIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Convertible Preferred Stock					Common Stock			Additional Paid-In Capital			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Accumulated (Deficit) Earnings			Total Stockholders’ Equity			Comprehensive (Loss) Income
	Shares		Amount			Shares	Amount					Shares	Amount
Balance at December 31, 2006	52,401		$	52		197	$	—	$	59,362		—	$	—		$	—		$	(55,349	)	$	4,065		$	(3,759	)
Conversion of preferred stock in connection with initial public offering	(52,401	)		(52	)	11,032		11		41		—		—			—			—			—			—
Initial public offering of common stock, net of $7,969 of offering costs	—			—		4,736		5		72,533		—		—			—			—			72,538			—
Stock-based compensation	—			—		—		—		540		—		—			—			—			540			—
Issuance of common stock, net	—			—		130		—		56		—		—			—			—			56			—
Net income	—			—		—		—		—		—		—			—			13,353			13,353			13,353
Unrealized gain on investment securities	—			—		—		—		—		—		—			53			—			53			53
Balance at December 31, 2007	—			—		16,095		16		132,532		—		—			53			(41,996	)		90,605		$	13,406
Issuance of common stock, net	—			—		587		1		1,863		—		—			—			—			1,864			—
Stock-based compensation	—			—		—		—		7,017		—		—			—			—			7,017			—
Excess tax benefits from stock-based compensation awards	—			—		—		—		2,968		—		—			—			—			2,968			—
Costs paid in connection with public offering	—			—		—		—		(764	)	—		—			—			—			(764	)		—
Net income	—			—		—		—		—		—		—			—			31,356			31,356			31,356
Unrealized loss on investment securities	—			—		—		—		—		—		—			(1,365	)		—			(1,365	)		(1,365	)
Deferred tax	—			—		—		—		—		—		—			538			—			538			538
Balance at December 31, 2008	—			—		16,682		17		143,616		—		—			(774	)		(10,640	)		132,219		$	30,529
Issuance of common stock, net	—			—		594		—		2,779		—		—			—			—			2,779			—
Repurchase of common stock	—			—		—		—		(5	)	1		(25	)		—			—			(30	)		—
Stock-based compensation	—			—		—		—		9,917		—		—			—			—			9,917			—
Excess tax benefits from stock-based compensation awards	—			—		—		—		3,757		—		—			—			—			3,757			—
Net income	—			—		—		—		—		—		—			—			30,634			30,634			30,634
Unrealized gain on investment securities	—			—		—		—		—		—		—			454			—			454			454
Deferred tax	—			—		—		—		—		—		—			(226	)		—			(226	)		(226	)
Balance at December 31, 2009	—		$	—		17,276	$	17	$	160,064		1	$	(25	)	$	(546	)	$	19,994		$	179,504		$	30,862

See accompanying notes to consolidated financial statements.

70

GENOPTIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended December 31,
	2009			2008			2007
Operating activities
Net income	$	30,634		$	31,356		$	13,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,569			1,388			580
Provision for doubtful accounts		3,150			3,196			1,093
Stock-based compensation expense		9,917			7,017			540
Amortization of premium/discount on investments securities		1,033			(417	)		(4	)
Excess tax benefits from stock-based compensation awards		(3,757	)		(2,968	)		—
Deferred taxes		(215	)		(6,680	)		—
Loss on sale of property and equipment		6			—			—
Realized loss on sale of investment securities		—			66			—
Non-cash interest expense		—			—			166
Changes in operating assets and liabilities:
Accounts receivable		(15,253	)		(9,787	)		(5,340	)
Other current and long-term assets		(1,283	)		(823	)		(1,159	)
Accounts payable and accrued expenses		1,848			1,641			2,325
Accrued compensation		1,661			510			1,438
Income taxes		5,404			2,908			—
Deferred revenues		860			270			56
Deferred rent		96			478			57
Net cash provided by operating activities		37,670			28,155			13,105
Investing activities
Purchase of property and equipment		(5,474	)		(9,567	)		(1,243	)
Proceeds from sales of property and equipment		—			21			—
Purchase of investment securities		(142,326	)		(114,946	)		(42,779	)
Proceeds from sales and maturities of investment securities		93,517			79,803			8,000
Purchase of intangibles		(150	)		(50	)		—
Change in restricted cash		90			—			—
Net cash used in investing activities		(54,343	)		(44,739	)		(36,022	)
Financing activities
Proceeds from issuance of common stock, net		2,779			1,864			56
Excess tax benefits from stock-based compensation awards		3,757			2,968			—
Repurchase of common stock		(26	)		—			—
Net (costs) proceeds from public offerings		—			(764	)		72,538
Principal payments on notes payable		—			—			(3,183	)
Proceeds from issuance of notes payable		—			—			284
Principal payments on capital lease obligations		—			—			(19	)
Net cash provided by financing activities		6,510			4,068			69,676
Net (decrease) increase in cash and cash equivalents		(10,163	)		(12,516	)		46,759
Cash and cash equivalents at beginning of year		38,108			50,624			3,865
Cash and cash equivalents at end of year	$	27,945		$	38,108		$	50,624
Supplemental information:
Income taxes paid, net	$	19,568		$	2,128		$	365
Interest paid	$	—		$	—		$	187
Non-cash investing and financing activities:
Unrealized gain (loss) on investment securities, net	$	454		$	(1,365	)	$	53
Capitalized tenant improvement allowance	$	—		$	1,470		$	—
Change in accrued purchases of property and equipment	$	(63	)	$	690		$	—

See accompanying notes to consolidated financial statements.

71

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Genoptix, Inc., or the Company, was incorporated in Delaware on January 20, 1999 and does business as Genoptix Medical Laboratory and Genoptix Clinical Laboratory. The Company operates as a certified “high complexity” clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Amendments of 1988, or CLIA, and is dedicated to the delivery of clinical diagnostic services to hematologist/oncologist physician customers.

Basis of Presentation and Principles of Consolidation

The Company’s industry is highly regulated. The manner in which licensed physicians can organize to perform and bill for medical services is governed by state laws and regulations. Business corporations, like the Company, often are not permitted to employ physicians to practice medicine or to own corporations that employ physicians to practice medicine or to otherwise exercise control over the medical judgments or decisions of physicians.

In California, where the Company’s clinical diagnostic services are provided, the Company is not permitted to directly own a medical operation. As a result, it performs only non-medical administrative and support services and does not exercise influence or control over the practice of medicine. The Company provides its medical services through Cartesian Medical Group, Inc. or Cartesian, an entity that it manages, and it is this entity that employs the physicians who provide medical services on behalf of the Company. The relationship between the Company and Cartesian is governed by the Clinical Laboratory Professional Services Agreement, or PSA, entered into by the Company and Cartesian on December 31, 2005 and which became effective on January 1, 2006. Under the PSA, Cartesian provides all medical services and the Company exclusively manages all non-medical aspects, including entering into all non-employment related contracts. All claims, demands and rights to charge, bill and collect for medical services rendered are assigned from Cartesian to the Company. The Company is specifically responsible for billing and collections of all charges for the medical services rendered and provides Cartesian certain services, including payroll, laboratory and medical office space and non-medical business functions, such as supplies, utilities and insurance. In addition, any changes in the number of physicians or physician compensation are subject to the Company’s approval. Under the provisions of the PSA, the Company records the revenue assigned to it and expenses the cost of the services provided by it. The PSA is automatically renewed on a yearly basis but may be terminated by the Company at any time on 60 days’ prior notice, and either party may terminate the PSA upon an uncured material breach by the other party. Cartesian has no operating assets. The Company has also entered into a Succession Agreement that limits the ability of Cartesian’s owner to only transfer his ownership interest in Cartesian to an entity or person designated by the Company. As of January 1, 2006, the date the PSA became effective, the Company determined it had a controlling financial interest in Cartesian and began to consolidate the results of Cartesian based on the criteria as required by ASC Topic 810, Consolidations.

The consolidated financial statements of the Company include the accounts of the Company, Cartesian and Genoptix, PR LLC, a wholly-owned subsidiary of the Company located in Puerto Rico. All intercompany transactions and balances have been eliminated in consolidation.

Financial Statement Preparation

The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. The consolidated financial statements of the Company include the accounts of the Company, Cartesian and Genoptix, PR LLC, a wholly-owned subsidiary of the Company located in Puerto Rico. All intercompany transactions and balances have been eliminated in consolidation.

72

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company evaluated subsequent events occurring up to the time this annual report on Form 10-K was filed with the SEC on February 25, 2010. See Note 10 in these notes to consolidated financial statements for discussion of subsequent events.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and these notes to consolidated financial statements. The most significant estimates in the Company’s consolidated financial statements relate to revenue recognition, allowance for doubtful accounts, valuation of investment securities, stock-based compensation and income tax. Actual results could differ from those estimates.

Segment and Geographic Information

The Company identifies its operating segments based on business activities, management responsibility and geographical location. For all periods presented, the Company operated in a single business segment. Less than 1% of the Company’s revenue is generated outside of the United States and related territories.

Cash and Cash Equivalents

The Company considers all liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents primarily represent funds invested in money market funds whose cost equals fair market value.

Investment Securities

As required by ASC Topic 320, Investments-Debt and Equity Securities, the Company classifies all investment securities as available-for-sale at the time of purchase, as the sale of such investment securities may be required prior to maturity in order to implement management strategies. The Company generally reports all investment securities as short-term based on its intent to fund current operations and its ability to convert the investment securities into cash. Investment securities with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All securities are carried at fair value, with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss, net of deferred tax, until realized. Amortization of premiums, accretion of discounts to maturity and interest earned are included in interest income. Realized gains and losses from the sale of available-for-sale investment securities, if any, are determined on a specific identification basis and included in interest income on the consolidated statements of operations.

Property and Equipment

Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from three to five years, using the straight-line method. Leasehold improvements are stated at cost and amortized over the lesser of the related remaining lease term or useful life. Depreciation expense, inclusive of tenant improvement amortization and offset by tenant improvement allowances, is reported in the statements of operations based on the nature of the underlying assets and the functional area to which the assets have been assigned.

73

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted Cash

Restricted cash consists of amounts held in a certificate of deposit to collateralize a standby letter of credit per the terms of an operating lease agreement. The standby letter of credit requirement expires on August 31, 2012, allowing for $90,000 annual reductions on June 30 of each year through 2012. As of December 31, 2009, the Company had total restricted cash of $270,000. The Company classified the restricted cash as long-term due to the nature of the agreement which requires a standby letter of credit per the terms of an operating lease agreement.

Deferred Rent

As of December 31, 2009, the Company had leased all of its facilities under non-cancellable operating leases (see Note 10 in these notes to consolidated financial statements for discussion of subsequent events). Some of these lease agreements contain tenant improvement allowances funded by the landlord, rent holidays and rent escalation clauses. Rent expense is recognized on a straight-line basis over the lease term. The difference between the rent due under the stated periods of the leases compared to that of the straight-line basis is recorded as deferred rent. The Company uses the date that it obtains the legal right to use and control the leased space to begin recording rent expense and amortizing deferred rent on a straight-line basis over the term of the lease. The Company classifies deferred rent to be recognized after 12 months as long-term on the consolidated balance sheet.

The Company capitalizes tenant improvements related to landlord lease incentives as property and equipment with an offsetting credit to deferred rent. During the year ended December 31, 2008, the Company capitalized $1.5 million of these landlord-funded tenant improvements. These capitalized tenant improvements were placed into service in December 2008 and are being amortized over the remaining lease term of 60 months. The Company is amortizing the lease incentives, recorded as deferred rent, on a straight-line basis over the term of the lease. There were no additional landlord-funded tenant improvements during the year ended December 31, 2009.

Revenue Recognition

The Company recognizes revenues as required by ASC Topic 605, Revenue Recognition, when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectibility of the resulting receivable is reasonably assured.

The Company’s specialized diagnostic services are performed based on a written test requisition form and revenues are recognized once the diagnostic services have been performed, the results have been delivered to the ordering physician, the payor has been identified and eligibility and insurance have been verified. These diagnostic services are billed to various payors, including Medicare, commercial insurance companies and other directly billed healthcare institutions such as hospitals and individuals. The Company reports revenues from contracted payors, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, the published fee schedules. The Company reports revenues from non-contracted payors, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount expected to be collected is recorded as a contractual allowance to arrive at the reported revenues. The expected revenues from non-contracted payors are based on the historical collection experience of each payor or payor group, as appropriate. In each reporting period, the Company reviews its historical collection experience for non-contracted payors and adjusts its expected revenues for current and subsequent periods accordingly. During the years ended December 31, 2009, 2008 and 2007, the Company recorded positive changes in prior period accounting estimates to reduce contractual allowances, which increased its revenues by $7.4 million, $3.3 million and $792,000, respectively.

74

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to the Company’s collection processes, changes in reimbursement policies by certain payors and increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods. As of December 31, 2009 and 2008, the Company had uncollected accounts receivable from non-contracted payors of approximately $17.0 million and $9.1 million, respectively.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from the Company’s contracted payors. The process for estimating the collection of receivables associated with the Company’s specialized diagnostic services involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts is adjusted periodically, based upon an evaluation of historical collection experience with specific payors and other relevant factors. The realization cycle for certain governmental and managed care payors can be lengthy involving denial, appeal and adjudication processes, and is subject to periodic adjustments that may be significant. The provision for doubtful accounts is charged to general and administrative expenses. Accounts receivable are written off as uncollectible and deducted from the allowance after appropriate collection efforts have been exhausted. As of December 31, 2009 and 2008, the Company had an allowance for doubtful accounts of $5.4 million and $4.1 million, respectively, which it reduced by $1.9 million and $664,000, respectively, for write-offs, net of recoveries.

The Company recorded a provision for doubtful accounts at a rate of approximately 2% of revenues for the year ended December 31, 2009, as compared to 3% for the year ended December 31, 2008. During the year ended December 31, 2009, the Company recorded $3.2 million of provision for doubtful accounts, which was consistent with the $3.2 million of provision for doubtful accounts for the comparable period in 2008.

Research and Development Costs

Costs incurred in connection with research and development activities are charged to operations as incurred.

Shipping Costs

Shipping costs are included in cost of revenues on the consolidated statements of operations.

Impairment of Long-Lived Assets

The Company reviews the carrying amount of its long-lived assets, as well as the useful lives, to determine whether indicators of impairment exist which warrant adjustments to carrying values or estimated useful lives whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. As required by ASC Topic 360, Property, Plant, and Equipment, if indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.

Fair Value of Financial Instruments

The carrying value of certain of the Company’s financial instruments that are not measured at fair value on a recurring basis, including cash, cash equivalents, accounts receivable, accounts payable and accrued expenses and other assets and liabilities, are considered to be reasonable estimates of their respective fair values due to their short-term nature.

75

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company values financial instruments that are measured at fair value on a recurring basis as required under ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the U.S. and expands disclosures about fair value measurements. Furthermore, ASC Topic 825, Financial Instruments, permits entities the option to measure many financial instruments and certain other items at fair value. The Company has not specifically identified any financial instruments subject to measurement under ASC Topic 825.

Concentrations of Risk

Financial instruments which potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, investment securities and accounts receivable.

The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company believes the financial positions of the depository institutions holding the Company’s deposits significantly reduce the exposure to credit risk. Additionally, the Company has established guidelines regarding diversification of its investment securities and their maturities, which are designed to maintain safety and liquidity.

Substantially all of the Company’s accounts receivable is with entities in the healthcare industry. However, concentrations of credit risk are limited due to the number of the Company’s customers as well as their dispersion across many different geographic regions in the United States. The Company has significant accounts receivable balances whose collectibility is dependent on the availability of funds from certain governmental programs, primarily Medicare, and compliance with the regulations of that agency. Upon audit by a Medicare intermediary, a condition of non-compliance could result in the Company having to refund amounts previously collected. The Company does not believe there is a significant credit risk associated with these governmental programs and believes an adequate allowance has been recorded for the possibility of these receivables proving uncollectible. The Company does not require collateral or other security to support accounts receivable. As of December 31, 2009 and 2008, other than Medicare, no other single payor’s accounts receivable balance resulted in any significant concentration of risk for contracted or non-contracted payors. Accounts receivable balances from Medicare were approximately $11.7 million and $7.7 million, as of December 31, 2009 and 2008, respectively.

For the years ended December 31, 2009, 2008 and 2007, approximately 40%, 38% and 38%, respectively, of the Company’s revenues were derived from tests performed for the beneficiaries of the Medicare and Medicaid programs. For the years ended 2009, 2008 and 2007, other than Medicare, no other single contracted or non-contracted payor’s revenue was individually significant.

Stock-Based Compensation

The Company records stock-based compensation expense as required by ASC Topic 718, Compensation. The Company grants share-based awards of stock options and restricted stock units, or RSUs, to employees, directors and Cartesian doctors. The Company adopted ASC Topic 718 using the prospective approach, which applies to new awards and to awards modified, repurchased or cancelled after the required effective date.

In addition, the Company allows qualified employees, excluding directors and Cartesian doctors, to participate in a Company employee stock purchase plan, or ESPP, which provides employees the opportunity to purchase Company common stock at a 15% discount. Generally, the ESPP consists of a two-year offering period with four six-month purchase periods and contains a look-back provision for determining the purchase price. The

76

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company values and accounts for its ESPP as required by ASC Topic 718-50. The objective of the measurement process for the ESPPs with a look-back option is to reasonably measure the fair value of the award at the grant date, the date at which there is a mutual understanding of the terms of the award in exchange for the services already rendered and the employee’s total contributions are known. On that date, the Company becomes contingently obligated to issue equity instruments to the employee. Typically, the grant date is the first business day of each offering period. Employee contributions were generally made through payroll deductions.

The Company previously granted equity instruments to non-employees, excluding Cartesian employees and directors, and recorded expense at the fair value over the related service period as required by ASC Topic 718 and periodically revalued the equity instruments as they vested. During the years ended December 31, 2009, 2008 and 2007, the Company recognized $12,000, $49,000 and $31,000, respectively, of non-employee stock-based compensation. The Company no longer grants these non-employees equity awards. All previously granted awards to these non-employees were fully vested as of December 31, 2009, and all remaining expense was recognized during the year ended December 31, 2009.

The Company recognizes stock-based compensation expense for options and RSUs over the vesting period using the straight-line method. The standard vesting period is four years for most stock option awards and ranges from one to four years for RSU awards. The Company measures stock options and RSU equity awards based on fair value. In addition, the Company records stock-based compensation expense related to the ESPP as required by ASC Topic 718-50. The initial ESPP offering period extended from October 29, 2007 to June 30, 2008, with the first grant occurring in 2008 and continuing with new offerings each six months thereafter. The Company classifies stock-based compensation expense amounts for all awards in the consolidated statements of operations based on the department to which the related employee reports.

The Company values RSU grants at their intrinsic value. In contrast, the Company uses the Black-Scholes valuation model to estimate the grant date fair value of employee stock options and ESPP awards using the following weighted-average assumptions:

	Stock Options									ESPP
	Years Ended December 31,									Years Ended December 31,
	2009			2008			2007			2009			2008
Grant date fair value (per share)	$	15.64		$	14.63		$	10.78		$	11.22		$	14.61
Assumptions used:
Expected life of awards (years)		6.04			6.02			6.08			1.32			1.20
Risk-free interest rate		2.16	%		2.92	%		4.48	%		0.68	%		2.79	%
Volatility		50.12	%		51.35	%		56.71	%		47.97	%		37.50	%
Dividend yield		—			—			—			—			—
Forfeitures		7.00	%		7.00	%		7.00	%		—			—

The Company calculated the weighted-average expected life of options using the simplified method as prescribed by ASC Topic 718. This decision was based on the lack of relevant historical data due to the Company’s limited operating experience as a public company. The Company derived the risk-free interest rate assumption from the U.S. Treasury rates for U.S. Treasury zero-coupon bonds with maturities equal to the expected term of the award being valued. In addition, due to the Company’s limited historical data, the estimated volatility incorporates the historical volatility of comparable companies within the Company’s peer group with publicly available share prices. The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future.

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized during the period is based on the value of the portion of awards that is ultimately expected to vest and thus the gross expense is reduced for estimated forfeitures. For the ESPP, the Company does not utilize a separate forfeiture rate since it adjusts ESPP stock-based compensation expense to the greater of the actual employee contributions or original estimate of employee contributions for the remaining participants at the end of each respective purchase period.

The following tables present a summary of the Company’s stock-based compensation as recognized in the consolidated statements of operations:

	Year Ended December 31, 2009
	Options		RSUs		ESPP		Total
	(in thousands)
Cost of revenues	$	2,073	$	881	$	282	$	3,236
Sales and marketing		1,150		78		502		1,730
General and administrative		2,417		2,186		348		4,951
Research and development		—		—		—		—
	$	5,640	$	3,145	$	1,132	$	9,917

	Year Ended December 31, 2008
	Options		RSUs		ESPP		Total
	(in thousands)
Cost of revenues	$	1,058	$	459	$	770	$	2,287
Sales and marketing		465		—		1,260		1,725
General and administrative		1,307		1,033		665		3,005
Research and development		—		—		—		—
	$	2,830	$	1,492	$	2,695	$	7,017

	Year Ended December 31, 2007
	Options		RSUs		ESPP		Total
	(in thousands)
Cost of revenues	$	164	$	15	$	—	$	179
Sales and marketing		81		—		—		81
General and administrative		226		—		—		226
Research and development		54		—		—		54
	$	525	$	15	$	—	$	540

Income Taxes

ASC Topic 740, Income Taxes, establishes a single model to address accounting for uncertain tax positions. ASC Topic 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements if that position is “more likely than not” of being sustained upon examination by taxing authorities, based on the technical merits of the position. ASC Topic 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense (benefit). The Company has recognized no significant interest or penalties since adoption of ASC Topic 740.

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As required by ASC Topic 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized based on the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. A valuation allowance is established when it is “more likely than not” that the future realization of all or some of the deferred tax assets will not be achieved. As of December 31, 2009, the Company no longer maintained a valuation allowance against deferred tax assets, as the Company concluded it met the “more likely than not” threshold.

Due to the adoption of provisions within ASC Topic 718, the Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company.

Accumulated Other Comprehensive Loss

As required by ASC Topic 220, Comprehensive Income, all components of comprehensive income are reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive loss, including unrealized gains and losses on investment securities, shall be reported net of their related tax effect to arrive at accumulated other comprehensive loss.

Net Income Per Share

Prior to the Company’s initial public offering, or IPO, net income per share was computed as required by provisions within ASC Topic 260, Earnings per share, which established standards regarding the computation of earnings per share, or EPS, by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company. ASC Topic 260 requires earnings for the period, after deduction of preferred stock dividends, to be allocated between the common and preferred stockholders based on their respective rights to receive dividends, whether or not declared. Basic net income per share is then calculated by dividing income allocable to common stockholders (after the reduction for any preferred stock dividends assuming current income for the period had been distributed) by the weighted-average number of shares of common stock outstanding for the period, net of shares subject to repurchase by the Company. ASC Topic 260 does not require the presentation of basic and diluted net income per share for securities other than common stock; therefore, the following net income per share amounts only pertain to the Company’s common stock. The Company calculated diluted net income per share under the as-if-converted method unless the conversion of the preferred stock was anti-dilutive to basic net income per share. To the extent preferred stock was anti-dilutive; the Company calculated diluted net income per share under the two-class method.

Subsequent to the Company’s IPO, net income per share continued to be computed as required by provisions within ASC Topic 260. Basic EPS is calculated by dividing the net income or loss allocable to common stockholders by the weighted-average number of common shares outstanding for the period, net of shares subject to repurchase by the Company and treasury stock, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income allocable to common stockholders by the

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, options, RSUs and ESPP shares are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

As a result of the completion of the Company’s IPO during the fourth quarter of 2007, the Company allocated income between the preferred and common stockholders on a pro-rata basis over the number of days of the respective periods presented for purposes of determining the income allocable to common stockholders under each of the methods noted above.

The net income per share amounts presented below are based on share and net income amounts that are not rounded and, as such, may result in minor differences from the amounts computed based on the equivalent information presented in thousands.

	Years Ended December 31,
	2009		2008		2007
	(in thousands, except per share data)
Numerator:
Net income	$	30,634	$	31,356	$	13,353
Income allocable to preferred stockholders		—		—		(10,036	)
Net income allocable to common stockholders	$	30,634	$	31,356	$	3,317
Denominator:
Weighted average shares of common stock outstanding, net—basic		16,978		16,399		2,756
Dilutive effect of common equivalent shares		976		1,254		1,490
Weighted average shares of common stock outstanding, net—diluted		17,954		17,653		4,246
Net income per share:
Basic	$	1.80	$	1.91	$	1.20
Diluted	$	1.71	$	1.78	$	0.78

The following table presents a summary of the Company’s weighted-average, common equivalent shares of potentially dilutive securities not included in the calculation of diluted net income per share due to its anti-dilutive nature:

	Years Ended December 31,
	2009	2008	2007
	(in thousands)
Preferred stock	—	—	9,249
Common stock options and restricted stock units	408	129	—

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pro Forma Net Income Per Share

Upon the completion of the Company’s IPO on November 2, 2007, all of the Company’s previously outstanding preferred shares converted into approximately 11.0 million shares of common stock. As a result of the issuance of these shares of common stock, there is a lack of comparability in both the basic and diluted net income per share amounts for the periods presented above. In order to provide a more relevant measure of the Company’s operating results, a pro forma net income per share calculation has been included below. The shares used to compute pro forma basic and diluted net income per share include the assumed conversion of all outstanding shares of preferred stock into shares of common stock using the as-if converted method as of the beginning of each period presented or the date of issuance, if later.

