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<SEC-DOCUMENT>0001206774-07-002881.txt : 20071214
<SEC-HEADER>0001206774-07-002881.hdr.sgml : 20071214
<ACCEPTANCE-DATETIME>20071214173034
ACCESSION NUMBER:		0001206774-07-002881
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		12
CONFORMED PERIOD OF REPORT:	20070930
FILED AS OF DATE:		20071214
DATE AS OF CHANGE:		20071214

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SURMODICS INC
		CENTRAL INDEX KEY:			0000924717
		STANDARD INDUSTRIAL CLASSIFICATION:	PATENT OWNERS & LESSORS [6794]
		IRS NUMBER:				411356149
		STATE OF INCORPORATION:			MN
		FISCAL YEAR END:			0930

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-23837
		FILM NUMBER:		071308268

	BUSINESS ADDRESS:	
		STREET 1:		9924 W 74TH ST
		CITY:			EDEN PRAIRIE
		STATE:			MN
		ZIP:			55344
		BUSINESS PHONE:		6128292700

	MAIL ADDRESS:	
		STREET 1:		9924 WEST 74TH ST
		CITY:			EDEN PRAIRIE
		STATE:			MN
		ZIP:			55344

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	BSI CORP
		DATE OF NAME CHANGE:	19970506
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>surmodics_10k.htm
<DESCRIPTION>INITIAL FILING - ANNUAL AND TRANSITION REPORT
<TEXT>

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<P align=center><B><FONT face=serif size=4>SECURITIES AND EXCHANGE
COMMISSION<BR></FONT></B><B><FONT face=serif size=2>WASHINGTON, DC
20549</FONT></B></P>
<P align=center><STRONG><FONT size=2>___________________</FONT></STRONG></P>
<P align=center><B><FONT face=serif size=5>FORM 10-K<BR><FONT size=2>___________________</FONT></FONT></B></P>
<P align=center><B><FONT face=serif size=2>Annual report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 <BR>For the fiscal year ended
September 30, 2007</FONT></B></P>
<P align=center><B><FONT face=serif size=2>Commission file number
0-23837<BR>______________________</FONT></B></P>
<P align=center><B><FONT face=serif size=5>SURMODICS, INC.</FONT></B></P>
<P align=center><FONT face=serif size=1>(Exact Name of Registrant as Specified
in Its Charter)</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=center width="49%"><B><FONT face=serif size=2>Minnesota</FONT></B>&nbsp;</TD>
    <TD align=center width="50%"><B><FONT face=serif size=2>41-1356149</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=center width="49%"><FONT face=serif size=1>(State or other
      jurisdiction of</FONT>&nbsp;</TD>
    <TD align=center width="50%"><FONT face=serif size=1>(IRS
    Employer</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=center width="49%"><FONT face=serif size=1>incorporation or
      organization)</FONT>&nbsp;</TD>
    <TD align=center width="50%"><FONT face=serif size=1>Identification
      No.)</FONT>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=center width="49%"><B><FONT face=serif size=2>9924 West
      74</FONT></B><B><SUP><FONT face=serif size=2>th</FONT></SUP></B> <B><FONT face=serif size=2>Street</FONT></B>&nbsp;</TD>
    <TD align=left width="50%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=center width="49%"><B><FONT face=serif size=2>Eden Prairie,
      Minnesota</FONT></B>&nbsp;</TD>
    <TD align=center width="50%"><B><FONT face=serif size=2>55344</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=center width="49%"><FONT face=serif size=1>(Address of Principal
      Executive Offices)</FONT>&nbsp;</TD>
    <TD align=center width="50%"><FONT face=serif size=1>(Zip
    Code)</FONT>&nbsp;</TD></TR></TABLE>
<P align=center><FONT face=serif size=1><STRONG><FONT size=2>______________________</FONT></STRONG></FONT></P>
<P align=center><FONT face=serif size=1>(Registrant&#146;s Telephone Number,
Including Area Code)<BR></FONT><B><FONT face=serif size=2>(952)
829-2700</FONT></B></P>
<P align=center><FONT face=serif size=2>Securities registered pursuant to
Section 12(b) of the Act:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="90%" border=0>

  <TR>
    <TD align=center width="50%"><U><FONT color=#231f20 size=2>Title of Each
      Class</FONT></U></TD>
    <TD align=center width="50%"><U><FONT color=#231f20 size=2>Name of
      Exchange on Which Registered</FONT></U></TD></TR>
  <TR>
    <TD align=center width="50%"><FONT face=serif size=2><STRONG>Common Stock,
      $0.05 par value</STRONG></FONT></TD>
    <TD align=center width="50%"><FONT face=serif size=2><STRONG>NASDAQ Global
      Select Market</STRONG></FONT></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>Securities registered pursuant to
Section 12(g) of the Act:</FONT></P>
<P align=center><B><FONT face=serif size=2>None</FONT></B></P>
<P align=justify><FONT face=serif size=1><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes <FONT face=Wingdings>x</FONT></FONT> <FONT face=sans-serif size=1></FONT><FONT face=serif size=1>No</FONT> <FONT face=Wingdings size=1>o</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>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&nbsp;<FONT face=Wingdings size=1>o</FONT> No <FONT face=Wingdings>x</FONT></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>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 <FONT face=Wingdings size=1>x</FONT> No <FONT face=Wingdings size=1>o</FONT></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant&#146;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. <FONT face=Wingdings size=1>o</FONT></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of &#147;accelerated
filer and large accelerated filer&#148; in Rule 12b-2 of the Exchange Act. (Check
one):</FONT></P>
<P align=center>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><FONT size=1>Large accelerated filer&nbsp;<FONT face=Wingdings size=1>o</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accelerated
filer <FONT size=1><FONT face=Wingdings>x&nbsp;</FONT><FONT face="Times New Roman" size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT face=sans-serif></FONT></FONT>Non-accelerated filer</FONT></FONT> <FONT face=Wingdings size=1>o</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes</FONT>&nbsp;<FONT face=Wingdings size=1>o</FONT>
<FONT face=serif size=1>No</FONT> <FONT size=1><FONT face=Wingdings>x</FONT><FONT face=sans-serif></FONT></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>The
aggregate market value of the Common Stock held by shareholders other than
officers, directors or holders of more than 5% of the outstanding stock of the
registrant as of March 31, 2007 was approximately $356 million (based upon the
closing sale price of the registrant&#146;s Common Stock on such date).</FONT></P>
<P align=justify><FONT face=serif size=1><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>The number of shares of the
registrant&#146;s Common Stock outstanding as of December 7, 2007 was
18,274,054.</FONT></P>
<P align=center><B><FONT face=serif size=1>DOCUMENTS INCORPORATED BY
REFERENCE</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=1>Portions
of the Registrant&#146;s definitive Proxy Statement for the Registrant&#146;s 2008 Annual
Meeting of Shareholders are incorporated by reference into Part III.</FONT></P>
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<HR style="MARGIN-TOP: -2px" color=black SIZE=1>

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<PAGE>
<P align=center><B><FONT face=serif size=2>Table of Contents</FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="1%"><B><FONT face=serif color=#231f20 size=1>Page No.</FONT></B>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%"><B><FONT face=serif size=2>Part
      I</FONT></B> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%">&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 1.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Business</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>3</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item 1A.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Risk
      Factors</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>19</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 1B.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Unresolved Staff Comments</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>26</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      2.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Properties</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>26</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 3.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Legal Proceedings</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>26</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item 4.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Submission of
      Matters to a Vote of Security Holders</FONT> </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>26</FONT>&nbsp;
    </TD></TR>
  <TR>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT size=2>Executive
      Officers of the Registrant</FONT>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=2>27</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap width="100%" colSpan=4>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0><B><FONT face=serif size=2>Part II</FONT></B> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD vAlign=top noWrap align=left width="4%">&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item 5.</FONT>&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top noWrap align=left width="1%"></TD>
    <TD vAlign=top noWrap align=left width="94%"><FONT face=serif size=2>Market for Registrant&#146;s Common Equity, Related Stockholder
      Matters<FONT size=3>&nbsp;<BR></FONT>and Issuer Purchases of Equity
      Securities</FONT>&nbsp; </TD>
    <TD vAlign=bottom noWrap align=right width="1%"><FONT face=serif size=2>30</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 6.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Selected Financial Data</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>32</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD vAlign=top noWrap align=left width="4%">&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item 7.</FONT>&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top noWrap align=left width="1%"></TD>
    <TD vAlign=top noWrap align=left width="94%"><FONT face=serif size=2>Management&#146;s Discussion and Analysis of Financial Condition
      and<FONT size=3>&nbsp;<BR></FONT>Results of Operations</FONT>&nbsp; </TD>
    <TD vAlign=bottom noWrap align=right width="1%"><FONT face=serif size=2>32</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 7A.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Quantitative and Qualitative Disclosures About Market
      Risk</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>41</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      8.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Financial
      Statements and Supplementary Data</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>42</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD vAlign=top noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item
      9.</FONT>&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Changes in and Disagreements with Accountants on
      Accounting and<FONT size=3>&nbsp;<BR></FONT>Financial
      Disclosure</FONT>&nbsp; </TD>
    <TD vAlign=bottom noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>42</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      9A.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Controls and
      Procedures</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>42</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 9B.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Other Information</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>44</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap width="100%" colSpan=4>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0><B><FONT face=serif size=2>Part III</FONT></B> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      10.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Directors,
      Executive Officers and Corporate Governance of the Registrant</FONT>&nbsp;
    </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>45</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 11.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Executive Compensation</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>45</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD vAlign=top noWrap align=left width="4%">&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Item 12.</FONT>&nbsp; </TD>
    <TD vAlign=top noWrap align=left width="1%"></TD>
    <TD vAlign=top noWrap align=left width="94%"><FONT face=serif size=2>Security Ownership of Certain Beneficial Owners and Management
      and<FONT size=3>&nbsp;<BR></FONT>Related Stockholder Matters</FONT>&nbsp;
    </TD>
    <TD vAlign=bottom noWrap align=right width="1%"><FONT face=serif size=2>45</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; &nbsp;<FONT face=serif size=2>Item 13.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Certain Relationships and Related Transactions, and Director
      Independence</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>46</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      14.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Principal
      Accountant Fees and Services</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>46</FONT>&nbsp;
    </TD></TR>
  <TR>
    <TD noWrap width="100%" colSpan=4>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0><B><FONT face=serif size=2>Part IV</FONT></B> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="4%">&nbsp; &nbsp;<FONT face=serif size=2>Item
      15.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Exhibits and
      Financial Statement Schedules</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>47</FONT>&nbsp;
    </TD></TR></TABLE>

<BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We make
available, free of charge, copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act on our web site, www.surmodics.com, as soon as reasonably
practicable after filing such material electronically or otherwise furnishing it
to the SEC. We are not including the information on our web site as a part of,
or incorporating it by reference into, our Form 10-K.</FONT></P>
<P align=center><FONT face=serif size=2>2</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>PART I</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>ITEM 1. BUSINESS.</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>Overview</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics, Inc. (referred to as &#147;SurModics,&#148; &#147;the Company,&#148; &#147;we,&#148; &#147;us,&#148;
&#147;our&#148; and other like terms) is a leading provider of surface modification and
drug delivery technologies to the healthcare industry. Our mission is to exceed
our customers&#146; expectations and enhance the well-being of patients by providing
the world&#146;s foremost, innovative surface modification and drug delivery
technologies and products. We partner with many of the world&#146;s leading and
emerging medical device, pharmaceutical and life science companies to develop
and commercialize innovative products designed to improve patient outcomes. Our
core offerings include: drug delivery technologies (coatings, microparticles,
and implants); surface modification coating technologies that impart lubricity,
prohealing, and biocompatibility capabilities; and components for <I>in
vitro</I> diagnostic test kits and specialized surfaces for cell culture and
microarrays. Our strategy is to build on our technical leadership in the field
of surface modification and drug delivery technologies and
products,&nbsp;enabling us to strengthen&nbsp;our position as a leading edge
product development partner to the healthcare industry.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
surface modification and drug delivery technologies are utilized by our
customers to alter the characteristics of the surfaces of devices and biological
materials (e.g., lubricity or hemocompatibility), create new functions for the
surfaces of the devices (e.g., drug delivery or promotion of healing), or enable
drug delivery through our microparticle, polymer implant or device platforms.
For example, our patented PhotoLink<SUP>&#174;</SUP> technology enhances the
maneuverability of dilatation catheters and guidewires within the body by
improving the lubricity of the device surface. Similarly, our patented drug
delivery technologies can create new device capabilities by enabling site
specific, controlled release drug delivery in cases where devices are themselves
(e.g., stents) necessary to treat a medical condition and in cases where devices
serve only as a vehicle to deliver a drug (e.g., ophthalmology implants and drug
delivery depots).</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
believe that site specific drug delivery has the potential to change the
landscape of the current medical device industry. Drug-eluting stents are one of
the first manifestations of how drugs and devices can be combined to
dramatically improve patient outcomes. We also believe that significant
opportunities exist for site specific drug delivery from a wide range of other
medical devices. Working with both pharmaceutical and medical device companies,
we believe we are poised to exploit this growing market opportunity as drugs and
devices converge to create improved products and therapies.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, we extended the application of our drug delivery technologies
beyond the cardiovascular market, where our drug delivery polymer expertise
first gained prominence, into the ophthalmology market by acquiring all of the
assets of InnoRx, Inc., including its innovative sustained drug delivery
platform technologies used to treat a variety of serious eye diseases. (For more
information on the InnoRx acquisition, see Liquidity and Capital Resources in
Item 7 of this report.) A Phase I clinical trial to demonstrate safety of the
I-vation&#153; intravitreal implant in patients with diabetic macular edema (DME) was
initiated during fiscal 2005. The study was fully enrolled in fiscal 2006 and
patients completed their twelve-month follow-up during fiscal 2007. The initial
clinical data suggest that the I-vation&#153; intravitreal implant is safe and well
tolerated in patients with DME. If this and other future clinical trials
demonstrate longer term safety and efficacy of this product, I-vation&#153; TA
(triamcinolone acetonide) may represent a viable commercial prospect.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>These
clinical trial results, in part, led to the collaborative research and license
agreement with Merck &amp; Co., Inc. that we signed in June 2007. Through this
agreement, SurModics and Merck will pursue the development and commercialization
of the I-vation&#153; Sustained Drug Delivery System in combination with
triamcinolone acetonide and proprietary Merck compounds. Under the terms of our
agreement with Merck, we received an up-front license fee of $20 million and may
receive up to an additional $288 million in fees and development milestones
associated with the successful product development and attainment of appropriate
U.S. and EU regulatory approvals for these new combination products. We will
also be paid for our activities in researching and developing these combination
products. Additionally, under the terms of our agreement with Merck, we will be
responsible for the exclusive manufacture and supply of clinical and commercial
products. We will also receive royalties on sales of products developed under
our collaboration.</FONT></P>
<P align=center><FONT face=serif size=2>3</FONT></P>
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<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We plan
to continue to invest in our technologies and products to expand our core
capabilities for ophthalmic drug delivery implants. We anticipate entering into
one or more additional strategic relationships to further advance these
ophthalmic technologies and products, and eventually commercialize such
technologies if they lead to viable, approved treatment solutions.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Since our
acquisition of Brookwood Pharmaceuticals, Inc. in July 2007, we also have
offered controlled release local or systemic drug delivery through the
incorporation of our customers&#146; drugs into our proprietary injectable
microparticles or implants, both of which are polymer-based. (For more
information on the Brookwood Pharmaceuticals acquisition, see Liquidity and
Capital Resources in Item 7 of this report.) We believe that this acquisition
strengthens SurModics&#146; portfolio of drug delivery technologies for the
pharmaceutical and biotechnology industries. Customer projects within our
Brookwood Pharmaceuticals business unit target a number of key clinical
indications in the diabetes, oncology, ophthalmology, cardiovascular,
orthopedics, dermatology, central nervous system and alcoholism markets, in addition to other
fields.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
continue to commercialize our surface modification and drug delivery
technologies primarily through licensing and royalty arrangements with medical
device manufacturers. Additionally, we now have the capability to partner with
pharmaceutical and biotechnology companies to integrate their proprietary drugs
with our unique drug delivery platform technologies, such as our polymer-based
microparticles and implants as well as our I-vation&#153; intravitreal implant,
through similar licensing and royalty arrangements. We believe this approach
allows us to focus our resources on the further development of our core
technologies and enables us to expand our licensing activities into new
markets.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenues
from our licensing arrangements typically include research and development
revenues, license fees and milestone payments, minimum royalties, and royalties
based on a percentage of licensees&#146; product sales. In addition, we manufacture
and sell the chemical reagents used in the coating process. We also manufacture
and sell coated glass slides to the genomics market. Furthermore, for
immunoassay diagnostic tests, we offer: a line of stabilization products used to
extend the shelf life of immunoassay diagnostic tests; substrates used to detect
and signal a result in immunoassay diagnostic tests; and recombinant human
antigens through our role as exclusive North American distributor for DIARECT
AG. We also license a format for <I>in vitro</I> diagnostics tests, which has
found broad application in the area of rapid point-of-care diagnostic testing,
such as pregnancy, strep and flu tests.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>We manage our business through the
following seven technology- and market-focused business units:</FONT></P>
<UL style="TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2><B><I>Drug Delivery, </I></B>creating and
  supporting site specific drug delivery polymers and coating technologies for
  use in drug/device combination products in our chosen markets, such as
  drug-eluting stents for the treatment of vascular disease, ophthalmic
  implants, orthopedics, urology, oncology, and wound treatment, among
  others.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><B><I>Ophthalmology, </I></B>developing drug
  delivery systems intended to enhance performance, safety, patient convenience
  and patient compliance for a variety of drugs and other bioactive agents that
  are being developed by pharmaceutical and ophthalmology companies for the
  treatment of serious eye diseases.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><B><I>Hydrophilic Technologies,</I></B>
  specializing in advanced lubricity (slippery) coatings that can enhance the
  function of medical devices, facilitating and easing their placement and
  maneuverability in the body.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><B><I>Regenerative Technologies,</I></B>
  developing platforms intended to augment or replace tissue/organ function
  (e.g., cell encapsulation applications), or to modify medical devices to
  facilitate tissue/organ recovery through natural repair mechanisms (e.g.,
  prohealing coatings).<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><B><I>Orthopedics, </I></B>developing innovative
  solutions for the treatment of structural defects in patients using proven
  SurModics technologies, and creating new technology solutions for existing
  patient care needs in the orthopedics field.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><B><I>In Vitro Technologies</I></B> <I>(formerly
  Diagnostics and Drug Discovery),</I> specializing in surface modification
  products and technologies for healthcare applications focused <I>in vitro
  </I>(outside the body). These products and technologies include protein
  stabilization reagents, substrates, recombinant autoimmune antigens, surface
  chemistry technologies for nucleic acid and protein immobilization, synthetic
  extracellular matrix (ECM) cell culture products, and diagnostic format
  intellectual property.</FONT></LI></UL>
<P align=center><FONT face=serif size=2>4</FONT></P>
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<PAGE><BR>
<UL style="TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2><B><I>Brookwood Pharmaceuticals
  </I></B><I>(acquired in July 2007),</I> specializing in proprietary injectable
  microparticles and implants to provide sustained delivery of drugs being
  developed by leading pharmaceutical, biotechnology and medical device clients
  as well as emerging companies. These microparticles and implants are based on
  biodegradable polymers. An important part of Brookwood&#146;s business continues to
  be the supply of biodegradable polymers to corporate and academic
  customers.</FONT></LI></UL>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
believe we have sufficient financial resources available to continue developing
and growing our business. We intend to continue investing in research and
development to advance our surface modification and drug delivery technologies
and to expand uses for our technology bases. In addition, we continue to pursue
access to products and technologies developed outside the Company as appropriate
to complement our internal research and development efforts.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company was organized as a Minnesota corporation in June 1979 and became a
public company, with shares of our common stock becoming listed for trading on
the Nasdaq market, in 1998.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Surface Modification&nbsp;and Drug
Delivery Markets</FONT></B></P>
<P align=justify><FONT face=serif size=2><EM>Medical Device
Industry</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Advances
in medical device technology have helped drive improved device efficacy and
patient outcomes. Pacemakers and defibrillators have dramatically reduced deaths
from cardiac arrhythmias. Stents, particularly drug-eluting stents, have
significantly reduced the need for repeat intravascular procedures, and they
have diminished the need for more invasive cardiac bypass surgery. Hip, knee and
spine implants have relieved pain and increased mobility. Acceptance of these
and other similar innovations by patients, physicians and insurance companies
has helped the U.S. medical device industry grow at a faster pace than the
economy as a whole. The attractiveness of the industry has drawn intense
competition among the companies participating in this area. In an effort to
improve their existing products or develop entirely new devices, a growing
number of medical device manufacturers are exploring or using surface
modification and drug delivery technologies as product differentiators or device
enablers. In addition, the continuing trend toward minimally invasive surgical
procedures, which often employ catheter-based delivery technologies, has
increased the demand for hydrophilic, lubricious coatings and other
technologies.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Pharmaceutical and Biotechnology
Industries</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
pharmaceutical and biotechnology industries have become increasingly competitive
due to the launch of new products (many of which have limited differentiating
characteristics), patent expirations, and reimbursement pressures. In response
to these competitive pressures, companies in these industries are continually
seeking to develop new products with improved efficacy, safety and convenience.
Reducing dosing frequency through polymer-based sustained release systems has
the opportunity to enable the development of new drug entities as well as to
improve a broad range of drugs developed by the pharmaceutical and biotechnology
industries. Converting a drug that must be, for instance, given daily as a pill
or injection, to one that can be administered by injection or implant weekly,
monthly or even less frequently, may have several patient benefits. Sustained,
controlled drug release has the potential to eliminate undesirable peak and
trough drug levels in the body, which can lead to both improved drug safety and
efficacy. Additionally, fewer treatments can result in improved patient
compliance with a specified administration schedule, thereby further enabling
the drug&#146;s effect to be optimized. Similarly, less frequent administration is
typically considered to be more convenient to the patient.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Drug
delivery solutions such as those offered by SurModics also create opportunities
for local delivery of medications to sites of disease in the body. In certain
applications such as ocular, orthopedic and pain applications, it can be
beneficial to provide a high local concentration of drug. Such local delivery
may enhance efficacy and reduce side effects by focusing the drug&#146;s effect where
it is needed and limiting the amount of drug impacting other parts of the
body.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Pharmaceutical and biotechnology companies have also found that sustained
drug delivery solutions can enhance product sales by creating competitive
advantage and extending patent protection through the issuance of patents on
controlled delivery formulations of their drugs.</FONT></P>
<P align=center><FONT face=serif size=2>5</FONT></P>
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<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
believe the benefits of polymer-based sustained release systems make them
applicable to drugs targeting a wide range of therapeutic fields, including
ophthalmology, orthopedics, dermatology, metabolic disease, alcoholism, central
nervous system disorders, and cardiovascular disease, among others.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Convergence of the Medical Device,
Pharmaceutical and Biotechnology Industries</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
convergence of the pharmaceutical, biotechnology and medical device industries,
often made possible by surface modification and drug delivery technologies,
presents a powerful opportunity for major advancements in the healthcare
industry. The dramatic success of drug-eluting stents in interventional
cardiology has captured the attention of the drug and medical device industries.
We believe the benefits of combining drugs and biologics with implantable
devices are becoming increasingly valuable in applications in cardiology,
ophthalmology, orthopedics, and other large markets.</FONT></P>
<P align=justify><B><FONT face=serif size=2>SurModics&#146; Surface
Modification&nbsp;and Drug Delivery Technologies &#150; Overview</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
believe SurModics is uniquely positioned to exploit the continuing trend of
incorporating surface modification and drug delivery technologies into the
design of products such as devices and drugs, potentially leading to more
efficient and effective products as well as creating entirely new product
applications. We have a growing portfolio of proprietary technologies, market
expertise and insight, and unique collaborative research and development
capabilities &#150; all key ingredients to bring innovation together for the benefit
of patients, the Company, and the healthcare industry.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Coatings for Surface Modification
and Drug Delivery</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
proprietary PhotoLink coating technology is a versatile, easily applied, coating
technology that modifies medical device surfaces by creating covalent bonds
between device surfaces and a variety of chemical agents. PhotoLink coatings can
impart many performance enhancing characteristics, such as advanced lubricity
(slippery) and hemocompatibility (preventing clot formation), by becoming bound
onto surfaces of medical devices or other biological materials without
materially changing the dimensions or other physical properties of devices. Our
PhotoLink technology utilizes proprietary, light activated (photochemical)
reagents, which include advanced polymers or active biomolecules having desired
surface characteristics and an attached light reactive chemical compound
(photogroup). When the reagent is exposed to a direct light source, typically
ultraviolet light, a photochemical reaction creates a covalent bond between the
photogroup and the surface of the medical device, thereby imparting the desired
property to the surface. A covalent bond is a very strong chemical bond that
results from the sharing of electrons between carbon atoms of the substrate and
the applied coating, making the coating very durable and resilient.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
proprietary PhotoLink reagents can be applied to a variety of substrates. Our
reagents are easily applied to the material surface by dipping, spraying, roll
coating, ink jetting or brushing. We continue to expand our portfolio of
proprietary reagents for use by our customers. These reagents enable our
customers to develop novel surface features for their devices, satisfying the
expanding requirements of the healthcare industry. We are also continually
working to expand the list of materials that are compatible with our surface
modification and drug delivery reagents. Additionally, we develop coating
processes and coating equipment to meet the device quality, manufacturing
throughput and cost requirements of our customers.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our drug
delivery coating technologies differ from PhotoLink in that they involve
non-photochemical reagents. Therapeutic drugs are incorporated within our
proprietary polymer matrices to provide controlled, site specific release of the
drug into the surrounding environment. The release of the drug can be tuned to
elute quickly (in a few days) or slowly (ranging from several months to over a
year), illustrating the wide range of release profiles that can be achieved with
our coating systems. On a wide range of devices, drug-eluting coatings can help
improve device performance, increase patient safety and enable innovative new
treatments. We work with companies in the pharmaceutical, biotechnology and
medical device industries to develop specialized coatings that allow for the
controlled release of drugs from device surfaces. We see at least three primary
areas with strong future potential: (1) improving the function of a device which
itself is necessary to treat the medical condition; (2) enabling drug delivery
in cases where the device serves only as a vehicle to deliver a drug to a
specific site in the body; and (3) enhancing the biocompatibility of a medical
device to ensure that it continues to function over a long period of
time.</FONT></P>
<P align=center><FONT face=serif size=2>6</FONT></P>
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<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We offer
customers several distinct polymer families for site specific drug delivery. Our
Bravo&#153; Drug Delivery Polymer Matrix is utilized on the CYPHER<SUP>&#174;</SUP>
Sirolimus-eluting Coronary Stent from Cordis Corporation, a Johnson &amp;
Johnson company. CYPHER<SUP>&#174;</SUP> is a trademark of Cordis Corporation. The
Bravo polymer is a durable coating and is also used on our I-vation&#153;
intravitreal implant within our Ophthalmology business unit. In addition, we
offer several biodegradable polymer technologies that can be used for drug
delivery applications. Because some biodegradable polymers can deliver proteins
and other large molecule therapeutic agents, they have the potential to expand
the breadth of drug delivery applications we can pursue. Biodegradable polymers
can be combined with one or more drugs and applied to a medical device, and the
drug is then released as the polymer degrades in the body over time.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Two key
differentiating characteristics of our coatings are their flexibility and ease
of use. In terms of flexibility, coatings can be applied to many different kinds
of surfaces and can immobilize a variety of chemical, pharmaceutical and
biological agents. This flexibility allows customers to be innovative in the
design of their products without significantly changing the dimensions or other
physical properties of the device. Additionally, the surface modification
process can be tailored to provide customers with the ability to improve the
performance of their devices by choosing the specific coating properties desired
for particular applications. Our surface modification technologies also can be
combined to deliver multiple surface-enhancing characteristics on the same
device.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In terms
of ease of use, unlike competitive coating processes, the PhotoLink coating
process is relatively simple and is easily integrated into the customer&#146;s
manufacturing process. In addition, it does not subject the coated products to
harsh chemical or temperature conditions, produces no hazardous byproducts, and
does not require lengthy processing or curing time. Further, our Photolink
coatings are compatible with generally accepted sterilization processes, so the
surface attributes are not lost when the medical device is
sterilized.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Systemic and Local Drug Delivery
Through Injectable Microparticles and Implants</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Through
our acquisition of Brookwood Pharmaceuticals, as well as internal development
and acquisition of our biodegradable materials, we offer customers drug delivery
systems based on polymer-based microparticles and implants. These systems enable
the controlled delivery of a broad variety of drugs, ranging in size from small
molecule drugs to larger molecule drugs such as peptides and proteins. Depending
on the drug and application, our microparticles and implants can incorporate
drugs for delivery over days to weeks to months.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Brookwood
Pharmaceuticals scientists have developed an extensive body of experience,
know-how and patented capability in the field of microparticle drug delivery,
working with a very wide range of drug classes. Our microparticles incorporate a
customer&#146;s drug and our polymers into very small particles that are measured in
microns (1,000 microns equals one millimeter). Using our extensive technology
base, we can develop long-acting, injectable microparticles for systemic, local,
and cellular delivery of active pharmaceutical ingredients and vaccines. A
variety of commercially viable microencapsulation processes are used including:
solvent extraction, solvent evaporation, phase separation, fluid bed coating,
and spray drying. Based on the desired product specifications, our development
team will select the appropriate microencapsulation process, as well as the
formulation variables to achieve dose, duration and other product
specifications.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Injectable solid implants are rod, coil or other-shaped devices with drug
dispersed throughout a polymer matrix. They are designed to release the drug at
a programmed rate for days, weeks, or months. This type of drug delivery dosage
form is especially suitable when efficacy is dependent on delivering a
relatively large dose of a drug over a long duration. The polymer matrix
controls the rate of release of drug from the implant. We are developing
long-acting implants with biodegradable and non-biodegradable polymers. One of
our biodegradable drug delivery implant systems has shape memory properties.
This capability allows the implant to be delivered in one shape so that it can
be placed through a catheter or other delivery device, after which the implant
returns to its original shape once delivered to the desired site in the
body.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Through
our Brookwood Pharmaceuticals business unit, we are also collaborating with
Genzyme Pharmaceuticals, a business unit of Genzyme Corporation, to develop
novel drug delivery solutions, with an initial focus on peptide delivery. The
relationship offers customized solutions for parenteral formulations by
combining expertise in design for peptide delivery, peptide synthesis, and drug
delivery technologies.</FONT></P>
<P align=center><FONT face=serif size=2>7</FONT></P>
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<P align=justify><FONT face=serif size=2><EM>SurModics&#146; Surface Modification and
Drug Delivery Technologies &#150; Clinical Benefits</EM></FONT></P>
<UL style="TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2><I>Drug Delivery</I>. We provide drug delivery
  polymer technology to enable controlled, site specific or systemic delivery of
  therapeutic agents. Our proprietary polymer reagents create coatings,
  microparticles and implants which serve as reservoirs for therapeutic drugs.
  The drugs can then be released on a controlled basis over days to weeks to
  months. Some of our systems can release drugs for over a year. For instance,
  when a drug-eluting stent is implanted into a patient, the drug releases from
  the surface of the stent into the blood vessel wall where it can act to
  inhibit unwanted tissue growth, thereby reducing the occurrence of restenosis.
  Cordis Corporation, a division of Johnson &amp; Johnson, is currently selling
  throughout the world a drug-eluting stent incorporating SurModics&#146; technology.
  We are also collaborating with Merck to pursue the joint development and
  commercialization of the I-vation sustained drug delivery system with
  triamcinolone acetonide and other products that combine Merck proprietary drug
  compounds with the I-vation system for the treatment of serious retinal
  diseases. In addition to our biodurable polymer technologies, we offer a
  number of biodegradable polymer technologies allowing us to deliver both large
  and small molecule drugs and address a wide variety of applications. We
  believe that we are unique in our ability to offer our medical device,
  pharmaceutical and biotechnology industry customers and their patients
  delivery of such a broad range of drugs through coatings, microparticles and
  implants.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><I>Lubricity</I>. Low friction or lubricious
  coatings reduce the force and time required for insertion, navigation and
  removal of devices in a variety of minimally invasive applications. Lubricity
  also reduces tissue irritation and damage caused by products such as
  catheters, guidewires and endoscopy devices. Based on internal and customer
  evaluation, when compared with uncoated surfaces, our PhotoLink coatings have
  reduced the friction on surfaces by more than 90%, depending on the substrate
  being coated.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><I>Prohealing</I>. We are developing biologically
  based extracellular matrix (ECM) protein coatings for use in various
  applications that may accelerate blood clotting in a controlled fashion,
  thereby minimizing thromboembolism (blood clots that detach from the device
  surface and travel downstream). Moreover, these coatings may improve
  device-site healing through specific protein-cell interactions. Such surfaces
  may be useful for endovascular grafts and neuroaneurysm devices where it is
  important to seal off blood clots before serious life threatening
  complications can occur. Certain ECM proteins specifically stimulate the
  migration and proliferation of endothelial cells (cells that line blood
  vessels). Covalently attaching the appropriate ECM proteins to stent surfaces
  with PhotoLink coatings may signal endothelial cells to migrate to the surface
  where they can rapidly form a stable endothelial lining. We believe these
  prohealing coatings could help prevent late stent thrombosis.<BR>&nbsp;</FONT>