	Years Ended December 31,
	2009		2008		Pro Forma 2007
	(in thousands, except per share data)
Numerator:
Pro forma net income allocable to common stockholders	$	30,634	$	31,356	$	13,353
Denominator:
Weighted average shares of common stock outstanding, net		16,978		16,399		2,756
Adjustments to reflect the weighted average effect of the assumed conversion of convertible preferred stock		—		—		9,249
Pro forma weighted average shares of common stock outstanding, net—basic		16,978		16,399		12,005
Dilutive effect of common equivalent shares		976		1,254		1,549
Pro forma weighted average shares of common stock outstanding, net—diluted		17,954		17,653		13,554
Pro forma net income per share:
Basic	$	1.80	$	1.91	$	1.11
Diluted	$	1.71	$	1.78	$	0.99

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board, or FASB, issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605), or ASU No. 2009-13. ASU No. 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for a deliverable will be based on vender-specific objective evidence if available, third party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third party evidence is available. This standard eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. This standard is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. Early adoption of ASU No. 2009-13 is permitted. The Company is currently evaluating the potential impact of ASU No. 2009-13 on its consolidated results of operations and financial position.

In August 2009, the Company adopted ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides clarification for circumstances where a quoted market price in an active market for an identical liability is not available. In such circumstances, a reporting entity must measure fair value of the liability using one of the

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

following techniques: 1) the quoted price of the identical liability when traded as an asset; 2) quoted prices for similar liabilities or similar liabilities when traded as assets; or 3) another valuation technique, such as a present value technique or the amount that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability that is consistent with the provisions of ASC Topic 820. The adoption of this new standard did not have a material impact on the Company’s consolidated results of operations and financial position.

In June 2009, the Company adopted FASB guidance establishing only two levels of U.S. Generally Accepted Accounting Principles, or GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification, or the Codification, became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This standard was effective for financial statements issued for interim and annual financial periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, the adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

In May 2009, the Company adopted FASB issued guidance for the accounting for and disclosures of subsequent events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is included in FASB ASC 855, Subsequent Events, and was effective for interim or annual financial periods ending after June 15, 2009. This guidance applies to both interim financial statements and annual financial statements. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

In April 2009, the Company adopted FASB issued guidance requiring disclosure about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is included in ASC Topic 825, Financial Instruments, and was effective for interim reporting periods ending after June 15, 2009 with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

In April 2009, the Company adopted FASB issued guidance amending the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This guidance became effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

In April 2009, the Company adopted FASB issued guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The guidance is included in ASC Topic 820 and also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance became effective for interim and annual reporting periods ending after June 15, 2009 and was applied prospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

2. Balance Sheet Detail

Investment Securities

Short-term investment securities consist of municipal securities, government-sponsored enterprise securities, corporate debt securities, U.S. treasury securities and certificates of deposit. As of December 31, 2009, the Company held one remaining auction rate security, or ARS, with a fair value of $3.8 million. The ARS had a

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cost basis of $4.9 million, which is net of a temporary impairment of $1.1 million as of December 31, 2009, due to the illiquidity of the investment security (see Note 3 in these notes to consolidated financial statements). As such, the Company has classified the ARS as a long-term investment security. ARS are collateralized debt instruments with long-term contractual maturities that are structured with short-term holding periods. They provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined intervals, typically every 7 to 35 days. The length of each holding period is determined at the original issuance of the ARS. The Company can sell at each auction at par, assuming there are buyers for the ARS at such auction. In order for the auction to be successful, demand in the marketplace must meet or exceed the supply. If an auction is unsuccessful, the interest rate on the security resets at a predetermined auction failure rate. An investor can continue to hold the investment security until the next auction date or attempt to sell in the secondary market, usually at a sizable discount. The ARS has a contractual maturity in 2038, with a 35-day holding period between scheduled auctions. The last auction occurred on September 10, 2008, prior to the bankruptcy of the broker/dealer that managed the auction.

The following tables present a summary of the Company’s available-for-sale investment securities as reported on the consolidated balance sheets:

	December 31, 2009
	Amortized Cost		Gross Unrealized					Aggregate Fair Value
			Gains		Losses
	(in thousands)
Short-term investment securities:
Municipal securities	$	52,619	$	212	$	—		$	52,831
Government-sponsored enterprise securities		45,677		39		(12	)		45,704
Corporate debt securities		7,100		43		(1	)		7,142
U.S. treasury securities		6,842		—		(3	)		6,839
Certificates of deposit		530		3		—			533
	$	112,768	$	297	$	(16	)	$	113,049
Long-term investment security:
Auction rate security	$	4,925	$	—	$	(1,139	)	$	3,786

	December 31, 2008
	Amortized Cost		Gross Unrealized					Aggregate Fair Value
			Gains		Losses
	(in thousands)
Short-term investment securities:
Government-sponsored enterprise securities	$	38,999	$	279	$	(2	)	$	39,276
Corporate debt securities		25,918		55		(419	)		25,554
	$	64,917	$	334	$	(421	)	$	64,830
Long-term investment security:
Auction rate security	$	5,000	$	—	$	(1,225	)	$	3,775

As of December 31, 2009, the gross unrealized losses of $16,000 on short-term investment securities represents temporary impairments on debt securities of multiple issuers, including one corporate debt security that has been in a loss position for more than 12 consecutive months. The gross unrealized loss related to this one security amounted to $1,000 as of December 31, 2009, which represented a decrease from the unrealized loss of $138,000 recorded as of December 31, 2008. The loss related to this security was due to the interest rate

83

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

environment for this security, which the Company believes is improving based on increases in the fair market value of the security over the previous 12 months as it nears maturity in the first quarter of 2010. The Company believes it does not need to sell nor intends to sell before recovery of par value upon maturity. The Company’s remaining 18 investment securities in loss positions have been in such positions for less than 12 consecutive months and were primarily caused by negative changes in the overall economic environment. These investment securities all have contractual maturities of less than 36 months and are expected to mature at par value. The Company recorded a temporary impairment relating to its single ARS of approximately $1.1 million as of December 31, 2009 against a cost basis of $4.9 million, as compared to a temporary impairment of $1.2 million as of December 31, 2008 against a cost basis of $5.0 million. The unrealized loss, net of deferred tax, is included in accumulated other comprehensive loss. See Note 3 in these notes to consolidated financial statements for discussion of fair value measurements. The Company had no realized losses on sales of investment securities for the year ended December 31, 2009, as compared to a realized loss of $66,000 for the year ended December 31, 2008 and no realized loss for the year ended December 31, 2007.

The following table presents a summary of the Company’s value of available-for-sale investment securities by contractual maturity:

	December 31, 2009
	Amortized Cost		Aggregate Fair Value
	(in thousands)
Contractual maturity:
One year or less	$	69,696	$	69,796
One to two years		24,013		24,189
Two to three years		5,514		5,519
Greater than three years		18,470		17,331
	$	117,693	$	116,835

Although certain municipal securities and ARS have contractual maturities up to 40 years, the effective maturities for the Company’s available-for-sale investment securities do not exceed 35 months.

Property and Equipment

The following table presents a summary of the Company’s property and equipment as reported on the consolidated balance sheets:

	Estimated Useful Life	December 31,
		2009			2008
		(in thousands)
Machinery and equipment	5	$	5,770		$	3,817
Computers	3		4,996			3,668
Furniture and fixtures	5		1,868			1,712
Leasehold improvements	Lesser of remaining lease term or useful life		6,568			5,821
Construction in process	—		1,186			599
Total property and equipment			20,388			15,617
Accumulated depreciation			(6,562	)		(3,428	)
Total property and equipment, net		$	13,826		$	12,189

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Depreciation expense was $3.8 million, $1.4 million and $580,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

3. Fair Value Measurements

Valuation techniques used to measure fair value under ASC Topic 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, which may be used to measure fair value, as follows:

Level 1 Real-time quoted prices in active exchange markets for identical assets or liabilities

Level 2 Other significant and readily available observable inputs for comparable instruments, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

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

The following table presents a summary of the Company’s financial instruments subject to ASC Topic 820 measured on a recurring basis:

	Balance at December 31, 2009		Fair Value Measurements
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Short-term investment securities:
Municipal securities	$	52,831	$	—	$	52,831	$	—
Government-sponsored enterprise securities		45,704		—		45,704		—
Corporate debt securities		7,142		—		7,142		—
U.S. treasury securities		6,839		6,839		—		—
Certificates of deposit		533		533		—		—
	$	113,049	$	7,372	$	105,677	$	—
Long-term investment security:
Auction rate security	$	3,786	$	—	$	—	$	3,786

The Company’s level 1 financial instruments consist of a certificate of deposit that matures in greater than 90 days from date of purchase and is fully insured by the Federal Deposit Insurance Corporation and U.S. treasury securities.

The Company’s level 2 financial instruments are valued using market prices on less active markets. These valuations use pricing models that vary by asset class, incorporating such data as available trade information for similar securities, expected cash flows and credit information.

The Company’s level 3 financial instruments consist of an ARS issued by a municipality, which is underwritten by an insurance agency. ARS are collateralized debt instruments with long-term contractual maturities that are structured with short-term holding periods. They provide liquidity through a Dutch auction

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

process that resets the applicable interest rate at pre-determined intervals, typically every 7 to 35 days. The length of each holding period is determined at the original issuance of the ARS. The Company can sell at each auction at par, assuming there are buyers for the ARS at such auction. In order for the auction to be successful, demand in the marketplace must meet or exceed the supply. If an auction is unsuccessful, the interest rate on the security resets at a predetermined auction failure rate. An investor can continue to hold the investment security until the next auction date or attempt to sell in the secondary market, usually at a sizable discount. The ARS has a contractual maturity in 2038, with a 35-day holding period between scheduled auctions. Although unsuccessful, the last auction occurred on September 10, 2008, prior to the filing of bankruptcy by the broker/dealer that managed the auction. This investment security has been valued as level 3 with unobservable inputs since its auctions began failing in February 2008. As of December 31, 2009, the ARS was rated “BAA1” by Moody’s Investors Service and “A” by Standard & Poor’s based on the underwriter’s guarantee. The funds associated with this security will not be accessible until the issuer redeems the ARS through a debt restructure, a buyer is found outside of the auction process, or the ARS matures in 2038.

The Company has evaluated this ARS based on interest rate spreads, credit quality, underlying assets of the issuer and underwriter, likelihood of a successful auction or redemption in the near term and the ability of the issuer to restructure the debt in the current credit environment. The Company assumed that the issuer and underwriter would not be able to satisfy its debt obligation until the credit market would provide a debt restructuring opportunity (within the next 4 years) and applied a 1.0% liquidity discount. The issuer of the ARS continues to make interest payments as scheduled and has made two partial redemptions during the year ended December 31, 2009, of which the Company benefited from one due to the lottery system used to distribute the redemption proceeds. This redemption resulted in cash proceeds to the Company of $75,000 during the year ended December 31, 2009. As a result of the internal valuation, the Company has recorded a temporary impairment of approximately $1.1 million as of December 31, 2009, against a cost basis of $4.9 million, as compared to a temporary impairment of $1.2 million as of December 31, 2008, against a cost basis of $5.0 million.

The following table presents a summary of the Company’s changes in fair value of level 3 financial assets:

	Level 3 Auction Rate Security
	(in thousands)
Balance at December 31, 2008	$	3,775
Transfers in (out) of level 3		—
Earned income		—
Total realized/unrealized losses:
Included in earnings		—
Included in accumulated other comprehensive loss		86
Purchases, (sales), issuances, (settlements), (redemptions), net		(75	)
Balance at December 31, 2009	$	3,786

4. Stockholders’ Equity

Equity Incentive Plans

In connection with the Company’s IPO, the 2007 Equity Incentive Plan, or the 2007 Plan, the 2007 Non-Employee Directors’ Stock Option Plan, or 2007 Directors’ Plan, and the 2007 ESPP became effective. Prior to the IPO, all options outstanding were governed by the Company’s 2001 Equity Incentive Plan, as amended, or 2001 Plan. The 2001 Plan, 2007 Plan and 2007 Directors’ Plan are collectively referred to as the

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GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

“Equity Incentive Plans, or EIP.” During the year ended December 31, 2009, all issued shares of common stock were new shares from the Equity Incentive Plans from either stock exercises or releases of RSUs, or were from ESPP purchases through employee contributions.

2001 Equity Incentive Plan

Under the 2001 Plan, options are generally exercisable for up to 10 years from the date of grant and vest over a four-year period, with 25% of the grant vesting on the first anniversary of the vesting base date and the remaining 75% vesting in equal monthly installments over the remaining three years. Since adoption of the 2007 Plan in October 2007, the Company has made no further grants from the 2001 Plan.

2007 Equity Incentive Plan

The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, RSU awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards. In addition, the 2007 Plan provides for the grant of performance cash awards. Options are generally exercisable for up to 10 years from the date of grant and generally vest over a four-year period, with 25% of the grant vesting on the first anniversary of the vesting base date and the remaining 75% vesting in equal monthly installments over the remaining three years. RSUs are granted requiring no cash payments from employees, directors or Cartesian doctors and generally vest over a one to four year period. Upon vesting of RSUs, the RSU issuance of the underlying shares of common stock can be delayed under certain circumstances. The aggregate number of shares of common stock that was initially authorized for issuance pursuant to stock awards under the 2007 Plan was 1.5 million shares, plus the 75,000 shares that remained available for future issuance under the 2001 Plan as of the effective date of the 2007 Plan. In addition, the number of shares of common stock reserved for issuance automatically increases (i) on January 1 of each calendar year, from January 1, 2008 through January 1, 2017, by the least of (a) 3% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (b) 750 shares, or (c) a number determined by the Company’s board of directors that is less than (a) or (b) and (ii) from time to time by shares that are issuable pursuant to options under the 2001 Plan that are forfeited or expire. The exercise price for an incentive or a nonstatutory stock option cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant.

2007 Non-Employee Directors’ Stock Option Plan

The 2007 Directors’ Plan provides for the automatic grant of nonstatutory stock options to purchase shares of the Company’s common stock to the Company’s non-employee directors and will terminate at the discretion of the Company’s board of directors. An aggregate of 250,000 shares of the Company’s common stock was initially reserved for issuance under the 2007 Directors’ Plan. This amount increases automatically annually on January 1, from 2008 until 2017, by an aggregate number of shares of the Company’s common stock equal to the number of shares subject to options granted as initial grants and annual grants under the 2007 Directors’ Plan during the immediately preceding year or a lesser amount as determined by the Company’s board of directors. The exercise price of the options granted under the 2007 Directors’ Plan will be equal to 100% of the fair market value of the Company’s common stock on the date of grant with initial grants vesting in equal monthly installments over three years after the date of grant and annual grants vesting in equal monthly installments over 12 months after the date of grant. The term of these stock options is ten years.

87

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents a summary of the Company’s RSU and stock option activity under the Equity Incentive Plans:

	Equity Incentive Plans		RSUs Outstanding		Options Outstanding
	Shares Available for Issuance		Number of Shares		Number of Shares		Weighted- Average Exercise Price (Per Share)
	(in thousands, except per share amounts)
Balance at December 31, 2008	1,389		145		1,991		$	12.23
Additional shares authorized	547		—		—			—
Granted/issued	(826	)	131		695			31.52
Exercised/released	—		(74	)	(425	)		4.01
Shares withheld for payment of taxes	17		(17	)	—			—
Forfeited/cancelled	135		(9	)	(126	)		29.18
Repurchases	—		—		—			—
Balance at December 31, 2009	1,262		176		2,135		$	19.14

The following tables present a summary of the Company’s stock-based compensation expense disclosures:

	Year Ended December 31, 2009
	Options		RSUs		ESPP
	(in thousands, except per share amounts)
Weighted-average grant date fair value	$	19.14	$	32.22	$	17.14
Total intrinsic value of shares exercised/released/purchased	$	13,034	$	2,889	$	3,187
Total fair value of shares vested during the year	$	6,031	$	2,889	$	2,204
	Year Ended December 31, 2008
	Options		RSUs		ESPP
	(in thousands, except per share amounts)
Weighted-average grant date fair value	$	12.23	$	29.29	$	15.22
Total intrinsic value of shares exercised/released/purchased	$	11,084	$	744	$	3,123
Total fair value of shares vested during the year	$	1,267	$	744	$	1,945
	Year Ended December 31, 2007
	Options		RSUs		ESPP
	(in thousands, except per share amounts)
Weighted-average grant date fair value	$	28.46	$	29.33	$	—
Total intrinsic value of shares exercised/released/purchased	$	1,068	$	—	$	—
Total fair value of shares vested during the year	$	497	$	—	$	—

88

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents a summary of the Company’s EIP option and RSU disclosures as of December 31, 2009:

	Options						RSUs
	Number of Shares	Weighted Average Exercise Price (Per Share)		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value		Number of Shares	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(in thousands, except per share amounts)
Outstanding	2,135	$	19.14	7.52	$	35,075	176	1.17	$	6,263
Fully vested and expected to vest	1,967	$	18.39	7.42	$	33,793	152	0.83	$	5,400
Exercisable	1,089	$	9.91	6.27	$	27,915	—	—		—

The following table presents a summary of the Company’s nonvested stock options and activity:

	Number of Shares		Weighted-Average Grant Date Fair Value
	(in thousands)
Nonvested at December 31, 2008	1,034		$	12.28
Granted	695			31.52
Vested	(550	)		10.97
Forfeited/cancelled	(126	)		29.18
Nonvested at December 31, 2009	1,053		$	14.88

As of December 31, 2009, 2008 and 2007, the Company had repurchasable stock options of 2,000 shares, 25,000 shares and 64,000 shares, respectively, subject to repurchase for an aggregate exercise price of approximately $16,000, $33,000 and $34,000, respectively.

The following table presents a summary of the Company’s unrecognized compensation expense related to outstanding unvested stock-based awards, adjusted for estimated forfeitures but before income taxes:

	December 31, 2009
	Options		RSUs		ESPP
Average remaining expense life (years)		2.67		1.92		1.44
Unrecognized compensation expense (in thousands)	$	13,444	$	3,665	$	245

Employee Stock Purchase Plan

The ESPP initially authorized the issuance of 500,000 shares of the Company’s common stock pursuant to purchase rights granted to the Company’s employees. The number of shares of the Company’s common stock reserved for issuance automatically increases on January 1 of each calendar year, from January 1, 2008 through January 1, 2017, by the least of (a) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (b) 250,000 shares or (c) a number determined by the Company’s board of directors that is less than (a) or (b). The ESPP is implemented through a series of offerings of purchase rights to eligible employees. Under the ESPP, the Company may specify offerings with duration of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering has one or more purchase dates on which shares of the Company’s common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances. Generally,

89

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

all regular employees, including executive officers, employed by the Company may participate in the ESPP and may contribute up to 15% of their earnings, subject to certain limitations, for the purchase of the Company’s common stock under the ESPP. Unless otherwise determined by the Company’s board of directors, common stock will be purchased for accounts of employees participating in the ESPP at a price per share equal to the lower of (a) 85% of the fair market value of a share of the Company’s common stock on the first date of an offering or (b) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. During the first purchase period, employees were permitted to contribute via cash payment up to the end of the purchase period. Employees can withdraw from a purchase period at any time excluding the 10 days prior to the purchase date. For the year ended December 31, 2009, utilizing employee withheld funds, the Company purchased approximately 95,000 shares of common stock for $1.6 million as compared to 96,000 shares of common stock for $1.5 million for the year ended December 31, 2008.

The following table presents a summary of the Company’s activity under the ESPP:

	ESPP
	Shares Available for Issuance		Weighted Average Purchase Price Per Share
	(in thousands, except per share amounts)
Balance at December 31, 2008	565
Additional shares reserved	167
Purchased	(95	)	$	17.14
Balance at December 31, 2009	637

Initial Public Offering

On November 2, 2007, the Company completed its IPO whereby it sold 4.7 million shares of common stock at $17.00 per share and received net proceeds of $72.5 million (after underwriting discounts and commissions and offering costs). The sale of these shares included the underwriter’s exercise in full of their option to purchase 450,000 additional shares from the Company. In connection with the closing of the IPO, the 52.4 million then outstanding shares of convertible preferred stock automatically converted into an aggregate of approximately 11.0 million shares of common stock.

Warrants

During the year ended December 31, 2008, warrants to purchase an aggregate of 86,000 shares of common stock were exercised in exchange for 77,000 shares of common stock in conjunction with net share settlements and cash payments of $35,000. As of December 31, 2009 and 2008, respectively, no warrants were outstanding.

5. Commitments and Contingencies

Operating Leases

As of December 31, 2009, the Company leased office and laboratory space and certain equipment under various non-cancellable operating leases. Rent expense under the Company’s operating leases totaled $3.2 million, $2.1 million and $1.3 million for years ended December 31, 2009, 2008 and 2007, respectively. The Company recognizes operating lease rent expense on a straight-line basis over the lease term. See Note 10 accompanying these notes to the consolidated financial statements for discussion of the operating lease agreement entered into in January 2010.

90

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In June 2009, the Company entered into a six-year operating lease beginning June 1, 2009 for an additional 44,000 square feet of laboratory space in Carlsbad, California, into which the Company will expand current laboratory facilities following the substantial completion of improvements, estimated to occur during the second quarter 2010. The lease contains one four-year extension option and is subject to annual rent increases. The non-cancellable future minimum payments under the lease total approximately $451,000, $465,000, $479,000, $493,000, $608,000, and $256,000 in 2010, 2011, 2012, 2013, 2014, and thereafter, respectively. See Note 10 in these notes to consolidated financial statements for discussion of subsequent events.

The following table presents a summary of the Company’s future minimum lease payments under non-cancellable leases as of December 31, 2009:

	Operating Leases
	(in thousands)
2010	$	3,694
2011		3,736
2012		3,090
2013		2,410
2014		2,578
Thereafter		256
Total future minimum lease payments	$	15,764

Contingencies

The Company is reimbursed for services provided to patients under certain programs administered by governmental agencies. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance in all material respects with all applicable laws and regulations and it is not aware of any significant pending or threatened claims involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs.

The Company is insured for medical malpractice risks on a claims-made basis under certain professional liability insurance policies. No malpractice claims were made against the Company as of December 31, 2009.

6. Income Taxes

The following table presents a summary of the Company’s provision for income taxes:

	Years Ended December 31,
	2009			2008			2007
	(in thousands)
Current:
Federal	$	19,339		$	3,419		$	263
State		5,590			1,570			176
Foreign		16			—			—
		24,945			4,989			439
Deferred:
Federal		(849	)		(4,102	)		—
State		634			(2,577	)		—
		(215	)		(6,679	)		—
Income tax expense (benefit)	$	24,730		$	(1,690	)	$	439

91

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents a summary of the Company’s effective tax rate on income taxes reconciled to the statutory federal income tax:

	Years Ended December 31,
	2009		2008		2007
Tax computed at the federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal benefit	6.7	%	7.1	%	6.4	%
Stock-based compensation	1.1	%	4.0	%	0.9	%
Tax attribute adjustment	0.0	%	(2.1	%)	19.2	%
Permanent differences and other	1.8	%	0.6	%	0.3	%
Change in valuation allowance	0.0	%	(50.3	%)	(58.6	%)
Actual effective tax rate	44.6	%	(5.7	%)	3.2	%

As of December 31, 2009, the Company had $7.2 million in net deferred tax assets. As of December 31, 2008, although realization was not assured, the Company believed it was “more likely than not” that it would be able to realize its net deferred tax assets through the ordinary course of business and expected future taxable income. Therefore, the Company recorded a $14.9 million tax benefit representing the release of the valuation allowance against the net deferred tax assets during the year ended December 31, 2008. Similarly, the Company had $14.9 million in net deferred tax assets as of December 31, 2007 that were offset entirely by a valuation allowance, as the Company was unable to conclude that it was “more likely than not” that such deferred tax assets would be realized.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant components of the deferred tax assets are as follows:

	December 31,
	2009			2008
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	473		$	1,053
Credit carryforwards		16			1,633
Accrued expenses		3,835			3,230
Intangible assets		712			1,051
Stock-based compensation		2,361			849
State taxes		1,637			406
Tax benefit on other comprehensive loss		312			538
Total deferred tax assets		9,346			8,760
Deferred tax liabilities:
Fixed assets		(2,140	)		(1,543	)
Total deferred tax assets		7,206			7,217
Less: current deferred tax asset		5,406			4,707
Long-term deferred tax asset	$	1,800		$	2,510

The Company had recorded $312,000 of deferred tax benefit in accumulated other comprehensive loss as of December 31, 2009, related to net unrealized losses on investment securities.

92

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2009, the Company had federal tax net operating loss carryforwards of approximately $1.2 million and state tax net operating loss carryforwards of approximately $27.0 million. The federal and state net operating losses will begin to expire in 2019 and 2013, respectively. As of December 31, 2009, the Company had no federal research tax credit carryforwards and state research credit carryforwards of approximately $104,000, which do not expire.

Utilization of net operating loss carryforwards, credit carryforwards and certain deductions have been subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company’s ownership have required the Company to limit the amount of net operating loss and research and development credit carryforwards that were previously available to offset future taxable income. The Company has three “change in ownership” events that limit the utilization of net operating loss and credit carryforwards. The “change in ownership” events occurred in March 2000, December 2001 and March 2008 and resulted in annual net operating loss carryforward limitations of $63,000, $96,000 and $16.1 million, respectively. As a result of a net unrealized built-in gain from the March 2008 change in ownership, the Company’s net operating loss carryforward annual limitation of $16.1 million was increased to $39.7 million for each of the five years starting after the change in ownership. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examination from various taxing authorities.