  <LI><FONT face=serif size=2><I>Hemo/biocompatibility</I>.
  Hemocompatible/biocompatible coatings help reduce adverse reactions that may
  be created when a device is inserted into the body and comes in contact with
  blood. Heparin has been used for decades as an injectable drug to reduce blood
  clotting in patients. PhotoLink reagents can be used to immobilize heparin on
  the surface of medical devices, thereby inhibiting blood clotting on the
  device surface, minimizing patient risk and enhancing the performance of the
  device. We have also developed synthetic, non-biological coatings that provide
  medical device surfaces with improved blood compatibility without the use of
  heparin. These coatings prevent undesirable cells and proteins that lead to
  clot formation from adhering to the device surface. These coatings may also
  reduce fibrous encapsulation.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><I>Tissue Engineering</I>. Studies have shown that
  attachment of extracellular matrix proteins and peptides onto surfaces of
  implantable medical devices improves host cell attachment, growth and
  subsequent tissue integration. Company studies have shown that biomedical
  implants (such as vascular grafts) coated with photoreactive collagen and
  other proteins may improve attachment, cell growth and acceptance by
  surrounding tissues. We have developed several coating and matrix technologies
  for tissue engineering applications, such as naturally biodegradable matrix
  forming polymers to provide scaffolds for cells, proteins, and genes for a
  variety of applications. For example, biocompatible coatings that form a
  semipermeable barrier may be used to encapsulate transplant cells, rendering
  them invisible to a patient&#146;s immune system. Accordingly, we have licensed
  technology to and have made an investment in Novocell, Inc., which is pursuing
  a treatment for diabetes by implanting encapsulated islet
cells.</FONT></LI></UL>
<P align=center><FONT face=serif size=2>8</FONT></P>
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<PAGE><BR>
<UL style="TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2><I>Wettability</I>. PhotoLink hydrophilic coatings
  have been shown in internal and customer tests to accelerate liquid flow rates
  on normally hydrophobic (water repelling) materials by up to 75%. For example,
  some rapid point-of-care diagnostic tests, such as home monitoring or
  physician monitoring of glucose levels in diabetics, are currently done by
  pricking a patient&#146;s finger and placing a drop of blood onto a polymer strip
  which is then inserted into a blood glucose reader. We believe that the time
  it takes for the blood to flow up the strip to provide a readout can be
  dramatically reduced and the consistency can be greatly improved with the use
  of PhotoLink technology.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2><I>DNA and Protein Immobilization</I>. Both DNA
  and protein microarrays are useful tools for the pharmaceutical, diagnostic
  and research industries. During a DNA gene analysis, typically thousands of
  different probes need to be placed in a pattern on a surface, called a DNA
  microarray. These microarrays are used by the pharmaceutical industry to
  screen for new drugs, by genome mappers to sequence human, animal or plant
  genomes, or by diagnostic companies to search a patient sample for disease
  causing bacteria or viruses. However, DNA does not readily adhere to most
  surfaces. We have developed various surface chemistries for both DNA and
  protein immobilization. GE Healthcare has licensed our technology in this area
  and sells genomics slides under the trade name CodeLink<SUP>&#174;</SUP>.
  CodeLink<SUP>&#174;</SUP> is a trademark of GE Healthcare. Protein microarrays are
  used as diagnostic and research tools to determine the presence and/or
  quantity of proteins in a biological sample. The most common type of protein
  microarray is the antibody microarray, where antibodies are spotted onto a
  surface and used as capture molecules for protein detection.</FONT></LI></UL>
<P align=justify><FONT face=serif size=2><EM>SurModics&#146; Surface Modification and
Drug Delivery Technologies &#150; Applications</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The table
below identifies several market segments where surface modification and drug
delivery technologies are desired to improve and enable both existing and new
medical devices and drugs.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="35%" colSpan=2>&nbsp; </TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="63%"><B><FONT face=serif size=1>Desired Surface
      Property and</FONT></B>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><FONT face=serif color=#231f20 size=1>Market Segment
      Served</FONT></B> </TD>
    <TD align=left width="34%">&nbsp;</TD>
    <TD align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=center width="63%"><B><FONT face=serif size=1>Examples of
      Applications</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><FONT face=serif size=2><STRONG>Interventional cardiology
      and&nbsp;<BR></STRONG><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><STRONG>vascular
      access</STRONG></FONT></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Lubricity</FONT></I><FONT face=serif size=2>: catheters, guidewires<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Hemocompatibility</FONT></I><FONT face=serif size=2>: vascular
      stents, catheters, distal protection<BR>&nbsp;&nbsp;&nbsp;&nbsp;
      devices&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Drug/biologics delivery</FONT></I><FONT face=serif size=2>:
      vascular stents, catheters&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Prohealing</FONT></I><FONT face=serif size=2>: vascular stents,
      vascular grafts<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="35%" colSpan=2>&nbsp;</TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="63%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Cardiac rhythm
      management</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Lubricity</FONT></I><FONT face=serif size=2>: pacemaker and defibrillator leads,
      electrophysiology<BR>&nbsp;&nbsp;&nbsp;&nbsp; devices&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Hemocompatibility</FONT></I><FONT face=serif size=2>:
      electrophysiology devices&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: pacemaker and defibrillator
      leads<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="35%" colSpan=2>&nbsp;</TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="63%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Cardiothoracic
      surgery</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Prohealing</FONT></I><FONT face=serif size=2>: heart valves, septal defect repair devices<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Hemocompatibility</FONT></I><FONT face=serif size=2>: minimally
      invasive bypass devices, vascular&nbsp;<FONT size=3>&nbsp;</FONT><BR>&nbsp;&nbsp;&nbsp;&nbsp; grafts, ventricular
      assist devices<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="35%" colSpan=2>&nbsp;</TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="63%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><I><FONT face=serif size=2>In
      Vitro</FONT></I></B><B><FONT face=serif size=2>
    Diagnostics</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Lubricity</FONT></I><FONT face=serif size=2>: microfluidic devices<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Hemocompatibility</FONT></I><FONT face=serif size=2>: blood/glucose
      monitoring devices, biosensors&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Biomolecule
      immobilization</FONT></I><FONT face=serif size=2>: DNA and protein arrays,
      protein&nbsp;<FONT size=3>&nbsp;</FONT><BR>&nbsp;&nbsp;&nbsp;&nbsp;
      attachment to synthetic nanofibrillar extracellular matrix for
      cell<BR>&nbsp;&nbsp;&nbsp;&nbsp; culture applications<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Cell culture
      growth and tissue integration</FONT></I><FONT face=serif size=2>: cell
      culture products,&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; <EM>in vitro</EM></FONT><FONT face=serif size=2> applications using synthetic nanofibrillar
      extracellular&nbsp;<FONT size=3>&nbsp;</FONT><BR>&nbsp;&nbsp;&nbsp;&nbsp;
      matrix to provide a more &#147;</FONT><I><FONT face=serif size=2>in
      vivo</FONT></I><FONT face=serif size=2>-like&#148; surface<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" colSpan=2>&nbsp;</TD>
    <TD vAlign=top align=center width="1%"></TD>
    <TD vAlign=top align=center width="63%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><FONT face=serif size=2><STRONG>Interventional neurology
      and&nbsp;<BR></STRONG><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><STRONG>neurosurgery
      </STRONG></FONT></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Lubricity</FONT></I><FONT face=serif size=2>: catheters, guidewires<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" colSpan=2>&nbsp;</TD>
    <TD vAlign=top align=center width="1%"></TD>
    <TD vAlign=top align=center width="63%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="35%" bgColor=#c0c0c0 colSpan=2><STRONG><FONT size=2>Urology and gynecology</FONT></STRONG></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="63%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Lubricity</FONT></I><FONT face=serif size=2>: urinary catheters, incontinence devices, ureteral
      stents,<BR>&nbsp;&nbsp;&nbsp;&nbsp; fertility devices&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: prostatic stents,
      microparticle injections<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>9</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top align=left width="39%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Ophthalmology</FONT></B>&nbsp;</P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="59%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: sustained drug delivery
      implants and<BR>&nbsp;&nbsp;&nbsp;&nbsp; microparticle injections<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="39%" colSpan=2></TD>
    <TD align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align=center width="59%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="39%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Orthopedics&nbsp;</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD vAlign=top align=center width="59%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Cell growth and tissue
      integration</FONT></I><FONT face=serif size=2>: bone and cartilage
      growth<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Infection resistance</FONT></I><FONT face=serif size=2>: orthopedic
      and trauma implants<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Drug/biologics delivery</FONT></I><FONT face=serif size=2>: orthopedic and trauma implants and<BR>&nbsp;&nbsp;&nbsp;&nbsp;
      microparticle injections<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="39%" colSpan=2>&nbsp;</TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="59%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="39%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Metabolic
      disease&nbsp;</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="59%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: microparticle
      injections&nbsp;<FONT size=3>&nbsp;</FONT><BR></FONT><I><FONT face=serif size=2>Tissue engineering</FONT></I><FONT face=serif size=2>: cell
      encapsulation<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD align=left width="39%" colSpan=2>&nbsp;</TD>
    <TD align=center width="1%"></TD>
    <TD align=center width="59%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="39%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Central nervous system
      disorders&nbsp;</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="59%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: microparticle injections,
      polymer<BR>&nbsp;&nbsp;&nbsp;&nbsp; implants<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR>
  <TR>
    <TD vAlign=top align=left width="39%" colSpan=2>&nbsp;</TD>
    <TD vAlign=top align=center width="1%"></TD>
    <TD vAlign=top align=center width="59%"></TD></TR>
  <TR>
    <TD vAlign=top align=left width="39%" bgColor=#c0c0c0 colSpan=2>
      <P align=justify><B><FONT face=serif size=2>Dermatology&nbsp;</FONT></B></P></TD>
    <TD vAlign=top align=center width="1%" bgColor=#c0c0c0></TD>
    <TD vAlign=top align=center width="59%" bgColor=#c0c0c0>
      <P align=justify><I><FONT face=serif size=2>Drug/biologics
      delivery</FONT></I><FONT face=serif size=2>: polymer implants<FONT size=3>&nbsp;</FONT></FONT></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Examples
of applications for our coating technologies include guidewires, angiography
catheters, IVUS catheters, neuro microcatheters/infusion catheters, PTCA/PTA
laser and balloon angioplasty catheters, atherectomy systems, chronic total
occlusion catheters, stent delivery catheters, cardiovascular stents, embolic
protection devices, vascular closure devices, EP catheters, pacemaker leads,
drug infusion catheters, wound drains, ureteral stents, urological catheters and
implants, hydrocephalic shunts, ophthalmic implants, among other devices. Beyond
coatings, our drug delivery technologies have also been applied to a wide range
of drugs currently in preclinical and clinical development.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Licensing
Arrangements</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
commercialize our surface modification and drug delivery technologies primarily
through licensing arrangements with medical device and drug manufacturers. We
believe this approach allows us to focus our resources on further developing new
technologies and expanding our licensing activities. Our technologies have been
designed to allow manufacturers to easily implement them into their own
manufacturing processes so customers can control production and quality
internally without the need to send their products to a contract
manufacturer.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
generate the largest portion of our revenue from commercializing our surface
modification and drug delivery technologies for use in connection with medical
devices and drugs, primarily through licensing arrangements. Royalties and
license fees represented 72.0%, 75.9% and 76.3% of our total revenue in fiscal
2007, 2006 and 2005, respectively. Revenue from these licensing arrangements
typically includes research and development revenue, license fees and milestone
payments, minimum royalties, and royalties based on a percentage of licensees&#146;
product sales. We also generate revenue from sales of chemical reagents to
licensees for use in their coating processes, and from polymer sales&nbsp;under
our Lakeshore Biomaterials brand. Our In Vitro Technologies business unit
generates revenue from: sales of stabilization products, substrates and antigens
to diagnostics customers; sales of genomic products; and licensing our
proprietary diagnostic formats for use in point-of-care testing. Product sales
represented 18.5%, 16.0% and 15.1% of total revenue in fiscal 2007, 2006 and
2005, respectively.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
licensing process begins with the customer specifying a desired product feature
to be created such as lubricity, drug delivery, etc. Because each device and
drug is unique, we routinely conduct a feasibility study to qualify each new
potential product application, often generating research and development
revenue. Once the feasibility phase has been completed in a manner satisfactory
to the customer, the customer funds a development project to optimize the
formulation to meet the customer&#146;s specific technical needs. At any time prior
to commercialization, a license agreement may be executed granting the licensee
rights to use our technology. We often support our customers by providing
coating assistance for parts required in animal tests and human clinical trials.
However, most customers perform the coating work internally once a product has
received regulatory approval and is being actively marketed. Our Brookwood
Pharmaceuticals business unit also supports many of our drug delivery customers
by manufacturing microparticles and implants incorporating customers&#146; drugs
through preclinical and clinical trials and by providing an option to
manufacture products upon commercialization as well.</FONT></P>
<P align=center><FONT face=serif size=2>10</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The term
of a license agreement is generally for a specified number of years or the life
of our patents, whichever is longer, although a license generally may be
terminated by the licensee for any reason upon 90 days&#146; advance written notice.
Our license agreements may include certain license fees and/or milestone
payments. The license can be either exclusive or nonexclusive, but a significant
majority of our licensed applications are nonexclusive, allowing us to license
technology to multiple customers. Moreover, as is the case with our agreement
with Merck, even exclusive licenses may be limited to a specific &#147;field of use,&#148;
allowing us the opportunity to further license technology to other customers.
The royalty rate on a substantial number of the agreements has traditionally
been in the 2% to 3% range, but there are certain contracts with lower or higher
rates. Royalty rates in certain more recent agreements have been trending
higher, especially where the relevant SurModics technology is an enabling
component of the customer&#146;s device (i.e., the device could not perform as
desired without our technology). The amount of the license fees, milestone
payments, and the royalty rate are based on various factors including whether
the arrangement is exclusive or nonexclusive, the perceived expected value of
the coating application to the device, the size of the potential market, and
customer preferences. Most of our agreements also incorporate a minimum royalty
to be paid by the licensee. Royalties are generally paid on a quarter-lag basis,
and are based on the customer&#146;s actual sales of coated products in the prior
quarter.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
currently have 100 licensed products (customer products utilizing SurModics
technology) already on the market generating royalties and 94 customer products
incorporating our technology pending regulatory approval. These 194 products are
being sold or developed by 92 licensed customers. We signed a record 27 new
licenses in fiscal 2007, up from 21 new licenses signed in fiscal
2006.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Licensed
customers include AbbeyMoor Medical, Inc., Abbott Laboratories, Ambrilia
Biopharma Inc., Bausch &amp; Lomb Incorporated, Boston Scientific Corporation,
CardioMind, Inc., Conor Medsystems, LLC (a wholly owned subsidiary of Johnson
&amp; Johnson), Cook Medical, Corning Incorporated, Cordis Corporation (a
Johnson &amp; Johnson company), Devax, Inc., Edwards Lifesciences Corporation,
elbion NV, ev3 Inc., FoxHollow Technologies, Inc., GE Healthcare, Medtronic,
Inc., Merck &amp; Co., Inc., Novocell, Inc., Paragon Intellectual Properties,
LLC, Spectranetics Corporation, St. Jude Medical, Inc., ThermopeutiX Inc., and
Xtent, Inc., among others. Under most of our licensing agreements, we are
required to keep the identity of our customers confidential unless they approve
such disclosure.</FONT></P>
<P align=justify><B><FONT face=serif size=2><EM>In Vitro</EM>
Products</FONT></B></P>
<P align=justify><FONT face=serif size=2><EM>Genomics Products</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>During
fiscal 1999, we launched our 3D-Link<SUP><FONT face=serif size=2>&#174;</FONT></SUP></FONT><FONT face=serif size=2> Activated Slide to the
genomics market. Coated glass slides are used by genomics researchers to prepare
microarrays for DNA analysis. General Electric Company, through GE Healthcare,
had an exclusive license to our coated glass slide technology that, in fiscal
2007, became a non-exclusive license. In addition to license fees, we generate
revenue under this license from the manufacture and sale of coated glass slides
to GE Healthcare, who markets the slides under their CodeLink<SUP><FONT face=serif size=2>&#174;</FONT></SUP></FONT><FONT face=serif size=2>
brand.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Stabilization Products</EM><STRONG>
</STRONG></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
offers a full line of stabilization products for the </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostics market. These
products decrease the variability often associated with storage conditions,
thereby producing more consistent assay results. SurModics&#146; stabilization
products are ready-to-use, eliminating the preparation time and cost of
producing stabilization and blocking reagents in house.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Substrates</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Through
the August 2007 acquisition of BioFX Laboratories, Inc. (&#147;BioFX&#148;), SurModics now
offers colorimetric and chemiluminescent substrates for the </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostics
market. A substrate is the component of a diagnostic test kit that detects and
signals that a reaction has taken place so that a result can be recorded.
Colorimetric substrates signal a positive diagnostic result through a color
change. Chemiluminescent substrates signal a positive diagnostic result by
emitting light. We believe that our substrates offer a high level of stability,
sensitivity and consistency.</FONT></P>
<P align=center><FONT face=serif size=2>11</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><EM>Recombinant Human
Antigens</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
is the exclusive North American distributor (and non-exclusive distributor in
Japan) of DIARECT AG&#146;s line of recombinant autoimmune antigens. Because of the
lack of high-quality antigens from natural sources, DIARECT produces these
proteins and other components using biotechnological methods. DIARECT has strong
capabilities in the bacilovirus/Sf9 expression system for autoimmune antigens as
well as </FONT><I><FONT face=serif size=2>E. coli</FONT></I><FONT face=serif size=2> systems for particular expression tasks.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Ultra-Web&#153; Synthetic Extracellular
Matrix (ECM) Cell Culture Products</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Ultra-Web&#153; Synthetic ECM product line is the result of a collaboration between
Donaldson Company, Inc. (providing the nanofiber technology) and SurModics
(providing the surface modification technology). Ultra-Web&#153; is a trademark of
Donaldson Company. In May 2006, SurModics and Donaldson entered into a strategic
marketing and distribution agreement with Corning Incorporated, through which
Corning Life Sciences, a subsidiary of Corning Incorporated, provides worldwide
marketing and distribution of the nanofiber cell culture products for
</FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2>
cell culture research and drug discovery applications. Corning Life Sciences
launched the initial Ultra-Web&#153; nanofiber cell culture products in 96 well
microplate and 100mm research dish formats in April 2007.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Ultra-Web&#153; Synthetic ECM is a nanofibrillar cell culture surface that
provides a biomimetic environment for more consistent and reproducible
</FONT><I><FONT face=serif size=2>in vivo</FONT></I><FONT face=serif size=2>-like cell phenotypes, leading to more biologically accurate results. The
Ultra-Web&#153; technology involves electrospinning various polymers to produce a
nanofiber material that is a defined and reproducible cell culture surface.
Modification of the nanofibers with specific surface chemistries and functional
groups can further enhance the desired cell matrix interactions. Extensive
laboratory testing of this cell culture surface has substantiated improved
performance when compared to conventional plastic and glass surface technology,
with observations of more </FONT><I><FONT face=serif size=2>in
vivo</FONT></I><FONT face=serif size=2>-like cellular morphology, organization,
and activity.</FONT></P>
<P align=justify><FONT face=serif size=2><EM>Diagnostic
Royalties</EM></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
also licensed patent rights to Abbott Laboratories involving a format for
</FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2>
diagnostic tests. This format has found broad application in the area of rapid
point-of-care diagnostic testing, such as pregnancy, strep and flu tests. At the
end of fiscal 2004, we expanded our agreement with Abbott by purchasing the
future royalty streams under certain of Abbott&#146;s sublicenses until the
expiration of our patents in fiscal 2009. Prior to such expansion, we were
receiving only a portion of the royalties under such sublicenses.</FONT></P>
<P align=justify><FONT face=serif size=2><STRONG>Research and
Development</STRONG></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
research and development personnel work to enhance and expand our technology
offerings in the area of surface modification and drug delivery through internal
scientific investigation. These scientists and engineers also evaluate external
technologies in support of our business development activities. All of these
efforts are directed by an assessment of the needs of the markets in which we do
business. Additionally, the R&amp;D staff support the sales staff and business
units in performing feasibility studies, providing technical assistance to
potential customers, optimizing the coating methodologies for specific customer
applications, supporting clinical trials, training customers, and integrating
our technologies and know-how into customer manufacturing operations.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We work
together with our customers to integrate the best possible surface modification
and drug delivery technologies with their products, not only to meet their
performance requirements, but also to perform services quickly so that the
product may reach the market ahead of the competition. To quickly solve problems
that might arise during the development and optimization process, we have
developed comprehensive capabilities in analytical chemistry and surface
characterization within our R&amp;D organization. Our state-of-the-art
instrumentation and extensive experience allow us to test the purity of coating
reagents, to monitor the elution rate of drug from coatings, microparticles and
implants, to measure coating thickness and smoothness, and to map the
distribution of chemicals throughout coatings, microparticles and implants. We
believe our capabilities far exceed those of our direct competitors, and
sometimes even exceed those of our large-company customers.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As
medical products become more sophisticated and complex and as competition
increases, we believe the need for surface modification and drug delivery will
continue to grow. We intend to continue our development efforts to expand our
surface modification and drug delivery technologies to provide additional
optimized properties </FONT></P>
<P align=center><FONT face=serif size=2>12</FONT></P>
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<P align=justify><FONT face=serif size=2>to meet these needs across multiple
medical markets. In addition, we are expanding our drug delivery and surface
modification technology expertise to capture more of the final product value. We
are doing this by, in selected cases, developing or acquiring technologies or
devices to develop from feasibility, up to and including animal and human
clinical tests. There can be no assurance that we will be successful in
developing or acquiring additional technologies or devices.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>After
thorough consideration of each market opportunity, our technical strategy is to
target selected formulation characteristics for further development, to
facilitate and shorten the license cycle. We continue to perform research into
applications for future products both on our own and in conjunction with some of
our customers. Some of the research and development projects currently in
progress include additional polymer systems for site specific and systemic drug
delivery, including biodegradable technologies, as well as technologies to
improve endothelialization of implantable devices and to improve long-term blood
compatibility, nanofiber cell culture technologies and drug delivery platforms
for ophthalmic applications.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In fiscal
2007, 2006 and 2005, our research and development expense was $28.5 million,
$20.4 million and $16.1 million, respectively. A portion of this expense is
billed to customers for coating optimization and other development work on
customer product applications. Research and development revenue in fiscal 2007,
2006 and 2005, was $6.9 million, $5.7 million and $5.4 million, respectively.
We intend to continue investing in research and development to advance our
surface modification and drug delivery technologies and to expand uses for our
technology bases. In addition, we continue to pursue access to products and
technologies developed outside the Company as appropriate to complement our
internal research and development efforts.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Patents and Proprietary
Rights</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Patents
and other forms of proprietary rights are an essential part of the SurModics
business model. We protect our extensive portfolio of technologies through a
number of U.S. patents covering a variety of coatings, drug delivery methods,
reagents, and formulations, as well as particular clinical device applications.
We generally file international patent applications in the locations matching
the major markets of our customers (primarily in North America, Europe, and
Japan) in parallel with U.S. applications. In fiscal 2007, we filed 47 United
States patent applications, expanding the portfolio protection around our
current technologies as well as enabling pursuit of new technology concepts,
innovations, and directions. As of September 30, 2007, we had 119 pending United
States patent applications, 8 of which were exclusively licensed from others,
and 272 foreign patent applications, of which 5 were exclusively licensed from
others. We own 96 issued U.S. patents and&nbsp;149 international patents.
Additionally, we have exclusively licensed rights to&nbsp;25 U.S. patents and 90
international patents.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We also
rely upon trade secrets and other unpatented proprietary technologies. We seek
to maintain the confidentiality of such information by requiring employees,
consultants and other parties to sign confidentiality agreements and by limiting
access by parties outside the Company to such information. There can be no
assurance, however, that these measures will prevent the unauthorized disclosure
or use of this information or that others will not be able to independently
develop such information. Additionally, there can be no assurance that any
agreements regarding confidentiality and non-disclosure will not be breached,
or, in the event of any breach, that adequate remedies would be available to
us.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Marketing and Sales</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We market
our technologies and products throughout the world using a direct sales force
consisting of dedicated sales professionals who focus on specific markets and
companies. These sales professionals work in concert with business unit
personnel to coordinate customer activities. Business unit general managers are
also integrally involved in sales and marketing activities. The specialization
of our sales professionals fosters an in-depth knowledge of the issues faced by
our customers within these markets such as industry trends, technology changes,
biomaterial changes and the regulatory environment. In addition, we are pursuing
further sales and marketing relationships in other geographies around the world.
Information regarding domestic and foreign revenues in Note 8 &#147;Operating
Segments&#148; under &#147;Notes to Financial Statements&#148; is incorporated herein by
reference.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
general, we license our technologies on a non-exclusive basis to customers for
use on specific products. This strategy enables us to license our technologies
to multiple customers in the same market. We also target new product
applications with existing customers.</FONT></P>
<P align=center><FONT face=serif size=2>13</FONT></P>
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<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>To
support our marketing and sales activities, we publish technical literature on
our various surface modification, drug delivery, and </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> technologies and products. In
addition, we exhibit at major trade shows and technical meetings, advertise in
selected trade journals and through our web site, and conduct direct mailings to
appropriate target markets.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We also
offer ongoing customer service and technical support throughout our licensees&#146;
relationships with us. This service and support may begin with a feasibility
study, and also may include additional services such as assistance in the
transfer of the technology to the licensee, further optimization, process
control and trouble shooting, preparation of product for clinical studies, and
assistance with regulatory submissions for product approval. Most of these
services are billable to customers.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Acquisitions and
Investments</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In order
to further our strategic objectives and strengthen our existing businesses, we
intend to continue to explore acquisitions, investments and strategic
collaborations to diversify and grow our business. As a result, we expect to
make future investments or acquisitions where we believe that we can broaden our
technology offerings and expand our sources of revenue and the number of markets
in which we participate. Mergers and acquisitions of medical technology
companies are inherently risky and no assurance can be given that any of our
previous or future acquisitions will be successful or will not materially
adversely affect our consolidated results of operations, financial condition, or
cash flows.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On July
10, 2007, we completed a $3.5 million equity investment in Paragon Intellectual
Properties, LLC, and its subsidiary, Apollo Therapeutics, LLC. SurModics has
agreed to invest an additional $2.5 million upon successful completion of
specified development milestones, which we expect will occur no later than the
second quarter of fiscal 2008. The investment was made in conjunction with our
agreement with Apollo to collaborate on the development of a coronary stent
system incorporating our proprietary Finale&#153; prohealing coating
technology.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On August
1, 2007, we announced our acquisition of Brookwood Pharmaceuticals, Inc., a
leading provider of drug delivery technology primarily to the pharmaceutical
industry, from Southern Research Institute, for $40 million in upfront cash at
closing and up to an additional $22 million in cash upon the successful
achievement of specified milestones. We will account for our acquisition of
Brookwood under the purchase method of accounting. Brookwood Pharmaceuticals is
a drug delivery company that provides its proprietary polymer-based technologies
to companies developing improved pharmaceutical products. The company has
particular strength in proprietary injectable microparticles and implant
technology, both of which are based on biodegradable polymers, to provide
sustained drug delivery. This acquisition is expected to help us broaden our
technology offerings to our customers, diversify the range of markets in which
we participate, expand our customer base, and enhance our pipeline of potential
revenue generating opportunities.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On August
13, 2007, we announced our acquisition of BioFX Laboratories, Inc., a provider
of substrates to the </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostics industry, for $11.3 million in cash at closing
and up to an additional $11.4 million in cash upon the successful achievement of
specified revenue targets. We will account for our acquisition of BioFX under
the purchase method of accounting. BioFX Laboratories is a leading manufacturer
of substrates, a critical component of diagnostic test kits used to detect and
signal that a certain reaction has taken place. We expect our acquisition of
BioFX to broaden our product portfolio in the </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostics market and expand
marketing opportunities for each company&#146;s products by way of complementary
customer bases.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Significant Customers</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
two customers that each provided more than 10% of our revenue in fiscal 2007.
Revenue from Johnson &amp; Johnson and Abbott Laboratories represented
approximately 33% and 16%, respectively, of our total revenue for the year ended
September 30, 2007. We have several products from each generating revenue for
us. Additionally, as previously discussed, during fiscal 2007, we announced the
signing of a collaborative research and license agreement with Merck to pursue
the development and commercialization of our I-vation&#153; intravitreal implant in
combination with triamcinolone acetonide and certain proprietary Merck
compounds. Under the terms of our agreement with Merck, we received an up-front
license fee of $20 million and may receive up to an additional $288 million in
fees and development milestones associated with the successful product
development and attainment </FONT></P>
<P align=center><FONT face=serif size=2>14</FONT></P>
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<P align=justify><FONT face=serif size=2>of appropriate U.S. and EU regulatory approvals for these new
combination products. We will also be paid for our activities in researching and
developing these combination products. Additionally, under the terms of our
agreement with Merck, we will be responsible for the exclusive manufacture and
supply of clinical and commercial products. We will also receive royalties on
sales of products developed under our collaboration. The loss of one or more of
our largest customers could have a material adverse effect on our business,
financial condition, results of operations, and cash flow as discussed in more
detail below.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Competition</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
ability for surface modification and drug delivery technologies to improve the
performance of medical devices and drugs and to enable new product categories
has resulted in increased competition in these markets. Our surface modification
and drug delivery technologies compete with technologies developed by Alkermes,
Inc., AST Products, Inc., Biocompatibles International plc, BioSensors
International Group, Ltd., Durect Corporation, Hydromer, Inc., MediVas, LLC,
pSivida Limited, QLT Inc., Specialty Coating Systems, Inc., STS Biopolymers
Inc., a division of Angiotech Pharmaceuticals, Inc., and W.L. Gore &amp;
Associates, among others. Some of these companies offer drug delivery
technologies, while others specialize in lubricious or hemocompatible coating
technology. Some of these companies target ophthalmology applications, while
others target cardiovascular medical device applications. In addition, due to
the many product possibilities afforded by surface modification technologies,
many of the large medical device manufacturers have developed or are engaged in
efforts to develop internal competency in the area of surface modification and
drug delivery. Some of our existing and potential competitors (especially
medical device manufacturers pursuing coating solutions through their own
research and development efforts) have greater financial, technical and
marketing resources than we have.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
attempt to differentiate ourselves from our competitors by providing what we
believe is a high value added approach to surface modification and drug delivery
technology. We believe that the primary factors customers consider in choosing a
particular technology include performance (e.g., flexibility, ability to fine
tune drug elution profiles, biocompatibility, etc.), ease of manufacturing,
time-to-market, intellectual property protection, ability to produce multiple
properties from a single process, compliance with manufacturing regulations,
customer service and total cost of goods (including manufacturing process
labor). We believe our technologies deliver exceptional performance in these
areas, allowing us to compete</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>favorably with respect to these factors. We believe that the
cost and time required to obtain the necessary regulatory approvals
significantly reduces the likelihood of a customer changing the manufacturing
process it uses once a device or drug has been approved for sale.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Because a
significant portion of our revenue is dependent on the receipt of royalties
based on sales of medical devices incorporating our technologies, we are also
affected by competition within the markets for such devices. We believe that the
intense competition within the medical device market creates opportunities for
our technologies as medical device manufacturers seek to differentiate their
products through new enhancements or to remain competitive with enhancements
offered by other manufacturers. Because we seek to license our technologies on a
non-exclusive basis, we may further benefit from competition within the medical
device markets by offering our technologies to multiple competing manufacturers
of a device. However, competition in the medical device market could also have
an adverse effect on us. While we seek to license our products to established
manufacturers, in certain cases our licensees may compete directly with larger,
dominant manufacturers with extensive product lines and greater sales, marketing
and distribution capabilities. We also are unable to control other factors that
may impact commercialization of coated devices, such as regulatory approval,
marketing and sales efforts of our licensees or competitive pricing pressures
within the particular device market. There can be no assurance that products
employing our technologies will be successfully commercialized by our licensees
or that such licensees will otherwise be able to compete effectively.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Manufacturing</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Historically, we have performed limited manufacturing activities for our
customers. In general, we do not coat medical devices that are intended for
commercial sale by our customers,&nbsp;though we often support our customers by
coating products intended for pre-clinical and clinical development, including
human clinical trials. However, during fiscal 2007, we agreed to become the
exclusive manufacturer of all clinical and commercial I-vation products covered
by our license agreement with Merck. Our manufacturing arrangements with Merck
support our business strategy in a variety of ways, including allowing us to
capture more of the final value of products being commercialized with our
</FONT></P>
<P align=center><FONT face=serif size=2>15</FONT></P>
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<P align=justify><FONT face=serif size=2>technology. In order to fulfill our
commitments to Merck, however, our facilities will need to be upgraded. In this
regard, we expect to make investments in our operations to add capacity and to
bring our facilities into compliance with GMP and other applicable regulatory
standards. We may enter into similar arrangements with other of our customers
where a clear, strategic rationale exists.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Currently, we also manufacture most of the reagent chemicals used by our
customers in the coating process, allowing us to control the quality of the
reagents and maintain their proprietary nature, while providing an additional
source of revenue. Reagents are polymer chemicals that are prepared using a
proprietary formula in relatively small batch processes (as contrasted with
commodity chemicals prepared by large continuous methods). The reagents are sold
in dry form, requiring the licensee, in most cases, to simply add water, a
water/isopropyl alcohol mix, or other solvent to put them into solution before
application. We have developed proprietary testing and quality assurance
standards for manufacturing our reagents and do not disclose the reagent
formulas or manufacturing methods.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
Brookwood Pharmaceuticals business unit supports many drug delivery customers by
manufacturing microparticles and implants incorporating their drugs through
preclinical and clinical trials. We also offer these customers commercial
manufacturing capabilities for products that incorporate our drug delivery
technologies, but none of our microparticle or polymer implant-based drug
delivery products have yet reached the market. Additionally, our Brookwood
Pharmaceuticals business unit manufactures polymers for more than 100 medical
device companies, drug companies and universities. Several of the products that
incorporate the polymers that we produce have been commercialized.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We also
manufacture our proprietary line of activated coated glass slides for sale by GE
Healthcare under the CodeLink</FONT><SUP><FONT face=serif size=2>&#174;</FONT></SUP><FONT face=serif size=2> brand. Precision glass slides are
cleaned and pretreated in a multiple-step process. We apply our proprietary
PhotoLink coating in a clean room environment, test the slides to assure they
meet quality standards, package slides in specialized containers and seal them
in moisture-proof packaging. Marketed and sold as either blank slides or
pre-arrayed with up to 40,000 genes, these products are a core technology of GE
Healthcare.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Additionally, we manufacture stabilization products employing a
three-step production process. First, component chemicals are mixed in high
purity water; next, these liquids are sterile-filtered into specific container
sizes under aseptic conditions; and finally, the resultant finished goods are
sealed and labeled. Through a somewhat different manufacturing process, our
substrates are mixed in high purity water then sealed and labeled, all under
controlled light conditions.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
attempt to maintain multiple sources of supply for the key raw materials used to
manufacture our products. We do, however, purchase some raw materials from
single sources, but we believe that additional sources of supply are readily
available. Further, to the extent additional sources of supply are not readily
available, we believe that we could manufacture such raw materials.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
we are not currently regulated by Good Manufacturing Practices (GMP), we follow
quality management procedures in part to respond to requests of customers to
establish compliance with their individual criteria. In an effort to better meet
our customers&#146; needs in this area, our Eden Prairie, Minnesota facility received
ISO 13485:2003 and ISO 9001:2000 certification in fiscal 2004 and has received
updated certifications in each subsequent year.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Government Regulation
</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
our surface modification and drug delivery technologies themselves
are</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>not
directly regulated by the U.S. Food and Drug Administration (&#147;FDA&#148;), the medical
devices and drugs incorporating our technologies are subject to FDA regulation.
New medical products utilizing our coating technologies can only be marketed in
the United States after a 510(k) application has been cleared or a pre-market
approval application (&#147;PMA&#148;) has been approved by the FDA. This process can take
anywhere from three months for a 510(k) application, to two or three years or
more for a PMA application. The burden of demonstrating to the FDA that a new
device is either equivalent to a previously marketed device (510(k) process), or
in the case of implantable devices, safe and effective (PMA process), rests with
our customers as the medical device manufacturers. If the primary mode of action
for a product is as a drug or biologic, customers are typically required to
submit an Investigational New Drug (IND) application to initiate clinical
studies that will support their marketing application, which is called a New
Drug Application (NDA) or Biologics License Application (BLA).</FONT></P>
<P align=center><FONT face=serif size=2>16</FONT></P>
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<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
support of our customers&#146; regulatory filings, we maintain confidential Device
Master Files at the FDA regarding the nature, chemical structure and
biocompatibility of our reagents. Although our licensees do not have direct
access to these files, they may, with our permission, reference these files in
their medical device submission to the FDA. This approach allows the FDA to
understand in confidence the details of our technologies without us having to
share this highly confidential information with our customers.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>U.S.
legislation allows companies, prior to obtaining FDA approval, to manufacture
devices in the U.S. and export them for sale in international markets. This
generally allows us to realize earned royalties sooner. However, sales of
medical devices outside the U.S. are subject to international requirements that
vary from country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required by the
FDA.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
is currently conducting a Phase I safety trial for our I-vation&#153; implant. The
study is being conducted at four clinical sites under an IND according to Good
Clinical Practices. We completed enrollment of the Phase I trial in fiscal 2006,
and we will conduct follow-up monitoring of the patients for three
years.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Employees</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
December 1, 2007, we had 244 employees, of whom 187 were engaged in product
development, quality, or manufacturing positions, with the remainder in sales,
marketing, or administrative positions. Post-graduate degrees are held by 79 of
our employees, 32 of whom hold Ph.D. degrees. We are not a party to any
collective bargaining agreements, and we believe that our employee relations are
good.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
believe that future success will depend in part on our ability to attract and
retain qualified technical, management and marketing personnel. Such experienced
personnel are in high demand, and we must compete for their services with other
firms that may be able to offer more favorable benefits.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Forward-Looking
Statements</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Certain
statements contained in this Form 10-K, in the Company&#146;s annual report to
shareholders or in other reports of the Company and other written and oral
statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered &#147;forward-looking
statements&#148; that provide current expectations or forecasts of future events.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by the use of terminology such as &#147;anticipate,&#148; &#147;believe,&#148; &#147;could,&#148;
&#147;estimate,&#148; &#147;expect,&#148; &#147;forecast,&#148; &#147;intend,&#148; &#147;may,&#148; &#147;plan,&#148; &#147;possible,&#148;
&#147;project,&#148; &#147;will&#148; and similar words or expressions. Any statement that is not a
historical fact, including estimates, projections, future trends and the outcome
of events that have not yet occurred, are forward-looking statements. The
Company&#146;s forward-looking statements generally relate to its growth strategy,
financial results, product development programs, sales efforts, and the impact
of the Cordis and Merck agreements, as well as other significant customer
agreements. You should carefully consider forward-looking statements and
understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be affected by inaccurate assumptions. Consequently,
no forward-looking statement can be guaranteed and actual results may vary
materially. The Company undertakes no obligation to update any forward-looking
statement.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
it is not possible to create a comprehensive list of all factors that may cause
actual results to differ from the Company&#146;s forward-looking statements, such
factors include, among others:</FONT></P>
<UL style="TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2>the Company&#146;s significant reliance on its
  relationship with Cordis, which causes our financial results and </FONT><FONT face=serif size=2>stock price to be subject to factors affecting Cordis and
  its CYPHER<SUP><FONT face=serif size=2>&#174; </FONT></SUP></FONT><FONT face=serif size=2>stent program, including among </FONT><FONT face=serif size=2>others,
  the rate of market penetration by Cordis, the timing of market introduction of
  competing products, </FONT><FONT face=serif size=2>product safety or efficacy
  concerns and intellectual property litigation generally and specifically the
  litigation involving Boston Scientific Scimed, Inc. and Cordis in the U.S.
  District Court for the District of Delaware in which each was reported in June
  and July 2005 to have infringed the patent rights of the other;<BR>&nbsp;
  </FONT>
  <LI><FONT face=serif size=2>the Company&#146;s reliance on its relationship with
  Merck and the need to achieve development milestones, conduct clinical trials,
  obtain regulatory approvals, and market I-vation products covered by our
  license agreement with Merck;</FONT></LI></UL>
<P align=center><FONT face=serif size=2>17</FONT></P>
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<PAGE><BR>
<UL style="FONT-SIZE: 10pt; TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2>frequent intellectual property litigation in the
  medical device industry that may directly or indirectly</FONT> <FONT face=serif size=2>adversely affect our customers&#146; ability to market their
  products incorporating our technologies;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>our ability to protect our own intellectual
  property;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>healthcare reform efforts and reimbursement rates
  for medical device products that may adversely affect our</FONT> <FONT face=serif size=2>customers&#146; ability to cost-effectively market and sell
  devices incorporating our technologies;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to attract new licensees and
  to enter into agreements for additional product</FONT> <FONT face=serif size=2>applications with existing licensees, the willingness of potential
  licensees to sign license agreements under</FONT> <FONT face=serif size=2>the
  terms offered by the Company, and the Company&#146;s ability to maintain
  satisfactory relationships with its</FONT> <FONT face=serif size=2>licensees;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to increase the number of
  market segments and applications that use its coating</FONT> <FONT face=serif size=2>technologies through its sales and marketing and research and
  development efforts;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to facilitate through
  strategic investment and research and development support the</FONT> <FONT face=serif size=2>creation of new medical device market segments and
  applications that incorporate its coating technologies;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>market acceptance of products sold by customers
  incorporating our technologies and the timing of new</FONT> <FONT face=serif size=2>product introductions by licensees;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>market acceptance of products sold by customers&#146;
  competitors and the timing and pricing of new product</FONT> <FONT face=serif size=2>introductions by customers&#146; competitors;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the difficulties and uncertainties associated with
  the lengthy and costly new product development and</FONT> <FONT face=serif size=2>foreign and domestic regulatory approval processes, such as delays,
  difficulties or failures in achieving</FONT> <FONT face=serif size=2>acceptable clinical results or obtaining foreign or FDA marketing
  clearances, which may result in lost market</FONT> <FONT face=serif size=2>opportunities or postpone or preclude product commercialization by
  licensees;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>efficacy or safety concerns with respect to
  products marketed by us and our licensees, whether scientifically</FONT> <FONT face=serif size=2>justified or not, that may lead to product recalls,
  withdrawals or declining sales;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the ability to secure raw materials for reagents
  the Company sells;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to manage successfully
  clinical trials and related foreign and domestic regulatory</FONT> <FONT face=serif size=2>processes for the I-vation&#153; intravitreal implant or other
  acquired products from InnoRx under development</FONT> <FONT face=serif size=2>by the Company&#146;s Ophthalmology business unit, whether delays,
  difficulties or failures in achieving</FONT> <FONT face=serif size=2>acceptable clinical results or obtaining foreign or FDA marketing
  clearances postpone or preclude product</FONT> <FONT face=serif size=2>commercialization of the intravitreal implant or other acquired
  products, and whether the intravitreal implant</FONT> <FONT face=serif size=2>and any other acquired products remain viable commercial
  prospects;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>product liability claims not covered by
  insurance;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the development of new products or technologies by
  competitors, technological obsolescence and other</FONT> <FONT face=serif size=2>changes in competitive factors;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the trend of consolidation in the medical device
  industry, resulting in more significant, complex and long</FONT> <FONT face=serif size=2>term contracts than in the past and potentially greater
  pricing pressures;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to identify suitable
  businesses to acquire or with whom to form strategic relationships</FONT>
  <FONT face=serif size=2>to expand its technology development and
  commercialization, its ability to successfully integrate the</FONT> <FONT face=serif size=2>operations of companies it may acquire from time to time and
  its ability to create synergies from acquisitions</FONT> <FONT face=serif size=2>and other strategic relationships;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to successfully internally
  perform certain product development activities and</FONT> <FONT face=serif size=2>governmental and regulatory compliance activities with respect to
  acquired technology, including InnoRx</FONT> <FONT face=serif size=2>technology, which activities the Company has not previously undertaken
  in any significant manner;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the Company&#146;s ability to improve and qualify its
  facilities to accommodate its obligations to manufacture</FONT> <FONT face=serif size=2>and supply clinical and commercial quantities of the
  I-vation&#153; intravitreal implant for Merck and other</FONT> <FONT face=serif size=2>potential licensees of that technology;</FONT></LI></UL>
<P align=center><FONT face=serif size=2>18</FONT></P>
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<UL style="FONT-SIZE: 10pt; TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2>economic and other factors over which the Company
  has no control, including changes in inflation and</FONT> <FONT face=serif size=2>consumer confidence;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>acts of God or terrorism which impact the
  Company&#146;s personnel or facilities; and<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>other factors described below in &#147;Risk
  Factors.&#148;</FONT></LI></UL>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Many of
these factors are outside the control and knowledge of the Company, and could
result in increased volatility in period-to-period results. Investors are
advised not to place undue reliance upon the Company&#146;s forward-looking
statements and to consult any further disclosures by the Company on this subject
in its filings with the Securities and Exchange Commission. Many of the factors
identified above are discussed in more detail below under &#147;Risk
Factors.&#148;</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 1A. RISK
FACTORS.</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>RISKS RELATING TO OUR BUSINESS,
STRATEGY AND INDUSTRY</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>The loss of, or significant
reduction in business from, one or more of our major customers could
significantly reduce our revenue, earnings or other operating
results.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
two customers that each provided more than 10% of our revenue in fiscal 2007.
Revenue from Johnson &amp; Johnson  and Abbott Laboratories represented
approximately 33% and 16%, respectively, of our total revenue for the year ended
September 30, 2007. Additionally, as previously discussed, during fiscal 2007,
we announced the signing of a collaborative research and license agreement with
Merck to pursue the development and commercialization of our I-vation&#153;
intravitreal implant in combination with triamcinolone acetonide and certain
proprietary Merck compounds. The loss of one or more of our largest customers,
or reductions in business from them, could have a material adverse effect on our
business, financial condition, results of operations, and cash flow. There can
be no assurance that revenue from any customer will continue at their historical
levels. If we cannot broaden our customer base, we will continue to depend on a
few customers for the majority of our revenue.</FONT></P>
<P align=justify><B><FONT face=serif size=2>The long-term success of our
business may suffer if we are unable to expand our licensing base to reduce our
reliance upon several major customers.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A
significant portion of our revenue is derived from a relatively small number of
customer products. We intend to continue pursuing a strategy of licensing our
technologies to a diversified base of medical device and drug manufacturers and
other customers, thereby expanding the licensing base for our technologies.
Success will depend, in part, on our ability to attract new licensees, to enter
into agreements for additional applications with existing licensees and to
develop and market new applications. There can be no assurance that we will be
able to identify, develop and adapt our technologies for new applications in a
timely and cost effective manner; that new license agreements will be executed
on terms favorable to us; that new applications will be accepted by customers in
our target markets; or that products incorporating newly licensed technology,
including new applications, will gain regulatory approval, be commercialized or
gain market acceptance. Delays or failures in these efforts could have an
adverse effect on our business, financial condition and results of
operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Surface modification and drug
delivery are competitive markets and carry the risk of technological
obsolescence.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
operate in a competitive and evolving field and new developments are expected to
continue at a rapid pace. Our success depends, in part, upon our ability to
maintain a competitive position in the development of technologies and products
in the field of surface modification and drug delivery. Our surface modification
and drug delivery technologies compete with technologies developed by Alkermes,
Inc., AST Products, Inc., Biocompatibles International plc, BioSensors
International Group, Ltd., Durect Corporation, Hydromer, Inc., MediVas, LLC,
pSivida Limited, QLT Inc., Specialty Coating Systems, Inc., STS Biopolymers
Inc., a division of Angiotech Pharmaceuticals, Inc., and W.L. Gore &amp;
Associates, among others. In addition, many medical device manufacturers have
developed, or are engaged in efforts to develop, surface modification or drug
delivery technologies for use on their own devices. Some of our existing and
potential competitors (especially medical device manufacturers pursuing coating
solutions through their own research and development efforts) have greater
financial and technical resources and </FONT></P>
<P align=center><FONT face=serif size=2>19</FONT></P>
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<P align=justify><FONT face=serif size=2>production and marketing capabilities
than us. Competitors may succeed in developing competing technologies or
obtaining governmental approval for products before us. Products incorporating
our competitors&#146; technologies may gain market acceptance more rapidly than
products using ours. Developments by competitors may render our existing and
potential products noncompetitive or obsolete. Furthermore, there can be no
assurance that new products or technologies developed by others, or the
emergence of new industry standards, will not render our products or
technologies or licensees&#146; products incorporating our technologies
noncompetitive or obsolete. Any new technologies which make our surface
modification or drug delivery technologies less competitive or obsolete would
have a material adverse effect on our business, financial condition and results
of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Failure to identify strategic
investment and acquisition opportunities may limit our growth.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>An
important part of our growth in the future may involve strategic investments and
the acquisition of complementary businesses or technologies. Our identification
of suitable investment opportunities and acquisition candidates involves risks
inherent in assessing the technology, value, strengths, weaknesses, overall
risks and profitability, if any, of investment and acquisition candidates. We
may not be able to identify suitable investment and acquisition candidates. If
we do not make suitable investments and acquisitions, we may find it more
difficult to realize our growth objectives.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Any acquisitions that we undertake
could be difficult to integrate, disrupt our business, dilute shareholder value,
or harm our operating results.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We may
make strategic investments or acquire complementary businesses, technologies, or
products if we identify a suitable investment or acquisition candidate. The
process of integrating new businesses into our operations poses numerous risks,
including:</FONT></P>
<UL style="FONT-SIZE: 10pt; TEXT-ALIGN: justify">
  <LI><FONT face=serif size=2>an inability to assimilate acquired operations,
  personnel, technology, information systems, and internal</FONT> <FONT face=serif size=2>control systems and products;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>diversion of management&#146;s
  attention;<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>difficulties and uncertainties in transitioning
  the customers or other business relationships from the acquired</FONT> <FONT face=serif size=2>entity to us; and<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>the loss of key employees of acquired
  companies.</FONT></LI></UL>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
addition, future acquisitions by us may be dilutive to our shareholders, and
cause large one-time expenses or create goodwill or other intangible assets that
could result in significant asset impairment charges in the future. Strategic
investments may result in impairment charges if the value of any such investment
declines significantly. In addition, if we acquire entities that have not yet
commercialized products but rather are developing technologies for future
commercialization, our earnings per share may fluctuate as we expend significant
funds for continued research and development efforts for acquired technology
necessary to commercialize such technology. We cannot guarantee that we will be
able to complete successfully any investments or acquisitions or that we will
realize any anticipated benefits from investments or acquisitions that we
complete.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Our acquisition of Brookwood
Pharmaceuticals could be difficult to integrate and may disrupt our business,
dilute shareholder value, or harm our operating results.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
acquisition of Brookwood Pharmaceuticals was the largest in our Company&#146;s
history. The process of integrating any acquired business, technology, or
product into our business and operations may result in unforeseen operating
difficulties and expenditures, including those described above. Our ability to
realize the anticipated benefits of our acquisition of Brookwood will require
the integration of our sales and marketing efforts to certain customers,
integration of information technology and other administration systems.
Additional operating difficulties may arise as a result of our having to manage
a large, remote location with a limited management team. Failure to successfully
integrate Brookwood into our operations may adversely affect our operating
results.</FONT></P>
<P align=center><FONT face=serif size=2>20</FONT></P>
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<P align=justify><B><FONT face=serif size=2>Our failure to expand our management
systems and controls to support anticipated growth or integrate acquisitions
could seriously harm our operating results and business.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
operations are expanding, and we expect this trend to continue as we execute our
business strategy. Executing our business strategy has placed significant
demands on management and our administrative, development, operational,
information technology, manufacturing, financial and personnel resources.
Accordingly, our future operating results will depend on the ability of our
officers and other key employees to continue to implement and improve our
operational, development, customer support and financial control systems, and
effectively expand, train and manage our employee base. Otherwise, we may not be
able to manage our growth successfully.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Research and development of new
technologies may adversely affect our operating results.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
success of our business depends on a number of factors, including our continued
research and development of new technologies for future commercialization. In
researching and developing such new technologies, we may incur significant
expenses that may adversely affect our operating results, including our
profitability. Additionally, these activities are subject to risks of failure
that are inherent in the development of new medical technologies and as a
result, may never result in commercially viable technologies.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We recognize revenue in accordance
with various complex accounting standards, and changes in circumstances or
interpretations may lead to accounting adjustments.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
revenue recognition policies involve application of various complex accounting
standards, including SEC Staff Accounting Bulletin No. 104, or SAB 104, and
Emerging Issues Task Force Issue No. 00-21 entitled,</FONT><I><FONT face=serif size=2> &#147;Revenue Arrangements with Multiple Deliverables.&#148;</FONT></I><FONT face=serif size=2> Our compliance with such accounting standards often involves
management&#146;s judgment regarding whether the criteria set forth in the standards
have been met such that we can recognize as revenue the amounts that we receive
as payment for our products or services. We base our judgments on assumptions
that we believe to be reasonable under the circumstances. However, these
judgments, or the assumptions underlying them, may change over time. In
addition, the SEC, PCAOB or AICPA may issue new positions or revised guidance on
the treatment of complex accounting matters. Changes in circumstances or
third-party guidance could cause our judgments to change with respect to our
interpretations of these complex standards, and transactions recorded, including
revenues recognized, for one or more prior reporting periods could be adversely
affected.</FONT></P>
<P align=justify><B><FONT face=serif size=2>RISKS RELATING TO OUR OPERATIONS AND
RELIANCE ON THIRD PARTIES</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>We rely on third parties to market,
distribute and sell the products incorporating our technologies, and those third
parties may not perform or agreements with those parties could be
terminated.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A
principal element of our business strategy is to enter into licensing
arrangements with medical device, pharmaceutical, and biotechnology companies
that manufacture products incorporating our technologies. For the fiscal years
ended September 30, 2007, 2006 and 2005, we derived approximately 72%, 76% and
76%, of our revenue, respectively, from royalties and license fees. We do not
currently market, distribute or sell our own medical devices, pharmaceutical or
biologic compounds, nor do we intend to do so in the foreseeable future. Thus,
our prospects are substantially dependent on the receipt of royalties from
licensees of our technologies. The amount and timing of such royalties are, in
turn, dependent on the ability of our licensees to gain successful regulatory
approval for, market and sell products incorporating our technologies. Failure
of certain licensees to gain regulatory approval or market acceptance for such
products could have a material adverse effect on our business, financial
condition and results of operations.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
customers market and sell (and most manufacture) the products incorporating our
licensed technologies. If one or more of our licensees fail to pursue the
development or marketing of these products as planned, our revenue and profits
may not reach our expectations, or may decline. Additionally, our ability to
generate positive operating results in connection with the achievement of
development or commercialization milestones may also suffer. We do not control
the timing and other aspects of the development or commercialization of products
incorporating our licensed technologies because our customers may have
priorities that differ from ours or their development or </FONT></P>
<P align=center><FONT face=serif size=2>21</FONT></P>
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<P align=justify><FONT face=serif size=2>marketing efforts may be unsuccessful,
resulting in delayed or discontinued products. Hence, the amount and timing of
royalty payments received by us will fluctuate, and such fluctuations could have
a material adverse effect on our business, financial condition and results of
operations.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Under our
standard license agreements, licensees can terminate the license for any reason
upon 90 days&#146; prior written notice. Existing and potential licensees have no
obligation to deal exclusively with us in obtaining surface modification or drug
delivery technologies and may pursue parallel development or licensing of
competing technological solutions on their own or with third parties. A decision
by a licensee to terminate its relationship with us could materially adversely
affect our business, financial condition and results of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We have limited or no redundancy in
our manufacturing facilities, and we may lose revenue and be unable to maintain
our customer relationships if we lose our production capacity.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
manufacture all of the products we sell in our existing production labs in our
Eden Prairie, Minnesota, Birmingham, Alabama, and Owings Mills, Maryland
facilities. If our existing production facilities become incapable of
manufacturing products for any reason, we may be unable to meet production
requirements, we may lose revenue and we may not be able to maintain our
relationships with our customers, including certain of our licensees. Without
our existing production facilities, we would have no other means of
manufacturing products until we were able to restore the manufacturing
capability at a particular facility or develop an alternative manufacturing
facility. Although we carry business interruption insurance to cover lost
revenue and profits in an amount we consider adequate, this insurance does not
cover all possible situations. In addition, our business interruption insurance
would not compensate us for the loss of opportunity and potential adverse impact
on relations with our existing customers resulting from our inability to produce
products for them.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We have limited experience
manufacturing pharmaceutical products for commercial sale and use, and we may be
subject to adverse consequences if we fail to comply with applicable
regulations.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Under the
terms of our agreement with Merck, we will be responsible for the manufacture
and supply of clinical and commercial quantities of the I-vation intravitreal
implant for use with certain pharmaceutical compounds. In addition to our
obligations to Merck, we may elect to manufacture other pharmaceutical products
for other existing or future licensees under appropriate circumstances. The
manufacture of pharmaceutical products can be an expensive, time consuming, and
complex process. Further, any manufacturer of pharmaceutical products is subject
to applicable Good Manufacturing Practices (GMP) as prescribed by the Food and
Drug Administration or other rules and regulations prescribed by foreign
regulatory authorities. Our current facilities do not meet these regulations. In
order to fulfill our commitments to Merck, we will need to make
investments in our operations to add capacity and to bring our facilities into
compliance with the applicable regulatory standards. We may be unable to
maintain our facilities or implement procedures that comply with GMP or other
applicable regulatory standards. Such a failure to comply with GMP could result
in significant time delays or inability to obtain (and maintain) marketing
approval for the I-vation products to be sold by Merck. Furthermore, we may be
subject to sanctions, including temporary or permanent suspension of operations,
product recalls and marketing restrictions, if we fail to comply with the laws
and regulations pertaining to our business.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We may face product liability claims
related to participation in clinical trials or the use or misuse of our
products.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
development and sale of medical devices and component products involves an
inherent risk of product liability claims. Although we expect that devices
incorporating our technologies will be manufactured by others and sold under
their own labels, and in most cases our customer agreements provide
indemnification against such claims, there can be no assurance that product
liability claims will not be filed against us for such devices or that such
manufacturers will not seek indemnification or other relief from us for any such
claims. In addition, there can be no assurance that product liability claims
will not be filed directly against us with respect to our own products. There
can be no assurance that our current product liability insurance will continue
to be available to us on acceptable terms, if at all, or that, if available, the
coverages will be adequate to protect us against any future product liability
claims. Furthermore, we do not expect to be able to obtain insurance covering
our costs and losses as a result of any recall of products or devices
incorporating our technologies because of alleged defects, whether such recall
is </FONT></P>
<P align=center><FONT face=serif size=2>22</FONT></P>
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<PAGE>
<P align=justify><FONT face=serif size=2>instituted by a device manufacturer or
us or required by a regulatory agency. A product liability claim, recall or
other claim with respect to uninsured liabilities or for amounts in excess of
insured liabilities could have a material adverse effect on our business,
financial condition and results of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Our manufacture and supply of
pharmaceutical products may subject us to product liability claims directly
against us that could result in costly litigation and significant
liability</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
involvement in the manufacture and supply of clinical and commercial quantities
of the I-vation intravitreal implant for Merck, and potentially other licensees,
may expose us to significant risk of product liability claims filed directly
against us. Any product liability claims, with or without merit, could result in
costly litigation, reduced sales, significant liabilities and diversion of our
management&#146;s time, attention and resources. We have obtained a level of
liability insurance coverage that we believe is adequate in scope and coverage
given our current stage of development. However, we cannot be sure that our
product liability insurance coverage is adequate or that it will continue to be
available to us on acceptable terms, if at all. If a product liability claim or
series of claims are brought against us in excess of our insurance coverage, the
payment of such liabilities could have a negative effect on our business and
financial condition.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Our revenue will be harmed if we
cannot purchase sufficient reagent components we use in our manufacture of
reagents.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
currently purchase some of the components we use to manufacture coating reagents
from sole suppliers. If any of our sole suppliers becomes unwilling to supply
components to us, incurs an interruption in its production or is otherwise
unable to provide us with sufficient material to manufacture our reagents, we
will experience production interruptions. If we lose our sole supplier of any
particular reagent component or are otherwise unable to procure all components
required for our reagent manufacturing for an extended period of time, we may
lose the ability to manufacture the reagents our customers require to
commercialize our coating technology. This could result in lost royalties and
product sales, which would harm our financial results. Adding suppliers to our
approved vendor list may require significant time and resources since we
typically thoroughly review a supplier&#146;s business and operations to become
comfortable with the quality and integrity of the materials we purchase for use
with our technology, including reviewing a supplier&#146;s manufacturing processes
and evaluating the suitability of materials and packaging procedures the
supplier uses. We routinely attempt to maintain multiple suppliers of each of
our significant materials, so we have alternative suppliers if necessary.
However, if the number of suppliers of a material is reduced, or if we are
otherwise unable to obtain our material requirements on a timely basis and on
favorable terms, our operations may be harmed.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We are dependent upon key personnel
and may not be able to attract qualified personnel in the future.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
success is dependent upon our ability to retain and attract highly qualified
management and technical personnel. We face intense competition for such
qualified personnel. We do not maintain key person insurance, nor do we have
employment agreements with any of our employees, except for certain of our
executive officers and other employees at Brookwood. Although we have
non-compete agreements with most employees, there can be no assurance that such
agreements will be enforceable. The loss of the services of one or more key
employees or the failure to attract and retain additional qualified personnel
could have a material adverse effect on our business, financial condition and
results of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>RISKS RELATING TO CLINICAL AND
REGULATORY MATTERS</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>Products incorporating our
technologies are subject to continuing regulations and an extensive approval
process. If our licensees are unable to obtain or maintain the necessary
regulatory approvals for such products, then our licensees will not be able to
commercialize those products on a timely basis, if at all.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
surface modification and drug delivery technologies themselves are not directly
regulated, the medical devices or pharmaceutical products incorporating the
technologies are subject to regulation by the FDA and other regulatory
authorities. In order to obtain regulatory approval for products incorporating
our technologies, extensive preclinical studies as well as clinical trials in
humans will be required. Clinical development, including preclinical testing, is
a long, expensive and uncertain process. The burden of securing regulatory
approval for these </FONT></P>
<P align=center><FONT face=serif size=2>23</FONT></P>
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<P align=justify><FONT face=serif size=2>products typically rests with our
licensees (the medical device or pharmaceutical manufacturers). However, we have
prepared Device Master Files which may be accessed by the FDA and other
regulatory authorities to assist them in their review of the applications filed
by our licensees.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
process of obtaining FDA and other required regulatory approvals is expensive
and time-consuming. Historically, most medical devices incorporating our
technologies have been subject to the FDA&#146;s 510(k) marketing approval process,
which typically lasts from six to nine months. Supplemental or full pre-market
approval (&#147;PMA&#148;) reviews require a significantly longer period, delaying
commercialization. By contrast, pharmaceutical products incorporating our
technologies are subject to the FDA&#146;s investigational new drug application
process which typically takes a number of years to complete. Furthermore, sales
of medical devices and pharmaceutical products outside the U.S. are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>There can
be no assurance that our licensees will be able to obtain regulatory approval
for their products on a timely basis, or at all. Regulatory approvals, if
granted, may include significant limitations on the indicated uses for which the
product may be marketed. In addition, product approval could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. Changes in existing regulations or
adoption of new governmental regulations or policies could prevent or delay
regulatory approval of products incorporating our technologies or subject us to
additional regulation. Failure or delay of our licensees in obtaining FDA and
other necessary regulatory approval or clearance or the loss of previously
obtained approvals could have a material adverse effect on our business,
financial condition and results of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Any adverse results in the clinical
trials involving the I-vation&#153; intravitreal implant could weaken our ability to
commercialize the implant in a timely, cost-effective manner, if at
all.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We are
currently collaborating with Merck in conducting a Phase I safety trial for our
I-vation&#153; intravitreal implant. The Phase I trial is intended to help assess the
safety and tolerability of the implant in patients with diabetic macular edema
(DME), and is being conducted under an investigational new drug application with
the U.S. Food and Drug Administration. A total of thirty subjects were enrolled
in this Phase I trial, which enrollment was completed in March 2006, and will be
subject to follow-up monitoring for three years. Merck&#146;s ability to
commercialize this implant in a timely manner will depend upon the success of
this Phase I safety trial, as well as future required clinical trials that will
further evaluate and document the safety profile and therapeutic benefit in
targeted patient populations. Although the early results of the Phase I trial
have not identified any significant safety issues, we cannot be certain the
implant will perform as expected in additional clinical tests. Problems in
connection with our Phase I trials or in any subsequent phases of required
clinical trials may prevent or delay our or our partner&#146;s obtaining necessary
regulatory approvals and threaten our ability to timely or cost-effectively
commercialize the implant, if at all. Our Phase I trial is being conducted on a
statistically insignificant number of human patients and is not intended to
evaluate aspects of the effectiveness of the implant. Because the initial number
of tests performed in humans has been relatively small, there is no assurance
that the Phase I trials will identify problems that may become evident from a
larger base of tests or after a longer period of observation of the patients. We
will be able to accurately evaluate the performance of the implant in humans
only after extensive testing in large numbers of patients over a period of
years.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We may face liability if we
mishandle or improperly dispose of the hazardous materials used in some of our
research, development and manufacturing processes.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
research, development and manufacturing activities sometimes involve the
controlled use of various hazardous materials. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
While we currently maintain insurance in amounts which we believe are
appropriate in light of the risk of accident, we could be held liable for any
damages that might result from any such event. Any such liability could exceed
our insurance and available resources and could have a material adverse effect
on our business, financial condition and results of operations.</FONT></P>
<P align=center><FONT face=serif size=2>24</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Additionally, certain of our activities are regulated by federal and
state agencies in addition to the FDA. For example, activities in connection
with disposal of certain chemical waste are subject to regulation by the U.S.
Environmental Protection Agency. Some of our reagent chemicals must be
registered with the agency with basic information filed related to toxicity
during the manufacturing process as well as the toxicity of the final product.
Failure to comply with existing or future regulatory requirements could have a
material adverse effect on our business, financial condition and results of
operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>RISKS RELATING TO OUR INTELLECTUAL
PROPERTY</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>If we cannot adequately protect our
technologies and proprietary information, we may be unable to sustain a
competitive advantage.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
success depends, in large part, on our ability to obtain and maintain patents,
maintain trade secret protection, operate without infringing on the proprietary
rights of third parties and protect our proprietary rights against infringement
by third parties. We have been granted U.S. and foreign patents and have U.S.
and foreign patent applications pending related to our proprietary technologies.
There can be no assurance that any pending patent application will be approved,
that we will develop additional proprietary technologies that are patentable,
that any patents issued will provide us with competitive advantages or will not
be challenged or invalidated by third parties, or that the patents of others
will not prevent the commercialization of products incorporating our
technologies. Furthermore, there can be no assurance that others will not
independently develop similar technologies, duplicate any of our technologies or
design around our patents.</FONT></P>
<P align=justify><B><FONT face=serif size=2>We may become involved in expensive
and unpredictable patent litigation or other intellectual property proceedings
which could result in liability for damages, or impair our development and
commercialization efforts.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
commercial success also will depend, in part, on our ability to avoid infringing
patent or other intellectual property rights of third parties. There has been
substantial litigation regarding patent and other intellectual property rights
in the medical device and pharmaceutical industries, and intellectual property
litigation may be used against us as a means of gaining a competitive advantage.
Intellectual property litigation is complex, time consuming and expensive, and
the outcome of such litigation is difficult to predict. If we were found to be
infringing any third party patent or other intellectual property right, we could
be required to pay significant damages, alter our products or processes, obtain
licenses from others, which we may not be able to do on commercially reasonable
terms, if at all, or cease commercialization of our products and processes. Any
of these outcomes could have a material adverse effect on our business,
financial condition and results of operations.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Patent
litigation or U.S. Patent and Trademark Office interference proceedings may also
be necessary to enforce any patents issued or licensed to us or to determine the
scope and validity of third party proprietary rights. These activities could
result in substantial cost to us, even if the eventual outcome is favorable to
us. An adverse outcome of any such litigation or interference proceeding could
subject us to significant liabilities to third parties, require disputed rights
to be licensed from third parties or require us to cease using our technology.
Any action to defend or prosecute intellectual property would be costly and
result in significant diversion of the efforts of our management and technical
personnel, regardless of outcome, and could have a material adverse effect on
our business, financial condition and results of operations.</FONT></P>
<P align=justify><B><FONT face=serif size=2>If we are unable to keep our trade
secrets confidential, our technology and proprietary information may be used by
others to compete against us.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We rely
significantly upon proprietary technology, information, processes and know-how
that are not subject to patent protection. We seek to protect this information
through trade secret or confidentiality agreements with our employees,
consultants, potential licensees, or other parties as well as through other
security measures. There can be no assurance that these agreements or any
security measure will provide meaningful protection for our unpatented
proprietary information. In addition, our trade secrets may otherwise become
known or be independently developed by competitors.</FONT></P>
<P align=center><FONT face=serif size=2>25</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>If we or any of our licensees breach
any of the agreements under which we have in-licensed intellectual property from
others, we could be deprived of important intellectual property rights and
future revenue.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We are a
party to various agreements through which we have in-licensed or otherwise
acquired from third parties rights to certain technologies that are important to
our business. In exchange for the rights granted to us under these agreements,
we agree to meet certain research, development, commercialization, sublicensing,
royalty, indemnification, insurance, and other obligations. If we or one of our
licensees fails to comply with these obligations set forth in the relevant
agreement through which we have acquired rights, we may be unable to effectively
use, license, or otherwise exploit the relevant intellectual property rights and
may be deprived of current or future revenues that are associated with such
intellectual property.</FONT></P>
<P align=justify><B><FONT face=serif size=2>RISKS RELATING TO OUR
SECURITIES</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>Our stock price has been volatile
and may continue to be volatile.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
trading price of our common stock has been, and is likely to continue to be,
highly volatile, in large part attributable to developments and circumstances
related to factors identified in &#147;Forward-Looking Statements&#148; and &#147;Risk
Factors.&#148; The market value of your investment in our common stock may rise or
fall sharply at any time because of this volatility, and also because of
significant short positions taken by investors from time to time in our stock.
In the fiscal year ended September 30, 2007, the closing sale price for our
common stock ranged from $31.10 to $52.68 per share. As of December 7, 2007, the
last reported sale price of our stock was $52.73 per share. The market prices
for securities of medical technology, drug delivery and biotechnology companies
historically have been highly volatile, and the market has experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies.</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 1B. UNRESOLVED STAFF
COMMENTS.</FONT></B></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>None.</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 2. PROPERTIES.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
principal operations are located in Eden Prairie, a suburb of Minneapolis,
Minnesota, where we own a building that has approximately 64,000 square feet of
space. To accommodate the future growth needs of our business, in August 2007,
we entered in a purchase agreement providing us with certain rights to acquire
an undeveloped parcel of land near our Eden Prairie facility, and we also
entered into an agreement to lease a facility having approximately 73,000 square
feet of space.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
addition to our Eden Prairie facilities, we also own and lease facilities in
Birmingham, Alabama in connection with our Brookwood Pharmaceuticals operations.
We also lease facilities in Owings Mills, Maryland in connection with our BioFX
operations and lease office space in Irvine, California for use by our
Ophthalmology business unit.</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 3. LEGAL
PROCEEDINGS.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
information in Note 6 &#147;Commitments and Contingencies&#148; under &#147;Notes to Financial
Statements&#148; is incorporated herein by reference.</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.</FONT></B></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>There were no matters submitted to a
vote of security holders during the fourth quarter of fiscal 2007.</FONT></P>
<P align=center><FONT face=serif size=2>26</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>EXECUTIVE OFFICERS OF THE
REGISTRANT</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>The names,
ages and positions of the Company&#146;s executive officers are as
follows:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0><B><FONT face=serif color=#231f20 size=1>Name</FONT></B> </FONT></TD>
    <TD noWrap align=left width="29%">&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%"><FONT size=+0><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG>Age</STRONG><FONT color=#000000 size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="63%"><FONT size=+0><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Position</STRONG></FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Bruce J Barclay</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>51</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>President and Chief Executive Officer</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Aron
      B. Anderson, Ph.D.</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>44</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Vice President
      and Chief Scientific Officer</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Philip D. Ankeny</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>44</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Senior Vice President and Chief Financial Officer</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Douglas P. Astry</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>55</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>General Manager,
      In Vitro Technologies</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Lise W. Duran, Ph.D.</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>52</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Vice President and General Manager, Regenerative</FONT>&nbsp;
</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Technologies</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Peter
      L. Ginsberg</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>42</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Vice President
      of Business Development and Strategic</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="63%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Planning</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Steven J. Keough</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>52</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Senior Vice President and General Manager, Orthopedics</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>and Chief Intellectual Property
      Counsel</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Paul
      A. Lopez</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>51</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Vice President,
      and President, Ophthalmology Division</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Charles W. Olson</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>43</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Vice President, Sales, and General Manager,
      Hydrophilic</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Technologies</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Bryan
      K. Phillips</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>36</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Deputy General
      Counsel and Corporate Secretary</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Brian L. Robey</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>44</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Vice President and General Manager, Drug Delivery</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Michael J. Shoup</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>47</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Vice President
      of Quality, Regulatory and Clinical</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="63%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Affairs</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Arthur J. Tipton, Ph.D.</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0><FONT face=serif size=2>50</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0><FONT face=serif size=2>Vice President, and President of Brookwood</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" bgColor=#c0c0c0 colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="63%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Pharmaceuticals, Inc.</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="30%" colSpan=2><FONT face=serif size=2>Jan M.
      Webster</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="2%"><FONT face=serif size=2>48</FONT>&nbsp;
    </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=left width="63%"><FONT face=serif size=2>Vice President
      of Human Resources</FONT>&nbsp; </TD></TR></TABLE><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Bruce
J Barclay</FONT></I><FONT face=serif size=2> joined the Company as its President
and Chief Operating Officer in December 2003. He became a director of the
Company in July 2004 and Chief Executive Officer of the Company in July 2005.
Mr. Barclay has more than 25 years of experience in the health care industry.
Prior to joining SurModics, he served as President and Chief Executive Officer
of Vascular Architects, Inc., a medical device company that developed,
manufactured and sold products to treat peripheral vascular disease, from 2000
to 2003. Prior to Vascular Architects, he served at Guidant Corporation, most
recently as an officer and Senior Vice President from 1998 to 2000. Previously,
he was a Vice President of Guidant&#146;s Interventional Cardiology division with
responsibility for the law division, a new therapies technical development team
and business development, charged with the acquisition of new products and
technologies for the division. Mr. Barclay also has considerable experience in
the pharmaceutical area serving in several positions at Eli Lilly and Company.
Mr. Barclay received a B.S. in chemistry and a B.A. in biology from Purdue
University in 1980 and a J.D. from the Indiana University School of Law in 1984.
He is also a registered patent attorney.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Aron
B. Anderson</FONT></I><FONT face=serif size=2>, </FONT><I><FONT face=serif size=2>Ph.D.</FONT></I><FONT face=serif size=2>, joined the Company as an
Associate Scientist in 1991. In 1994, he was named Director, Hemocompatibility
R&amp;D, in 2001, named Director, Drug Delivery, and in January 2005, Vice
President and Chief Scientific Officer. Dr. Anderson serves on the Board of
Directors of University Enterprise Laboratories, a partnership between the
University of Minnesota and the city of St. Paul that functions as a technology
company incubator. Dr. Anderson received a B.S. in Chemical Engineering from the
University of Minnesota in 1985, and received an M.S. in 1987 and Ph.D. in 1991,
both in Chemical Engineering, from Stanford University.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Philip
D. Ankeny</FONT></I><FONT face=serif size=2> joined the Company as its Vice
President and Chief Financial Officer in April 2003 with the additional
responsibilities of Vice President, Business Development added in April 2004. He
was promoted to Senior Vice President and Chief Financial Officer in May 2006.
Prior to joining SurModics, he served as Chief Financial Officer for Cognicity,
Inc. from 1999 to 2002. Prior to that, Mr. Ankeny served as a Partner at Sherpa
Partners, LLC, a venture capital and venture development firm, from 1998 to
1999. He also spent five years in investment banking with Robertson Stephens and
Morgan Stanley. In addition, his operating experience includes </FONT></P>
<P align=center><FONT face=serif size=2>27</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>over five years with IBM and Shiva in
sales, marketing and business development roles. Mr. Ankeny also serves on the
Board of Directors of Innovex, Inc., which designs and manufactures flexible
circuit interconnect solutions to original equipment manufacturers in the
electronics industry. Mr. Ankeny received an A.B. degree in economics and
engineering from Dartmouth College in 1985 and an M.B.A. from Harvard Business
School in 1989.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Douglas P. Astry</FONT></I><FONT face=serif size=2> joined the Company in
June 2003 as Manager, Array Business, and was promoted to General Manager,
Diagnostics and Drug Discovery in April 2004. Prior to joining SurModics, from
2002 to 2003, he was Vice President of Marketing and Business Development at HTS
Biosystems, and from 1980 through 2001, he held various research and business
management positions at 3M, most recently Business Development Manager of 3M&#146;s
Bioanalytical Technologies Group. Mr. Astry received his B.A. degree in Biology
from Williams College in 1974, an M.S. in Physiology from the University of
Connecticut in 1980, and an M.B.A. from the University of Minnesota in
1987.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Lise
W. Duran, Ph.D.</FONT></I><FONT face=serif size=2>, became Vice President and
General Manager of the Regenerative Technologies business unit in April 2004.
Dr. Duran came to SurModics in 1990, serving as a senior microbiologist and was
promoted in 1992 to Director of Microbiology. She was promoted to Vice President
of Product Development in 1998. From 1988 to 1990, Dr. Duran served as a Study
Director for Microbiological Associates, Inc., in the Biotechnology Services
Division. She also did a research fellowship in Immunology at the Mayo Clinic
and was a postdoctoral associate in Laboratory Medicine and Pathology at the
University of Minnesota. Dr. Duran received her B.S. in microbiology from the
University of Maryland in 1977 and a Ph.D. in cellular immunology from the
Uniformed Services University of the Health Sciences in 1984.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Peter
L. Ginsberg</FONT></I><FONT face=serif size=2> joined the Company in May 2006 as
Vice President of Business Development and Strategic Planning. Mr. Ginsberg has
more than 15 years of healthcare and financial services experience. His previous
positions were at Deephaven Capital Management, where he worked as an analyst
responsible for equity investments in pharmaceutical, biotechnology and medical
device firms from 2003 to 2006, at U.S. Bancorp Piper Jaffray as Managing
Director and Senior Analyst from 1997 to 2003, at Vector Securities
International as a sell-side analyst from 1994 through 1997, and at USAA
Investment Management as a buy-side analyst from 1991 to 1994. Additionally, Mr.
Ginsberg serves on the faculty of the University of Minnesota&#146;s Carlson School
of Management. Peter earned an A.B. in Economics from Princeton University in
1987 and an M.B.A. from the Amos Tuck School of Business at Dartmouth College in
1991.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Steven
J. Keough </FONT></I><FONT face=serif size=2>joined the Company as its Senior
Vice President and Chief Intellectual Property Counsel in January 2004 and added
the duties of Vice President and General Manager of the New Ventures business
unit in April of that year. The current Orthopedics business unit emerged in
October 2005 from New Ventures, and is led by Mr. Keough. Before joining
SurModics, Mr. Keough practiced law at Minneapolis-based Fredrikson &amp; Byron,
P.A. from 2000-2003, where he was a senior member and past chairman of the
intellectual property department. He previously served as president and
co-founder of the intellectual property law firm Patterson &amp; Keough, P.A.
from 1991-2000. He was also Manager of Asia-Pacific at the Minneapolis law firm
of Merchant &amp; Gould, from 1987-1991. Mr. Keough has extensive business and
legal experience involving medical technologies, technology transfer, strategic
planning, licensing and high technology business management. Mr. Keough earned a
J.D. from Boston College in 1987, an M.A. from the Catholic University of
America in 1982, and a Bachelor of Science degree from the United States Naval
Academy in 1977.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Paul
A. Lopez</FONT></I><FONT face=serif size=2> joined the Company in July 2005 as
Vice President and President of the Company&#146;s Ophthalmology business unit.
Before joining SurModics, Mr. Lopez was President and CEO of Valley Forge
Pharmaceuticals, an early stage pharmaceutical company from March 2001 to July
2005. Prior to Valley Forge, Mr. Lopez served in various senior level positions
at Bausch &amp; Lomb, including President, North America Surgical; Vice
President, Commercial Operations, Americas and Asia Pacific Regions; and Vice
President, Business Integration from January 1999 to March 2001. Mr. Lopez has
also held roles at Monsanto Company, Pharmacia and Upjohn, Inc. and Iolab
Corporation. Mr. Lopez serves on the Board of Directors of Alliance Medical
Products, a private company located in Irvine, California. Mr. Lopez received an
M.B.A. from California State Polytechnic University in 1984 </FONT><FONT face=serif size=2>and a B.S. in Business Administration from California State
University, Long Beach in 1979.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Charles W. Olson</FONT></I><FONT face=serif size=2> joined the Company in
2001 as Market Development Manager, was promoted in December 2002 to Director,
Business Development, named General Manager of the Hydrophilic Technologies
business unit in April 2004, and promoted to Vice President and General Manager,
Hydrophilic Technologies in October 2004. In April </FONT></P>
<P align=center><FONT face=serif size=2>28</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>2005, the position of Vice President,
Sales was added to his responsibilities. Prior to joining SurModics, Mr. Olson
was employed as General Manager at Minnesota Extrusion from 1998 to 2001 and at
Lake Region Manufacturing in project management and technical sales from 1993 to
1998. Mr. Olson received a B.S. degree in Marketing from Winona State University
in 1987.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Bryan
K. Phillips</FONT></I><FONT face=serif size=2> joined the Company in July 2005
as Patent Counsel and Assistant General Counsel. In January 2006, Mr. Phillips
was appointed Corporate Secretary, and he was promoted to his current role as
Deputy General Counsel in October 2007. Prior to joining SurModics, Mr. Phillips
served as patent counsel at Guidant Corporation&#146;s Cardiac Rhythm Management
Group where he was responsible for developing and implementing intellectual
property strategies and also for supporting the company&#146;s business development
function. He also practiced law at the Minneapolis-based law firm of Merchant
&amp; Gould P.C. Mr. Phillips received a B.S. degree in Mechanical Engineering
from the University of Kansas in 1993 and a law degree from the University of
Minnesota Law School in 1999. He is admitted to the Minnesota State Bar
association and is registered to practice before the United States Patent and
Trademark Office.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Brian
L. Robey</FONT></I><FONT face=serif size=2> joined the Company in 2005 as Senior
Director, Commercial Development for Drug Delivery and was promoted to Vice
President and General Manager, Drug Delivery in May 2006. Mr. Robey has nearly
20 years of research and development and management experience in the medical
device industry. Most recently, he was Manager, Product Development at Guidant
Corporation in the Cardiac Rhythm Management Division from 2002 to 2005. Prior
to Guidant, Mr. Robey was employed at Southwest Research Institute in San
Antonio, Texas from 1987 to 2002, where he held engineering and project
management positions of increasing responsibility with his last role as Manager
of the Bioengineering Section. Mr. Robey received bachelor&#146;s and master&#146;s
degrees in biomedical engineering from Louisiana Tech University in 1985 and
1987 and an M.B.A. from the University of Texas at San Antonio in
2000.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Michael J. Shoup</FONT></I><FONT face=serif size=2> joined the Company in
March 2006 as Vice President of Quality, Regulatory and Clinical Affairs and
assumed additional responsibilities for analytical and characterization sciences
in January 2007. Mr. Shoup has over 20 years of experience in quality assurance
and manufacturing, including over 15 years in the medical device industry.
Before joining SurModics, he was Director of Quality and Design Assurance for
St. Jude Medical&#146;s Cardiac Surgery Division from 2005 to 2006 and held various
positions at Acorn Cardiovascular from 1998 to 2005, most recently as Director
of Operations. Mike&#146;s employment history also includes Integ (1994 - 1998),
SciMed Life Systems, now part of Boston Scientific (1990 - 1994) and Minco
Products (1983 - 1990). He teaches in the area of medical device design and
manufacturing at the University of St. Thomas as an adjunct professor in the
School of Engineering and is a regular lecturer for the Center of Business
Excellence. Mr. Shoup received a bachelor&#146;s degree in mechanical engineering
from the University of Minnesota (1982) and earned an M.B.A. with a
manufacturing systems concentration from the University of St. Thomas
(1995).</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Arthur
J. Tipton, Ph.D.,</FONT></I><FONT face=serif size=2> became Vice President,
SurModics and President, Brookwood Pharmaceuticals, coincident with the
acquisition of Brookwood by SurModics in July 2007. Dr. Tipton joined Southern
Research Institute in 2004 and then became President and CEO of Brookwood
Pharmaceuticals, when it was launched as a new company based on Southern
Research Institute&#146;s pharmaceutical formulations business in January 2005. Prior
to joining Southern Research Institute, Dr. Tipton served as Executive Vice
President at Durect Corporation. Dr. Tipton also held a variety of positions at
Southern BioSystems (now part of Durect), including Vice President and Chief
Scientific Officer, where he led all efforts on biodegradable technology from
1993 to 2001. Dr. Tipton was with Atrix Laboratories (now part of QLT Inc.) from
1988 to 1993. He currently serves on the Boards of the Biotechnology Association
of Alabama and the Controlled Release Society. Dr. Tipton earned a Ph.D. in
Polymer Science and Engineering from the University of Massachusetts, Amherst in
1987 and a B.S. in Chemistry from Spring Hill College in 1980.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Jan M.
Webster </FONT></I><FONT face=serif size=2>joined the Company as Vice President
of Human Resources in January of 2006. Ms. Webster came to SurModics with over
20 years of experience in the healthcare industry. From 1987 through 2005, she
held various human resources and management positions at St. Jude Medical, Inc.,
most recently as Director of Human Resources for the Cardiac Surgery division.
From 1984 to 1987, she served in several human resources roles for Fairview
Health Services. Ms. Webster received a bachelor&#146;s degree in business
administration from Minnesota State University, Mankato in 1981 and earned an
M.A. in human resources and industrial relations from the University of
Minnesota in 2006.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>The executive officers of the
Company are elected by and serve at the discretion of the Board of
Directors.</FONT></P>
<P align=center><FONT face=serif size=2>29</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>PART II</FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=top>
    <TD noWrap width="1%"><FONT face=serif size=2><STRONG>ITEM
      5.</STRONG></FONT></TD>
    <TD noWrap width="1%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="97%">
      <P align=justify><FONT face=serif size=2><STRONG>MARKET FOR REGISTRANT&#146;S
      COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES.</STRONG></FONT></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our stock
is traded on the Nasdaq Global Select Market under the symbol &#147;SRDX.&#148; The table
below sets forth the range of high and low closing sale prices, by quarter, for
our Common Stock, as reported by Nasdaq, in each of the last two fiscal
years.</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><FONT face=serif color=#231f20 size=1>Fiscal Quarter
      Ended:</FONT></B>&nbsp; </TD>
    <TD noWrap align=left width="81%">&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>High</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Low</STRONG></FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>September 30, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="8%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>52.68</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>44.72</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" colSpan=2><FONT face=serif size=2>June
      30, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="8%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>50.00</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>35.30</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>March 31, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="8%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>38.49</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>31.11</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" colSpan=2><FONT face=serif size=2>December 31, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="8%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>35.38</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>31.10</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>September 30, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="8%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>38.00</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>33.36</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" colSpan=2><FONT face=serif size=2>June
      30, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="8%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>39.65</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>31.92</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>March 31, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="8%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>40.22</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>32.90</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="82%" colSpan=2><FONT face=serif size=2>December 31, 2005</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="8%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>43.37</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>36.46</FONT>&nbsp; </TD></TR></TABLE></DIV><BR>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Our transfer agent is:</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>American
Stock Transfer &amp; Trust Company&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>59
Maiden Lane, Plaza Level&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>New
York, New York 10038&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(800)
937-5449</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>According
to the records of our transfer agent, as of December 7, 2007, there were 295
holders of record of our Common Stock and approximately 5,784 beneficial owners
of shares registered in nominee or street name.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
never paid any cash dividends on our Common Stock and do not anticipate doing so
in the foreseeable future.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following table presents information with respect to purchases of common stock
of the Company made during the three months ended September 30, 2007, by the
Company or on behalf of the Company or any &#147;affiliated purchaser&#148; of the
Company, as defined in Rule 10b-18(a)(3) under the Exchange Act. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>(c)</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>(d)</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Total Number</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Maximum</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>of Shares</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Number of</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Purchased</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Shares that</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>as Part of</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>May Yet Be</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>(a)</STRONG></FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>(b)</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Publicly</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Purchased</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Total Number</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Average</STRONG></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Announced</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Under the</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>of Shares</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Price Paid</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Plans or</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Plans or</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><FONT face=serif color=#231f20 size=1>Period</FONT></B>&nbsp; </TD>
    <TD noWrap align=left width="68%">&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Purchased(1)</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Per
      Share(1)</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Programs</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Programs</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>7/1/07 - 7/31/07</FONT>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>6,390&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT size=2>$</FONT>
</TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>50.87</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>N/A</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2><FONT face=serif size=2>8/1/07
      - 8/31/07</FONT>&nbsp; </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT size=2><FONT face=serif>33,400</FONT>&nbsp;&nbsp;&nbsp;</FONT>&nbsp;&nbsp; </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%">&nbsp;</TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>49.48</FONT>&nbsp; </TD>
    <TD noWrap align=center width="1%">&nbsp;</TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>N/A</FONT>&nbsp;
    </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>9/1/07 - 9/30/07</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>7,810</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>48.00</FONT>&nbsp; </TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="69%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Total</FONT>&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT size=2><FONT face=serif>47,600</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>49.42</FONT>&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="1%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;</TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>N/A<FONT size=3>&nbsp; </FONT></FONT></TD></TR></TABLE>