The following table presents a summary of the Company’s unrecognized tax benefit:

	Years Ended December 31,
	2009		2008			2007
	(in thousands)
Beginning balance	$	249	$	677		$	840
Additions based on tax positions related to current year		—		—			—
Additions for tax positions of prior years		—		—			—
Reductions for tax positions of prior years		—		(428	)		(163	)
Settlements		—		—			—
Ending balance	$	249	$	249		$	677

At December 31, 2009, the Company’s unrecognized tax benefit associated with uncertain tax positions was $249,000, of which $195,000, if recognized, would impact the effective tax rate. The Company recognized no material interest or penalties during the year ended December 31, 2009, 2008 or 2007. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within 12 months of this reporting date.

In August 2009, the Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax return for the tax year ended December 31, 2007. To date, there have been no proposed adjustments communicated to the Company. While the Company believes it is adequately reserved, if the examination results in an unfavorable outcome, there could be a material impact on the financial results in the period the outcome is determined.

The Company is subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are 2006 for federal income taxes and 2005 for state income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carry-forward amounts.

93

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Employee Savings Plan

The Company has a 401(k) program, which allows participating employees to contribute up to 100% of their salary, subject to annual limits. In 2009, the Company amended its 401(k) program to provide that the Company will match employee contributions made to their 401(k) account of up to 3% of their salary beginning in January 2010. No such matching contributions were made as of or for the year ended December 31, 2009.

8. Treasury Stock

The Company repurchased shares of common stock issued to certain of its directors under their RSU agreement for the purpose of satisfying the director’s tax obligations created by the vesting of their RSUs. For the year ended December 31, 2009, the Company repurchased 749 shares representing a total value of $25,000. No repurchase of shares occurred during the year ended December 31, 2008. The Company accounted for these share purchases as treasury stock transactions using the cost method. The value of the repurchased shares was classified as treasury stock as a reduction in stockholders’ equity on the consolidated balance sheets.

9. Selected Quarterly Financial Data (Unaudited)

The following tables present unaudited selected quarterly financial data and reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods:

	Year Ended December 31, 2009
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Year
	(in thousands, except per share data)
Selected quarterly financial data:
Revenues(1)	$	39,189	$	45,298	$	50,807	$	49,084	$	184,378
Gross profit		23,760		28,526		32,405		30,487		115,178
Total operating expenses		13,620		15,109		16,026		16,613		61,368
Net income(3)		5,942		7,874		9,462		7,356		30,634
Net income per common share—basic(4)	$	0.35	$	0.47	$	0.55	$	0.43	$	1.80
Net income per common share—diluted(4)	$	0.33	$	0.44	$	0.53	$	0.41	$	1.71
	Year Ended December 31, 2008
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Year
	(in thousands, except per share data)
Selected quarterly financial data:
Revenues(2)	$	22,298	$	27,825	$	32,087	$	33,960	$	116,170
Gross profit		13,123		16,619		19,805		20,692		70,239
Total operating expenses		8,966		11,442		11,217		11,986		43,611
Net income(3)		5,007		5,571		15,428		5,350		31,356
Net income per common share—basic(4)	$	0.31	$	0.34	$	0.93	$	0.32	$	1.91
Net income per common share—diluted(4)	$	0.29	$	0.32	$	0.87	$	0.30	$	1.78

(1) During the quarters ended March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009, the Company recorded positive changes in accounting estimates to reduce contractual allowances by $2.0 million, $3.7 million, $4.4 million and $2.0 million respectively, of which $7.4 million related to revenues

94

GENOPTIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

originally recorded in prior periods. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to the Company’s collection processes, changes in reimbursement policies by certain payors and increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods. In the consolidated statements of operations, the reduction in contractual allowances resulted in an increase to revenues.

(2) During the quarters ended March 31, 2008, June 30, 2008, September 30, 2008 and December 31, 2008, the Company recorded positive changes in accounting estimates to reduce contractual allowances by $651,000, $864,000, $2.5 million and $2.2 million respectively, of which $3.3 million related to revenues originally recorded in prior periods. These favorable changes in accounting estimates related primarily to non-contracted payors and resulted from continued improvements to the Company’s collection processes, as well as increased hiring of personnel and management focused on the collection of accounts receivable for services rendered in prior periods and changes in reimbursement policies by certain payors. In the consolidated statements of operations, the reduction in contractual allowances resulted in an increase to revenues.

(3) The income tax expense for the year ended December 31, 2009 was $24.7 million, as compared to the income tax benefit for the year ended December 31, 2008 of $1.7 million. As of December 31, 2007, the Company had $14.9 million in net deferred tax assets that were offset entirely by a valuation allowance, as the Company was unable to conclude, at that time, that it was “more likely than not” that such deferred tax assets would be realized. In 2008, although realization was not assured, we believed it was “more likely than not” that we would be able to realize net deferred tax assets through the ordinary course of business and expected future taxable income. Therefore, during the year ended December 31, 2008, we recorded a $14.9 million tax benefit representing the release of the valuation allowance against the net deferred tax assets.

(4) Net income per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net income per share amounts will not necessarily equal the total for the year.

10. Subsequent Events

On January 4, 2010, the Company entered into a six-year operating lease, with lease payments commencing on May 1, 2010, for an additional 33,000 square feet of space in Carlsbad, California, into which the Company will expand the Company’s current customer service and support operations following the substantial completion of improvements, estimated to occur in the second quarter of 2010. Building improvements and related capital expenditures are expected to cost approximately $3.0 million. The lease contains one five-year extension option and is subject to annual rent increases. The annual noncancellable future minimum payments under the lease total approximately $256,000, $392,000, $404,000, $416,000 and $428,000 in 2010, 2011, 2012, 2013 and 2014, respectively.

On January 12, 2010, the Company entered into a purchase agreement to acquire the property in Carlsbad, California, that was originally leased by the Company in June 2009 (see Note 5 in these notes to consolidated financial statements for discussion of the lease), which consisted of land and a building with approximately 44,000 square feet of space to be used for laboratory operations. The total purchase price of the facility and related land was $7.6 million and was purchased using existing cash derived from operations. Building improvements and related capital expenditures are expected to cost approximately $11.0 million and are expected to be substantially complete during the second quarter of 2010. As a result of this purchase, the lease agreement entered into by the Company for the leasing of the property was terminated.

95

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

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the SEC are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b) of the Exchange Act, prior to filing this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on their evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2009, which is included herein.

96

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Genoptix, Inc.

We have audited Genoptix, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Genoptix, Inc.’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 consolidated 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, Genoptix, Inc. maintained in all material respects, effective internal control over financial reporting as of December 31, 2009 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Genoptix, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 25, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California

February 25, 2010

97

Item 9B. Other Information.

None.

98

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item with respect to executive officers and directors is incorporated by reference from the information under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics” contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2010 annual meeting of stockholders.

Item 11. Executive Compensation.

The information required by this item is incorporated by reference to the information under the captions “Non-Employee Director Compensation,” “Executive Compensation,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation” contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2010 annual meeting of stockholders.

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

The information required by this item is incorporated by reference to the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2010 annual meeting of stockholders.

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

The information required by this item is incorporated by reference to the information under the captions “Elections of Directors” and “Transactions with Related Persons” contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2010 annual meeting of stockholders.

Item 14. Principal Accounting Fees and Services.

The information required by this item is incorporated by reference to the information under the captions contained in “Ratification of Selection of Independent Auditors” contained in the proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with our 2010 annual meeting of stockholders.

99

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) Documents filed as part of this Annual Report on Form 10-K.

(1) Consolidated Financial Statements:

	Page
Report of Independent Registered Public Accounting Firm	67
Consolidated Balance Sheets	68
Consolidated Statements of Operations	69
Consolidated Statements of Stockholders’ Equity	70
Consolidated Statements of Cash Flows	71
Notes to Consolidated Financial Statements	72

(2) Consolidated Financial Statements Schedules:

	Page
Schedule II—Valuation and Qualifying Accounts	103

All other consolidated financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the consolidated financial statements or the notes thereto.

(3) List of exhibits required by Item 601 of Regulation S-K. See part (b) below.

(b) Exhibits filed as part of this Annual Report on Form 10-K.

The following exhibits are filed as part of this Annual Report on Form 10-K:

Exhibit Number	Description
3.1(1)	Amended and Restated Certificate of Incorporation of the Registrant
3.2(10)	Amended and Restated Bylaws of the Registrant
4.1(2)	Form of the Registrant’s Common Stock Certificate
10.1†(2)	Form of Indemnity Agreement by and between the Registrant and its directors and executive officers
10.2†(2)	2001 Equity Incentive Plan and Form of Option Agreement (Employees), Form of Option Agreement (Executive Officers), Form of Stock Option Grant Notice, Notice of Exercise and Early Exercise Stock Purchase Agreement and Notice of Exercise and other exhibits thereto
10.3†(2)	2007 Equity Incentive Plan and Form of Stock Option Agreement, Form of Stock Option Grant Notice and Notice of Exercise thereunder
10.4†(13)	Form of Restricted Stock Unit Award Agreement for Executives and Form of Restricted Stock Unit Award Grant Notice for Executives under 2007 Equity Incentive Plan
10.5†(12)	Form of Restricted Stock Unit Award Agreement for Directors and Form of Restricted Stock Unit Award Grant Notice for Directors under 2007 Equity Incentive Plan
10.6†(11)	Form of Restricted Stock Unit Award Agreement for Non-Executives and Form of Restricted Stock Unit Award Grant Notice for Non-Executives under 2007 Equity Incentive Plan
10.7†(2)	2007 Employee Stock Purchase Plan and Form of Offering Document thereunder

100

Exhibit Number	Description
10.8†(6)	2007 Non-Employee Directors’ Stock Option Plan, as amended
10.9†(11)	Form of Stock Option Agreement, Form of Initial and Annual Stock Option Grant Notice and Notice of Exercise under 2007 Non-Employee Directors’ Stock Option Plan
10.10†(6)	Non-Employee Director Compensation Policy
10.11†(9)	2009 Annual Executive Bonus Plan
10.12†(13)	2010 Annual Executive Bonus Plan
10.13†(11)	Amended and Restated Employment Agreement, dated November 5, 2008, between Registrant and Tina S. Nova, Ph.D.
10.14†(11)	Amended and Restated Employment Agreement, dated November 25, 2008, between Registrant and Samuel D. Riccitelli
10.15†(11)	Amended and Restated Employment Agreement, dated November 25, 2008, between Registrant and Douglas A. Schuling
10.16†(9)	Amended and Restated Employment Agreement, dated December 22, 2008, between Registrant and Christian V. Kuhlen, M.D., Esq.
10.17(2)	Amended and Restated Sublease Agreement, dated May 1, 2006, by and between the Registrant and CancerVax Corporation
10.18(2)	Amendment No. 1 to Sublease, dated April 2, 2007, by and between the Registrant and Micromet, Inc.
10.26(2)	Clinical Laboratory Professional Services Agreement, dated December 31, 2005, between Registrant and Cartesian Medical Group, Inc.
10.27(2)	Succession Agreement, dated December 31, 2005, between Registrant, Bashar Dabbas, M.D. and Cartesian Medical Group, Inc.
10.28(11)	Amended and Restated Medical Director Agreement, dated October 31, 2008, between Registrant and Pacific Medical Consultants, Inc. and Bashar Dabbas, M.D.
10.29(3)	Standard Multi-Tenant Office Lease, dated February 4, 2008, by and between the Registrant and Blackmore Signal Hill
10.30(8)	Termination of Lease, dated August 8, 2008, by and between Blackmore Signal Hill, L.P. and the Registrant
10.31(5)	Standard Multi-Tenant Office Lease dated April 14, 2008, by and between the Registrant and Allen Joseph Blackmore, Trustee of the Blackmore Family Trust, Restated 1995
10.32(7)	First Amendment to Standard Multi-Tenant Office Lease dated September 15, 2008 by and between the Registrant and Allen Joseph Blackmore, Trustee of the Blackmore Family Trust, Restated 1995
10.33(12)	Standard Single-Tenant Office Lease, dated June 1, 2009, by and between the Registrant and Reynolds Family Trust
10.34(12)	Second Amendment to Standard Multi-Tenant Office Lease – Gross, dated July 1, 2009, by and between the Registrant and Allen Joseph Blackmore, Trustee
10.35	Standard Single-Tenant Office Lease, dated January 5, 2010, by and between the Registrant and Allen Joseph Blackmore, Trustee
10.36	Purchase Agreement and Joint Escrow Instructions, dated January 12, 2010, by and between the Registrant and Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, Ronald Reynolds and Jacqueline S. Reynolds, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, and RM-USE, LLC, a California limited liability company

101

Exhibit Number	Description
23.1	Consent of independent registered public accounting firm
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

† Indicates management contract or compensatory plan.

(1) Incorporated herein by reference to the corresponding exhibit to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on November 2, 2007.

(2) Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (No. 333-144997), as amended, filed with the Securities and Exchange Commission.

(3) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on February 7, 2008.

(4) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on April 16, 2008.

(5) Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q (No. 001-33753), filed with the Securities and Exchange Commission on May 8, 2008.

(6) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on May 13, 2008.

(7) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on September 17, 2008.

(8) Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q (No. 001-33753), filed with the Securities and Exchange Commission on November 6, 2008.

(9) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on December 22, 2008.

(10) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on January 8, 2009.

(11) Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-33753), filed with the Securities and Exchange Commission on February 26, 2009.

(12) Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-33753), filed with the Securities and Exchange Commission on July 30, 2009.

(13) Incorporated herein by reference to the Registrant’s Current Report on Form 8-K (File No. 001-33753), filed with the Securities and Exchange Commission on December 22, 2009.

102

GENOPTIX, INC.

SCHEDULE II—Valuation and Qualifying Accounts

	Allowance for Doubtful Accounts(1)
	December 31,
	2009			2008			2007
	(in thousands)
Beginning Balance	$	4,126		$	1,594		$	1,360
Provision for doubtful accounts		3,150			3,196			1,093
Write-offs, net of recoveries		(1,889	)		(664	)		(859	)
Ending Balance	$	5,387		$	4,126		$	1,594

(1) The provision was charged against general and administrative expenses on the consolidated statements of operations for each respective year.

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

	GENOPTIX, INC.
Date: February 25, 2010	By:	/s/    TINA S. NOVA
		Tina S. Nova, Ph.D.
		President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tina S. Nova, Ph.D. and Douglas A. Schuling, and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

Name	Title	Date
/s/    TINA S. NOVA         Tina S. Nova, Ph.D.	President, Chief Executive Officer and Member of the Board of Directors (Principal Executive Officer)	February 25, 2010
/s/    DOUGLAS A. SCHULING         Douglas A. Schuling	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February 25, 2010
/S/    ANDREW E. SENYEI       Andrew E. Senyei, M.D.	Chairman of the Board of Directors	February 25, 2010
/S/    TIMOTHY M. BUONO         Timothy M. Buono	Member of the Board of Directors	February 25, 2010
/S/    ROBERT E. CURRY         Robert E. Curry, Ph.D.	Member of the Board of Directors	February 25, 2010
/S/    MICHAEL A. HENOS         Michael A. Henos	Member of the Board of Directors	February 25, 2010

104

Name	Title	Date
/S/    LAURENCE R. MCCARTHY         Laurence R. McCarthy, Ph.D.	Member of the Board of Directors	February 25, 2010
/S/    KARIN EASTHAM         Karin Eastham	Member of the Board of Directors	February 25, 2010
/s/    CHRISTINE A. WHITE         Christine A. White, M.D.	Member of the Board of Directors	February 25, 2010

105

EX-10.35

Exhibit 10.35

  AIR COMMERCIAL REAL ESTATE ASSOCIATION

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE – NET

(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1. Basic Provisions (“Basic Provisions”).

1.1 Parties: This Lease (“Lease”), dated for reference purposes only January 4, 2010 is made by and between Blackmore Rutherford Investment, a California Limited Partnership (“Lessor”) and Genoptix, Inc., a Delaware Corporation (“Lessee”), (collectively the “Parties,” or individually a “Party”)

1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 2105 Rutherford Rd, Carlsbad located in the County of San Diego, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the “Project”, if the property is located within a Project) the approximate 33,200 square foot free-standing, single tenant concrete tilt-up R&D/Industrial building situated on 2.16 acres of land, including 99 on-site parking spaces (see Addendum Paragraph 50) (“Premises”). (See also Paragraph 2)

1.3 Term: Approximately Five (5) years and Zero months (“Original Term”) commencing January 4, 2010 (“Commencement Date”) and ending December 31, 2014 (“Expiration Date”). (See also Paragraph 3)

1.4 Early Possession: Upon full execution of lease and Lessor’s receipt of first month’s rent and security deposit (“Early Possession Date”). (See also Paragraphs 3.2 and 3.3)

1.5 Base Rent: $32,000.00 per month (“Base Rent”), payable on the first day of each month commencing May 1, 2010. (See also Paragraph 4)

þ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.

1.6 Base Rent and Other Monies Paid Upon Execution:

(a) Base Rent: $32,000.00 for the period May 1 - 31, 2010.

(b) Security Deposit: $50,000.00 (“Security Deposit”). (See also Paragraph 5)

(c) Association Fees: $                         for the period included in Operating Expense fee.

(d) Other: $ Estimated Operating for Expenses $6,937.00 (May 1 - 31, 2010) due on May 1, 2010.

(e) Total Due Upon Execution of this Lease: $82,000.00.

1.7 Agreed Use: General office uses and any other legal related uses permitted under all applicable laws and zoning. (See also Paragraph 6)

1.8 Insuring Party: Lessor is the “Insuring Party” unless otherwise stated herein. (See also Paragraph 8)

1.9 Real Estate Brokers: (See also Paragraph 15)

(a) Representation: The following real estate brokers (the “Brokers”) and brokerage relationships exist in this transaction (check applicable boxes):

¨                                                                                                                    represents Lessor exclusively (“Lessor’s Broker”);

¨                                                                                                                    represents Lessee exclusively (“Lessee’s Broker”); or

¨                                                                                                                    represents both Lessor and Lessee (“Dual Agency”).

(b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of                          or         % of the total Base Rent) for the brokerage services rendered by the Brokers.

1.10 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A (“Guarantor”). (See also Paragraph 37)

1.11 Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

þ an Addendum consisting of Paragraphs 49 through 68;

¨ a plot plan depicting the Premises;

¨ a current set of the Rules and Regulations;

þ a Work Letter; Tenant Improvement Agreement:

þ other (specify): Exhibits A – D of the Addendum.

2. Premises.

2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and

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upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Lessee is advised to verify the actual size prior to executing this Lease.

2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs (“Start Date”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“HVAC”), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date, that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the “Building”) shall be free of material defects, and that the Premises do not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law. If a non-compliance with said warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Building. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense.

2.3 Compliance. Lessor warrants that to the best of its knowledge the improvements on the Premises comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (“Applicable Requirements”) that were in effect at the time that each improvement, or portion thereof, was constructed. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 50), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“Capital Expenditure”), Lessor and Lessee shall allocate the cost of such work as follows:

(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

(b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date that on which the Base Rent is due, an amount equal to 144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay interest on the balance but may prepay its obligation at any time. If, however, such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis. Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not, however, have any right to terminate this Lease.

2.4 Acknowledgements. Lessee acknowledges that: (a) It has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

3. Term.

3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

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3.2. Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect the Expiration Date.

3.3. Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

3.4. Lessee Compliance. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4. Rent.

4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rent”).

4.2. Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Common Area Operating Expenses, and any remaining amount to any other outstanding charges or costs.

4.3. Association Fees. In addition to the Base Rent, Lessee shall pay to Lessor each month an amount equal to any owner’s association or condominium fees levied or assessed against the Premises. Said monies shall be paid at the same time and in the same manner as the Base Rent.

5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due already due Lessor, for Rents which will be due in the future, and/ or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 90 60 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.

6. Use.

6.1. Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

6.2. Hazardous Substances.

(a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product,

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substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

(f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

(g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

6.3 Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the such Requirements, without regard to whether such Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s

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compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises.

6.4 Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor.

7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.

7.1 Lessee’s Obligations.

(a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior but not the structural components of the exterior walls), foundations, ceilings, roofs (except the structural components), roof drainage systems, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g. graffiti removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.

(b) Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, and (vi) clarifiers, and (vii) basic utility feed to the perimeter of the Building. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof.

(c) Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

(d) Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item $25,000 per occurrence, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease and any exercised Option Period, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay Interest on the unamortized balance but may prepay its obligation at any time.

7.2 Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee Notwithstanding the foregoing, Lessor shall, at lessor’s sole expense, maintain in good order and condition the foundations, structural portions of exterior walls and the structural components of the roof of the Premises. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

7.3 Utility Installations; Trade Fixtures; Alterations.

(a) Definitions. The term “Utility Installations” refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Alterations or Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent $25,000 in the aggregate or a sum equal to one month’s Base Rent $5,000 in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a

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precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

(c) Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

7.4 Ownership; Removal; Surrender; and Restoration.

(a) Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Provided that Lessor indicates such removal will be required concurrently with its consent to the Lessee Owned Alterations or Utility Installations Failure to indicate whether removal is required at the time of consent shall be deemed Lessor’s election to required removal. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

(c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises, or if applicable, the Premises) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The cost associated with the removal or disposal of any abandoned personal property shall be deducted from Lessee’s Security Deposit. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8. Insurance; Indemnity.

8.1 Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within 10 days following receipt of an invoice.

8.2 Liability Insurance.

(a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional Insured-Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

(b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

8.3 Property Insurance - Building, Improvements and Rental Value.

(a) Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and

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Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.

(b) Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee shall be liable for any deductible amount in the event of such loss.

(c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

8.4 Lessee’s Property; Business Interruption Insurance.

(a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

(b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

(c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state wherein the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least A-, VI, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. Lessee shall provide Lessor written notice no later than 5 business days following Lessee’s receipt of any cancellation or modification of any insurance policy and shall deliver copies of any written communication from the insurance company in connection with such cancellation or modification. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 30 days following prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7 Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

8.8 Exemption of Lessor and its Agents from Liability. Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

8.9 Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to

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maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

9. Damage or Destruction.

9.1 Definitions.

(a) “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. Notwithstanding the foregoing, Premises Partial Damage shall not include damage to windows, doors, and/or other similar items which Lessee has the responsibility to repair or replace pursuant to the provisions of Paragraph 7.1.

(b) “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) “Insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

(d) “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

(e) “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration.

9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee’s responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

9.6 Abatement of Rent; Lessee’s Remedies.

(a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for

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which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b) Remedies. If Lessor is obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

10. Real Property Taxes.

10.1 Definition. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises or the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

10.2 Payment of Taxes. In addition to Base Rent, Lessee shall pay to Lessor an amount equal to the Real Property Taxes installment due at least 20 days prior to the applicable delinquency date as part of the monthly Operating Expenses in Paragraph 54 hereof. If any such installment shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee’s share of such installment shall be prorated. In the event Lessee incurs a late charge on any Rent payment, Lessor may estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. Such monthly payments shall be an amount equal to the amount of the estimated installment of annual taxes divided by the number of 12 months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sum as is necessary. Advance payments may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any such advance payments may be treated by Lessor as an additional Security Deposit.

10.3 Joint Assessment. If the Premises are not separately assessed, Lessee’s liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available.

10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

11. Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

12. Assignment and Subletting.

12.1 Lessor’s Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

(b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

(c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

(d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(c), or

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a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

(f) Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

(g) Notwithstanding the foregoing, allowing a de minimis portion of the Premises, ie. 20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

12.2 Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

(c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,500 $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

(g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

(f) Notwithstanding anything contained in Paragraph 7.3 and 12 of this lease, if a sublessee desires to modify the Premises including, without limitation, any modifications to demise the Premises to accommodate a subtenant, Lessee will deposit with Lessor adequate funds (in the form of cash or a irrevocable letter of credit in form and from a financial institution approved by Lessor in its sole discretion) to restore the Premises to its original condition upon lease termination prior to Lessor’s approval of said Sublease.

13. Default; Breach; Remedies.

13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

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(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 5 business days following written notice to Lessee. The acceptance by Lessor of a partial payment of rent or security deposit shall not constitute a waiver of any of Lessor’s rights, including Lessor’s right to recover possession of the Premises.

(c) The failure of Lessee to allow Lessor and/or its agents access to the Premises, subject to Section 32 below, or the commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee.

(d) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate or financial statements, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 business days following written notice to Lessee.

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 60 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(h) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) 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 rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no

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further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 10 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6 Breach by Lessor.

(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided, however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. No reduction in Base Rent shall occur if the only portion of the Premises taken is land on which there is no building Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15. Brokerage Fees.

15.1 Additional Commission. in addition to the payments owed pursuant to Paragraph 1.9 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee or anyone affiliated with Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of the Brokers in effect at the time of the execution of this lease.

15.2 Assumption of Obligations. Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.9, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder

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or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

16. Estoppel Certificates.

(a) Each Party (as “Responding Party”) shall within 10 business days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 business day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

23. Notices.

23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24. Waivers.

(a) No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease

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requiring such consent.

(b) The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

(c) THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

(i) Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(ii) Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(iii) Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

(c) Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee or Lessee’s Sublessee, as approved by Lessor in accordance with Paragraph 12 hereof holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any

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Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Devise to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited to such new owner.

30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32. Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee.

33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Lease” signs during the last 6 months of the term hereof. Except for ordinary “for sublease” signs, provided said sign is in compliance with the CC&R’s of the Carlsbad Research Center and any necessary city sign permit has been obtained. Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

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37. Guarantor.

37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.

37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Options. If Lessee is granted an Option, as defined below, then the following provisions shall apply:

39.1 Definition. “Option” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4 Effect of Default on Options.

(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (v) If Lessee has been delinquent in paying Base Rent more than 6 times during the lease term.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.

41. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” with 6 months shall be deemed to have waived its right to protest such payment.

44. Authority; Multiple Parties; Execution.

(a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

(b) If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

(c) This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

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45. Conflict. Any conflict between the printed provisions of this Lease and typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease  ¨ is  þ is not attached to this Lease.

50. Americans with Disabilities Act. Since compliance with the Americans with Disabilities Act (ADA) is dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in ADA compliance, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Executed at:	Carlsbad, CA.	Executed at:	1811 Aston Avenue Carlsbad, CA 92008
On:	1/5/10	On:	1/4/10
By LESSOR:		By LESSEE:
Blackmore Rutherford Investment, a		Genoptix, Inc., a Delaware Corporation
California Limited Partnership

By:	/s/ Allen Joseph Blackmore	By:	/s/ Tina S. Nova
Name Printed:	Allen Joseph Blackmore, Trustee of the Blackmore Family Trust, restated 1995	Name Printed:	Tina S. Nova, Ph.D.
Title:	General Partner	Title:	President and CEO
By:		By:	/s/ Christian V. Kuhlen
Name Printed:		Name Printed:	Christian V. Kuhlen, M.D. Esq.
Title:		Title:	VP, General Counsel
Address:	Mail: P.O. Box 1810, Rancho Santa Fe, CA 92067. Physical: 1811 Aston Ave, Suite 102, Carlsbad, CA 92008	Address:	1811 Aston Avenue Carlsbad, CA 92008
Telephone:	(760) 804-9600	Telephone:	(760) 268-6200
Facsimile:	(760) 804-9607	Facsimile:	(760) 268-6245
Federal ID No.		Federal ID No.	33-0840570

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BROKER:	BROKER:
Attn:	Attn:
Title:	Title:
Address:	Address:
Telephone:(___)	Telephone:(___)
Facsimile:(___)	Facsimile:(___)
Federal ID No.	Federal ID No.

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800, Los Angeles, CA 90017. Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

^© Copyright 2001 - By AIR Commercial Real Estate Association. All rights reserved.

No part of these works may be reproduced in any form without permission in writing.

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ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE – NET

BY AND BETWEEN

BLACKMORE RUTHERFORD INVESTMENT, A CALIFORNIA LIMITED PARTNERSHIP, LESSOR

AND

GENOPTIX, INC., A DELAWARE CORPORATION, LESSEE

DATED JANUARY 4, 2010

This Addendum to Standard Industrial/Commercial Single-Tenant Lease – Net dated as of January 4, 2010, is attached to and made a part of that certain Standard Industrial/Commercial Single-Tenant Lease – Net dated January 4, 2010 (the “Lease”) by and between Blackmore Rutherford Investment, a California limited partnership (“Lessor”), and Genoptix, Inc., a Delaware Corporation (“Lessee”). In the event of any express or implied inconsistency between the provisions of this Addendum and the Lease, the provisions of this Addendum shall control. Initially capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Lease.

49. RENT ABATEMENT: Lessor acknowledges receipt from Lessee of the sum of $32,000.00 as specified in Section 1.5 of the Lease, for prepaid Base Rent for the specified time frame of May 1-31, 2010 pursuant to Section 1.6(a). Lessee’s occupancy of the Premises shall be subject to all of the terms and conditions of the Lease with the exception that the monthly Base Rent and all operating expenses (including costs of Lessor’s insurance under Section 8.1 and Real Property Taxes), shall be abated for the period of the Commencement Date through April 30, 2010.

50. PARKING: Lessee shall have the exclusive use of the parking lot adjacent to the Premises. Said parking areas of the property shall be used for parking of automobiles, and the loading and unloading of trucks only. The use by Lessee of those areas for storage of materials (including pallets) is expressly prohibited. All such materials shall be stored within the Premises.

The site currently has 99 onsite parking spaces but can accommodate 102 onsite parking spaces. The previous tenant installed two (2) roll up doors which eliminated three (3) parking spaces. As Lessee intends to remove the roll up doors and install a glass storefront system, the three (3) previously eliminated parking spaces may be recaptured during the tenant improvement construction phase.

51. BASE RENT INCREASES:

On May 1, 2011, the monthly base rent shall be increased to $33,000.00 per month plus Operating Expenses (as defined below);

On May 1, 2012, the monthly base rent shall be increased to $34,000.00 per month plus Operating Expenses;

On May 1, 2013, the monthly base rent shall be increased to $35,000.00 per month plus Operating Expenses;

On May 1, 2014, the monthly base rent shall be increased to $36,000.00 per month plus Operating Expenses.

52. CONDITION OF BUILDING: Lessee agrees to accept the Premises in its current ‘as is’ condition. Subject to Sections 2.2 and 2.3 of the Lease, Lessor will not be obligated to make any modifications, upgrades or repairs to the subject property. To the extent that any system replacement or repair of any key component to the system of the Building (as defined below) is required to be made within nine (9) months of the Commencement Date, or Lessor receives notice within such nine (9) month period that any such replacements or repairs are required, such repair or replacement shall be paid for solely by Lessor, up to the sum of $7,500.00, and shall not be charged to Lessee as Building Operating Expenses provided such repair or replacement is not occasioned by Lessee’s negligence or abuse.

53. SIGNAGE: Lessee shall have the right to place its business identification sign(s) at the Premises either on the exterior of the Building or on a monument to be constructed and installed by Lessee at Lessee’s sole cost and expenses, subject to Lessor’s approval, which shall not be unreasonably withheld, conditioned or delayed, provided such sign(s) is/are in compliance with all applicable laws and recorded covenants including the Carlsbad Research Center Design Guidelines and City of Carlsbad permit requirements. Lessor shall provide Lessee with a copy of all such covenants and guidelines.

54. OPERATING EXPENSES: “Operating Expenses” means all actual, out-of-pocket costs and expenses incurred in the operation and management of the Premises, but excluding any costs incurred by Lessor in the performance of its obligations under Paragraph 7.2. Notwithstanding anything to the contrary contained in this Lease, although Lessee is responsible for the cost of the Operating Expenses, Lessor shall contract directly with the following providers on behalf of Lessee for necessary Building services including those detailed below, but Lessor shall not charge Lessee any amounts beyond the actual cost incurred by Lessor. In addition to the monthly Base Rent, Lessee shall reimburse Lessor for the cost incurred by Lessor in causing the following services to be performed on Lessee’s behalf:

a) Property Taxes: Estimated to be $27,000.00 per year, subject to increase;

b) Property Insurance: Estimated to be $6,500.00 per year, subject to increase;

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c) Landscape Maintenance: Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, it is understood by the parties hereto that Lessor shall maintain the landscaping for the Building at Lessee’s expense. Lessor shall employ a landscaping contractor to maintain the landscaping to include fertilizing, changing of annual colored flowers at entrance, tree trimming and replacing of dead plants for the Building, and Lessee shall reimburse Lessor monthly in addition to rent for such maintenance. Such maintenance is currently $590.00 per month, subject to increase.

d) CRC Common Area Maintenance Fees: Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, it is understood by the parties hereto that there exists a monthly common area maintenance fee charged by Carlsbad Research Center (CRC). Said maintenance for the Building is currently $438.86 per month, subject to increase.

e) HVAC Maintenance: Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, Lessor shall procure and maintain, at Lessee’s expense, an air conditioning system maintenance contract, providing for quarterly service. Such maintenance is approximately $246.00 per quarter, subject to increase.

f) Water: Lessee acknowledges that the Building is equipped with three (3) water meters (Building, Landscape and Fire Sprinkler). Lessor shall maintain the three water meter accounts in its name and Lessee shall reimburse Lessor for the cost thereof.

g) Fire Sprinkler Testing and Certification: It is understood by the parties hereto that the Building is equipped with an automatic fire sprinkler system, which according to state law, must be serviced and inspected quarterly and certified every five (5) years. Notwithstanding anything to the contrary contained in Paragraph 7 of this lease, Lessor shall procure and maintain a fire sprinkler maintenance contract providing for the required quarterly inspections and service and five (5) year certifications. Lessee shall reimburse Lessor for these services,

h) Roof Inspections: Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, Lessor shall procure and maintain, at Lessee’s expense, a roof inspection contract, providing for bi-annual inspections of the roof. Such inspection is currently $75.00 per inspection, subject to increase.

i) Exposed Architectural Concrete Sealer Maintenance: It is understood by the parties hereto that the architectural concrete paving areas located al the front entrance of the Premises have been treated with a clear concrete sealer. Said sealer must be reapplied annually (unless Lessor and Lessee mutually decide it is not necessary at that time) in order to protect these areas from deterioration. Lessor shall use its good faith efforts to determine when it is appropriate to have the sealer reapplied to these areas and Lessee shall reimburse Lessor.

j) Backflow Maintenance: Each water meter is equipped with a backflow maintenance device that must be tested annually to prevent any water from flowing back into the public water supply. The annual backflow maintenance testing is currently $300.00, subject to increase.

k) Window Washing: It is understood by the parties hereto that Lessor shall procure and maintain a contract providing for interior and exterior window washing on a quarterly basis and Lessee shall reimburse Lessor monthly in addition to rent for such maintenance. Such maintenance is estimated to be $1,960.00 per year, subject to increase.

l) Fire Sprinkler Alarm Phone Lines: The automatic fire sprinkler alarm system must be monitored at all times via telephone connection to the central station.

m) Management Fee: It is understood by the parties hereto that Lessor shall charge a maximum of two percent (2%) of the annual base rent for the management fees. The cost of the management fees for the first year of the lease term is estimated to be $7,680.00 subject to increase.

55. ESTIMATED OPERATING EXPENSE REIMBURSEMENT; LESSOR’S STATEMENT: Lessee shall pay to Lessor, on the first day of each calendar month of the Lease Term, an amount reasonably estimated (“Estimated Operating Expenses”) by Lessor to be the monthly amount of Operating Expenses, Real Property Taxes, insurance premiums and deductibles allocable to the Premises that are payable to Lessor pursuant to the provisions of this Lease. Lessor may adjust the Estimated Operating Expenses by providing no less than thirty (30) days prior written notice to Lessee of the changed Estimated Operating Expenses. Within one hundred twenty (120) days following the end of each calendar year, Lessor shall furnish Lessee a statement of the actual expenses incurred by Lessor during the previous calendar year and the payments made by Lessee for that preceding calendar year. This statement of actual expense reimbursements is referred to as the “Lessor’s Statement.” If Lessee’s payments are less than the amount of the actual expenses, Lessee shall pay Lessor the deficiency within thirty (30) days after delivery of Lessor’s Statement. If Lessee’s payments exceed the actual expenses, Lessor shall offset Lessee’s excess payment against Rent next thereafter payable to Lessor; provided, however, if the Lease Term shall have expired, Lessor shall refund Lessee’s excess payment within thirty (30) days of delivery of Lessor’s Statement. For up to sixty (60) days following delivery of Lessor’s Statement, Lessee shall have the right (on not less than ten (10) days prior written notice to Lessor) to audit financial records of lessor related to expense reimbursements to verify expense reimbursements covered by the most recent of Lessor’s Statement. Any audit shall be conducted during normal business hours at Lessor’s office, or any other location reasonably designated by Lessor, and shall be conducted by a certified public accounting firm reasonably approved by Lessor, provided it is not retained on a contingency or percentage of recovery basis. Lessee must make any claim to Lessor for an adjustment to the Lessor’s Statement within thirty (30) days of any audit of Lessor’s Statement performed by Lessee.

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56. EXCLUSIONS FROM OPERATING EXPENSES:

(a) Notwithstanding anything to the contrary in the Lease, Operating Expenses and Real Property Taxes shall not include the following:

(i) Any ground lease rental;

(ii) Rentals for items (except when needed in connection with normal repairs and maintenance of permanent systems) which if purchased, rather than rented, would constitute a Capital Expenditure which is specifically excluded in Section 2.3 of the Lease (excluding, however, equipment not affixed to the Building which is used in providing janitorial or similar services);

(iii) Costs incurred by Lessor for the repair of damage to the Building, to the extent that Lessor is reimbursed by insurance proceeds;

(iv) Depreciation, amortization and interest payments, except as provided herein and except on materials, tools, supplies and vendor-type equipment purchased by Lessor to enable Lessor to supply services Lessor might otherwise contract for with a third party where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party’s services.

(v) Marketing costs including, without limitation, leasing commissions, attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with prospective tenants;

(vi) Overhead and profit increment paid to Lessor or to subsidiaries or affiliates of Lessor for goods and/or services in or to the Building to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis;

(vii) Interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project;

(viii) Lessor’s general corporate overhead and general and administrative expenses;

(ix) Advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building;

(x) Costs to bring the exterior of the Premises (parking lot and pathway to the entrance to the Premises) into compliance with the Americans With Disabilities Act, but only to the extent that such work (including planning construction) is supervised and contracted by Lessor (i.e. Lessee will not receive a reimbursement) and only to the extent it is performed in conjunction with Lessee’s initial improvements of the Premises as described on Exhibit C;

(xi) Costs arising from latent defects in the foundation, structural portions of exterior walls and structural portions of the roof;

(xii) Costs (including all attorneys fees and costs of settlement, judgments and payments in lieu thereof) arising from claims, disputes or potential disputes concerning the Premises that either occurred prior to the Commencement Date or that do not in any way involve Lessee’s use or occupancy of the Premises (this exclusion is not meant to modify the provisions of subparagraph 8.7).

(xiii) Tax penalties incurred as a result of Lessor’s negligence, inability or unwillingness to make payments and/or file any tax or information returns when due;

(xiv) Costs for which Lessor has been compensated by a management fee and any management fees in excess of those management ‘fees which are normally and customarily charged by comparable landlords of comparable buildings in the vicinity of the Building;

(xv) Costs arising from the negligence or fault of Lessor or its agents, or any vendors, contractors, or providers or materials or services selected, hired or engaged by Lessor or its agents;

(xiii) Costs arising from Lessor’s charitable or political contributions; Costs for sculpture, paintings or other objects of art;

(xiv) Costs associated with the operation of the business of the partnership or entity which constitutes Lessor as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the action of Lessee may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Lessor’s interest in the Building, costs of any disputes between Lessor and its employees (if any) not engaged in Building operation, disputes of Lessor with Building management;

(xv) Any “finders fees”, brokerage commissions, job placement costs or job advertising cost, other than with respect to a receptionist or secretary in the Building office, once per year;

(xvi) The cost of any magazine, newspaper, trade or other subscriptions;

(xvii) The cost of any training or incentive programs, other than for tenant life safety information services;

(xviii) The cost of any “tenant relations” parties, events or promotion not consented to by an authorized representative of Lessee in writing;

(xix) “In-house” legal and/or accounting fees in excess of the management fees.

57. REASONABLE EXPENDITURES: Any expenditure by a party permitted or required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred and shall be substantiated by documentary evidence available for inspection and review by the other party or its representatives by appointment during normal business hours.

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58. FIRE SPRINKLER ALARM MAINTENANCE/MONITORING: Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, it is understood by the parties hereto that the Building is equipped with a fire sprinkler alarm system for which Lessee shall be responsible. Effective upon the commencement date of the lease, Lessor’s existing fire sprinkler alarm monitoring contract shall be transferred into Lessee’s name and Lessor shall not be responsible for maintenance or repair of the fire sprinkler alarm system equipment.

59. ELECTRICAL, GAS AND PHONE SERVICES: It is understood by the parties hereto that Lessee shall contract directly with the appropriate vendors for electrical, gas and phone services to the building and said costs shall be paid directly by Lessee. These costs shall not be included in the Operating Expenses.

60. JANITORIAL SERVICES: It is understood by the parties hereto that Lessee shall contract directly with an appropriate vendor for janitorial services for the Premises and will engage in a scope of services necessary to maintain the facility in a first class condition. These costs shall be paid directly by Lessee and shall not be included in the Operating Expenses.

61. FIRE DEPARTMENT KNOX BOX: Lessor has contacted the fire department to have a current key to the facility placed into the knox box at the front entrance to the building to ensure that the fire department can gain access to the Premises without excessive damage in the event of an after-hours emergency. If at any time Lessee changes the locks to the Premises, Lessee will be responsible for contacting the fire department to arrange to have the key in the knox box replaced.

62. PERMITTED TRANSFER: Notwithstanding anything to the contrary contained in the Lease (including Section 12 thereof), Lessee may assign the Lease or sublease all of the Premises without Lessor’s consent, but with ten (10) days advance written notice to (each, a “Permitted Transferee”): (i) any corporation, partnership or other business entity that controls, is controlled by, or is under common control with Lessee, (ii) any corporation, partnership or other business entity resulting from a merger or consolidation with Lessee, or (iii) to any entity which acquires substantially all of Lessee’s assets or capital stock. In no event shall any public offering of stock of Lessee on a national stock exchange constitute a transfer requiring Lessor’s consent pursuant to Article 12 of the Lease. The provisions of Section 12.1(c) are hereby deleted from the Lease.

63. OPTION TO EXTEND: Provided that Lessee is not in default under any of the terms, covenants and conditions of the Lease, Lessor hereby grants to Lessee, subject to the conditions hereinafter set forth, one (1), five (5) year option to extend the term of this Lease. The option shall be on such terms and conditions as this Lease, except for Base Rent, which shall be adjusted as set forth below. This grant of an option shall be of no force and effect unless Lessee gives Lessor written notification of Lessee’s intent to exercise the option no later than July 1, 2014. The monthly base rent payable for said option period shall be as follows:

January 1, 2015 through April 30, 2015 – $36,000.00 per month;

May 1, 2015 through April 30, 2016 – $ 37,000.00 per month;

May 1, 2016 through April 30, 2017 – $ 38,000.00 per month;

May 1, 2017 through April 30, 2018 – $ 39,000.00 per month;

May 1, 2018 through April 30, 2019 – $ 40,500.00 per month;

May 1, 2019 through December 31, 2019 – $41,500.00 per month.

64. ALTERATIONS; FIXTURES: Notwithstanding any provision in the Lease to the contrary, including Section 1.2 (a) of the Lease, Lessee shall have the right to, at Lessee’s sole cost and expense (subject to the requirements of Sections 7.3 and 7.4 of the Lease applicable to Alterations), install and maintain (i) a “key card” security system in the Building for purposes of protecting the Premises against unauthorized access, and (ii) telephone, data and IT cabling in the Premises. Further notwithstanding any provision in the Lease to the contrary, all personal property, equipment, trade fixtures and furniture, including without limitation, fume hoods and generators, shall at all times remain the personal property of Tenant, and Tenant shall have the right to remove same at the expiration of the Lease, provided that Tenant repairs any damage caused by such removal at Tenant’s expense.

65. INSTALLATION OF STOP SIGNS: Lessor and Lessee shall cooperate in efforts to obtain approval from the City of Carlsbad (“City”) to install two (2) stop signs at the intersection of Rutherford Road and Aston Avenue (“Stop Signs”) in compliance with all applicable laws, rules and regulations. Within five (5) business days after Lessee provides Lessor with notice that it wishes to proceed, Lessor shall submit to the City a written application for approval to install the Stop Signs, and following the submission of such application, shall diligently pursue same to completion. All costs of installation and of City approval of the Stop Signs, including application fees, shall be paid by Lessee. Lessee shall reimburse Lessor for all out- of-pocket costs incurred by Lessor in connection with the Stop Signs promptly following Lessee’s receipt of an invoice therefor. The Stop Signs shall not be removed, nor shall Lessee have any obligation to cause the Stop Signs to be removed, at the expiration of the Term of the Lease, Lessor makes no

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representation or warranty regarding whether or not the City will approve and allow installation of the Stop Signs.

66. NON-DISTURBANCE: Lessee has reviewed and approved the Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) in the form attached hereto as Exhibit D. Lessee shall execute the SNDA simultaneously with the execution of this Lease. Immediately following receipt of the SNDA executed by Lessee, Lessor shall exercise commercially reasonable efforts to obtain and deliver to Lessee the SNDA executed by Lessor’s lender in a form reasonably similar to Exhibit D. If Lessor is unable to deliver the SNDA executed by Lessor’s lender in substantially the same form as the attached Exhibit D on or before forty five (45) days following Lessee’s delivery of the executed SNDA to Lessor, then Lessor, at Lessor’s sole discretion, shall take one of the following actions:

a) Payoff the outstanding balance of the loan secured by the deed of trust on the Premises on or before seventy five (75) days after Lessee delivers the executed SNDA to Lessor and provide evidence of such payoff and release of deed of trust to Lessee; or

b) Provide Lessee with an abatement of one (1) day of Base Rent for every 2 days following the forty five (45) day period after Lessee’s delivery of the fully executed SNDA to Lessor through the date that Lessor obtains the SNDA executed by Lender.

67. EXHIBITS: The following exhibits are attached hereto and made a part hereof:

Exhibit A – Building Site Plan;

Exhibit B – Landlord Waiver and Consent Form;

Exhibit C – Tenant Improvement Agreement; and

Exhibit D – Form of SNDA

68. ENTIRE AGREEMENT; COUNTERPARTS: There are no oral agreements between the parties hereto affecting this Addendum and the Lease (collectively herein, the “Lease”), and the Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Lessor to Lessee with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. This Addendum may be executed in counterparts, which, when taken together, shall constitute a single document.

IN WITNESS WHEREOF, Lessor and Lessee have entered into this Addendum as of the date first written above.

LESSOR:		LESSEE:
BLACKMORE RUTHERFORD INVESTMENT, A CALIFORNIA LIMITED PARTNERSHIP		GENOPTIX, INC., A DELAWARE CORPORATION
By:	/s/ Allen Joseph Blackmore	By:	/s/ Tina S. Nova
	Allen Joseph Blackmore, Trustee		Tina S. Nova, Ph.D.
	of the Blackmore Family Trust	Its:	President and CEO
	Restated 1995, General Partner		(title of officer)
Date:	1/5/10	Date:	1/4/10
		By:	/s/ Christian V. Kuhlen
			Christian V. Kuhlen, MD, Esq.
		Its:	VP, General Counsel
			(title of officer)
		Date:	1/4/10

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EXHIBIT B

LANDLORD’S WAIVER AND CONSENT

(OWNER)

THIS LANDLORD’S WAIVER AND CONSENT is made by Blackmore Rutherford Investment, a California Limited Partnership (“Owner”) whose address is P.O. Box 1810, Rancho Santa Fe, California 92067 in favor of                      (hereinafter referred to as “Lender”) with an address of                                  and affects the real property commonly known as 2105 Rutherford Road, Carlsbad, California 92008 (hereinafter referred to as the “Real Property” or the “Premises”) in connection with the Lender entering into the following agreements dated              and other agreements related thereto (hereinafter collectively referred to as the “Agreements”) with Genoptix, Inc., a Delaware Corporation (hereinafter jointly and severally referred to as “Borrower”), which Agreements, among other things were given by Borrower to Lender for the purpose of securing the repayment of all obligations and the performance of all duties now or hereafter owing by Borrower to Lender, of every kind and description (collectively the “Obligations”). Borrower is a tenant of Owner for the Premises pursuant to that certain lease agreement dated              (“Lease”). This Waiver does not amend any of the terms of the Agreements and reference is made to the Agreements for further information as to their terms.

Pursuant to the Agreements, Lender has loaned or may hereafter loan monies to Borrower secured by, among other collateral, Borrower’s now-owned and hereafter acquired goods, merchandise, inventory, equipment, furniture, furnishings, fixtures, trade fixtures, machinery and tools, together with all additions, substitutions, replacements, and improvements to the same (hereafter referred to as “Goods”), which Goods are or are to be located on and may be affixed to the Premises or improvements thereon.

Owner agrees as follows:

1. Goods Remain Personal Property The Goods shall at all times be and remain personal property, and the Goods shall not be deemed a fixture or part of the Real Property. Owner disclaims any interest in the Goods and will not assert any statutory or possessory lien against any of the Goods.

2. Notice of Default Owner will send to Lender by certified mail, at its address above, a copy of any written notice Owner sends to Borrower, at the same time as it sends such notice to Borrower, of a default by Borrower under the Lease, and allow Lender at Lender’s option, thirty (30) days from Lender’s receipt of such notice in which to cure or request Borrower to cure such default or to take possession of the Premises in accordance with Paragraph 3 below.

3. License to Lender Conditioned upon Lender’s performance of the items described in Paragraph 4, Owner grants Lender the option, as set forth below, to enter into possession of the Premises to do any or all of the following with respect to the Goods: inspect them, assemble them, have them appraised, display them, sever them, remove them, maintain them, prepare them for sale or lease, repair them, lease them, and transfer and/or sell them at one or more public auctions or private sales. Lender shall have the foregoing rights for a period of up to thirty (30) days (at Lender’s discretion and with Owner’s prior approval), following Lender obtaining possession of the Premises either by Borrower or Owner placing Lender in possession of the Premises or abandonment of the Premises by Borrower to Lender or otherwise, but in no event shall Lender be under any obligation to take possession of the Premises. Any extensions of the foregoing period shall be with the written consent of Owner. Lender shall repair prior to vacating the Premises, at its cost, any structural or cosmetic damage to the Premises caused by the removal of the Goods by Lender. In the event Lender does not remove said Goods from the Premises within the thirty (30) day period, or Lender fails to take possession of the Premises within ten (10) days after Owner’s notice of availability, Lender shall have no further right to said inventory and Owner will execute the right to distrain on the Goods as Owner deems necessary.