____________________<BR><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(1)</FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>All of the shares were
      repurchased by the Company to pay the exercise price and/or to satisfy tax
      withholding obligations in connection with so-called &#147;stock swap
      exercises&#148; of employee stock options issued to seven
  employees.</FONT></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>30</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>Stock Performance
Chart</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following chart compares the cumulative total shareholder return on the
Company&#146;s Common Stock with the cumulative total return on the Nasdaq Stock
Market and the Nasdaq Medical Industry Index (Medical Devices, Instruments and
Supplies). The comparison assumes $100 was invested on September 28, 2002 and
assumes reinvestment of dividends.</FONT></P>
<P align=center><IMG src="surmodics_10k4x5x1.jpg" border=0> </P>
<P align=center><FONT face=serif size=2>31</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>ITEM 6. SELECTED FINANCIAL
DATA.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The data
presented below as of and for the fiscal years ended September 30, 2007, 2006,
and 2005 are derived from our audited consolidated financial statements included
elsewhere in this report. The financial data as of and for the fiscal years
ended September 30, 2004 and 2003 are derived from our audited financial
statements that are not included in this report. The information set forth below
should be read in conjunction with the Company&#146;s financial statements and
&#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of
Operations&#148; contained in Item 7 of this report and our financial statements and
related notes beginning on page F-1 and other financial information included in
this report.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="29%" colSpan=15>&nbsp;<B><FONT face=serif size=1>Fiscal
  Year</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><I><FONT face=serif color=#231f20 size=1>(Dollars in
      Thousands)</FONT></I></B>&nbsp; </TD>
    <TD noWrap align=left width="69%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><FONT face=serif size=1>2007</FONT></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><FONT face=serif size=1>2006</FONT></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3>&nbsp;<B><FONT face=serif size=1>2005</FONT></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><FONT face=serif size=1>2004</FONT></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><FONT face=serif size=1>2003</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Statements of Operations Data:</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Total revenue</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>73,164</FONT>
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>69,884</FONT>
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>62,381</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>49,738</FONT>
</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>43,232</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Operating income</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>9,899</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>36,163</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>2,985</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>10,474</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>20,640</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Net income (loss)</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>3,347</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>20,334</FONT>
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(8,246</FONT>
</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>7,242</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>13,936</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Diluted net income (loss) per
      share</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>0.18</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1.09</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(.45</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>.41</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>.78</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2><FONT face=serif size=2>Balance Sheet Data:</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Cash and investments</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>26,308</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>58,813</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>24,445</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>19,215</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>6,647</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Total assets</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>171,331</FONT>
    </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>157,402</FONT>
    </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>124,225</FONT>
    </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>109,587</FONT>
    </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>97,808</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Retained earnings</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>51,620</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>48,273</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>27,914</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>36,161</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>28,918</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Total stockholders&#146; equity</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>130,922</FONT>
    </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>145,203</FONT>
    </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>115,581</FONT>
    </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>94,310</FONT>
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>86,114</FONT>
  </TD></TR></TABLE><BR>
<P align=justify><B><FONT face=serif size=1></FONT></B><B><FONT face=serif size=2>ITEM 7. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following discussion and analysis of our financial condition, results of
operations and trends for the future should be read together with &#147;Selected
Financial Data&#148; and our audited consolidated financial statements and related
notes appearing elsewhere in this report. Any discussion and analysis regarding
trends in our future financial condition and results of operations are
forward-looking statements that involve risks, uncertainties and assumptions, as
more fully identified in &#147;Forward-Looking Statements&#148; and &#147;Risk Factors.&#148; Our
actual future financial condition and results of operations may differ
materially from those anticipated in the forward-looking statements.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Overview</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
is a leading provider of surface modification and drug delivery technologies to
the healthcare industry. The Company is organized into three operating segments
composed of seven technology-centered and industry-focused business units. The
&#147;Drug Delivery&#148; operating segment contains: (1) the Drug Delivery business unit,
which is responsible for technologies dedicated to site-specific delivery of
drugs; (2) the Ophthalmology business unit, which is dedicated to the
advancement of treatments for eye diseases, such as age-related macular
degeneration (AMD) and diabetic macular edema (DME), two of the leading causes
of blindness; and (3) the Brookwood Pharmaceuticals unit, which provides
proprietary polymer-based technologies to companies developing improved
pharmaceutical products. The &#147;Hydrophilic and Other&#148; operating segment consists
of three business units: (1) the Hydrophilic Technologies business unit, which
focuses on enhancing medical devices with advanced lubricious coatings that
facilitate their placement and maneuverability in the body; (2) the Regenerative
Technologies business unit, which is developing platforms intended to augment or
replace tissue/organ function (e.g., cell encapsulation applications), or to
modify medical devices to facilitate tissue/organ recovery through natural
repair mechanisms (e.g., hemo/biocompatible or prohealing coatings); and (3) the
Orthopedics business unit, which is committed to innovative solutions for
orthopedics patients using proven SurModics technologies, and creating new
technology solutions to existing patient care gaps in the orthopedics field. The
&#147;In Vitro&#148; operating segment contains the In Vitro Technologies (formerly
Diagnostics and Drug Discovery) business unit, which includes our genomics slide
technologies, our stabilization products, antigens and substrates for
immunoassay diagnostic tests, our </FONT><I><FONT face=serif size=2>in
vitro</FONT></I><FONT face=serif size=2> diagnostic format technology and our
synthetic ECM cell culture products.</FONT></P>
<P align=center><FONT face=serif size=2>32</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue
in each of our operating segments is derived from three primary sources: (1)
royalties and license fees from licensing our patented surface modification and
drug delivery technologies and </FONT><I><FONT face=serif size=2>in
vitro</FONT></I><FONT face=serif size=2> diagnostic formats to customers; the
vast majority (typically in excess of 90%) of revenue in the &#147;royalties and
license fees&#148; category is in the form of royalties; (2) the sale of reagent
chemicals to licensees of our technologies, stabilization products, antigens and
substrates to the diagnostics industry and coated glass slides to the genomics
market; and (3) research and development fees generated on customer projects.
Revenue should be expected to fluctuate from quarter to quarter depending on,
among other factors: our customers&#146; success in selling products incorporating
our technologies; the timing of introductions of coated products by customers;
the timing of introductions of products that compete with our customers&#146;
products; the number and activity level associated with customer development
projects; the number and terms of new license agreements that are finalized; the
value of reagent chemicals and other products sold to licensees; and the timing
of future acquisitions we complete, if any.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>For
financial accounting and reporting purposes, we treat our three operating
segments as one reportable segment. We made this determination because a
significant percentage of our employees provide support services (including
research and development) to each operating segment; technology and products
from each operating segment are marketed to the same or similar customers; each
operating segment uses the same sales and marketing resources; and each
operating segment operates in the same regulatory environment.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, we acquired all of the assets of InnoRx, Inc. by paying cash and
issuing shares of SurModics common stock to InnoRx stockholders. InnoRx was an
early-stage company developing drug delivery implants and therapies for the
ophthalmology market. The assets we acquired were folded into our newly-created
Ophthalmology business unit. Prior to the acquisition, SurModics held an
ownership interest in InnoRx of less than 20% and accounted for the investment
under the cost method. Upon completion of the InnoRx acquisition, we
retroactively adjusted our previously reported results to show the impact of
accounting for InnoRx under the equity method. The net impact was an approximate
$194,000 reduction in net income for fiscal 2004 from previously reported
results.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In June
2007, we signed a collaborative research and license agreement with Merck to
pursue the joint development and commercialization of the I-vation sustained
drug delivery system with triamcinolone acetonide and other products that
combine Merck proprietary drug compounds with the I-vation system for the
treatment of serious retinal diseases. Under the terms of our agreement with
Merck, we received an up-front license fee of $20 million and may receive up to
an additional $288 million in fees and development milestones associated with
the successful product development and attainment of appropriate U.S. and EU
regulatory approvals for these new combination products. We will also be paid
for our activities in researching and developing these combination products.
Additionally, under the terms of our agreement with Merck, we will be
responsible for the exclusive manufacture and supply of clinical and commercial
products. Once products licensed under the agreement are commercialized, we will
also receive royalties on sales of such products.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In July
2007, we acquired all of the assets of Brookwood Pharmaceuticals, Inc. by paying
cash to Southern Research Institute, which owned the capital stock of Brookwood.
Brookwood is a drug delivery company based in Birmingham, Alabama that provides
its proprietary polymer-based technologies to companies developing improved
pharmaceutical products. Brookwood is a wholly owned subsidiary of SurModics and
is reported as part of our Drug Delivery operating segment.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In August
2007, we acquired all of the assets of BioFX Laboratories, Inc. by paying cash
to BioFX stockholders. Based in Owings Mills, Maryland, BioFX Laboratories is a
leading manufacturer of substrates, a critical component of diagnostic test kits
used to detect and signal that a certain reaction has taken place. BioFX is a
wholly owned subsidiary of SurModics and is reported as part of our In Vitro
operating segment.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Critical Accounting
Policies</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our
financial statements are based in part on the application of significant
accounting policies, many of which require management to make estimates and
assumptions (see Note 2 to the consolidated financial statements). Management
believes the following are critical areas in the application of our accounting
policies that currently affect our financial condition and results of
operations.</FONT></P>
<P align=center><FONT face=serif size=2>33</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Revenue recognition.<EM> </EM></FONT></B><FONT face=serif size=2>In
accordance with SEC Staff Accounting Bulletin (SAB) No. 104, &#147;Revenue
Recognition,&#148; revenue is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) shipment has occurred or
delivery has occurred if the terms specify destination; (3) the sales price is
fixed or determinable; and (4) collectibility is reasonably assured. However,
when there are additional performance requirements, revenue is recognized when
such requirements have been satisfied. Royalty revenue is generated when a
licensed customer sells products incorporating our technologies. Royalty revenue
is recognized as our licensees report it to us, and payment is typically
submitted concurrently with a quarterly report. Revenue related to a performance
milestone is recognized upon achievement of the milestone and meeting specific
revenue recognition criteria. We recognize initial license fees over the term of
the related agreement. Product Sales to third parties are recognized at the time
of shipment, provided that an order has been received, the price is fixed or
determinable, collectibility of the resulting receivable is reasonably assured
and returns can be reasonably estimated. Our sales terms provide no right of
return outside of our standard warranty policy. Payment terms are generally set
at 30 days. Generally, revenue for research and development is recorded as
performance progresses under the applicable contract. When we have revenue
arrangements with multiple deliverables, we comply with Emerging Issues Task
Force Issue No. 00-21, &#147;Accounting for Revenue Arrangements with Multiple
Deliverables,&#148; and recognize each element as it is earned.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Costs
related to products delivered are recognized in the period revenue is
recognized. Customer advances are accounted for as a liability until all
criteria for revenue recognition have been met.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Valuation of long-lived assets.</FONT></B><FONT face=serif size=2> We
periodically evaluate whether events and circumstances have occurred that may
affect the estimated useful life or the recoverability of the remaining balance
of long-lived assets, such as property and equipment. If such events or
circumstances were to indicate that the carrying amount of these assets would
not be recoverable, we would estimate the future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) or other
measure of fair value were less than the carrying amount of the assets, we would
recognize an impairment charge. In September 2005, we signed an agreement to
sell our Bloomington facility and based on the selling price recorded a $2.5
million impairment charge.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Goodwill.</FONT></B><FONT face=serif size=2> Goodwill represents the
excess of the cost of the acquired entities over the fair value assigned to the
assets purchased and liabilities assumed in connection with the Company&#146;s
acquisitions. The carrying amount of goodwill is evaluated annually, and between
annual evaluations if events occur or circumstances change indicating that the
carrying amount of goodwill may be impaired.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Investments.</FONT></B><FONT face=serif size=2> Investments consist
principally of U.S. government and government agency obligations and
mortgage-backed securities. Our investment policy calls for no more than 5% of
investments be held in any one credit issue, excluding U.S. government and
government agency obligations. Investments are classified as available-for-sale,
that is, investments are reported at fair value with unrealized gains and losses
excluded from operations and reported as a separate component of stockholders&#146;
equity, except for other-than-temporary impairments, which are reported as a
charge to current operations and result in a new cost basis for the
investment.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Results of Operations</FONT></B></P>
<P align=center><B><I><FONT face=serif size=2>Years Ended September 30, 2007 and
2006</FONT></I></B></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Fiscal</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Fiscal</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Increase</STRONG></FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><I><FONT face=serif color=#231f20 size=1>(Dollars in
      thousands)</FONT></I></B>&nbsp; </TD>
    <TD noWrap align=left width="69%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="7%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>2007</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="7%" colSpan=4>&nbsp;<B><FONT face=serif size=1>2006</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>(Decrease</STRONG></FONT><FONT face=serif size=1><STRONG>)</STRONG></FONT> </TD>
    <TD noWrap align=left width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%"><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG>% Ch</STRONG></FONT><FONT face=serif size=1><STRONG>ange</STRONG></FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Revenue:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Drug Delivery</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=center width="3%"><FONT face=serif size=2>26,488</FONT>
    </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>32,918</FONT></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(6,430</FONT>
</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="3%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>(20)%<FONT size=3></FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Hydrophilic and Other</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0><FONT face=serif size=2>26,493</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>22,233</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>4,260</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3></FONT>19%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2><EM>In Vitro</EM></FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%"><FONT face=serif size=2>20,183</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>14,733</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>5,450</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="3%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>37%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="70%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Total
      revenue</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=center width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>73,164</FONT>
    </FONT></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>69,884</FONT>
    </FONT></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>3,280</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>5%</FONT> </TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif size=2>34</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>