Landlord’s Waiver and Consent

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4. Rent Payable By Lender If the rent payable from the Borrower to the Owner has not been paid for a period during which Lender may take possession of the Premises pursuant to Paragraph 3 above, then Owner shall condition Lender’s right to take or keep possession of the Premises upon Lender agreeing (within ten (10) days of Landlord’s request), in writing, to pay in advance such rent which is payable to Owner (prorated on a daily basis) for the actual number of days Lender is in possession of the Premises, up to 60 days or such longer period as may be agreed to in writing between Owner and Lender. Lender shall have no obligation to remedy any defaults of Borrower or to pay any share of real property taxes or other taxes, insurance, maintenance costs, or other sums payable by Borrower (whether or not denominated as “rent” in the Lease) for any period prior to Lender taking possession. No agreement by Lender to pay such rent shall be binding on Lender unless set forth in a written agreement signed by Lender. Lender’s failure to agree to pay such rent within ten (10) days of Landlord’s request shall cause this waiver and consent to terminate immediately.

5. General This Waiver and Consent shall continue until the earlier of such time as all Obligations have been paid and performed in full and Lender’s failure to take possession of the Premises within ten (10) days after Owner notifying Lender that it may take possession of the Premises. This Waiver and Consent shall be governed and controlled by, and interpreted under, the laws of the State of California and shall inure to the benefit of, and be binding upon, the successors, heirs and assigns of Owner and Lender.

DATED: OWNER: BLACKMORE RUTHERFORD INVESTMENT, A CALIFORNIA LIMITED PARTNERSHIP

By:
	Allen Joseph Blackmore, Trustee of the Blackmore Family Trust, restated 1995, General Partner

EXHIBIT “C”

TENANT IMPROVEMENT AGREEMENT

This Tenant Improvement Agreement (“Agreement”) is entered into as of January 4, 2010, between Blackmore Rutherford Investment, a California limited partnership (“Lessor”), and Genoptix, Inc., a Delaware corporation (“Lessee”), in connection with the execution of the Standard Industrial/Commercial Single-Tenant Lease – Net between Lessor and Lessee executed simultaneously with this Agreement (“Lease”), who agree as follows:

1. General.

a. The purpose of this Agreement is to set forth how all the interior improvements in the Premises, including offices, employee services facilities, restroom facilities and warehouse areas and other alterations, additions and improvements to be described in the Plans approved by Lessor and Lessee in accordance with this Agreement (“Tenant Improvements”) are to be constructed, who will perform the construction of the Tenant Improvements, who will pay for the construction of the Tenant Improvements, and the time schedule for completion of the construction of the Tenant Improvements.

b. The Premises have existing tenant improvements (“Existing Improvements”) and Lessee has approved and accepted the Existing Improvements. Lessor shall have no further obligation to make any improvements to the Premises. However, pursuant to Section 52 of the Lease, Lessor shall reimburse Lessee for up to $7,500 for any items that do not comply with the warranties contained in Sections 2.2 and 2.3 of the Lease.

c. Except as defined in this Agreement to the contrary, all terms utilized in this Agreement shall have the same meanings as the defined terms in the Lease.

d. This Agreement is attached to and incorporated into the Lease. To the extent that there is an inconsistency between the terms of the Lease to which this Agreement is attached and this Agreement, the terms of this Agreement shall prevail.

2. Designer/Architect. The plans for the Tenant Improvements shall be prepared by Ferguson Pape Baldwin Architects or another design firm selected by Lessee (“Designer”) who is familiar with the design of the Building and with all applicable laws, statutes, codes, rules or regulations, together with such additional regulations and procedures promulgated by Lessor and delivered to Lessee within five (5) business days of the date of this Agreement, if any, (collectively, “Laws”), applicable to construction of the Tenant Improvements. Lessor hereby approves of Ferguson Pape Baldwin. Any other design firm selected by Lessee shall be subject to Lessor’s consent, which consent shall not be unreasonably withheld or conditioned, and which consent (or refusal to consent for reasonable reasons) shall be granted within three (3) business days after Lessee has submitted the name of the Designer to Lessor. This procedure shall be repeated until the Designer is finally approved by Lessor.

3. Preparation of Plans and Construction Schedule for Tenant Improvements. Within two (2) business days after the full execution of the Lease (or within two (2) business days following selection and approval (or deemed approval) of a Designer, if no Designer has been selected and approved as of execution), Lessor shall provide accurate as-built drawings of the Premises to the Designer to complete the plans and specifications, and Lessee shall arrange for the construction of the Tenant Improvements in accordance with the following procedure:

a. Lessee shall provide Designer with sufficient information to allow Designer to prepare a preliminary schematic layout of the facility. After Lessee has approved the preliminary schematic layout (the “Preliminary Layout”) in writing, the Preliminary Layout shall be presented to Lessor for approval (not to be

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unreasonably withheld or conditioned). Within three (3) business days of receipt, Lessor shall approve the Preliminary Layout, or designate by written notice to Lessee the specific changes required to be made to the Preliminary Layout, which Lessee shall direct Designer to accomplish. This procedure shall be repeated until the Designer is finally approved by Lessor. Following Lessor’s approval (or deemed approval) of the Preliminary Layout, Lessee shall direct Designer to prepare working drawings based on the Preliminary Layout (“Working Drawings”), which Working Drawings shall be delivered to Lessor and Lessee.

b. Lessor shall approve such Working Drawings within five (5) business days of receipt or designate by written notice to Lessee the specific changes required to be made to the Working Drawings, which Lessee shall direct Designer to accomplish. This procedure shall be repeated until Lessor finally approves the Working Drawings. Concurrently with Lessor’s approval of the Working Drawings, Lessor shall notify Lessee if Lessee will be required to remove the Tenant Improvements and restore the Premises to its existing condition at the expiration or earlier termination of the Lease. If Lessor fails to so notify Lessee within the five (5) business day period, then Lessee shall be required to remove the Tenant Improvements at the expiration or earlier termination of the Lease.

c. After Lessor has approved (or deemed to have approved) the Working Drawings. Lessee shall cause the Designer to submit to Lessor final Plans (“Plans”) which shall be defined as, and shall consist of, complete architectural plans (inclusive of Working Drawings) and specifications necessary to allow the Contractor to build the Tenant Improvements in accordance with the final Plans.

d. Lessor shall approve such Plans within five (5) business days of receipt or designate by notice to Lessee the specific changes required to be made to such Plans, which Lessee shall direct Designer to make. This procedure shall be repeated until Lessor finally approves the Plans.

e. Lessee shall be responsible for obtaining all governmental approvals of the Plans to the full extent necessary for the issuance of a building permit for the Tenant Improvements based upon such Plans. Thereafter, Lessee shall also cause to be obtained all other necessary approvals and permits from all governmental agencies having authority over the construction and installation of the Tenant Improvements in accordance with the approved Plans and shall undertake all steps necessary to insure that the construction of the Tenant Improvements is accomplished in compliance with all state or local laws, ordinances, rules and regulations applicable to such construction and the requirements and standards of any insurance underwriting board, inspection bureau or insurance carrier insuring the Premises pursuant to the Lease, provided that Lessor delivers a copy of such requirements and standards to Lessee. Lessee (or its Contractor) shall carry course of construction insurance in form and substance that is commercially reasonable, and Lessee shall provide Lessor with a copy of such policy prior to commencing the construction in the Premises.

4. Constitution of Tenant Improvements. Lessee shall make arrangements for Reno Contracting, Inc. (or such other reputable contractor with experience in San Diego County with similar projects selected by Lessee and reasonably approved by Lessor) (“Contractor”) to construct the Tenant Improvements as indicated on the Plans. Lessee shall also present the subcontractors for IIVAC, mechanical, plumbing and electrical for Lessors prior written approval. Lessor shall approve or reasonably disapprove of any such proposed Contractor or subcontractor within three (3) business days of Lessee’s submission. The construction of the Tenant Improvements shall be consistent with the quality and construction of the Building and industry custom and practice. Lessor or Lessor’s agents shall have the right (but not the obligation) to inspect the construction work to be conducted by Lessee during the progress thereof, it being the intent of the parties hereto that Lessor shall be reasonable in its inspection of the construction work conducted by Lessee and that Lessor shall recognize, to the extent commercially

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reasonable and practicable, the necessity of field changes based on field conditions. If Lessor shall give notice of faulty construction or any other deviation from the Plans, then Lessee shall cause Contractor to make corrections promptly. However, neither the privilege herein granted to Lessor to make such inspections, nor the making of such inspection by Lessor, shall operate as a waiver of any rights of Lessor to require good and workmanlike construction and improvements erected in accordance with the Plans.

5. Supervision of Tenant Improvements. Lessee shall supervise Designer and Contactor in the completion of the Tenant Improvements. Lessor or Lessor’s agent shall have the right, but not the obligation, to attend the weekly contractor meetings.

6. Cost of Tenant Improvements. The total cost of the Tenant Improvements (“Total Cost”) shall include all direct and indirect costs and expenses incurred relating to the Tenant Improvements as indicated by the Plans, as modified, including, without limitation, all direct and indirect costs related to the architectural, engineering and inspection fees, the costs of the Working Drawings and the Plans, payments made under all construction contracts, premiums for all bonds and insurance, all sales, use or similar taxes relating to the construction of the Tenant Improvements, permit fees and other governmental fees, blueprinting expenses and all other ordinary and reasonable expenses incurred applicable to the construction of the Tenant Improvements. Lessor shall not impose any charge for profit, overhead, supervision or general conditions payable to Lessor, its agents or its related entities in connection with the Tenant Improvements. Lessee shall have sole responsibility for the Total Cost. Lessee shall comply with the procedures described in Section 7.3(c) of the Lease with respect to the construction of the Tenant Improvements.

7. Substantially Complete. Lessee shall cause Contractor to use reasonable efforts to complete all of the Tenant Improvements as soon as reasonably possible, but the actual date of Substantial Completion shall impact neither the Commencement Date nor the rental abatement period as described in Section 49 of the Lease. The term “Substantially Complete” means that Lessee has completed the Tenant Improvements pursuant to this Agreement, and that this work shall be deemed complete, notwithstanding the fact that minor details of construction, mechanical adjustments or decoration which do not materially interfere with Lessee’s use of the Premises remain to be performed (items normally referred to as “Punchlist” items). The actual Date of Substantial Completion shall be that date when Lessee and the Contractor certify that Tenant Improvements are substantially complete. The Premises shall be deemed Substantially Complete even though certain portions of the Premises, which do not interfere with Lessee’s efficient conduct of its business in the Premises, have not been fully completed, and even though Lessee’s furniture, telephones, telexes, telecopiers, photocopy machines, computers and other office machines or equipment have not been installed, the purchase and installation of which shall be Lessee’s sole responsibility. Lessee shall cause the Punchlist items, if any, to be corrected as soon as reasonably possible and practical. Whenever possible and practical, Lessee will utilize, for the construction of the Tenant Improvements, the items and materials designated in the Plans. However, whenever Lessee determines in its reasonable judgment that it is not practical or efficient to use such materials, then Lessee shall have the right, upon receipt of Lessor’s consent, which consent shall not be unreasonably withheld, conditioned or delayed, to substitute comparable items and materials that are consistent with the materials originally included within the Plans and/or the materials used to construct the Building. Upon the completion of the Tenant Improvements, Lessee shall supply Lessor with both the original of the signed-off “yellow card” issued by the City of Carlsbad evidencing that the City has approved the completion of the Tenant Improvements and a set of “as-built” plans for the Premises.

8. Change Orders. If Lessee requests any changes to the Plans (“Change Order”), then Lessor shall not unreasonably withhold or condition its consent to any such Change Order, and Lessor shall grant its consent to such Change Order within three (3) business days following Lessor’s receipt of same, provided the Change Order does not materially adversely affect the Premises’ structure, systems, equipment or exterior appearance and does not result in the use of materials in the construction of the Tenant Improvements of a lesser quality than the materials currently in the Building. Lessee shall request Change

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Orders in writing consistent with the provisions of Section 3 of this Agreement. Lessor shall not be liable for any direct or indirect damages to Lessee as a result of delays in construction or delivery of the Premises to Lessee.

9. No Lessor Liability. Lessor shall not be liable for any loss, cost, damage, or expense incurred or claimed by Lessee or any other person or party on account of the construction or installation of the Tenant Improvements or any other improvements to the Premises made by Lessee, except to the extent caused by Lessor’s gross negligence, recklessness or intentional acts. Lessee agrees and understands that Lessor shall neither be the guarantor of, nor responsible for, the correctness or accuracy of any Plans, the compliance of such Plans with applicable laws or the operation of the Tenant Improvements in the Premises. Lessor assumes no liability or responsibility resulting from the failure of the Lessee to comply with applicable governmental laws, codes and regulations or for any defect in any of the Tenant Improvements or other alterations to the Premises made by Lessee.

10. Future Improvements by Lessee to the Premises. In the event that Lessee shall desire to perform additional improvements to the Premises during the term of the Lease or any extension thereof following the completion of the Tenant Improvements, Lessee shall construct such improvements in accordance with the terms and conditions of the Lease.

11. Default. Any default by Lessee or Lessor under the terms of this Agreement, subject to applicable notice and cure periods, shall constitute a default under the Lease and shall entitle the other to exercise all remedies set forth in the Lease. The defaulting party shall have all rights to remedy such default pursuant to the provisions of the Lease.

12. Reasonable Diligence. Both Lessor and Lessee agree to use reasonable diligence and cooperation in performing all of their respective obligations and duties under this Agreement and in proceeding with the construction and completion of all Tenant Improvements in the Premises.

13. Bonding. Notwithstanding anything to the contrary set forth in the Lease, Lessee shall not be required to obtain or provide any completion or performance bond in connection with the construction of the Tenant Improvements.

14. Unions. Lessee, in the exercise of its sole discretion, may utilize union or non-union contractors and/or subcontractors.

15. Consent. Wherever a party’s consent or approval is required under this Agreement, if such party fails to respond within the specified time period, consent shall be deemed to have been given.

LESSOR:
BLACKMORE RUTHERFORD INVESTMENT,
a California limited partnership
By:	/s/ Allen Joseph Blackmore
	Allen Joseph Blackmore, Trustee of the Blackmore Family Trust Restated 1995, General Partner

[signatures continue on next page]

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LESSEE:
GENOPTIX, INC. a Delaware corporation
By:	/s/ Tina S. Nova
	Tina S. Nova, Ph. D.
Its:	President and CEO
By:	/s/ Christian V. Kuhlen
	Christian V. Kuhlen, MD, Esq.
Its:	VP, General Counsel

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EXHIBIT D

SUBORDINATION, NON-DISTURBANCE AND

ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this “Agreement”), made and entered into as of this              day of         , 2010 by and between Great-West Life & Annuity Insurance Company, its successors and assigns, having offices at 8515 East Orchard Road – 3T2, Greenwood Village, Colorado 80111, Attention: Mortgage Investments (“Lender”), Blackmore Rutherford Investment, a California limited partnership, with offices at P. O. Box 1810, Rancho Santa Fe, CA 92067 (“Landlord”), and Genoptix, Inc., a Delaware corporation, with offices at 1811 Aston Avenue, Carlsbad, CA 92008 (“Tenant”).

W I T N E S S E T H

WHEREAS, pursuant to a certain AIR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease – Net dated as of January 4, 2010, and a certain Addendum to Standard Industrial/Commercial Single-Tenant Lease – Net dated as of January 4, 2010 (hereinafter referred to as the “Lease”), Landlord leased and rented to Tenant certain premises located at 2105 Rutherford Road, Carlsbad, CA (the “Property”), which Property is more particularly described in Exhibit A attached hereto and made a part hereof;

WHEREAS, the Property is encumbered by a Deed of Trust with Assignment of Rents and Fixture Filing (the “Mortgage”) in favor of Lender as recorded on April 15, 1997 as DOC# 1997-0172919 in the Official Records of the San Diego County Recorder’s Office;

WHEREAS, pursuant to and under the terms set forth in the Mortgage, Landlord has assigned to Lender all of its right, title and interest in the Lease and the rents payable thereunder as security for the performance of its obligations secured by the Mortgage;

WHEREAS, Tenant, Landlord, and Lender desire hereby to establish certain rights, safeguards, obligations and priorities with respect to their respective interests by means of this Subordination, Non-Disturbance and Attornment Agreement;

NOW THEREFORE, for and in consideration of the premises and the mutual covenants and promises herein contained, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, Tenant, Landlord, and Lender agree as follows:

1. The Lease and the rights of Tenant thereunder are and at all times hereafter shall be subject and subordinate to the lien of the Mortgage and to all of the terms, conditions and provisions thereof, to all advances made or to be made thereunder, to the full extent of the principal sum and interest thereon from time to time secured thereby, and to any renewal, substitution, extension, modification, consolidation, spreader or replacement thereof, including any increase in the indebtedness secured thereby or any supplements thereto, with the same force and effect as if the Mortgage had been executed, delivered and recorded prior to the execution and delivery of the Lease. In the event that Lender or any other person or entity that acquires title to the Property pursuant to the exercise of any remedy provided for in the Mortgage or by reason of the acceptance of a deed in lieu of foreclosure (Lender, and any other such person and their participants, successors and assigns being referred to herein as the “Purchaser”), Tenant covenants and agrees to attorn to and recognize and be bound to Purchaser as its new Landlord, and subject to the provision in Paragraph 2 of this Agreement, the Lease shall continue in full force and effect as a direct Lease between Tenant and Purchaser, except that, notwithstanding anything to the

contrary herein or in the Lease, the provisions of the Mortgage will govern with respect to the disposition of proceeds of insurance policies and condemnation awards.

2. So long as the Lease is in full force and effect, the term of the Lease has commenced, the Tenant is in possession of the premises demised under the Lease, and Tenant is not in default under any provision of the Lease or this Agreement beyond applicable notice and cure periods, and no event has occurred which has continued to exist for a period of time (after notice, if any, required by the Lease) as would entitle Landlord to terminate the Lease or would cause without further action by Landlord, the termination of the Lease or would entitle Landlord to dispossess the Tenant thereunder:

a. The right of possession of Tenant to the leased premises shall not be terminated or disturbed by any steps or proceedings taken by Lender in the exercise of any of its rights under the Mortgage;

b. The Lease shall not be terminated or affected by said exercise of any remedy provided for under the Mortgage, and Lender hereby covenants that any sale by it of the Property pursuant to the exercise of any rights and remedies under the Mortgage or otherwise, shall be made subject to the Lease and the rights of Tenant thereunder.

3. In no event shall Lender or any other Purchaser be:

a. liable for any accrued obligation of, or any act or omission of, the Landlord or any prior landlord (except to the extent that a default is continuing);

b. liable for the return of any security deposit which was delivered to Landlord, but which was not subsequently delivered to Lender or any other Purchaser;

c. subject to any offsets, defenses or counterclaims which the Tenant might have against Landlord or any prior landlord;

d. bound by any payment of rent or additional rent which Tenant might have paid to Landlord or any prior landlord for more than the current month; or

e. bound by any action listed in Paragraph 7(a) through (f) below made without Lender’s or such other Purchaser’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.

4. Neither Lender nor any Purchaser shall be obligated to undertake or complete any renovations, additions or capital improvements to the Property or the premises demised under the Lease, nor to pay or reimburse the cost of any construction or other special landlord work (either presently underway or hereafter to be undertaken, nor to make any repairs to the Property or to the premises demised under the Lease as a result of any fire or other casualty or by reason of condemnation unless the Lease requires the Landlord to do so and sufficient casualty insurance proceeds or condemnation awards have been received by the Lender or Purchaser, as the case may be, to pay for the completion of such repairs, and whether or not the same is set forth in the Lease or any other agreement), nor, so long as the Mortgage remains outstanding and unpaid, shall the proceeds of any insurance or condemnation awards be applied other than as provided for in the Mortgage.

5. Tenant agrees to give prompt written notice to Lender of any default by Landlord under the Lease which would entitle Tenant to cancel the Lease or abate the rent payable thereunder, and agrees that notwithstanding any provision of the Lease, no notice of cancellation thereof given on behalf of

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Tenant shall be effective unless Lender has received said notice and has failed within 60 days of the date of receipt thereof to cure Landlord’s default (which 60-day period shall run concurrently with any cure period afforded to Landlord under the Lease), or if the default cannot be cured within 60 days, has failed to commence and to diligently pursue the cure of Landlord’s default which gave rise to such right of cancellation or abatement. Tenant further agrees to give such notices to any successor of Lender, provided that such successor shall have given written notice to Tenant of its acquisition of Lender’s interest in the Mortgage and designated the address to which such notices are to be sent.

6. Tenant acknowledges that Landlord will execute and deliver to Lender an Assignment of Leases and Rents conveying the rentals under the Lease as additional security for the loan secured by the Mortgage, and Tenant hereby expressly consents to such Assignment.

7. Tenant agrees that it will not, without the prior written consent of Lender, which consent Lender shall not unreasonably withhold, delay or condition, do any of the following, and any such purported action without such consent shall be void as against Lender or any other Purchaser:

a. modify or amend or terminate the Lease, except as may be permitted or otherwise provided for pursuant to the provisions of the Lease;

b. or enter into any extensions or renewals thereof in such a way as to reduce the rent, accelerate rent payments, shorten the term of the Lease, or change any renewal option; or

c. prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due dates thereof; or

d. tender or accept a surrender of the Lease or make a prepayment in excess of one month of rent thereunder; or

e. assign the Lease or sublet the premises demised under the Lease or any part thereof except pursuant to the provisions of the Lease; or

f. subordinate or permit subordination of the Lease to any lien other than the Mortgage.

8. Landlord hereby irrevocably authorizes and directs Tenant to pay to Lender, or to such person or firm designated by Lender, all rent and other monies due and to become due to Landlord under the Lease after notice from Lender to Tenant that there has occurred and is continuing an Event of Default under the Mortgage. Such receipt of rent by Lender or any other party shall not relieve Landlord of its obligations under the Lease, and Tenant shall continue to look to Landlord only for performance thereof. Tenant’s payment of rent to Lender shall satisfy Tenant’s obligation to pay rental under the Lease, notwithstanding any dispute between Lender and Landlord, and Landlord hereby releases Tenant from all liability, excepting Tenant fraud, to Landlord in connection with Tenant’s compliance with Lender’s written instructions. Tenant shall not be liable to Lender for rent paid to Landlord prior to receipt of Lender’s notice of an Event of Default under the Mortgage. No person or entity who exercises a right, arising under the Mortgage or any assignment of the Lease, to receive the rents, additional rents or other sums payable by Tenant under the Lease shall thereby become obligated to Tenant for the performance of any of the terms, covenants, conditions and agreements of Landlord under the Lease.

9. Tenant agrees that if Lender acquires title to the Property as a result of foreclosure of the Mortgage, the acceptance of a deed in lieu of such foreclosure, or obtaining control of the Property pursuant to the remedies contained in the Mortgage, the laws of the State of California, Tenant shall have

Page 3

no recourse to any assets of Lender and Tenant’s sole remedy against Lender for any act or omission in contravention of any provision of the Lease shall be to terminate the Lease without recourse against Lender. Lender’s acquisition of title to or control of the Premises in the manner aforesaid or the performing of any of the obligations of Landlord pursuant to the Lease shall not be construed as an assumption of said Lease by Lender. Furthermore, upon such acquisition, the Lease shall be modified to include the provisions contained herein notwithstanding any other provisions of said Lease.

10. Tenant, in order to induce Lender to enter into this Agreement, hereby affirms that:

a. Lender has received a full, true and complete copy of the Lease;

b. The Lease is in full force and effect and has not been modified; amended or terminated;

c. The annual base rent payable under the Lease, and all additional rent obligations, are as set forth in the Lease and all rents, additional rents and other sums due and payable under the Lease have been paid in full and no rents, additional rents or other sums payable under the Lease have been paid more than one (1) month in advance of the due dates thereof;

d. The Tenant has unconditionally accepted and occupied the entire space demised under the Lease and has commenced payment of the full rent under the Lease;

e. The commencement date of the Lease is January 4, 2010, and the primary term of the Lease expires on December 31, 2014;

f. Neither the Landlord nor Tenant has commenced any action to terminate the Lease or given or received any notice of default in respect of the Lease;

g. To the best of Tenant’s knowledge and belief, Landlord is not in default under any of Landlord’s obligations under the Lease;

h. Tenant has no present right of offset or defense against any rents, additional rents or other sums due or to become due under the Lease;

i. The Lease and this Agreement was duly authorized and entered into and constitutes the valid and binding obligation of Tenant and is enforceable in accordance with its provisions;

j. Tenant will, after notice from Lender, pay to Lender, or to such person or firm designated by Lender, all rent and other monies due and to become due to Landlord under the Lease;

k. Tenant has not prepaid any sums payable by Tenant under the Lease, other than one month’s rent; and

11. Tenant agrees to certify in writing to Lender, upon request, whether or not any default on the part of Landlord exists under the Lease and the nature of any such default.

12. The foregoing provisions shall be self-operative and effective without the execution of any further instruments on the part of either party hereto. However, Tenant agrees to execute and deliver to Lender or to any person to whom Tenant herein agrees to attorn such other instruments as either shall

Page 4

request in order to evidence the full subordination of the Lease to the lien of the Mortgage and otherwise effectuate the provisions of this Agreement.

13. From and after payment in full of the loan secured by the Mortgage and the recordation of a release or satisfaction thereof, without the transfer of the Property to Lender as a Purchaser, this Agreement shall become void and of no further force or effect.