<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><B>Revenue. </B>Fiscal 2007 revenue was $73.2 million, an increase of
$3.3 million or 5% from fiscal 2006. A decrease in Drug Delivery operating
segment revenue was more than offset by growth in the Hydrophilic and Other and
In Vitro operating segments, as detailed in the table above and further
explained in the narrative below.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><I>Drug
Delivery. </I>Revenue in the Drug Delivery segment decreased 20% to $26.5
million in fiscal 2007. The decrease in total revenue reflects a significant
decrease in royalties and license fees, which was partially offset by an
increase in research and development revenue related to drug delivery and
ophthalmology projects and the addition of $2.4 million in revenue from
Brookwood Pharmaceuticals.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Drug
Delivery derives a substantial majority of its revenue from royalties and
license fees and product sales attributable to Cordis Corporation, a Johnson
&amp; Johnson company, on its CYPHER<SUP>&#174;</SUP> Sirolimus-eluting Coronary
Stent. The CYPHER<SUP>&#174;</SUP> stent incorporates a proprietary SurModics polymer
coating that delivers a therapeutic drug designed to reduce the occurrence of
restenosis in coronary artery lesions.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
decrease in drug delivery royalties and license fees principally reflects
decreased royalty revenue from Cordis as a result of lower CYPHER<SUP>&#174;</SUP>
sales. Partially offsetting the decrease attributable to CYPHER<SUP>&#174;</SUP> was
an increase in royalties and license fees from ophthalmology customers, as well
as an increase in research and development fees from drug delivery and
ophthalmology customers. We received a $20 million license fee from Merck in
association with the collaborative research and license agreement that we signed
in fiscal 2007. However we recognized as revenue only a small portion of this
fee as we will be amortizing these payments over the estimated economic life of
the technology we licensed to Merck. Fiscal 2007 sales of reagent chemicals
(chemicals that we manufacture and sell to licensees for coating their medical
devices) to Cordis decreased slightly when compared with the prior year. The
unit volume of reagents sold to Cordis will likely be directly impacted by the
proportion of stenting procedures that utilize drug eluting stents, in addition
to relative market share positions of drug eluting stent players.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
CYPHER<SUP>&#174;</SUP> stent, from which we derive a substantial majority of our
Drug Delivery revenue, faces continuing competition from Boston Scientific
Corporation&#146;s Taxus drug eluting stent, which is sold within and outside the
U.S., and stents from Medtronic, Abbott Vascular and others sold outside the
U.S. In addition, drug eluting stents from Medtronic and Abbott are expected to
be approved in the U.S. within the next year. These stents compete or will
compete directly with the CYPHER<SUP>&#174;</SUP> stent. In addition to competition
among the various players, the total size of the drug eluting stent market has
decreased significantly in the past eighteen months as a result of concerns
about product safety, mostly related to potential clotting associated with
stents. Therefore, future royalty and reagent sales revenue could decrease
because of lower CYPHER<SUP>&#174;</SUP> stent sales as a result of the market
contraction and the ongoing and expected future competition. We anticipate that
quarterly royalty revenue from the CYPHER<SUP>&#174;</SUP> stent may be volatile
throughout fiscal 2008 and beyond as the various marketers of drug eluting
stents continue competing in the marketplace and as others enter the
marketplace. Management expects royalties from the CYPHER<SUP>&#174;</SUP> stent to
continue to constitute a significant portion of our revenue in fiscal 2008.
However, whether and the extent to which royalties from the CYPHER<SUP>&#174;</SUP>
stent continue to constitute a significant source of revenue is subject to a
number of risks, including intellectual property litigation generally, and
specifically the damages, settlements and mutual agreements that may result from
various infringement suits between Boston Scientific and Cordis in which each
has been found to have violated certain intellectual property rights of the
other.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
inclusion of Brookwood Pharmaceuticals, which contributed to Drug Delivery
revenue for only two months in fiscal 2007, will also impact the overall revenue
and mix in fiscal 2008. A substantial majority of Brookwood&#146;s revenue is
comprised of research and development fees.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><I>Hydrophilic and Other. </I>Hydrophilic and Other revenue increased 19%
to $26.5 million, primarily as a result of 27% growth in royalties and license
fees and 13% growth in reagent sales, partially offset by a 19% decrease in
research and development revenue. In contrast to our Drug Delivery segment,
where a significant percentage of revenue is attributable to Cordis, there are
several dozen licensees and an even larger number of coated products generating
royalties in our Hydrophilic and Other segment. The growth in royalties
principally reflects increased sales of coated products already on the market,
and to a lesser extent newly introduced licensed products. We believe that
revenue will likely continue to increase in fiscal 2008; however, the rate of
growth will depend upon the timing and market success of newly released
products.</FONT></P>
<P align=center><FONT face=serif size=2>35</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>In
Vitro. </FONT></I><FONT face=serif size=2>Revenue in the In Vitro segment
increased 37% to $20.2 million. Over 60% of the increase was attributable to
increased royalties and license fees. The balance of the growth resulted from
growth in sales of our stabilization products, antigens and substrates used by
diagnostic kit manufacturers in immunoassay diagnostic tests. We began selling
recombinant autoimmune antigens in the first quarter of fiscal 2007, and sales
of BioFX products following the acquisition of BioFX in August 2007 contributed
$0.5 million of product sales to our results. We anticipate continued growth in
our In Vitro segment revenue in fiscal 2008, but the rate of growth will likely not be as high as fiscal 2007. We anticipate continued growth in product sales
reflecting particularly the addition of BioFX products for a full year of
operations, but the rate of growth will depend on the success of certain product
launches. Royalties and license fees likely will not increase. In Vitro derives
a significant percentage of its revenue from GE Healthcare and Abbott
Laboratories.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Product costs. </FONT></B><FONT face=serif size=2>Product costs were $5.6
million in fiscal 2007, a 64% increase from the prior year. Overall product
margins averaged 59%, compared with 70% reported last year. The decrease in
product margins reflects the mix of products sold in the period (in particular,
some of our stabilization and antigen products, genomics slides and Brookwood
polymer products carry lower margins than our reagent products) and higher
depreciation costs on the recently-constructed manufacturing space at our Eden
Prairie facility. We anticipate that product margins will continue to be lower
on a year-over-year basis throughout fiscal 2008 when compared to prior year
results, principally as a result of product mix.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Research and development expenses. </FONT></B><FONT face=serif size=2>Research and development expenses were $28.5 million, an increase of 40%
compared with fiscal 2006. The increase principally reflects the addition of
Brookwood Pharmaceuticals and BioFX Laboratories to our operations, higher
compensation expenses as we have added personnel to support customer projects
and internal development projects, increased incentive and stock-based
compensation, and higher costs related to our internal development projects.
Research and development expenses are expected to continue to increase in fiscal
2008 reflecting the addition of Brookwood Pharmaceuticals and BioFX Laboratories
to our operations, and as we expand our research and development organization.
Brookwood&#146;s research and development expenses, in particular, are a higher
percentage of that unit&#146;s total revenues than for our other business
units.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Selling, general and administrative expenses. </FONT></B><FONT face=serif size=2>Selling, general and administrative expenses were $13.6 million, an
increase of 37% compared with fiscal 2006. The increase principally reflects the
addition of Brookwood Pharmaceuticals and BioFX Laboratories to our operations,
higher compensation expenses, and increased incentive and stock-based
compensation. We expect selling, general and administrative expenses to continue
to increase reflecting the addition of Brookwood Pharmaceuticals and BioFX
Laboratories to our operations, and as we expand our organization to support our
anticipated growth.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Purchased in-process research and development. </FONT></B><FONT face=serif size=2>In July 2007, we acquired all of the assets of Brookwood
Pharmaceuticals, Inc. by paying cash to Southern Research Institute, which owned
the capital stock of Brookwood. Results in the fourth quarter of fiscal 2007
include an in-process research and development charge of $15.6 million related
to the Brookwood acquisition. The fair value of the in-process research and
development was determined by an independent valuation consultant.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Other
income, net. </FONT></B><FONT face=serif size=2>Other income was $4.8 million in
fiscal 2007, compared with a loss of $0.6 million in fiscal 2006. The fiscal
2006 loss primarily reflects a $4.7 million impairment loss on our investment in
Novocell, which we recorded in the second quarter of fiscal 2006. Income from
investments was $4.8 million in fiscal 2007, compared with $4.1 million in
fiscal 2006. The increase reflects higher yields generated from our investment
portfolio.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Income
tax expense. </FONT></B><FONT face=serif size=2>The income tax provision was
$11.3 million in fiscal 2007 compared with $15.2 million in fiscal 2006. The
effective tax rate in fiscal 2007 was 77.2%. Excluding the impact of the non-tax
deductible purchased in-process research and development charges, the fiscal
2007 effective rate was 37.4%. Excluding the impact of the $4.7 million
impairment loss in fiscal 2006 (since the Company does not currently foresee
offsetting capital gains to offset this capital loss, no tax benefit has been
recorded), the effective tax rate was 38.2% in fiscal 2006.</FONT></P>
<P align=center><FONT face=serif size=2>36</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><I><FONT face=serif size=2>Years Ended September 30, 2006 and
2005</FONT></I></B></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="80%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>Fiscal</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>Fiscal</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="2%">&nbsp;</TD>
    <TD noWrap align=center width="5%" colSpan=4>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><I><FONT face=serif color=#231f20 size=1>(Dollars in
      thousands)</FONT></I></B> </TD>
    <TD noWrap align=left width="71%">&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>2006</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>2005</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>Increase</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><B><FONT face=serif size=1>% Increase</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Revenue:</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Drug Delivery</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>32,918</FONT>
</TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>29,678</FONT>
</TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>3,240</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>11</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>%</FONT> </TD>
    <TD noWrap align=left width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Hydrophilic and
      Other</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>22,233</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>19,065</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>3,168</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>17</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>%</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2><EM>In Vitro</EM></FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%"><FONT face=serif size=2>14,733</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%"><FONT face=serif size=2>13,638</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%"><FONT face=serif size=2>1095</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"><FONT face=serif size=2>8</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>%</FONT> </TD>
    <TD noWrap align=left width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Total revenue</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>69,884</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>62,381</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>7,503</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>12</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>%</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Revenue. </FONT></B><FONT face=serif size=2>Fiscal 2006 revenue was $69.9
million, an increase of $7.5 million or 12% from fiscal 2005. We experienced
growth in all three operating segments as detailed in the table above and
further explained in the narrative below.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Drug
Delivery. </FONT></I><FONT face=serif size=2>Revenue in the Drug Delivery
segment increased 11% to $32.9 million in fiscal 2006. The growth in total
revenue reflects increases in royalties and license fees, and research and
development revenue related to drug delivery and ophthalmology
projects.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Drug
Delivery derives a substantial majority of its revenue from royalties and
license fees and product sales attributable to Cordis Corporation, a Johnson
&amp; Johnson company, on its CYPHER<SUP>&#174;</SUP> Sirolimus-eluting Coronary
Stent. The CYPHER<SUP>&#174;</SUP> stent incorporates a proprietary SurModics polymer
coating that delivers a therapeutic drug designed to reduce the occurrence of
restenosis in coronary artery lesions.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Over
three-fourths of the overall increase in drug delivery revenue reflects
increased royalty revenue from Cordis as a result of higher CYPHER<SUP>&#174;</SUP>
sales. The balance of the fiscal 2006 increase was a result of increased
research and development fees from drug delivery and ophthalmology customers.
Fiscal 2006 sales of reagent chemicals (chemicals that we manufacture and sell
to licensees for coating their medical devices) to Cordis decreased slightly
when compared with the prior year.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Hydrophilic and Other. </FONT></I><FONT face=serif size=2>Hydrophilic and
Other revenue increased 17% to $22.2 million, primarily as a result of 19%
growth in royalties and license fees and 35% growth in reagent sales, partially
offset by a 15% decline in research and development revenue. In contrast to our
Drug Delivery segment, where a significant percentage of revenue is attributable
to Cordis, there are several dozen licensees and an even larger number of coated
products generating royalties in our Hydrophilic and Other segment. The growth
in royalties principally reflects increased sales of coated products already on
the market, and to a lesser extent newly introduced licensed
products.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>In
Vitro. </FONT></I><FONT face=serif size=2>Revenue in the In Vitro segment
increased 8% to $14.7 million. Roughly 60% of the increase was attributable to
growth in sales of our stabilization products used by diagnostic kit
manufacturers in immunoassay diagnostic tests. The balance of the growth
resulted from increased royalty revenue from our diagnostic format patents. In
Vitro derives a significant percentage of its revenue from GE Healthcare and
Abbott Laboratories.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Product costs. </FONT></B><FONT face=serif size=2>Product costs were $3.4
million in fiscal 2006, a 19% increase from the prior year. Overall product
margins averaged 70%, on par with the 70% reported for the comparable period in
2005.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Research and development expenses. </FONT></B><FONT face=serif size=2>Research and development expenses were $20.4 million, an increase of 27%
compared with fiscal 2005. Approximately $2.5 million of the $4.3 million
increase was related to non-cash stock-based compensation charges following the
adoption of SFAS No. 123(R). Research and development expenses included no such
charge in fiscal 2005. Excluding stock-based compensation, research and
development expenses increased 11% in fiscal 2006. The balance of the increase
reflects higher costs associated with the clinical trial on our I-vation&#153;
intravitreal implant, increased costs of operating the recently constructed
clean rooms and drug coating suites at our Eden Prairie headquarters, and
increased personnel costs. These increased costs were partially offset by
reduced legal costs.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Selling, general and administrative expenses. </FONT></B><FONT face=serif size=2>Selling, general and administrative expenses were $9.9 million, an
increase of 29% compared with fiscal 2005. We recorded approximately $2.9
million in non-cash stock-based compensation charges compared with $588,000 in
fiscal 2005. Excluding the impact of stock-based compensation, </FONT></P>
<P align=center><FONT face=serif size=2>37</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>selling, general and administrative
expenses decreased approximately 1% as a result of the cost savings realized
since we exited our contract manufacturing facility in Bloomington in April
2006. The majority of the operating costs of the Bloomington facility were
reported in selling, general and administrative expenses.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Asset
impairment charge. </FONT></B><FONT face=serif size=2>Results in fiscal 2005
included a non-cash asset impairment charge of $2.5 million against our
Bloomington, Minnesota, contract manufacturing facility. Results in fiscal 2004
included a non-cash asset impairment charge of $16.5 million against the
facility. In September 2005, we entered into an agreement to sell the
Bloomington facility and consolidated operations at our Eden Prairie, Minnesota,
headquarters in April 2006.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Purchased in-process research and development. </FONT></B><FONT face=serif size=2>In January 2005, the Company acquired all of the assets of
InnoRx, Inc. by paying cash and issuing shares of SurModics common stock to
InnoRx stockholders. Results in the second quarter of fiscal 2005 include a
non-cash in-process research and development charge of $30.3 million. The fair
value of the in-process research and development was determined by an
independent valuation consultant.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Other
income, net. </FONT></B><FONT face=serif size=2>Other income resulted in a loss
of $598,000 in fiscal 2006 compared with income of $1.4 million in fiscal 2005,
primarily as a result of the $4.7 million impairment loss on our investment in
Novocell we recorded in the second quarter of fiscal 2006. Income from
investments was $4.2 million in fiscal 2006, an increase of $2.2 million,
compared with $2.0 million in fiscal 2005. The increase reflects higher levels
of investable cash and higher yields generated from our investment portfolio.
Prior year other income results also include a $500,000 loss related to the
impact of accounting for the InnoRx acquisition under the equity method. We
recorded no such comparable transaction in fiscal 2006.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT face=serif size=2>Income
tax expense. </FONT></B><FONT face=serif size=2>The income tax provision was
$15.2 million in fiscal 2006 compared with $12.6 million in fiscal 2005.
Excluding the impact of the $4.7 million impairment loss (since the Company does
not currently foresee offsetting capital gains to offset this capital loss, no
tax benefit has been recorded), the effective tax rate was 38.2% in fiscal 2006,
compared with 36.8% for fiscal 2005 when the impact of non-tax deductible
purchased in-process research and development is excluded. The impact of
adopting SFAS No. 123(R) accounts for the bulk of the increase in the effective
tax rate from fiscal 2006.</FONT></P>
<P align=justify><B><FONT face=serif size=2>Liquidity and Capital
Resources</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
September 30, 2007, the Company had working capital of $28.0 million and cash,
cash equivalents and investments totaling $70.2 million. The Company&#146;s
investments principally consist of U.S. government and government agency
obligations and investment grade, interest-bearing corporate debt securities
with varying maturity dates, the majority of which are five years or less. The
Company&#146;s policy requires that no more than 5% of investments be held in any one
credit issue, excluding U.S. government and government agency obligations. The
primary investment objective of the portfolio is to provide for the safety of
principal and appropriate liquidity while meeting or exceeding a benchmark
(Merrill Lynch 1-3 Year Government-Corporate Index) total rate of return.
Management plans to continue to direct its investment advisors to manage the
Company&#146;s investments primarily for the safety of principal for the foreseeable
future as it assesses other investment opportunities and uses of its
investments. </FONT></P>
<P align=center><FONT face=serif size=2>38</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company had positive cash flows from operating activities of approximately $50.7
million in fiscal 2007, compared with $35.3 million in fiscal 2006. The
following table depicts our cash flows from operations for each of fiscal 2006
and 2007:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="80%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=center width="12%" colSpan=7><B><FONT face=serif size=1>For the Years Ended</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="12%" colSpan=7><B><FONT face=serif size=1>Sep</FONT></B><B><FONT face=serif size=1>tember </FONT></B><B><FONT face=serif size=1>30,</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><I><FONT face=serif color=#231f20 size=1>(Dollars in
      thousands)</FONT></I></B> </TD>
    <TD noWrap align=left width="87%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><B><FONT face=serif size=1>2007</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><B><FONT face=serif size=1>2006</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Net income</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>3,347</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>20,334</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Depreciation and amortization</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>4,214</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>3,710</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" bgColor=#c0c0c0 colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Stock-based
      compensation</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>10,312</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>5,711</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Purchased in-process research &amp; development</FONT>
    </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>15,573</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" bgColor=#c0c0c0 colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Asset
      impairment charge</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>4,651</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Net other operating activities</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(11,004</FONT>
    </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(3,929</FONT>
</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" bgColor=#c0c0c0 colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Net change in
      deferred revenue</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>19,166</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>2,489</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" colSpan=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Net change in other operating assets and
      liabilities</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>9,107</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>2,313</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="88%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Net cash provided by operating activities</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>50,715</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>35,279</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;
</TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>While net
income in fiscal 2007 decreased compared with fiscal 2006, certain non-cash
charges contributed substantially to the decrease in net income. Specifically,
we recorded a $15.6 million in-process research and development charge in
connection with the acquisition of Brookwood Pharmaceuticals and $10.3 million
of stock-based compensation. Additionally, we received a $20 million up-front
license fee from Merck in fiscal 2007, of which $19.7 million remains in
deferred revenue.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
conduct a significant majority of our operations at our Eden Prairie, Minnesota
headquarters. Throughout fiscal 2005 and 2006, we constructed capital
improvements to enhance the research and development capabilities at the Eden
Prairie facility. The $6.1 million in capital improvements were sufficiently
complete by the end of second quarter of fiscal 2006, allowing us to vacate our
contract manufacturing facility in Bloomington, Minnesota, and consolidate our
Minnesota operations at our Eden Prairie headquarters. In addition to our Eden
Prairie location, we lease approximately 3,000 square feet of commercial office
space in Irvine, California, where our Ophthalmology business unit conducts a
portion of its operations. In September 2007, we leased 73,000 square feet of
office and warehouse space in Eden Prairie, Minnesota to accommodate planned
growth and to construct manufacturing capabilities in support of our
ophthalmology business.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2004, we made a commitment to purchase for $7 million certain
additional sublicense rights and the accompanying future royalty revenue streams
under certain sublicenses through an amendment to our diagnostic format patent
license with Abbott Laboratories. Prior to such amendment, we were receiving
only a portion of the royalties under such sublicenses. The first $5 million
installment was paid in November 2004. We made an additional $1 million
installment payment in June 2007. The remaining $1 million installment is
reflected in other current liabilities at September 30, 2007.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, we entered into a merger agreement whereby SurModics acquired all
of the assets of InnoRx, Inc. by paying approximately $4.1 million in cash and
issuing 600,064 shares of SurModics common stock to InnoRx stockholders. In July
2005, we issued 60,002 shares of SurModics&#146; common stock to the shareholders of
InnoRx upon the successful completion of the first milestone involving the
InnoRx technology acquired in the purchase of InnoRx. In March 2006, we issued
an additional 60,007 shares as a result of completion of the second milestone.
Upon the successful completion of the remaining development and commercial
milestones involving InnoRx technology acquired in the transaction, we will be
required to issue up to approximately 480,059 additional shares of our common
stock to the stockholders of InnoRx.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, we made an equity investment of approximately $3.9 million in
OctoPlus, a company based in the Netherlands active in the development of
pharmaceutical formulations incorporating novel biodegradable polymers. In May
2006, we made an additional investment of approximately $160,000. As of
September 30, 2006 the $4.1 million investment, which is accounted for under the
cost method, represented an ownership interest of less than 20%. In October
2006, we made an additional investment of $1.9 million, bringing our total
investment to $6.0 million, representing an ownership interest of less than 10%.
Also in October 2006, OctoPlus common </FONT></P>
<P align=center><FONT face=serif size=2>39</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>stock began trading on an international
exchange following an initial public offering of its common stock. With a
readily determinable fair market value, the Company now treats the investment in
OctoPlus as an available-for-sale investment rather than a cost method
investment.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2006, our Board of Directors authorized the repurchase of up to $35
million of the Company&#146;s common stock. During fiscal 2007, the Company
repurchased 1,007,752 shares of its common stock for $35.0 million at an average
price of $34.76 per share.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>In July 2007, we made equity
investments in Paragon Intellectual Properties, LLC (&#147;Paragon&#148;) and Apollo
Therapeutics, LLC (&#147;Apollo&#148;), a Paragon subsidiary. The Paragon and Apollo
investments totaled $3.5 million. The arrangement calls for SurModics to invest
additional equity totaling $2.5 million upon successful completion of specified
development milestones, which we expect to occur no later than the second
quarter of fiscal 2008. Our investment in Paragon represents an ownership
interest of approximately 5% and the investment in Apollo represents an
ownership interest of less than 10%. Following the additional investment, our
investment in Apollo will represent an ownership interest of 20%.&nbsp;We
account for our investments in Paragon and Apollo under the equity method.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In July
2007, we entered into a stock purchase agreement with Southern Research
Institute whereby we acquired 100% of the capital stock of Brookwood
Pharmaceuticals, Inc. (&#147;Brookwood&#148;) for $40 million in cash on the closing date,
and up to an additional $22 million in cash upon the successful achievement of
specified milestones. Brookwood is a drug delivery company based in Birmingham,
Alabama that provides proprietary polymer-based technologies to companies
developing pharmaceutical products. See Note 3 to the consolidated financial
statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In August
2007, we entered into a stock purchase agreement to acquire 100% of the capital
stock of BioFX Laboratories, Inc. (&#147;BioFX&#148;) for $11.3 million in cash on the
closing date, and up to an additional $11.4 million in cash upon the successful
achievement of specified milestones. Based in Owings Mills, Maryland, BioFX
Laboratories is a leading manufacturer of substrates, a critical component of
diagnostic test kits used to detect and signal that a certain reaction has taken
place. See Note 3 to the consolidated financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In August
2007, we entered into an agreement to purchase an undeveloped parcel of land in
Eden Prairie, Minnesota for approximately $3.6 million (including a
non-refundable deposit of $100,000 paid to the seller at the time we signed the
agreement). The agreement requires that we complete the purchase on or before
August 24, 2008. While it is the Company&#146;s intention to complete the purchase on
or before that date, if we fail to do so, we will be required to pay the seller
$1.6 million and will have no further rights to acquire the land.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have a
current income tax liability of $6.2 million, which will be paid in December
2007. This payment will include taxes payable on the $20 million up-front
license fee received from Merck. Because this license fee will be amortized over
16 years under the EITF 00-21 accounting treatment, the related tax expense has
been deferred and will be recognized over the same period. Accordingly, going
forward, we will carry a deferred tax asset even though the cash taxes will have
been paid.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
October 2007, QLT Inc. acquired ForSight Newco II (&#147;ForSight&#148;), a company with
drug delivery technology for ophthalmology. SurModics held a small equity stake
in ForSight, for which we received an initial payment of over $900,000 in cash,
which will be recorded as other income in fiscal 2008. Additionally, we may
receive future payments associated with the successful attainment of certain
clinical development, and commercialization milestones for products developed by
QLT that incorporate the technology acquired from ForSight. The amount of any
such payments will be prorated according to the level of our equity ownership in
ForSight prior to the acquisition.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
November 2007, our Board of Directors authorized the repurchase of up to $35
million of the Company&#146;s stock. No purchases have been made to date under this
authorization.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
September 30, 2007, we had $252,000 of long-term debt in connection with our
Brookwood Pharmaceuticals and BioFX subsidiaries. We do not have any other credit
agreements. We believe that our existing cash, cash equivalents and investments
will be adequate to fund our operations and material commitments into the
foreseeable future. </FONT></P>
<P align=justify><B><FONT face=serif size=2>Off-Balance Sheet
Arrangements</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
September 30, 2007, the Company did not have any off-balance sheet arrangements
with any unconsolidated entities.</FONT></P>
<P align=center><FONT face=serif size=2>40</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>Contractual
Obligations</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Presented
below is a summary of contractual obligations and other minimum commercial
commitments. See the Notes to the consolidated financial statements for
additional information regarding the below obligations and
commitments.</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="95%" border=0>

  <TR>
    <TD noWrap align=left width="66%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="6%" colSpan=4></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%" colSpan=4><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Less
than</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%" colSpan=4>&nbsp;<STRONG><FONT size=1> </FONT></STRONG></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="4%" colSpan=4>&nbsp;<FONT size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3>&nbsp;<STRONG><FONT size=1>More than</FONT></STRONG>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="66%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=4><B><FONT face=serif size=1>Total</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>1
      Year</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><FONT size=1><STRONG>1-3 </STRONG><STRONG>Years</STRONG></FONT></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=4><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><FONT size=1><STRONG>3-5 </STRONG></FONT><STRONG>Years</STRONG><FONT size=3>&nbsp;</FONT></FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>5
      Years</STRONG><FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="66%" bgColor=#c0c0c0><FONT face=serif size=2>Operating leases</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>2,344</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>684</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>1,660<FONT style="BACKGROUND-COLOR: #c0c0c0" size=3>
    </FONT></FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;<FONT size=3> </FONT></FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$&#151;</FONT> </TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="66%"><FONT face=serif size=2>Other
      liabilities reflected on the</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="66%">&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>balance sheet under GAAP</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%"><FONT face=serif size=2>1,000</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%"><FONT face=serif size=2>1,000</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="2%">&nbsp; <FONT size=2>&#151;</FONT> </TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=2>&#151;</FONT><FONT size=3> </FONT></TD>
    <TD noWrap align=left width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="66%" bgColor=#c0c0c0><FONT face=serif size=2>Total</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="2%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>3,344</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>1,684</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="2%" bgColor=#c0c0c0><FONT face=serif size=2>1,660<FONT style="BACKGROUND-COLOR: #c0c0c0" size=3> </FONT></FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;<FONT size=3> </FONT></FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=center width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$&#151;</FONT> </TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD></TR></TABLE>

</DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Our only
material lease commitment relates to a recently leased facility in Eden Prairie,
Minnesota near our Minnesota headquarters. Additionally, in August 2007, we
entered into an agreement to purchase an undeveloped parcel of land in Eden
Prairie, Minnesota for approximately $3.6 million (including a non-refundable
deposit of $100,000 paid to the seller at the time we signed the agreement). The
agreement requires that we complete the purchase on or before August 24, 2008.
While it is the Company&#146;s intention to complete the purchase on or before that
date, if we fail to do so, we will be required to pay the seller $1.6 million
and will have no further rights to acquire the land.</FONT></P>
<P align=justify><B><FONT face=serif size=2>New Accounting
Pronouncements</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On July
13, 2006, the Financial Accounting Standards Board (&#147;FASB&#148;) Interpretation
(&#147;FIN&#148;) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation
of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise&#146;s financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The new FASB interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The provisions of FIN 48 are
effective for the Company beginning in fiscal 2008. The Company is currently
evaluating the effect that the adoption of FIN 48 will have on its results of
operations and financial condition.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2006, the FASB issued Statement of Financial Accounting Standard
(&#147;SFAS&#148;) No. 157, Fair Value Measurements. This statement establishes a
consistent framework for measuring fair value and expands disclosures on fair
value measurements. SFAS No. 157 is effective for the Company starting in fiscal
2008. The Company has not determined the impact, if any, that the adoption of
this statement will have on its financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. SFAS No. 159 is effective for the Company
in fiscal 2009. The Company is currently evaluating the impact, if any, the
adoption of SFAS No. 159 will have on the consolidated financial position and
results of operations.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD noWrap width="1%"><STRONG><FONT size=2>ITEM 7A.</FONT></STRONG></TD>
    <TD noWrap width="1%">&nbsp;</TD>
    <TD noWrap width="97%"><STRONG><FONT size=2>QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK.</FONT></STRONG></TD></TR></TABLE>
<P align=justify><B><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The Company&#146;s investment policy requires investments with high
credit quality issuers and limits the amount of credit exposure to any one
issuer. The Company&#146;s investments principally consist of U.S. government and
government agency obligations and investment-grade, interest-bearing corporate
debt securities with varying maturity dates, the majority of which are five
years or less. Because of the credit criteria of the Company&#146;s investment
policies, the primary market risk associated with these investments is interest
rate risk. SurModics does not use derivative financial instruments to manage
interest rate risk or to speculate on future changes in interest rates. A one
percentage point increase in interest rates would result in an approximate
$931,000 decrease in the fair value of the Company&#146;s available-for-sale
securities as of September 30, 2007, but no material impact on the results of
operations or cash flows. Management believes that a reasonable change in raw
material prices would not have a material impact on future earnings or cash
flows because the Company&#146;s inventory exposure is not material.</FONT></P>
<P align=center><FONT face=serif size=2>41</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Although
we conduct business in foreign countries, our international operations consist
primarily of sales of reagent and stabilization chemicals. Additionally, all
sales transactions are denominated in U.S. dollars. Accordingly, we do not
expect to be subject to material foreign currency risk with respect to future
costs or cash flows from our foreign sales. To date, we have not entered into
any foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in foreign currency
exchange.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif size=2><STRONG>ITEM
      8.</STRONG><FONT size=3> </FONT></FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="97%"><B><FONT face=serif size=2>FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.</FONT></B> </TD></TR></TABLE><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
consolidated balance sheets as of September 30, 2007 and 2006 and the statements
of operations, stockholders&#146; equity and cash flows for each of the three years
in the period ended September 30, 2007, together with Report of Independent
Registered Public Accounting Firm and related footnotes (including selected
unaudited quarterly financial data) begin on page F-1 of this Form 10-K.
</FONT></P>
<TABLE style="text-align:justify" cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=justify width="1%"><B><FONT face=serif size=2>ITEM
      9.</FONT></B> </TD>
    <TD noWrap align=justify width="1%">&nbsp;</TD>
    <TD noWrap align=justify width="98%"><FONT face=serif size=2><STRONG>CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.</STRONG><FONT size=3>&nbsp;</FONT></FONT></TD></TR></TABLE>
<BR>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>None.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif size=2><STRONG>ITEM
      9A.</STRONG><FONT size=3> </FONT></FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="97%"><B><FONT face=serif size=2>CONTROLS AND
      PROCEDURES.</FONT></B><FONT size=3> </FONT></TD></TR></TABLE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></FONT><FONT face=serif size=2><STRONG>1. Disclosure Controls and Procedures. </STRONG></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of the
end of the period covered by this report, the Company conducted an evaluation
under the supervision and with the participation of the Company&#146;s management,
including the Company&#146;s Chief Executive Officer and Chief Financial Officer
regarding the effectiveness of the design and operation of the Company&#146;s
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934 (the &#147;Exchange Act&#148;). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company&#146;s
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time
period specified in the rules of the Securities Exchange Commission.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><STRONG>2. Internal Control over
Financial Reporting.</STRONG></FONT></P>
<TABLE style="TEXT-ALIGN: justify" cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD vAlign=top noWrap><B><FONT face=serif size=2>(a)</FONT></B></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top width="100%"><B><FONT face=serif size=2>Management&#146;s Report
      on Internal Control Over Financial Reporting. </FONT></B><FONT face=serif size=2>Management is responsible for establishing and maintaining adequate
      internal control over financial reporting for the Company. Management
      conducted an evaluation of the effectiveness of internal control over
      financial reporting based on the framework in <I><FONT face=serif size=2>Internal Control </FONT></I><FONT face=serif size=2>&#150;
      </FONT><I><FONT face=serif size=2>Integrated Framework </FONT></I><FONT face=serif size=2>issued by the Committee of Sponsoring Organizations of
      the Treadway Commission (COSO). As discussed in Note 3 to the Consolidated
      Financial Statements, in July 2007 the Company acquired Brookwood
      Pharmaceuticals, Inc. and in August 2007 the Company acquired BioFX
      Laboratories, Inc. In accordance with guidance published by the Securities
      and Exchange Commission, the Company&#146;s assessment of internal control over
      financial reporting excluded the acquisitions of Brookwood and BioFX,
      which together represented approximately 4% of total revenue for the
      fiscal year ended September 30, 2007, and approximately 20% of total
      assets (excluding goodwill of Brookwood and BioFX) as of September 30,
      2007. Based on this evaluation, management concluded that the Company&#146;s
      internal control over financial reporting was effective as of September
      30, 2007. Deloitte &amp; Touche LLP, the registered public accounting firm
      that audited the financial statements included in this Annual Report on
      Form 10-K, has issued the attestation report below regarding the Company&#146;s
      internal control over financial reporting.</FONT></FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><B><FONT face=serif size=2>(b)</FONT></B></TD>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top width="100%"><B><FONT face=serif size=2>Attestation Report
      of the Independent Registered Public Accounting
  Firm.</FONT></B></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>42</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM</FONT></B></P>
<P align=justify><FONT face=serif size=2>Board of Directors and Stockholders
<BR>SurModics, Inc.<BR></FONT><FONT face=serif size=2>Eden Prairie,
Minnesota</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
audited the internal control over financial reporting of SurModics, Inc. and
subsidiaries (the &#147;Company&#148;) as of September 30, 2007, based on criteria
established in </FONT><I><FONT face=serif size=2>Internal Control &#151; Integrated
Framework </FONT></I><FONT face=serif size=2>issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in
Management&#146;s Report on Internal Control Over Financial Reporting, management
excluded from its assessment the internal control over financial reporting at
Brookwood Pharmaceuticals Inc. and BioFX Laboratories LLC, which were acquired
in August 2007 and whose financial statements constitute 29% and 27% of net and
total assets, respectively, 4% of revenues, and 0% of net income of the
consolidated financial statement amounts as of and for the year ended September
30, 2007. Accordingly, our audit did not include the internal control over
financial reporting at Brookwood Pharmaceuticals Inc. and BioFX Laboratories
LLC. The Company&#146;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&#146;s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company&#146;s internal control over
financial reporting based on our audit.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>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.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A
company&#146;s internal control over financial reporting is a process designed by, or
under the supervision of, the company&#146;s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company&#146;s board of directors, management, and other personnel 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&#146;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&#146;s
assets that could have a material effect on the financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2007, based on the criteria
established in </FONT><I><FONT face=serif size=2>Internal Control &#151; Integrated
Framework </FONT></I><FONT face=serif size=2>issued by the Committee of
Sponsoring Organizations of the Treadway Commission.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended September 30, 2007 of the Company and our report dated
December 13, 2007 expressed an unqualified opinion on those financial
statements.</FONT></P>
<P align=justify><I><FONT face=serif size=2>DELOITTE &amp; TOUCHE
LLP</FONT></I></P>
<P align=justify><FONT face=serif size=2>Minneapolis, Minnesota <BR>December 13,
2007 </FONT></P>
<P align=center><FONT face=serif size=2>43</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><STRONG>3. Changes in Internal
Controls.</STRONG></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>There
were no changes in the Company&#146;s internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Company&#146;s internal control
over financial reporting. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><B><FONT face=serif size=2>ITEM
      9B.</FONT></B> </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="98%"><B><FONT face=serif size=2>OTHER
      INFORMATION.</FONT></B>&nbsp;</TD></TR></TABLE><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>All
information required to be disclosed in a report on Form 8-K during the fourth
quarter of the year covered by this Form 10-K has been reported.</FONT></P>
<P align=center><FONT face=serif size=2>44</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>PART III</FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top noWrap width="1%">
      <P align=justify><B><FONT face=serif size=2>ITEM
    10.&nbsp;</FONT></B></P></TD>
    <TD vAlign=top width="99%">
      <P align=justify><B><FONT face=serif size=2>DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE.</FONT></B></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
information required by Item 10 relating to directors, our audit committee, the
nature of changes, if any, to procedures by which our shareholders may recommend
nominees for directors, codes of ethics and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference to the
sections entitled &#147;Election of Directors,&#148; &#147;Section 16(a) Beneficial Ownership
Reporting Compliance&#148; and &#147;Corporate Governance - Code of Ethics and Business
Conduct,&#148; which appear in the Company&#146;s definitive Proxy Statement for its 2008
Annual Meeting of Shareholders. The information required by Item 10 relating to
executive officers appears in Part I of this Form 10-K. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top noWrap width="1%">
      <P align=justify><B><FONT face=serif size=2>ITEM
    11.&nbsp;</FONT></B></P></TD>
    <TD vAlign=top width="99%">
      <P align=justify><B><FONT face=serif size=2>EXECUTIVE
      COMPENSATION.</FONT></B></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2> The
information required by Item 11 is incorporated herein by reference to the
sections entitled &#147;Executive Compensation and Other Information,&#148; &#147;Compensation
Discussion and Analysis,&#148; &#147;Director Compensation for Fiscal 2007,&#148; &#147;Compensation
Committee Report&#148; and &#147;Corporate Governance &#150; Committee and Board Meetings,&#148;
which appear in the Company&#146;s definitive Proxy Statement for its 2008 Annual
Meeting of Shareholders.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top noWrap width="1%">
      <P align=justify><B><FONT face=serif size=2>ITEM
    12.&nbsp;</FONT></B></P></TD>
    <TD vAlign=top width="99%">
      <P align=justify><B><FONT face=serif size=2>SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS.</FONT></B></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
information required by Item 12 is incorporated herein by reference to the
sections entitled &#147;Principal Shareholders&#148; and &#147;Management Shareholdings,&#148; which
appear in the Company&#146;s definitive Proxy Statement for its 2008 Annual Meeting
of Shareholders.</FONT></P>
<P align=center><FONT face=serif size=2>45</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>Equity Compensation Plan
Information</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following table provides information related to the Company&#146;s equity
compensation plans in effect as of September 30, 2007:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="13%" colSpan=3></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="12%" colSpan=3></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>(c)</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="13%" colSpan=3></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="12%" colSpan=3></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>Number of securities</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="13%" colSpan=3><B><FONT face=serif size=1>(a)</FONT></B> </TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="12%" colSpan=3><B><FONT face=serif size=1>(b)</FONT></B> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>remaining available for</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="13%" colSpan=3><B><FONT face=serif size=1>Number of securities to</FONT></B> </TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="12%" colSpan=3><B><FONT face=serif size=1>Weighted-average exercise</FONT></B> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>future issuance under</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="13%" colSpan=3><B><FONT face=serif size=1>be issued upon exercise</FONT></B> </TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="12%" colSpan=3><B><FONT face=serif size=1>price of outstanding</FONT></B> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>equity compensation</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="13%" colSpan=3><B><FONT face=serif size=1>of outstanding options,</FONT></B> </TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="12%" colSpan=3><B><FONT face=serif size=1>options, warrants and</FONT></B> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>plans (excluding securities</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><FONT face=serif color=#231f20 size=1>Plan
      Category</FONT></B> </TD>
    <TD noWrap align=left width="64%">&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="13%" colSpan=3><B><FONT face=serif size=1>warrants and rights</FONT></B> </TD>
    <TD noWrap align=center width="3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="12%" colSpan=3><B><FONT face=serif size=1>rights</FONT></B> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><B><FONT face=serif size=1>reflected in column(a))</FONT></B>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Equity compensation plans</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0>&nbsp;&nbsp; </TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;approved by
      shareholders</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0><FONT size=2>1,607,611</FONT><FONT style="BACKGROUND-COLOR: #c0c0c0" size=3>&nbsp;</FONT></TD>
    <TD noWrap align=left width="5%" bgColor=#c0c0c0><FONT size=2>(1)</FONT><FONT size=3></FONT> </TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0><FONT size=2>$27.28</FONT>&nbsp;</TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0><FONT size=2>(1)</FONT><FONT size=3> </FONT></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0><FONT size=2>730,491</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=2>(2)</FONT><FONT size=3> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2><FONT face=serif size=2>Equity
      compensation plans not</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="4%"></TD>
    <TD noWrap align=center width="4%"></TD>
    <TD noWrap align=center width="5%"></TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="4%"></TD>
    <TD noWrap align=center width="4%"></TD>
    <TD noWrap align=center width="4%"></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" colSpan=2><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;approved by shareholders</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%">&nbsp;<FONT size=2>0</FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="5%">&nbsp;</TD>
    <TD noWrap align=right width="3%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=2>N/A</FONT><FONT size=3>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%">&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=2>0</FONT><FONT size=3>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="65%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Total</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0><FONT size=2>1,607,611</FONT><FONT style="BACKGROUND-COLOR: #c0c0c0" size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0><FONT size=2>$27.28</FONT><FONT style="BACKGROUND-COLOR: #c0c0c0" size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0><FONT size=2>730,491</FONT><FONT style="BACKGROUND-COLOR: #c0c0c0" size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="1%" bgColor=#c0c0c0></TD></TR></TABLE>
____________________<BR>&nbsp;<BR>
<TABLE style="TEXT-ALIGN: justify" cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Excludes shares that may be
      issued under the Company&#146;s 1999 Employee Stock Purchase Plan.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>(2)</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Includes 637,528 shares
      available for future issuance under the amended and restated 2003 Equity
      Incentive Plan and 92,963 shares available under the 1999 Employee Stock
      Purchase Plan.</FONT></TD></TR></TABLE>
<P align=justify><B><FONT face=serif size=2>ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
information required by Item 13 is incorporated herein by reference to the
sections entitled &#147;Corporate Governance - Related Person Transaction Approval
Policy&#148; and &#147;Corporate Governance - Majority of Independent Directors;
Committees of Independent Directors,&#148; which appear in the Company&#146;s definitive
Proxy Statement for its 2008 Annual Meeting of Shareholders.</FONT></P>
<P align=justify><B><FONT face=serif size=2>ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES. </FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
information required by Item 14 is incorporated herein by reference to the
section entitled &#147;Independent Registered Public Accounting Firm,&#148; which appears
in the Company&#146;s definitive Proxy Statement for its 2008 Annual Meeting of
Shareholders.</FONT></P>
<P align=center><FONT face=serif size=2>46</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>PART IV</FONT></B></P>
<P align=justify><B><FONT face=serif size=2>ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES.</FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD align=left width="1%">
      <P align=justify><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></P></TD>
    <TD align=left width="91%">
      <P align=justify><FONT face=serif size=2>1. </FONT><I><FONT face=serif size=2>Financial Statements</FONT></I></P></TD>
    <TD align=center width="4%"></TD>
    <TD align=center width="3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD></TR>
  <TR>
    <TD align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align=left width="91%">&nbsp;</TD>
    <TD align=center width="4%"></TD>
    <TD align=center width="3%"></TD></TR>
  <TR>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%">
      <P align=justify><FONT face=serif size=2>The following statements are
      included in this report on the pages indicated:</FONT></P></TD>
    <TD align=center width="4%"></TD>
    <TD align=center width="3%"></TD></TR>
  <TR>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%">&nbsp;</TD>
    <TD align=center width="4%"></TD>
    <TD align=center width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%">&nbsp;</TD>
    <TD align=left width="91%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%"><B><FONT face=serif color=#231f20 size=1>Page (s)</FONT></B>
</TD>
    <TD noWrap align=center width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%" bgColor=#c0c0c0><FONT face=serif size=2>Report
      of Independent Registered Public Accounting Firm</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>F-1</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%"><FONT face=serif size=2>Consolidated Balance
      Sheets</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>F-2</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%" bgColor=#c0c0c0><FONT face=serif size=2>Consolidated Statements of Operations</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>F-3</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%"><FONT face=serif size=2>Consolidated Statements
      of Stockholders&#146; Equity</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>F-4</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%" bgColor=#c0c0c0><FONT face=serif size=2>Consolidated Statements of Cash Flows</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>F-5</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%"><FONT face=serif size=2>Notes to Consolidated
      Financial Statements.</FONT>&nbsp; </TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>F-6 &#150;
      F-20</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR>
    <TD align=left width="1%"></TD>
    <TD align=left width="91%">&nbsp;</TD>
    <TD noWrap align=right width="4%"></TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR>
    <TD align=left width="1%"></TD>
    <TD align=left width="98%" colSpan=3>
      <P align=justify><FONT face=serif size=2>2. </FONT><I><FONT face=serif size=2>Financial Statement Schedules. </FONT></I><FONT face=serif size=2>All schedules for which provision is made in the applicable
      accounting regulations of the Securities and Exchange Commission other
      than the ones listed above are not required under the related instructions
      or are not applicable, and, therefore, have been omitted.</FONT></P>
      <P align=justify><FONT face=serif size=2>3. </FONT><I><FONT face=serif size=2>Listing of Exhibits.</FONT></I><FONT face=serif size=2> The
      exhibits which are filed with this report or which are incorporated herein
      by reference are set forth in the Exhibit Index following the signature
      page. </FONT></P></TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>47</FONT></P>
<HR align=center width="100%" noShade SIZE=2>