14. The term “Lender” as used herein shall include the successors and assigns of Lender and any person, party or entity which shall become the owner of the Property by reason of foreclosure of the Mortgage or the acceptance of a deed in lieu of a foreclosure of the Mortgage or otherwise. The term “Landlord” as used herein shall mean and include the present landlord under the Lease and such landlord’s predecessors and successors in interest under the Lease. The term “Property” as used herein shall mean the Property, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage.

15. The agreements herein contained shall be binding upon and shall inure to the benefit of the parties hereto, their respective participants, successors, and assigns, and, without limiting such, the agreements of Lender shall specifically be binding upon any Purchaser of the Property at foreclosure or at a sale under power.

16. This Agreement may not be modified other than by an agreement in writing signed by the parties hereto or their respective successors.

17. This Agreement may be signed in counterparts, all of which taken together shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart.

18. If any term or provision of this Agreement shall to any extent be held invalid or unenforceable, the remaining terms and provisions hereof shall not be affected thereby, but each term and provision hereof shall be valid and enforceable to the fullest extent permitted by law.

19. All notices, demands or requests, and responses thereto, required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given or served for all purposes when sent by certified or registered mail, postage prepaid, return receipt requested, or nationwide commercial courier service, and addressed to the party as provided below or at such other place as such party may from time to time designate in a notice to the other parties. Any notice shall be effective three (3) business days after the letter transmitting such notice is certified or registered and deposited in the United States Mail, or, if delivery is by nationwide commercial courier service, one (1) business day after the letter transmitting such notice is delivered to such commercial courier service. Rejection or other refusal to accept or inability to deliver because of changed address of which no notice has been given shall constitute receipt of the notice, demand or request sent. Any such notice if given to Lender shall be addressed as follows:

Great-West Life & Annuity Insurance Company

8515 East Orchard Road - 3T2

Greenwood Village, CO 80111

Attn: Mortgage Investments

Page 5

if given to Tenant shall be addressed as follows:

Genoptix, Inc.

1811 Aston Avenue

Carlsbad, CA 92008

if given to Landlord shall be addressed as follows:

Blackmore Rutherford Investment

P.O. Box 1810

Rancho Santa Fe, CA 92067

20. This Agreement shall be governed by, and construed in accordance with, the laws of California.

[Signature pages to follow.]

Page 6

IN WITNESS WHEREOF, Lender, Landlord, and Tenant have caused this instrument to be executed as of the day and year first above written.

TENANT:

GENOPTIX, INC.,

a Delaware corporation

By:

Name:

Title:

[Remainder of Page Intentionally Left Blank]

Page 7

LENDER:

Great-West Life & Annuity Insurance Company, its successors and assigns

By:

Name:

Title:

By:

Name:

Title:

[Remainder of Page Intentionally Left Blank]

Page 8

LANDLORD:

BLACKMORE RUTHERFORD INVESTMENT,

a California limited partnership

By:

Name:

Title:

[Remainder of Page Intentionally Left Blank]

Page 9

STATE OF COLORADO	)
	) ss:
COUNTY OF ARAPAHOE	)

Before me, a Notary Public in and for said County and State, personally appeared                          and                         , of The Canada Life Assurance Company, Canada Life Insurance Company of America, Canada Life Insurance Company of New York or Great-West Life & Annuity Insurance Company (“Lender”) a                          corporation, and acknowledged the execution of the foregoing instrument for and on behalf of said corporation.

Witness my hand and Notarial Seal this          day of                 , 2008.

Notary Public

My Commission Expires:                             

My address is: 8515 E. Orchard Road, Greenwood Village, CO 80111

STATE OF CALIFORNIA	)
	) SS
COUNTY OF	)

On                         , before me,                                              , Notary Public, personally appeared                                                   who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

Witness my hand and official seal.

	[Seal]
(Signature)

Page 10

STATE OF CALIFORNIA	)
	) SS
COUNTY OF	)

On                         , before me,                                 , Notary Public, personally appeared                                          who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

Witness my hand and official seal.

	[Seal]
(Signature)

[Insert Notary Acknowledgement for Tenant/applicable state]

Page 11

EXHIBIT “A”

(Legal Description)

ALL THAT CERTAIN REAL PROPERTY SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF SAN DIEGO, AND DESCRIBED AS FOLLOWS:

PARCEL A:

LOT 52 OF CARLSBAD TRACT NO. 85-24, UNIT NO. 4, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 11811, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, MAY 19, 1987.

PARCEL B:

A NON-EXCLUSIVE EASEMENT FOR PEDESTRIAN AND VEHICULAR ACCESS, INGRESS, EGRESS AND TRAVEL TO AND FROM RUTHERFORD ROAD LYING WITHIN THAT PORTION OF LOT 37 OF CARLSBAD TRACT NO. 81-10, UNIT NO. 2A, ACCORDING TO MAP NO. 11134, AS FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO ON JANUARY 31, 1985. SAID EASEMENT BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:

THE NORTHWESTERLY 15.00 FEET OF THE NORTHEASTERLY 50.00 FEET OF SAID LOT 37 OF MAP NO. 11134.

EX-10.36

Exhibit 10.36

PURCHASE AGREEMENT AND JOINT ESCROW INSTRUCTIONS

between

ROMAN B. CHAM,

Trustee of the Roman B. Cham, M.D. Profit Sharing Plan,

RONALD REYNOLDS AND JACQUELINE S. REYNOLDS,

Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001,

and

RM-USE, LLC,

a California limited liability company,

collectively, as Seller

and

GENOPTIX, INC.,

a Delaware corporation,

as Buyer

January 12, 2010

2131 Faraday Avenue

Carlsbad, California

TABLE OF CONTENTS

		Page
ARTICLE 1 Purchase and Sale		1
1.1	The Property	1
ARTICLE 2 Purchase Price		2
2.1	Amount and Payment	2
2.2	Deposit	2
2.3	Liquidated Damages	2
ARTICLE 3 Completion of Sale		3
3.1	Place and Date	3
ARTICLE 4 Title to the Property		3
4.1	Real Property	3
4.2	Personal Property	3
4.3	Permits	3
4.4	Intangible Property	3
ARTICLE 5 Review of the Property		4
5.1	Delivery of Documents	4
5.2	Access for Review	4
5.3	Property Approval Period	4
5.4	Survey	5
5.5	Environmental Definitions	5
5.6	Title	6
ARTICLE 6 Representations and Warranties		7
6.1	Seller	7
6.2	Buyer	9
6.3	Disclaimer of Warranties	9
6.4	Survival of Covenants, Representations and Warranties	11
ARTICLE 7 Covenants		12
7.1	Seller	12
7.2	Buyer	13
7.3	Casualty Damage	14
7.4	Eminent Domain	15
ARTICLE 8 Conditions Precedent		15
8.1	Seller	15
8.2	Buyer	16
ARTICLE 9 Closing		17

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9.1	Procedure	17
9.2	Possession	17
9.3	Closing Costs	18
9.4	Prorations	18
ARTICLE 10 General		19
10.1	Notices	19
10.2	Attorneys’ Fees	20
10.3	Governing Law	20
10.4	Construction	20
10.5	Terms Generally	20
10.6	Further Assurances	21
10.7	Partial Invalidity	21
10.8	Waivers	21
10.9	Natural Hazard Disclosure Statement	21
10.10	Joint and Several Liability	21
10.11	Miscellaneous	21

Exhibit A	Preliminary Report
Exhibit B	Grant Deed
Exhibit C	Bill of Sale
Exhibit D	Assignment of Permits
Exhibit E	Assignment of Intangible Property
Exhibit F	Certificate of Non-Foreign Status
Exhibit G	Lease Termination
Exhibit H	Reconfirmation of Representations

- ii -

PURCHASE AGREEMENT AND JOINT ESCROW INSTRUCTIONS

THIS PURCHASE AGREEMENT AND JOINT ESCROW INSTRUCTIONS (this “Agreement”), is made as of January 12, 2010, by and between ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, as to an undivided 15.49% interest (“Cham Profit Sharing Plan”), RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, as to an undivided 65.14% interest (the “Reynolds Trust”), and RM-USE, LLC, a California limited liability company, as to an undivided 19.37% interest (“RM-USE,” and collectively and individually with the Cham Profit Sharing Plan and the Reynolds Trust, “Seller”), and GENOPTIX, INC., a Delaware corporation (“Buyer”).

W I T N E S S E T H:

In consideration of the covenants in this Agreement, Seller and Buyer agree as follows:

ARTICLE 1

Purchase and Sale

1.1 The Property. Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller, in accordance with this Agreement, all of the following property (collectively, the “Property”):

(a) The real property in the City of Carlsbad, County of San Diego, State of California, commonly known as 2131 Faraday Avenue, described in that certain First Amended Preliminary Report dated as of December 10, 2009 (Order No. 930015830-U50) (the “Preliminary Report”), prepared by Chicago Title Company (the “Title Company”), attached hereto as Exhibit A, together with all buildings, structures, improvements, machinery, fixtures and equipment affixed or attached to such real property and all easements and rights appurtenant to such real property (all such real property, buildings, structures, improvements, machinery, fixtures, equipment, easements and rights are collectively the “Real Property”);

(b) All tangible personal property owned by Seller and used in the operation of the Real Property, if any (the “Personal Property”);

(c) Seller’s interest in all building permits, certificates of occupancy, and other certificates, permits, licenses and approvals pertaining to the Real Property (the “Permits”); and

(d) All intangible property, including development rights, property identification marks or rights, chooses in action and warranty or guaranty rights pertaining to the Real Property (the “Intangible Property”).

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ARTICLE 2

Purchase Price

2.1 Amount and Payment. The total purchase price for the Property shall be Seven Million Six Hundred Thousand and 00/100 Dollars ($7,600,000.00) (the “Purchase Price”). At the Closing (as defined below) on the Closing Date (as defined below), Buyer shall deposit into the Escrow (as defined below) the Purchase Price for the Property in cash in immediately available funds.

2.2 Deposit. Within two (2) business days after full execution of this Agreement, Buyer shall deposit the sum of Seventy-Five Thousand and 00/100 Dollars ($75,000.00) (the “Deposit”) in cash in immediately available funds into an escrow (the “Escrow”) to be opened with Chicago Title Company (the “Escrow Holder”). The Deposit shall be held by the Escrow Holder in an interest-bearing account designated by Buyer. If Seller and Buyer complete the purchase and sale of the Property, the Deposit and all interest thereon shall be applied to payment of the Purchase Price for the Property in accordance with Section 2.1 hereof. If the purchase and sale of the Property is not completed and this Agreement terminates for any reason other than a material default by Buyer under or a material breach by Buyer of this Agreement, then the Deposit and all interest thereon shall be returned to Buyer on demand upon such termination of this Agreement; provided, however, if this Agreement is terminated under Section 5.3, the sum of $500.00 (the “Due Diligence Option Consideration”) shall be paid to and retained by Seller in consideration of Seller’s agreement in Section 5.3 to allow Buyer to terminate this Agreement in Buyer’s discretion based upon Buyer’s feasibility review.

2.3 Liquidated Damages. SELLER AND BUYER AGREE THAT, IF THE PURCHASE AND SALE OF THE PROPERTY IS NOT COMPLETED AND THIS AGREEMENT TERMINATES BECAUSE BUYER MATERIALLY DEFAULTS UNDER OR MATERIALLY BREACHES THIS AGREEMENT, THE DEPOSIT AND ALL INTEREST THEREON SHALL BE PAID TO SELLER UPON TERMINATION OF THIS AGREEMENT AND RETAINED BY SELLER AS LIQUIDATED DAMAGES AND AS SELLER’S SOLE REMEDY AT LAW OR IN EQUITY. SELLER AND BUYER AGREE THAT, UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS AGREEMENT, ACTUAL DAMAGES MAY BE DIFFICULT TO ASCERTAIN AND THE DEPOSIT AND ALL INTEREST THEREON IS A REASONABLE ESTIMATE OF THE DAMAGES THAT WILL BE INCURRED BY SELLER IF BUYER MATERIALLY DEFAULTS UNDER OR MATERIALLY BREACHES THIS AGREEMENT AND FAILS TO PURCHASE THE PROPERTY. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS PARAGRAPH, IF BUYER BRINGS AN ACTION (“BUYER’S ACTION”) AGAINST SELLER FOR AN ALLEGED BREACH OR DEFAULT BY SELLER OF SELLER’S OBLIGATIONS UNDER THIS AGREEMENT, AND, IN CONNECTION WITH BUYER’S ACTION, BUYER RECORDS A LIS PENDENS, SELLER SHALL NOT BE RESTRICTED BY THE PROVISIONS OF THIS PARAGRAPH FROM SEEKING EXPUNGEMENT OR RELIEF FROM THAT LIS PENDENS AND IF SELLER IS THE PREVAILING PARTY, RECOVERING DAMAGES, COSTS, OR EXPENSES (INCLUDING ATTORNEY’S FEES) TO WHICH SELLER IS OTHERWISE ENTITLED UNDER APPLICABLE LAW

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(INCLUDING RECOVERY AGAINST ANY UNDERTAKING GIVEN BY BUYER PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 405.34).

SELLER’S INITIALS:   RLR     RLR     JR     RC      BUYER’S INITIALS:   TSN  

ARTICLE 3

Completion of Sale

3.1 Place and Date. The purchase and sale of the Property shall be completed in accordance with Article 9 hereof (the “Closing”). The Closing shall occur through the Escrow on January 22, 2010 (the “Closing Date”). Prior to the Closing Date, Seller and Buyer each shall give appropriate written escrow instructions, consistent with this Agreement, to the Escrow Holder for the Closing in accordance with this Agreement.

ARTICLE 4

Title to the Property

4.1 Real Property. Seller shall convey good and marketable fee simple absolute title to the Real Property to Buyer, by a duly executed and acknowledged Grant Deed (the “Grant Deed”) in the form of Exhibit B attached hereto, free and clear of all liens, encumbrances, leases, easements, restrictions, rights, covenants and conditions of any kind or nature whatsoever, except only the following (the “Permitted Exceptions”): (a) the matters shown as exceptions to title in the Preliminary Report and approved by Buyer, and (b) any matters shown on any Updated Survey (as defined below) obtained by Buyer in accordance with this Agreement. Without the requirement that Buyer give notice of any Title Objection (as defined below), Seller shall, at Seller’s sole cost and expense and prior to the Closing, (i) correct any vesting errors or issues identified in the Preliminary Report or by the Title Company (including the execution and recordation of any quitclaim deeds and corrective deeds), as required by the Title Company and Buyer in order to cause good and marketable title to the Property to be conveyed to Buyer at the Closing; (ii) remove any monetary liens or deeds of trust from title to the Property; and (iii) remove all leasehold interests shown as title exceptions in the Preliminary Report.

4.2 Personal Property. Seller shall transfer good title to the Personal Property to Buyer, by a duly executed Bill of Sale (the “Bill of Sale”) in the form of Exhibit C attached hereto, free and clear of all liens, encumbrances, security interests and adverse claims of any kind or nature whatsoever.

4.3 Permits. Seller shall assign good title to Seller’s interest in the Permits to Buyer, by a duly executed Assignment of Permits (the “Assignment of Permits”) in the form of Exhibit D attached hereto, free and clear of all liens, encumbrances, security interests and adverse claims of any kind or nature whatsoever.

4.4 Intangible Property. Seller shall assign good title to the Intangible Property to Buyer, by a duly executed Assignment of Intangible Property (the “Assignment of Intangible

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Property”) in the form of Exhibit E attached hereto, free and clear of all liens, encumbrances, security interests and adverse claims of any kind or nature whatsoever.

ARTICLE 5

Review of the Property

5.1 Delivery of Documents. On or before the date of this Agreement, Seller shall, at the expense of Seller, deliver to Buyer the following documents relating to the Property that have been prepared by, for or at the request of Seller or are in the possession of or reasonably available to Seller:

(a) Copies of all architectural, engineering and other drawings, plans and specifications for the buildings, structures, improvements, machinery, fixtures and equipment included in the Real Property (collectively, “the Plans”) to the extent in Seller’s possession. Buyer acknowledges that in connection with the execution of the Lease (defined below), Seller previously delivered to Buyer a copy of the Plans; and

(b) Copies of that certain Phase I Environmental Site Assessment, Facility Survey, Seismic and Structural Engineering Reviews dated April 27, 1998 prepared by Dames & Moore and that certain Phase I Environmental Site Assessment dated September 13, 2006 prepared by Bryant Geoenvironmental Inc.

5.2 Access for Review. From the date of this Agreement to the Closing Date, Seller shall provide Buyer and Buyer’s representatives with access to the Real Property, the Personal Property, all drawings, plans and specifications for the Real Property, all engineering and other reports and studies relating to the Real Property, all files and correspondence relating to the Real Property, and all financial and accounting books and records relating to the ownership, management, operation, maintenance or repair of the Real Property at all reasonable times to make such studies, inspections, tests (including subsurface tests, borings, samplings and measurements), copies and verifications as Buyer, in Buyer’s discretion, considers reasonably necessary or desirable in the circumstances. Buyer shall indemnify and defend Seller against and hold Seller harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including reasonable attorneys’ fees and disbursements, arising from any bodily injury, property damage or mechanics’ lien claim caused by Buyer in connection with entry on the Real Property by Buyer pursuant to this Section 5.2 other than arising from, or due to, pre-existing conditions on the Real Property, arising from the negligence or intentional acts of Seller, its agents, employees, tenants or occupants or arising from the discovery of information revealed by Buyer’s inspections of the Property.

5.3 Property Approval Period. During the period from the date of full execution of this Agreement to 5:00 p.m. Pacific time on January 11, 2010 (the “Property Approval Period”), Buyer shall have the right to review and investigate the physical and environmental condition of the Property, the income and expenses of the Property, the character, quality, value and general utility of the Property, the zoning, land use, environmental and building requirements and restrictions applicable to the Property, the state of title to the Real Property, and any other factors or matters relevant to Buyer’s decision to purchase the Property. Buyer may determine, in its

- 4 -

sole discretion, whether or not the Property is acceptable to Buyer within the Property Approval Period. If, during the Property Approval Period, Buyer determines that the Property is not acceptable for any reason whatsoever, Buyer shall have the right, by giving notice (“Disapproval Notice”) to Seller and the Escrow Holder on or before the last day of the Property Approval Period, to disapprove any matters relating to the Property. The Disapproval Notice shall identify and briefly describe the disapproved matters (“Disapproved Matters”). If Buyer does not give a Disapproval Notice within the Property Approval Period, Buyer shall be deemed to have approved the Property, this Agreement shall continue in full force and effect, and Buyer shall have no further right to terminate this Agreement pursuant to this Section 5.3. If Buyer delivers a Disapproval Notice within the Property Approval Period, Seller shall have a period of three (3) business days after Seller’s receipt of the Disapproval Notice (“Response Period”) (a) to elect to cure any Disapproved Matters by the Closing Date and to inform Buyer and the Escrow Holder of the same, in which case Seller shall be required to cure the Disapproved Matters prior to, and as a condition to, the Closing, or (b) to advise Buyer and the Escrow Holder, in writing, that Seller will not agree to cure the Disapproved Matters (the “Response Notice”). If Seller fails to deliver to Buyer and the Escrow Holder the Response Notice within the Response Period, Seller shall be deemed to have elected not to cure the Disapproved Matters. If Seller advises Buyer in its Response Notice that it will not cure the Disapproved Matters (or Seller is deemed to have elected not to cure the Disapproved Matters), then Buyer shall have three (3) business days following (i) receipt of the Response Notice, or (ii) expiration of the Response Period, if Seller is deemed to have elected not to cure the Disapproved Matters, to advise Seller and the Escrow Holder, in writing, whether Buyer elects to waive the Disapproved Matters and proceed with the acquisition of the Property or to terminate this Agreement. If Buyer fails to deliver a waiver of Disapproved Matters within the three (3)-business day period, Buyer shall be deemed to have elected to terminate this Agreement. In the event of Buyer’s election (or deemed election) to terminate this Agreement under this Section 5.3, the Escrow Holder shall return the Deposit to Buyer, less one-half ( ¹/2) of the Escrow termination fees and the Due Diligence Option Consideration, on the next business day.

5.4 Survey. Buyer shall have the right, at Buyer’s expense, to obtain a current survey (“Updated Survey”) of the Real Property prepared by a licensed land surveyor or a registered civil engineer selected by Buyer. The Updated Survey shall comply with the current minimum standard detail requirements for land title surveys established by the American Land Title Association and the American Congress on Surveying and Mapping, shall contain the legal description of the Real Property, shall include the surveyor’s or engineer’s certification (in form and substance satisfactory to Buyer) to Buyer and the Title Company and any lender designated by Buyer, signed by the surveyor or engineer, that the Updated Survey correctly shows the Real Property on the basis of a field survey and in accordance with the current minimum standard detail requirements for land title surveys established by the American Land Title Association and the American Congress on Surveying and Mapping, and shall otherwise be in form and substance satisfactory to Buyer.

5.5 Environmental Definitions. As used in this Agreement, the following definitions shall apply: “Environmental Laws” shall mean all federal, state and local laws, ordinances, rules and regulations now or hereafter in force, as amended from time to time, in any way relating to or regulating human health or safety, or industrial hygiene or environmental conditions, or protection of the environment, or pollution or contamination of the air, soil, surface water or

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groundwater, and includes the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 O.K. § 9601, et seq., the Resource Conservation and Recovery Act, 42 O.K. § 6901, et seq., the Clean Water Act, 33 O.K. § 1251, et seq., the Hazardous Substance Account Act, California Health and Safety Code § 25300, et seq., the Hazardous Waste Control Law, California Health and Safety Code § 25100, et seq., the Medical Waste Management Act, California Health and Safety Code § 25015, et seq., and the Porter-Cologne Water Quality Control Act, California Water Code § 13000, et seq. “Hazardous Substances” shall mean any substance or material that is described as a toxic or hazardous substance, waste or material or a pollutant or contaminant, or words of similar import, in any of the Environmental Laws, and includes asbestos, petroleum (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel, or any mixture thereof), petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which may cause cancer or reproductive toxicity. “Release” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment, including continuing migration, of Hazardous Substances into or through soil, surface water or groundwater.

5.6 Title. Notwithstanding Section 5.3 or any provision herein to the contrary, Buyer shall have until the later of (i) the expiration of the Property Approval Period, or (ii) five (5) business days following receipt of any update to the Preliminary Report or the Updated Survey (the “Title Approval Date”), to either approve the exceptions contained in the Preliminary Report or update thereto and any exceptions arising from the Updated Survey, or to notify Seller and the Escrow Holder in writing (the “Title Objection Notice”), specifying any exceptions and/or survey matters to which Buyer objects (the “Title Objections”). Seller shall have a period of three (3) business days after Seller’s receipt of the Title Objection Notice (“Title Response Period”) (a) to remove, or agree to remove prior to the Closing, some or all of the Title Objections and to inform Buyer and the Escrow Holder of the same, or to cause the Title Company to issue an endorsement acceptable to Buyer over, or bond over, such Title Objection, in which case Seller shall be required to perform same prior to, and as a condition to, the Closing, or (b) to advise Buyer and the Escrow Holder, in writing, that Seller will not agree to remove some or all of the Title Objections (the “Title Response Notice”). If Seller fails to deliver to Buyer and the Escrow Holder the Title Response Notice within the Title Response Period, Seller shall be deemed to have elected not to remove any of the Title Objections. If Seller advises Buyer in its Title Response Notice that it will not remove nor agree to remove some or all of the Title Objections (or Seller is deemed to have elected not to remove the Title Objections), then Buyer shall have three (3) business days following (x) receipt of the Title Response Notice, or (y) expiration of the Title Response Period, if Seller is deemed to have elected not to remove the Title Objections, to advise Seller and the Escrow Holder, in writing, whether Buyer elects to waive the Title Objections and proceed with the acquisition of the Property or to terminate this Agreement. If Buyer fails to deliver a waiver of Title Objections within the three (3)-business day period, Buyer shall be deemed to have elected to terminate this Agreement. In the event of Buyer’s election (or deemed election) to terminate this Agreement under this Section 5.6, the Escrow Holder shall return the Deposit to Buyer, less one-half ( ¹/2) of the Escrow termination fees and the Due Diligence Option Consideration, on the next business day.

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ARTICLE 6

Representations and Warranties

6.1 Seller. The representations and warranties of Seller in this Section 6.1 are a material inducement for Buyer to enter into this Agreement. Buyer would not purchase the Property from Seller without such representations and warranties of Seller. Such representations and warranties shall survive the Closing. To the extent that Seller is comprised of more than one individual or entity, the representations and warranties of Seller hereunder are made only as to such individual or entity. Seller represents and warrants to Buyer as of the date of this Agreement as follows:

(a) RM-USE is a limited liability company, duly incorporated and organized and validly existing and in good standing under the laws of the State of California. RM-USE is duly qualified to do business in the State of California. Seller has full power and authority to enter into this Agreement and to perform this Agreement. The execution, delivery and performance of this Agreement by Seller have been duly and validly authorized by all necessary action on the part of Seller and all required consents and approvals have been duly obtained. This Agreement is a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally.

(b) Except for the Lease, Seller is not a party to any leases, contracts or agreements that are binding on or pertain to the Property. Seller has good title to the Personal Property and the Permits, free and clear of all liens, encumbrances, security interests and adverse claims of any kind or nature whatsoever. All of the copies of the documents delivered to Buyer pursuant to Section 5.1 hereof are accurate and complete copies of all originals of the documents described in Section 5.1 hereof.

(c) Seller has received no notice of any kind from any insurance broker, agent or underwriter that any no insurable condition exists in, on or about the Real Property or any part thereof. Seller has received no notice, citation or other claim alleging any violation of any laws, statutes, rules, regulations, ordinances or covenants, conditions or restrictions applicable to the Real Property.

(d) To the best of Seller’s knowledge, without a duty of inquiry except with respect to the property manager for the Real Property, no Hazardous Substances are present in, on or under the Real Property or any nearby real property which could migrate to the Real Property, and there is no present Release or threatened Release of any Hazardous Substances in, on or under the Real Property. Seller has never used the Real Property or any part thereof, and has never permitted any person to use the Real Property or any part thereof, for the production, processing, manufacture, generation, treatment, handling, storage or disposal of Hazardous Substances. No underground storage tanks of any kind are located in the Real Property. To the best of Seller’s knowledge, the Real Property and every part thereof, and all operations and activities therein and thereon and the use and occupancy thereof, comply with all applicable Environmental Laws, and neither Seller nor any person using or occupying the Real Property or

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any part thereof is violating any Environmental Laws. Seller has all permits, licenses and approvals (which are included in the Permits) required by all applicable Environmental Laws for the use and occupancy of, and all operations and activities in, the Real Property, Seller is in full compliance with all such permits, licenses and approvals, and all such permits, licenses and approvals were duly issued and are in full force and effect. The Real Property has not been designated as “hazardous waste property” or “border zone property” pursuant to California Health and Safety Code § 25220 et seq., no proceedings for a determination as to whether the Real Property should be so designated are pending or threatened, and no portion of the Real Property is located within two thousand (2,000) feet of a significant disposal of “hazardous waste” within the meaning of California Health and Safety Code Section 25221, which could cause the Real Property to be classified as “border zone property.” No claim, demand, action or proceeding of any kind relating to any past or present Release or threatened Release of any Hazardous Substances in, on or under the Real Property or any past or present violation of any Environmental Laws at the Real Property has been made or commenced, or is pending, or to the best of Seller’s knowledge, is being threatened or contemplated by any person.

(e) There is no litigation, arbitration or other legal or administrative suit, action, proceeding or investigation of any kind pending or to the best of Seller’s knowledge, threatened or being contemplated against or involving Seller relating to the Real Property or any part thereof and there is no valid basis for any such litigation, arbitration or other legal or administrative suit, action, proceeding or investigation. There is no general plan, land use or zoning action or proceeding of any kind, or general or special assessment action or proceeding of any kind, or condemnation or eminent domain action or proceeding of any kind pending or to the best of Seller’s knowledge, without any duty of inquiry except with respect to the property manager for the Real Property, threatened or being contemplated with respect to the Real Property or any part thereof. There is no legal or administrative action or proceeding pending to contest or appeal the amount of real property taxes or assessments levied against the Real Property or any part thereof or the assessed value of the Real Property or any part thereof for real property tax purposes. No supplemental real property taxes have been or will be levied against or assessed with respect to the Real Property or any part thereof based on any change in ownership or new construction or other event or occurrence relating to the Real Property before the date of this Agreement, except any such supplemental real property taxes as have been paid in full and discharged.

(f) All water, sewer, gas, electric, steam, telephone and drainage facilities and all other utilities required by law or reasonably necessary or proper and usual for the full operation, use and occupancy of the Real Property are installed to the boundary lines of the Real Property, are connected with valid permits, and are adequate to service the Real Property and to allow full compliance with all applicable laws, and the cost of installation and connection of all such utilities to the Property has been fully paid.

(g) Seller is not a “foreign person” as defined in Section 1445 of the Internal Revenue Code of 1986, as amended, and the Income Tax Regulations thereunder.

(h) Seller is the sole owner of (and Buyer will acquire hereunder) the entire right, title and interest in and to the Property free from any possessory or other legal interest of any other person or party in and to the Property, except with respect to that certain AIR

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Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease – Net dated as of June 1, 2009 by and between the Reynolds Family Trust, as “Lessor,” and Buyer, as “Lessee,” that certain Addendum dated as of June 1, 2009, and that certain Option(s) to Extend Standard Lease Addendum dated as of June 1, 2009, and that certain Third Addendum to Lease dated as of June 1, 2009 (collectively, the “Lease”).

(i) Seller has not dealt with any investment adviser, real estate broker or finder, or incurred any liability for any commission or fee to any investment adviser, real estate broker or finder, in connection with the sale of the Property to Buyer or this Agreement. Ronald Reynolds is a California licensed real estate agent.

6.2 Buyer. The representations and warranties of Buyer in this Section 6.2 are a material inducement for Seller to enter into this Agreement. Seller would not sell the Property to Buyer without such representations and warranties of Buyer. Such representations and warranties shall survive the Closing. Buyer represents and warrants to Seller as of the date of this Agreement as follows:

(a) Buyer is a corporation duly incorporated and organized and validly existing and in good standing under the laws of the State of Delaware. Buyer is duly qualified to do business and is in good standing in the State of California. Buyer has full corporate power and authority to enter into this Agreement and to perform this Agreement. The execution, delivery and performance of this Agreement by Buyer have been duly and validly authorized by all necessary action on the part of Buyer and all required consents and approvals have been duly obtained, subject to the authorization and approval described in Section 8.2(a) hereof. This Agreement is a legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally.

(b) Buyer has not dealt with any investment adviser, real estate broker or finder that is entitled to a commission or fee, or incurred any liability for any commission or fee to any investment adviser, real estate broker or finder, in connection with the sale of the Property to Buyer or this Agreement.

6.3 Disclaimer of Warranties. Except as provided in Section 6.1 above, Buyer acknowledges and agrees that Seller has not made, does not make, and specifically negates and disclaims any representations, warranties, promises, covenants, agreements or guaranties of any kind or character whatsoever, whether express or implied, oral or written, past, present, or future, of, as to, concerning, or with respect to the Property, including, without limitation, (1) the value of the Property, (2) the income to be derived from the Property, (3) the suitability of the Property for any activities or uses that Buyer may conduct thereon, including the possibilities for future development or use of the Property, (4) the habitability, merchantability, marketability, profitability or fitness for a particular purpose of the Property, (5) the manner, quality, state of repair or lack of repair of the Property, (6) the nature, quality or condition of the Property, including, without limitation, the water, soil and geology, (7) the compliance of or by the Property or its operation with any laws, rules, ordinances or regulations of any applicable governmental authority or body, including the Americans with Disabilities Act, (8) the manner

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or quality of the construction or materials, if any, incorporated into the Property, (9) compliance with any environmental protection, pollution or land use laws, rules, regulations, orders or requirements, including, but not limited to, Environmental Laws, (10) the presence or absence of Hazardous Materials at, on, under or adjacent to the Property, (11) the content, completeness or accuracy of the Due Diligence Documents or the Title Report, (12) the conformity of the improvements to any plans or specifications for the Property, including any plans and specifications that may have been or may be provided to Buyer, (13) the conformity of the Property to past, current or future applicable zoning or building requirements, (14) deficiency of any under-shoring, (15) deficiency of any drainage, (16) the fact that all or a portion of the Property may be located on or near an earthquake fault line, or (17) the existence of vested land use, zoning or building entitlements affecting the Property. Buyer further acknowledges and agrees that, having been given the opportunity to inspect the Property and review information and documents affecting the Property, except as provided in Section 6.1, Buyer is relying solely on its own investigation of the Property and review of such information and documents in determining whether or not to purchase the Property and not on any information provided or to be provided by Seller. Buyer further acknowledges and agrees that any information made available to Buyer or provided or to be provided by or on behalf of Seller with respect to the Property was obtained from a variety of sources and that Seller has not made any independent investigation or verification of such information and, except as provided in Section 6.1, makes no representations as to the accuracy or completeness of such information. Effective as of the Closing, Buyer agrees to fully and irrevocably release Seller from any and all claims that Buyer may now have or hereafter acquire against Seller for any cost, loss, liability, damages, expense, demand, action or cause of action arising from such information or documents, except to the extent of Seller’s representations and warranties pursuant to Section 6.1. Except as provided in Section 6.1, Seller is not liable or bound in any manner by any oral or written statements, representations, or information pertaining to the Property or to the operation thereof furnished by any real estate broker, agent, employee, servant or other person. Buyer further acknowledges and agrees that to the maximum extent permitted by law, the sale of the Property, as provided for herein, is made on an as-is condition and basis with all faults and that Seller has no obligation to make repairs, replacements or improvements except as may otherwise be expressly stated herein. Effective as of the Closing, Buyer and anyone claiming by, through, or under Buyer, hereby fully and irrevocably release Seller, Seller’s agents, employees, and affiliates, and their respective employees, agents, representatives, successors and assigns, from any and all claims that Buyer may now have or hereafter acquire for any action, cause of action, cost, damage, demand, expense (including, without limitation, attorney’s fees and expenses), fine, judgment, liability, lien, loss, or penalty, whether foreseen or unforeseen, direct or indirect, arising from or related to the condition of the Property, including, without limitation, the presence of Hazardous Substances (collectively, “Released Claims”); however, the Released Claims do not include any of Seller’s obligations or representations expressly stated in this Agreement or Seller’s fraud or misrepresentation. Buyer further acknowledges and agrees that this release shall be given full force and effect according to each of its express terms and provisions, including, but not limited to, those relating to unknown and suspected claims, damages, and causes of action. This waiver shall be deemed given at the Closing. Buyer hereby acknowledges that Buyer has read and is familiar with the provisions of California Civil Code section 1542 (“Section 1542”), which is set forth below:

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A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

By initialing below, effective as of the Closing, Buyer hereby waives the provisions of Section 1542 solely in connection with the matters that are the subject of the foregoing waivers and releases:

TSN      Buyer’s Initials

6.4 Survival of Covenants, Representations and Warranties. Subject to the limitation below, all of the covenants, representations and warranties of Seller set forth in Section 6.1 shall survive the Closing and the delivery of the Deed. In the event that after the date of this Agreement and prior to the Closing (1) Buyer discovers any material misrepresentation of Seller or any material breach of Seller’s representations or warranties hereunder (excluding any misrepresentation amounting to fraud) or (2) a change in circumstances occurs that causes one or more of Seller’s representations above to be materially untrue, then, for a period of 10 days following the discovery, Buyer shall have the right, as Buyer’s sole remedy, to terminate this Agreement, and, if Buyer elects to terminate this Agreement, the following shall apply:

(i) Buyer shall be entitled to a return of the Deposit and any interest thereon.

(ii) All title and escrow charges shall be paid by Seller.

(iii) If Buyer elects to terminate based upon clause (1) above (i.e., a material misrepresentation or material breach of Seller’s representations or warranties), then Buyer may recover from Seller all reasonable costs incurred by Buyer during the course of Buyer’s review and investigation of the Property, provided that Seller’s liability for such costs shall not exceed $50,000.00.

If, notwithstanding Buyer’s discovery of a misrepresentation of Seller or a change of circumstances, Buyer elects to affirm this Agreement and proceed with the Closing, such election shall, upon the Closing, constitute a waiver by Buyer of any and all claims relating to such misrepresentation of Seller or change of circumstances. If, after the Closing, Buyer discovers a breach of any representation or warranty in Section 6.1, then any action by Buyer for breach of such representation or warranty under Section 6.1 must be commenced within one year after the Closing.

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ARTICLE 7

Covenants

7.1 Seller. Seller covenants and agrees with Buyer as follows:

(a) Between the date of this Agreement and the Closing Date, Seller shall not execute any agreement affecting the Real Property or amend, modify, renew, extend or terminate any of the Permits in any respect without the prior approval of Buyer, which approval may not be unreasonably withheld, conditioned or delayed; provided, however, from and after the expiration of the Property Approval Period in the event that Buyer elects to proceed with the purchase of the Property, such approval shall be in the sole and absolute discretion of Buyer. Between the date of this Agreement and the Closing Date, Seller shall manage, operate, maintain and repair the Real Property and the Personal Property in the ordinary course of business in accordance with sound property management practice to the extent required under the Lease, perform Seller’s obligations under the Lease, comply with the Permits and all covenants, conditions, restrictions, laws, statutes, rules, regulations and ordinances applicable to the Real Property or the Personal Property, keep the Permits in force, immediately give Buyer copies of all notices received by Seller asserting any violation of the Permits or any covenants, conditions, restrictions, laws, statutes, rules, regulations or ordinances applicable to the Real Property or the Personal Property, and perform when due all of Seller’s obligations under the Permits and all applicable laws. Between the date of this Agreement and the Closing Date, Seller shall keep in force property insurance covering all buildings, structures, improvements, machinery, fixtures and equipment included in the Real Property insuring against all risks of physical loss or damage, subject to standard exclusions, in an amount equal to the actual replacement cost (without deduction for depreciation) of such buildings, structures, improvements, machinery, fixtures and equipment.

(b) Between the date of this Agreement and the Closing Date, Seller shall not use, produce, process, manufacture, generate, treat, handle, store or dispose of any Hazardous Substances in, on or under the Real Property, or use the Real Property for any such purposes, or Release any Hazardous Substances into any air, soil, surface water or groundwater comprising the Real Property, or permit any person using or occupying the Real Property or any part thereof to do any of the foregoing. Between the date of this Agreement and the Closing Date, Seller shall comply with, and shall cause all persons using or occupying the Real Property or any part thereof to comply with, all Environmental Laws applicable to the Real Property, or the use or occupancy thereof, or any operations or activities therein or thereon. Immediately after Seller obtains any information indicating that any Hazardous Substances may be present or any Release or threatened Release of Hazardous Substances may have occurred in, on or under the Real Property (or any nearby real property which could migrate to the Real Property) or that any violation of any Environmental Laws may have occurred at the Real Property, Seller shall give written notice thereof to Buyer with a reasonably detailed description of the event, occurrence or condition in question. Seller shall immediately furnish to Buyer copies of all written communications received by Seller from any person (including notices, complaints, claims or citations that any Release or threatened Release of any Hazardous Substances or any violation of any Environmental Laws has actually or allegedly occurred) or given by Seller to any person concerning any past or present Release or threatened Release of any Hazardous Substances in, on

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or under the Real Property (or any nearby real property which could migrate to the Real Property) or any past or present violation of any Environmental Laws at the Real Property.

(c) Subject to the limitation in Section 6.4, all representations and warranties made by Seller in Section 6.1 hereof shall survive the Closing. All of the representations and warranties made by Seller in Section 6.1 hereof shall be true and correct on and as of the Closing Date.

(d) Subject to the limitation in Section 6.4, Seller shall indemnify and defend Buyer against and hold Buyer harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including reasonable attorneys’ fees and disbursements, that may be suffered or incurred by Buyer if any representation or warranty made by Seller in Section 6.1 hereof was untrue or incorrect in any respect when made or that may be caused by any breach by Seller of any such representation or warranty.

(e) Seller shall indemnify and defend Buyer against and hold Buyer harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including reasonable attorneys’ fees and disbursements, arising from or based on any failure by Seller to perform all obligations of Seller in accordance with the Permits before the Closing Date, or any breach, default or violation by Seller (or any event by Seller or condition which, after notice or the passage of time, or both, would constitute a breach, default or violation by Seller) under the Permits that occurs before the Closing Date, or any condition, event or circumstance relating to the Real Property that existed or occurred before the Closing Date, or any personal injury or property damage occurring in, on or about the Real Property before the Closing Date.

(f) Seller shall indemnify and defend Buyer against and hold Buyer harmless from all claims, demands, liabilities, losses, damages, costs and expenses in any way arising from, relating to or connected with any past or present Release or threatened Release of any Hazardous Substances in, on or under the Real Property or any past or present violation of any Environmental Laws at the Real Property that exists or occurs, or the onset of which exists or occurs, before the Closing Date. The foregoing indemnification shall include all expenses of investigation and monitoring, costs of containment, abatement, removal, repair, cleanup, restoration and remedial work, penalties and fines, attorneys’ fees and disbursements, and other response costs. Notwithstanding the foregoing or any provision in this Agreement to the contrary, Seller’s obligation under this Section 7.1(f) shall expire on, and no claim for indemnification under this Section 7.1(f) may be made on or after, the first (1^st) anniversary of the Closing.

(g) Between the date of this Agreement and the Closing Date, Seller shall not in any manner sell, convey, assign, transfer, encumber or otherwise dispose of the Real Property, the Personal Property, the Permits, or any part thereof or interest therein.

7.2 Buyer. Buyer covenants and agrees with Seller as follows:

(a) All representations and warranties made by Buyer in Section 6.2 shall survive the Closing. All of the representations and warranties made by Buyer in Section 6.2 hereof shall be true and correct on and as of the Closing Date.

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(b) Buyer shall indemnify and defend Seller against and hold Seller harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including reasonable attorneys’ fees and disbursements, that may be suffered or incurred by Seller if any representation or warranty made by Buyer in Section 6.2 hereof was untrue or incorrect in any respect when made or that may be caused by any breach by Buyer of any such representation or warranty.

(c) Buyer shall indemnify and defend Seller against and hold Seller harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including reasonable attorneys’ fees and disbursements, arising from or based on any failure by Buyer to perform all obligations of Buyer under the Permits arising or accruing on or after the Closing Date and during Buyer’s ownership of the Property or any breach, default or violation by Buyer (or any event by Buyer or condition which, after notice or the passage of time, or both, would constitute a breach, default or violation by Buyer) under the Permits that occurs on or after the Closing Date and during Buyer’s ownership of the Property.

7.3 Casualty Damage.

(a) If the Property suffers a casualty (“Casualty”) and the reasonably estimated cost of repairing damage caused by the Casualty shall equal or exceed $100,000.00 (the “Upset Loss Amount”), Buyer may terminate this Agreement by delivery of written notice to Seller within 21 days following written notification to Buyer of the Casualty and Buyer shall be entitled to a return of the Deposit as provided in Section 2.2 above. If the Property shall suffer a Casualty, but only to such an extent that the reasonably estimated cost of repairing such damage shall be less than the Upset Loss Amount, then (1) Seller shall, at its sole expense, promptly proceed to repair the Property to substantially the same condition that existed prior to the Casualty, (2) neither Seller nor Buyer shall be entitled to terminate this Agreement by reason of such Casualty, and (3) at Buyer’s option, either (i) the Closing Date shall be extended for a period equal to the lesser of (a) 30 days, or (b) the time reasonably required to effect such repairs or (ii) the Closing shall occur without delay and Seller shall complete the repairs following the Closing.

(b) If a Casualty occurs resulting in reasonable repair costs exceeding the Upset Loss Amount and this Agreement is not so terminated by Buyer as provided in the preceding paragraph, then Seller shall either:

(i) By written notice to Buyer within 10 days following the last date on which Buyer could have so terminated this Agreement, elect not to restore the Property. If Seller elects not to restore the Property, then Buyer shall have the right either to (1) terminate this Agreement by written notice to Seller within 10 days following Buyer’s receipt of such notice from Seller, as provided for above, whereupon Buyer shall be entitled to a return of the Deposit as provided in Section 2.2 above, or (2) consummate the acquisition of the Property in accordance with this Agreement and (i) all rights to insurance proceeds otherwise payable to Seller on account of such Casualty shall be assigned to Buyer at Closing, (ii) Seller shall pay a portion of the cost to repair the damage caused by the casualty equal to the lesser of the Upset Loss Amount or the uninsured portion of the cost of repair (including any deductible amount required to be

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paid under any applicable casualty insurance policy), and (iii) pending Closing, Seller shall not adjust or settle such matters with the insurance carriers without the consent of Buyer; or

(ii) Promptly proceed to repair the Property to substantially the same condition that existed prior to the Casualty, at Seller’s sole expense. If Seller elects to restore the Property, then Buyer shall have either of the following options: (1) the Closing Date shall be extended for a period equal to the lesser of (i) 30 days or (ii) the time reasonably required to effect such repairs or (2) the Closing shall occur without delay, and Seller shall complete the repairs following the Closing.

7.4 Eminent Domain. If, before the Closing Date, proceedings are commenced for the taking by exercise of the power of eminent domain of all or a material part of the Property which, as reasonably determined by Buyer, would render the Property unacceptable to Buyer or unsuitable for Buyer’s intended use, Buyer shall have the right, by giving notice to Seller within thirty (30) days after Seller gives notice of the commencement of such proceedings to Buyer, to terminate this Agreement, in which event this Agreement shall terminate. If, before the Closing Date, proceedings are commenced for the taking by exercise of the power of eminent domain of less than such a material part of the Property, or if Buyer has the right to terminate this Agreement pursuant to the preceding sentence but Buyer does not exercise such right, then this Agreement shall remain in full force and effect and, on the Closing Date, the condemnation award (or, if not theretofore received, the right to receive such award) payable on account of the taking shall be transferred to Buyer. Seller shall give notice to Buyer immediately after Seller’s receiving notice of the commencement of any proceedings for the taking by exercise of the power of eminent domain of all or any part of the Property. Buyer shall have a period of thirty (30) days (or such shorter period as Buyer may elect by giving notice to Seller) after Seller has given the notice to Buyer required by this Section 7.4 to evaluate the extent of the taking and make the determination as to whether to terminate this Agreement. If necessary, the Closing Date shall be postponed until Seller has given the notice to Buyer required by this Section 7.4 and the period of thirty (30) days described in this Section 7.4 has expired.

ARTICLE 8

Conditions Precedent

8.1 Seller. The obligations of Seller under this Agreement are subject to satisfaction of all of the conditions set forth in this Section 8.1. Seller may waive any or all of such conditions in whole or in part but any such waiver shall be effective only if made in writing. After the Closing, any such condition that has not been satisfied shall be treated as having been waived in writing. No such waiver shall constitute a waiver by Seller of any of its rights or remedies if Buyer defaults in the performance of any covenant or agreement to be performed by Buyer under this Agreement or if Buyer breaches any representation or warranty made by Buyer in Section 6.2 hereof. If any condition set forth in this Section 8.1 is not fully satisfied or waived in writing by Seller, this Agreement shall terminate, but without releasing Buyer from liability if Buyer defaults in the performance of any such covenant or agreement to be performed by Buyer or if Buyer breaches any such representation or warranty made by Buyer before such termination.

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(a) On the Closing Date, Buyer shall not be in default in the performance of any covenant or agreement to be performed by Buyer under this Agreement.

(b) On the Closing Date, all representations and warranties made by Buyer in Section 6.2 hereof shall be true and correct as if made on and as of the Closing Date.

(c) On the Closing Date, no judicial or administrative suit, action, investigation, inquiry or other proceeding by any person shall have been instituted against Seller which challenges the validity or legality of any of the transactions contemplated by this Agreement.

8.2 Buyer. The obligations of Buyer under this Agreement are subject to satisfaction of all of the conditions set forth in this Section 8.2. Buyer may waive any or all of such conditions in whole or in part but any such waiver shall be effective only if made in writing. After the Closing, any such condition that has not been satisfied shall be treated as having been waived in writing. No such waiver shall constitute a waiver by Buyer of any of its rights or remedies if Seller defaults in the performance of any covenant or agreement to be performed by Seller or if Seller breaches any representation or warranty made by Seller in Section 6.1 hereof. If any condition set forth in this Section 8.2 is not fully satisfied or waived in writing by Buyer, this Agreement shall terminate, but without releasing Seller from liability if Seller defaults in the performance of any such covenant or agreement to be performed by Seller or if Seller breaches any such representation or warranty made by Seller before such termination.

(a) On or before the Closing Date, (i) the Board of Directors of Buyer shall have authorized and approved, in the sole and absolute discretion of such Board of Directors, the transactions contemplated by this Agreement, and the negotiation, execution, delivery and performance of this Agreement by Buyer, and (ii) Buyer shall have given notice of such authorization and approval to Seller.

(b) On the Closing Date, Seller shall not be in default in the performance of any covenant or agreement to be performed by Seller under this Agreement.

(c) On the Closing Date, no judicial or administrative suit, action, investigation, inquiry or other proceeding by any person shall have been instituted against Buyer which challenges the validity or legality of any of the transactions contemplated by this Agreement.

(d) On or before the Closing Date, the Title Company shall be unconditionally and irrevocably committed to issue to Buyer an American Land Title Association Owner’s Policy of title insurance, with liability in the amount of the Purchase Price, insuring Buyer that fee simple absolute title to the Real Property is vested in Buyer subject only to the Permitted Exceptions, together with such endorsements as requested by Buyer (the “Title Policy”).

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ARTICLE 9

Closing

9.1 Procedure. Seller and Buyer shall cause the following to occur at the Closing on the Closing Date (except as otherwise provided below):

(a) One (1) original of the Grant Deed, duly executed and acknowledged by Seller and delivered into the Escrow no later than one (1) business day prior to the Closing Date, shall be recorded by the Escrow Holder in the Official Records of the County of San Diego, State of California.

(b) Seller shall date as of the Closing Date, execute and deliver into the Escrow no later than one (1) business day prior to the Closing Date, (i) one (1) original of the Bill of Sale, (ii) two (2) originals of the Assignment of Permits, (iii) one (1) original Certificate of Non-Foreign Status in accordance with Section 1445 of the Internal Revenue Code of 1986, as amended, and the Income Tax Regulations thereunder in the form of Exhibit F attached hereto, (iv) two (2) originals of an agreement between Seller and Buyer terminating the Lease effective as of the Closing in the form attached hereto as Exhibit G (the “Lease Termination”), and (v) a written statement signed by Seller that confirms that during the period from the date of this Agreement to the Closing Date, nothing has occurred (and Seller has not become aware of any facts) that, to Seller’s actual knowledge, causes any of the Seller’s representations and warranties contained in this Agreement to be materially untrue and that, to Seller’s actual knowledge, all of the representations and warranties contained in this Agreement remain true and are reconfirmed as of the Closing; however, Seller’s written statement may except any occurrences or facts as to which Seller has, prior to the Closing, delivered to Buyer written notice and, as provided pursuant to Section 6.4 above, Buyer has, nevertheless, elected to proceed with the Closing. The written statement shall be substantially in form and content as Exhibit H attached hereto.

(c) Buyer shall date as of the Closing Date, execute and deliver into the Escrow no later than one (1) business day prior to the Closing Date, (i) two (2) originals of the Assignment of Permits, and (ii) two (2) originals of the Lease Termination.

(d) Buyer shall deposit into the Escrow the balance of the Purchase Price for the Property in accordance with Section 2.1 hereof, plus any additional amounts required pursuant to a Closing Statement (as defined below) approved by Buyer.

(e) The Title Company shall issue to Buyer the Title Policy.

(f) The Escrow Holder shall file the information return for the sale of the Property required by Section 6045 of the Internal Revenue Code of 1986, as amended, and the Income Tax Regulations thereunder.

9.2 Possession. Seller and Buyer acknowledge and agree that Buyer is currently in possession of the Real Property under the Lease, and Buyer shall continue to remain in possession of the Real Property effective as of the Closing. If not previously delivered to Buyer, Seller shall deliver originals of the documents described in Section 5.1 hereof, all files, correspondence, maintenance records and operating manuals relating to the Real Property, and

- 17 -

all keys (properly tagged or identified) to the Real Property to Buyer on the Closing Date. The originals of such documents and such keys shall become the property of Buyer on the Closing Date.

9.3 Closing Costs. Seller shall pay the County documentary transfer tax in respect of the Grant Deed, the City conveyance tax in respect of the Grant Deed, the premium for the CLTA standard coverage provided by the Title Policy, the cost of any endorsements to the Title Policy providing for the removal of any disapproved title exceptions that Seller has agreed to provide, one-half (1/2) of the escrow fee charged by the Escrow Holder, and the recording fee for the Grant Deed. Buyer shall pay the premium for the ALTA extended coverage of the Title Policy, the cost of any endorsements to the Title Policy requested by Buyer (other than endorsements providing for the removal of any disapproved title exceptions that Seller has agreed to provide), and one-half (1/2) of the escrow fee charged by the Escrow Holder. When the Grant Deed is submitted to the Recorder for recordation, Escrow Holder shall, in accordance with California Revenue and Taxation Code Section 11932, request that the amount of the documentary transfer tax due be shown on a separate paper which shall be affixed to the Grant Deed by the Recorder after the permanent record is made and before the Grant Deed is returned to Buyer.

9.4 Prorations. All current base rent, additional rent, reimbursements and other amounts owed under the Lease, determined using the accrual method of accounting, shall be prorated between Seller and Buyer as of the Closing Date and, to the extent of information then available, such prorations shall be made at the Closing, provided that the parties acknowledge that the Lease and all rental and other obligations thereunder shall be terminated as of the Closing pursuant to the Lease Termination. Since the Lease is a triple-net lease under which Buyer, as lessee, is responsible for payment of taxes, maintenance, and insurance, rent under the Lease is the only matter to be prorated as of the Closing. Buyer shall receive a Purchase Price credit at the Closing in the amount of $51,243.39, which is equal to the security deposit paid under the Lease. Seller and Buyer shall use their best efforts prior to the Closing Date to provide the Escrow Holder with information necessary to prepare a closing statement (“Closing Statement”) covering as many items to be prorated as practicable so such prorations can be made at the Closing. The Closing Statement shall be prepared by the Escrow Holder and delivered to Seller and Buyer no later than three (3) business days before the scheduled Closing Date. Such prorations shall be adjusted, if necessary, and completed after the Closing as soon as final information becomes available. Seller and Buyer agree to cooperate and to use their best efforts to complete such prorations no later than thirty (30) days after the Closing Date, except for any annual reconciliation of expense reimbursements payable by tenants which cannot be completed until the final accounting for the year has been prepared. Monthly income and expense items shall be prorated on the basis of a thirty (30) day month. Such income and expenses of the Property for the period before the Closing Date shall be for the account of Seller and such income and expenses for the period on and after the Closing Date shall be for the account of Buyer.

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ARTICLE 10

General

10.1 Notices. All notices and other communications under this Agreement shall be properly given only if made in writing and either mailed by certified mail, return receipt requested, postage prepaid, delivered by hand (including messenger or recognized delivery, courier or air express service, including, without limitation, Federal Express) to the party at the address set forth in this Section 10.1 or such other address as such party may designate by notice to the other party, or delivered by facsimile. Such notices and other communications shall be effective on the date of receipt (evidenced by the certified mail receipt) if mailed, on the date of hand delivery if hand delivered or on the date of the facsimile confirmation if delivered by facsimile (provided that any facsimile delivered after 5:00 p.m. Pacific time shall not be effective until the next business day). If any such notice or communication is not received or cannot be delivered due to a change in the address or facsimile number of the receiving party of which notice was not previously given to the sending party or due to a refusal to accept by the receiving party, such notice or other communication shall be effective on the date delivery is attempted. Any notice or other communication under this Agreement may be given on behalf of a party by the attorney for such party.

(a) The address of Seller is:

Cal Commercial Properties

6367 Alvarado Court, Suite 206

San Diego, CA 92120

Attn: Ron Reynolds

Fax No.: (619) 286-5002

With a copy to:

F. Sigmund Luther, Esq.

401 West A Street, Suite 1625

San Diego, CA 92101

Fax No.: (619) 239-0541

(b) The address of Buyer is:

Genoptix, Inc.

1811 Aston Ave.

Carlsbad, CA 92008

Attn: Chief Financial Officer

Fax No.: (760) 268-6201

With a copy to:

- 19 -

Genoptix, Inc.

1811 Aston Ave.

Carlsbad, CA 92008

Attn: General Counsel

Fax No.: (760) 268-6201

and

Pillsbury Winthrop Shaw Pittman LLP

12255 El Camino Real, Suite 300

San Diego, CA 92130

Attn: Eric A. Kremer, Esq.

Fax No.: (858) 509-4010

(c) The address of the Escrow Holder is:

Chicago Title Company

701 Palomar Airport Rd., Suite 260

Carlsbad, CA 92011

Attn: Lorraine Martin

Fax No.: (760) 268-0966

10.2 Attorneys’ Fees. If there is any legal action or proceeding between Seller and Buyer arising from or based on this Agreement, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys’ fees and disbursements, incurred by such prevailing party in such action or proceeding and in any appeal in connection therewith. If such prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorneys’ fees and disbursements shall be included in and as a part of such judgment.

10.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

10.4 Construction. Seller and Buyer acknowledge that each party and its counsel have reviewed and revised this Agreement and that the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any document executed and delivered by either party in connection with the transactions contemplated by this Agreement. The captions in this Agreement are for convenience of reference only and shall not be used to interpret this Agreement.

10.5 Terms Generally. The defined terms in this Agreement shall apply equally to both the singular and the plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The term “person” includes individuals, corporations, partnerships, trusts, other legal entities, organizations and associations, and any government or governmental agency or authority. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase

20

“without limitation.” The words “approval,” “consent” and “notice” shall be deemed to be preceded by the word “written.”

10.6 Further Assurances. From and after the date of this Agreement, Seller and Buyer agree to do such things, perform such acts, and make, execute, acknowledge and deliver such documents as may be reasonably necessary or proper and usual to complete the transactions contemplated by this Agreement and to carry out the purpose of this Agreement in accordance with this Agreement.

10.7 Partial Invalidity. If any provision of this Agreement is determined by a proper court to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement and this Agreement shall remain in full force and effect without such invalid, illegal or unenforceable provision.

10.8 Waivers. No waiver of any provision of this Agreement or any breach of this Agreement shall be effective unless such waiver is in writing and signed by the waiving party and any such waiver shall not be deemed a waiver of any other provision of this Agreement or any other or subsequent breach of this Agreement.

10.9 Natural Hazard Disclosure Statement. Within five (5) business days following full execution of this Agreement, Seller shall, at Seller’s sole cost and expense, provide or cause the Escrow Holder to provide Buyer with a Natural Hazard Disclosure Statement with respect to the Real Property as required by applicable law.

10.10 Joint and Several Liability. To the extent that Seller or Buyer is comprised of more than one person or entity, such persons or entities comprising such party shall be jointly and severally liable for such party’s obligations under this Agreement.

10.11 Miscellaneous. The Exhibits attached to this Agreement are made a part of this Agreement. Seller shall make no public announcement of this Agreement or the transactions contemplated by this Agreement without the prior consent of Buyer, unless such public announcement is necessary to comply with applicable law. This Agreement shall benefit and bind Seller and Buyer and their respective personal representatives, heirs, successors and assigns. Buyer shall have the right, without releasing Buyer from any obligation under this Agreement, by giving notice to Seller before the Closing Date, to assign this Agreement or to have Seller convey, assign and transfer the Property at the Closing in accordance with this Agreement to any person designated by Buyer in such notice. Time is of the essence of this Agreement. This Agreement may be executed in counterparts, each of which shall be an original, but all of which shall constitute one and the same Agreement. This Agreement may not be amended or modified except by a written instrument signed by Seller and Buyer. This Agreement constitutes the entire and integrated agreement between Seller and Buyer relating to the purchase and sale of the Property and supersedes all prior agreements, understandings, offers and negotiations, oral or written, with respect to the purchase and sale of the Property.

[Signature pages to follow.]

21

IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the date first hereinabove written.

SELLER:
/s/ Roman B. Cham
Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan
/s/ Ronald Reynolds
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
/s/ Jacqueline Reynolds
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:	/s/ Ron Reynolds
	Name:	Ron Reynolds
	Title:	Managing Member
BUYER:
GENOPTIX, INC., a Delaware corporation
By:	/s/ Tina S. Nova
	Name:	Tina S. Nova, Ph.D.
	Title:	President and CEO

22

Agreed to this 12th day of January, 2010 as to provisions relating to Escrow Holder:
CHICAGO TITLE COMPANY
By:	/s/ Lorraine Martin
	Name:	Lorraine Martin
	Title:	VP/Escrow Mgr.

23

EXHIBIT A

PRELIMINARY REPORT

[Attached]

A-1

EXHIBIT B

GRANT DEED

RECORDED AT THE REQUEST OF

AND WHEN RECORDED MAIL TO:

Pillsbury Winthrop Shaw Pittman LLP

12255 El Camino Real, Suite 300

San Diego, CA 92130

Attn: Eric A. Kremer, Esq.

MAIL TAX STATEMENTS TO:

Genoptix, Inc.

1811 Aston Ave.

Carlsbad, CA 92008

Attn: Chief Financial Officer

(Space Above Line For Recorder’s Use Only)

(Documentary Transfer Tax is not of public record and is shown on a separate sheet attached to this Grant Deed in accordance with the provisions of Section 11932 of the California Revenue and Taxation Code)

APN:                         

GRANT DEED

For valuable consideration, receipt of which is acknowledged, ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, and RM-USE, LLC, a California limited liability company, hereby grants to GENOPTIX, INC., a Delaware corporation, the real property in the City of Carlsbad, County of San Diego, State of California, described in Exhibit “A” attached hereto and made a part hereof, together with all improvements thereon and fixtures affixed thereto and all privileges, easements, tenements and appurtenances thereon or in any way appertaining to such real property

Dated:                     , 2010

B-1

Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC,
a California limited liability company
By:
	Name:
	Title:

B-2

EXHIBIT “A” TO GRANT DEED

LEGAL DESCRIPTION OF PROPERTY

All of the real property in the City of Carlsbad, County of San Diego, State of California, described as follows:

B-3

STATE OF CALIFORNIA	)
	)	SS
COUNTY OF	)

On                                 , before me,                                                  , Notary Public, personally appeared                                                   who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

Witness my hand and official seal.
	[Seal]
(Signature)

B-4

EXHIBIT C

BILL OF SALE

For valuable consideration, receipt of which is acknowledged, ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, and RM-USE, LLC, a California limited liability company (collectively, “Seller”), hereby sells, assigns, transfers and delivers to GENOPTIX, INC., a Delaware corporation (“Buyer”), all of the personal property owned by Seller and used in the operation of the real property commonly known as 2131 Faraday Avenue, Carlsbad, California, and described in Exhibit “A” attached hereto. Seller warrants to Buyer that Seller has good title to all such personal property, free and clear of all liens, encumbrances, security interests and adverse claims of any kind or nature whatsoever, and Seller shall forever warrant and defend the title to all such personal property unto Buyer.

Dated:                     , 2010

SELLER:
Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:
	Name:
	Title:

C-1

EXHIBIT “A” TO BILL OF SALE

LEGAL DESCRIPTION OF REAL PROPERTY

All of the real property in the City of Carlsbad, County of San Diego, State of California, described as follows:

C-2

EXHIBIT D

ASSIGNMENT OF PERMITS

THIS ASSIGNMENT OF PERMITS (this “Assignment”), made as of                     , 2010, by and between ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001 (the “Reynolds Trust”), and RM-USE, LLC, a California limited liability company (collectively, “Seller”), and GENOPTIX, INC., a Delaware corporation (“Buyer”).

W I T N E S S E T H:

For valuable consideration, receipt of which is acknowledged, Seller and Buyer agree as follows:

1. Assignment and Assumption.

(a) Seller hereby assigns and transfers to Buyer all right, title and interest of Seller in, to and under all permits relating to the real property commonly known as 2131 Faraday Avenue, Carlsbad, California, and described in Exhibit “A” attached hereto (the “Permits”).

(b) Buyer hereby accepts the foregoing assignment, and assumes and agrees to perform all of the covenants and agreements in, and obligations under, the Permits to be performed by Seller thereunder that arise or accrue from and after the date of this Assignment as long as Buyer owns the real property subject to the Permits.

2. Indemnification.

(a) Seller shall indemnify and defend Buyer against and hold Buyer harmless from all claims, demands, liabilities, losses, damages, costs and expenses, including, without limitation, reasonable attorneys’ fees and disbursements, that are caused by any failure by Seller to perform the obligations of Seller arising or accruing under the Permits before the date of this Assignment, to the extent that such obligations are Seller’s obligations as lessor under the Lease.

(b) Buyer shall indemnify and defend Seller against and hold Seller harmless form all claims, demands, liabilities, losses, damages, costs and expenses, including, without limitation, reasonable attorneys’ fees and disbursements, that are caused by any failure by Buyer to perform the obligations of Seller arising or accruing under the Permits on or after the date of this Assignment and during Buyer’s ownership of the real property subject to the Permits.

3. Further Assurances. Seller and Buyer agree to execute such other documents and perform such other acts as may be reasonably necessary or proper and usual to effect this Assignment.

D-1

4. Counterparts. This Assignment may be executed in counterparts which taken together shall constitute one and the same instrument.

5. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of the State of California, except with respect to conflicts of law.

6. Successors and Assigns. This Assignment shall be binding upon and shall inure to the benefit of Seller and Buyer and their respective personal representatives, heirs, successors and assigns.

[Remainder of page intentionally left blank.]

D-2

IN WITNESS WHEREOF, Seller and Buyer have executed this Assignment as of the date first hereinabove written.

SELLER:
Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:
	Name:
	Title:
GENOPTIX, INC., a Delaware corporation
By:
	Name:	Tina S. Nova, Ph.D.
	Title:	President and CEO

D-3

EXHIBIT “A” TO ASSIGNMENT OF CONTRACTS AND PERMITS

DESCRIPTION OF REAL PROPERTY

[Attached]

D-4

EXHIBIT E

ASSIGNMENT OF INTANGIBLE PROPERTY

THIS ASSIGNMENT OF INTANGIBLE PROPERTY (the “Assignment”) is made this      day of                     , 2010, by and between ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, and RM-USE, LLC, a California limited liability company (collectively, “Assignor”), and GENOPTIX, INC., a Delaware corporation (“Assignee”), with reference to the following facts:

A. Assignor has used or acquired (or may have acquired) certain intangible rights in connection with the Property described on the attached Exhibit “A,” including, but not limited to, any easements, licenses, permits, air rights, building rights and other entitlements, certificates of occupancy, rights of way, sewer agreements, water line agreements, utility agreements, water rights and oil, gas and mineral rights (collectively, the “Intangibles”).

B. Pursuant to the terms of that certain Purchase Agreement and Joint Escrow Instructions dated as of January         , 2010 entered into by Assignor, as “Seller,” and Assignee, as “Buyer” (the “Purchase Agreement”), Assignor now desires to assign and transfer to Assignee all of its right, title and interest in and to the Intangibles, to the extent such right, title and interest may exist and is assignable by Assignor, and Assignee desires to accept any such Intangibles to the extent they exist and are assignable.

NOW THEREFORE, in consideration of the mutual covenants and conditions hereinbelow set forth, it is agreed:

1. Assignment. Effective as of the Closing (as defined in the Purchase Agreement), Assignor assigns and transfers to Assignee and its successors and assigns, all of Assignor’s right, title and interest in and to the Intangibles, to the extent such right, title and interest may exist and is assignable by Assignor.

2. Assumption. Effective as of the Closing, Assignee accepts the foregoing assignment of the Intangibles and shall be entitled to all rights and benefits accruing to Assignor thereunder and hereby assumes all obligations arising or accruing thereunder from and after the Closing.

3. No Rights in Trade Names. Nothing herein shall be construed to allow Assignee any right, title or interest in Assignor’s trade names or marks, or to use said names or marks in any manner.

4. Counterparts. This Assignment may be executed in counterparts which taken together shall constitute one and the same instrument.

5. Successors and Assigns. The provisions of this instrument shall be binding upon and inure to the benefit of Assignor and Assignee and their respective successors and assigns.

E-1

6. Further Assurances. Assignor hereby covenants that it will, at any time and from time to time, at no material cost or expense to Assignor, execute any documents and take such additional actions as Assignee or its successors or assigns shall reasonably require in order to more completely or perfectly carry out the transfers intended to be accomplished by this Assignment.

7. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of the State of California, except with respect to conflicts of law.

[Remainder of page intentionally left blank.]

E-2

IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the date set forth above.

ASSIGNOR:
Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:
	Name:
	Title:
ASSIGNEE:
GENOPTIX, INC., a Delaware corporation
By:
	Name:	Tina S. Nova, Ph.D.
	Title:	President and CEO

E-3

EXHIBIT “A” TO ASSIGNMENT OF INTANGIBLE PROPERTY

LEGAL DESCRIPTION OF REAL PROPERTY

[Attached]

E-4

EXHIBIT F

CERTIFICATE OF NON-FOREIGN STATUS

Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by                                                           (“Seller”), the undersigned hereby certifies the following on behalf of Seller:

1. Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

2. Seller is not a disregarded entity as defined in Section 1.1445-2(b)(2)(iii); and

2. Seller’s U.S. employer identification number is                     ; and

3. Seller’s office address is                                                                          .

Seller understands that this certification may be disclosed to the Internal Revenue Service by the transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certificate and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Seller.

Dated:                     , 2010

SELLER:
,
a  ______________________________________
By:
	Name:
	Title:

F-1

EXHIBIT G

FORM OF LEASE TERMINATION

LEASE TERMINATION AGREEMENT

This LEASE TERMINATION AGREEMENT (this “Agreement”) is made as of                         , 2010 by and between ROMAN B. CHAM, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan, as to an undivided 15.49% interest (“Cham Profit Sharing Plan”), RONALD REYNOLDS AND JACQUELINE S. REYNOLDS, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, as to an undivided 65.14% interest (the “Reynolds Trust”), and RM-USE, LLC, a California limited liability company, as to an undivided 19.37% interest (“RM-USE,” and collectively with the Cham Profit Sharing Plan and the Reynolds Trust, “Landlord”), on the one hand, and GENOPTIX, INC., a Delaware corporation (“Tenant”), on the other hand.

RECITALS

A. The Reynolds Family Trust and Tenant are currently parties to that certain AIR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease – Net dated as of June 1, 2009 by and between the Reynolds Family Trust, as “Lessor,” and Buyer, as “Lessee,” that certain Addendum dated as of June 1, 2009, that certain Option(s) to Extend Standard Lease Addendum dated as of June 1, 2009, and that certain Third Addendum to Lease dated as of June 1, 2009 (collectively, the “Lease”), with respect to that certain real property located at 2131 Faraday Avenue, Carlsbad, California, as more particularly described in the Lease (the “Property”).

B. Landlord and Tenant are parties to that certain Purchase Agreement and Joint Escrow Instructions dated as of January     , 2010 (“Purchase Agreement”) between Landlord, as “Seller,” and Tenant, as “Buyer,” with respect to the Property. Initially capitalized terms that are used but not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement.

C. Pursuant to the Purchase Agreement, Landlord and Tenant desire to terminate the Lease in its entirety effective as of the Closing.

D. The parties are executing this Agreement to effectuate the foregoing in accordance with the terms hereof.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants hereafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Termination and Release.

G-1

(a) Subject to all of the terms and conditions of this Agreement, the Lease is hereby terminated as to the Property effective as of the Closing (the “Termination Date”).

(b) Effective as of the Termination Date, all agreements, covenants or obligations of the parties hereto under or in any way arising from the Lease shall be of no further force or effect whatsoever except as expressly provided in the Lease as surviving a termination or expiration of the Lease, or as expressly provided in this Agreement. Pursuant to Section 9.4 of the Purchase Agreement, Landlord shall have satisfied its obligation to return Tenant’s security deposit pursuant to a Purchase Price credit in favor of Tenant at Closing in the sum of $51,243.39.

2. Condition of Premises. Notwithstanding any provision in the Lease to the contrary, the parties confirm and agree that Tenant shall not be required to remove any alterations or trade fixtures, furniture, equipment or personal property from the Property or otherwise restore the Property to the condition received by Tenant under the Lease.

3. Attorneys’ Fees. In the event of any action instituted between the parties in connection with this Agreement, the prevailing party shall be entitled to recover from the losing party all the prevailing party’s costs and expenses, including court costs and reasonable attorneys’ fees.

4. Conditions to Effectiveness. The effectiveness of this Agreement is expressly conditioned on the consummation of the Closing pursuant to the Purchase Agreement.

5. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions thereof. All prior agreements, representations, negotiations and understandings of the parties hereto, oral or written, express or implied, are hereby superseded and merged herein. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same binding agreement.

[Remainder of Page Left Intentionally Blank.]

G-2

IN WITNESS WHEREOF, the undersigned have executed this Lease Termination Agreement as of the date first written above.

LANDLORD:	TENANT: GENOPTIX, INC., a Delaware corporation
	By:
Roman B. Cham, Trustee of the Roman B. Cham, M.D. Profit Sharing Plan		Name:	Tina S. Nova, Ph.D.
		Title:	President and CEO
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:
Name:
Title:

G-3

EXHIBIT H

RECONFIRMATION OF REPRESENTATIONS

This Reconfirmation dated                     , is executed by Roman B. Cham, Trustee of the Roman B. Cham, M.D., Profit Sharing Plan, Ronald Reynolds and Jacqueline S. Reynolds, Co-Trustees of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001, and RM-USE, LLC, a California limited liability company (collectively, “Seller”) for the benefit of Genoptix, Inc., a Delaware corporation (“Buyer”). Pursuant to that certain Purchase Agreement and Joint Escrow Instructions dated as of January     , 2010 (“the Agreement”) between Buyer and Seller, Seller hereby confirms that during the period from the Effective Date to the Closing Date, nothing has occurred and Seller has not become aware of any facts that, to Seller’s actual knowledge, cause any of the Seller’s representations and warranties contained in the Agreement to be materially untrue, and, to the best of Seller’s knowledge, all of the representations and warranties contained in the Agreement remain true and are reconfirmed as of the Closing except                     . Initially capitalized terms used in this Reconfirmation shall have the same meanings as defined in the Agreement.

Roman B. Cham, Trustee of the Roman B. Cham, M.D., Profit Sharing Plan
Ronald Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
Jacqueline S. Reynolds, Co-Trustee of the Ronald L. Reynolds and Jacqueline S. Reynolds Trust dated June 21, 2001
RM-USE, LLC, a California limited liability company
By:
	Name:
	Title:

H-1

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-157601, 333-151892 and 333-147021) pertaining to the Genoptix, Inc. 2001 Equity Incentive Plan, 2007 Equity Incentive Plan, 2007 Employee Stock Purchase Plan and the 2007 Non-Employee Directors’ Stock Option Plan of our reports dated February 25, 2010, with respect to the consolidated financial statements and schedule of Genoptix, Inc. and the effectiveness of internal control over financial reporting of Genoptix, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2009.

/s/ Ernst & Young LLP

San Diego, California

February 25, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tina S. Nova, Ph.D., certify that:

1. I have reviewed this Annual Report on Form 10-K of Genoptix, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: February 25, 2010

/s/ TINA S. NOVA                                                     

Tina S. Nova, Ph.D.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas A. Schuling, certify that:

1. I have reviewed this Annual Report on Form 10-K of Genoptix, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: February 25, 2010

/s/ DOUGLAS A. SCHULING                                                                             

Douglas A. Schuling

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

In connection with the Annual Report of Form 10-K of Genoptix, Inc., a Delaware corporation (the “Company”), on Form 10-K for the period ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tina S. Nova, Ph.D., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

Dated: February 25, 2010	/S/ TINA S. NOVA
	Tina S. Nova, Ph.D.
	President and Chief Executive Officer
	(principal executive officer of the registrant)

In connection with the Report, I, Douglas A. Schuling, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

Dated: February 25, 2010	/S/ DOUGLAS A. SCHULING
	Douglas A. Schuling
	Executive Vice President and Chief Financial Officer
	(principal financial and accounting officer of the registrant)

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.