<PAGE>


<P align=center><B><FONT face=serif size=2>SIGNATURES</FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD align=left width="49%"></TD>
    <TD align=left width="50%" colSpan=2><FONT size=2>SURMODICS,
      INC.<BR>(&#147;Registrant&#148;)</FONT></TD></TR>
  <TR>
    <TD align=left width="49%">&nbsp;</TD>
    <TD align=left width="1%">&nbsp;</TD>
    <TD align=left width="49%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%"><FONT face=serif size=2>Dated: December 14,
      2007</FONT>&nbsp; </TD>
    <TD align=left width="1%"><FONT face=serif size=2>By:&nbsp;</FONT> </TD>
    <TD align=left width="49%"><U><FONT face=serif color=#231f20 size=2>/s/
      Bruce J Barclay</FONT></U>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%">&nbsp; </TD>
    <TD align=left width="1%">&nbsp; </TD>
    <TD align=left width="49%"><FONT face=serif size=2>Bruce J
      Barclay</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%">&nbsp; </TD>
    <TD align=left width="1%">&nbsp; </TD>
    <TD align=left width="49%"><FONT face=serif size=2>Chief Executive
      Officer</FONT>&nbsp; </TD></TR></TABLE><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant, in the
capacities, and on the dates indicated.</FONT></P>
<P align=center><FONT face=serif size=2>(Power of Attorney)</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Each
person whose signature appears below authorizes BRUCE J BARCLAY and PHILIP D.
ANKENY, and constitutes and appoints said persons as his true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or 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, authorizing said persons
and granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="2%"><B><FONT face=serif color=#231f20 size=1>Signature</FONT></B>
    </TD>
    <TD noWrap align=left width="18%">&nbsp;</TD>
    <TD noWrap align=center width="5%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="52%" colSpan=3><B><FONT face=serif size=1>Title</FONT></B> </TD>
    <TD noWrap align=center width="5%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="17%"><B><FONT face=serif size=1>Date</FONT></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ Bruce J Barclay </FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align=left width="50%"><FONT face=serif size=2>President and Chief
      Executive Officer (principal executive officer)</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Bruce
      J Barclay</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD align=left width="50%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ Philip D. Ankeny </FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD align=left width="50%"><FONT face=serif size=2>Senior Vice President
      and Chief Financial Officer (principal financial officer and acting
      principal <FONT size=3><FONT size=2>accounting
      officer)</FONT></FONT></FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Philip
      D. Ankeny</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Jos&#233;
      H. Bedoya</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ John W. Benson </FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>John
      W. Benson</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ Gerald B. Fischer </FONT></U>&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Gerald
      B. Fischer</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ Kenneth H. Keller </FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Kenneth H. Keller</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ David A. Koch </FONT></U>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>David
      A. Koch</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT face=serif color=#231f20 size=2>/s/ Kendrick B. Melrose </FONT></U>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>Kendrick B. Melrose</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif color=#231f20 size=2><U>/s/ John A. Meslow&nbsp;</U><FONT color=#000000 size=3>&nbsp;</FONT></FONT></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT face=serif size=2>John
      A. Meslow<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="20%" colSpan=2>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><U><FONT color=#231f20 size=2>/s/ Dale R. Olseth&nbsp;</FONT></U>&nbsp;</TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Director</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%"><FONT face=serif size=2>December 14,
      2007</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="20%" colSpan=2><FONT size=2>Dale R.
      Olseth</FONT>&nbsp; </TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="5%"></TD>
    <TD noWrap align=left width="17%">&nbsp; </TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>48</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>SECURITIES AND EXCHANGE
COMMISSION<BR>WASHINGTON, D.C. 20549</FONT></B></P>
<P align=center><B><FONT face=serif size=2>EXHIBIT INDEX TO FORM
10-K</FONT></B></P>
<P align=center><B><FONT face=serif size=2>For the Fiscal Year Ended September
30, 2007</FONT></B></P>
<P align=center><B><FONT face=serif size=2>SURMODICS, INC.</FONT></B></P>
<TABLE style="TEXT-ALIGN: justify" cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap>
      <P align=justify><B><FONT face=serif color=#231f20 size=2>Exhibit</FONT></B></P></TD>
    <TD noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="100%"></TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT face=serif size=2>2.1&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT face=serif size=2>Agreement of
      Merger, dated January 18, 2005, with InnoRx, Inc.--incorporated by
      reference to Exhibit 2.1 to the Company&#146;s Current Report on Form 8-K dated
      January 18, 2005, SEC File No. 0-23837.</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT face=serif size=2>2.2</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT face=serif size=2>Stock Purchase
      Agreement, dated July 31, 2007, between SurModics, Inc. and Southern
      Research Institute.--incorporated by reference to Exhibit 2.1 to the
      Company&#146;s Current Report on Form 8-K dated July 31, 2007, SEC File No.
      0-23837.</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT face=serif size=2>3.1</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT face=serif size=2>Restated Articles
      of Incorporation, as amended--incorporated by reference to Exhibit 3.1 to
      the Company&#146;s Quarterly Report on Form 10-QSB for the quarter ended
      December 31, 1999, SEC File No. 0-23837.</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT face=serif size=2>3.2</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT face=serif size=2>Bylaws, as
      amended to date. **</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT face=serif size=2>4</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT face=serif size=2>Rights Agreement,
      dated as of April 5, 1999, between the Company and Firstar Bank Milwaukee,
      NA., as Rights Agent, including as: Exhibit A Statement of Designation of
      Series A Preferred Stock of the Company; Exhibit B Summary of Rights to
      Purchase Shares of Series A Preferred Stock; and Exhibit C Form of Right
      Certificate--incorporated by reference to Exhibit 1 to the Company&#146;s
      Registration of Securities on Form 8-A, SEC File No. 0-23837.</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.1*</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Company&#146;s Incentive 1987 Stock
      Option Plan, including specimen of Incentive Stock Option
      Agreement--incorporated by reference to Exhibit 10.2 to the Company&#146;s
      Registration Statement on form SB-2, Reg. No. 333-43217.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.2*</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Company&#146;s Incentive 1997 Stock
      Option Plan, including specimen of Incentive Stock Option
      Agreement--incorporated by reference to Exhibit 10.3 to the Company&#146;s
      Registration Statement on form SB-2, Reg. No. 333-43217.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.3*</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of Restricted Stock
      Agreement under 1997 Plan--incorporated by reference to Exhibit 10.4 to
      the Company&#146;s Registration Statement on form SB-2, Reg. No.
      333-43217.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.4*</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of Non-qualified Stock
      Option Agreement under 1997 Plan--incorporated by reference to Exhibit
      10.5 to the Company&#146;s Registration Statement on form SB-2, Reg. No.
      333-43217.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.5</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of License
      Agreement--incorporated by reference to Exhibit 10.6 to the Company&#146;s
      Registration Statement on form SB-2, Reg. No. 333-43217.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.6*</FONT></P></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>SurModics, Inc. Executive Income
      Continuation Plan--incorporated by reference to Exhibit 10 to the
      Company&#146;s Quarterly Report on Form 10-QSB for the quarter ended June 30,
      1999, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT size=2>10.7</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT size=2>Adjusted License Agreement
      by and between the Company and Cordis Corporation effective as of January
      1, 2003--incorporated by reference to Exhibit 10.11 to the Company&#146;s
      Annual Report on Form 10-K for the fiscal year ended September 30, 2002,
      SEC File No. 0-23837.</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD noWrap></TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap bgColor=#c0c0c0><FONT size=2>10.8</FONT></TD>
    <TD noWrap bgColor=#c0c0c0></TD>
    <TD width="100%" bgColor=#c0c0c0><FONT size=2>Reagent Supply Agreement by
      and between the Company and Cordis Corporation effective as of January 1,
      2003--incorporated by reference to Exhibit 10.12 to the Company&#146;s Annual
      Report on Form 10-K for the fiscal year ended September 30, 2002, SEC File
      No. 0-23837.</FONT></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>49</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" width="2%">
      <P align=justify><B><FONT face=serif color=#231f20 size=2>Exhibit</FONT></B></P></TD>
    <TD width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.9*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of officer acceptance
      regarding employment/compensation--incorporated by reference to Exhibit
      10.9 to the Company&#146;s Annual Report on Form 10-K for the fiscal year ended
      September 30, 2005, SEC File No. 0-23837. </FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.10*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>2003 Equity Incentive Plan (as
      amended and restated December 13, 2005) (adopted December 13, 2005 by the
      board of directors and approved by the shareholders on January 30,
      2006)--incorporated by reference to Exhibit 10.1 to the Company&#146;s Form 8-K
      filed February 3, 2006, SEC File No. 0-23837. </FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.11* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Nonqualified Stock Option Agreement--incorporated by
      reference to Exhibit 99.1 to the Company&#146;s 8-K filed March 20, 2006, SEC
      File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.12* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Incentive Stock Option Agreement--incorporated by
      reference to Exhibit 99.2 to the Company&#146;s 8-K filed March 20, 2006, SEC
      File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.13* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Restricted Stock Agreement--incorporated by
      reference to Exhibit 99.3 to the Company&#146;s 8-K filed March 20, 2006, SEC
      File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.14* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Performance Share Award Agreement--incorporated by
      reference to Exhibit 99.4 to the Company&#146;s 8-K filed March 20, 2006, SEC
      File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.15* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Performance Unit Award (cash settled)
      Agreement--incorporated by reference to Exhibit 99.5 to the Company&#146;s 8-K
      filed March 20, 2006, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.16* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Restricted Stock Unit Agreement--incorporated by
      reference to Exhibit 99.6 to the Company&#146;s 8-K filed March 20, 2006, SEC
      File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.17* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Stock Appreciation Rights (cash settled)
      Agreement--incorporated by reference to Exhibit 99.7 to the Company&#146;s 8-K
      filed March 20, 2006, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp; </TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.18* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Form of SurModics, Inc. 2003
      Equity Incentive Plan Stock Appreciation Rights (stock settled)
      Agreement--incorporated by reference to Exhibit 99.8 to the Company&#146;s 8-K
      filed March 20, 2006, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.19*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Change in Control Agreement with
      Bruce J Barclay, dated April 19, 2006--incorporated by reference to
      Exhibit 99.1 to the Company&#146;s Form 8-K filed April 25, 2006, SEC File No.
      0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.20* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Change in Control Agreement with
      Philip D. Ankeny, dated April 19, 2006--incorporated by reference to
      Exhibit 99.2 to the Company&#146;s Form 8-K filed April 25, 2006, SEC File No.
      0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#ffffff>&nbsp;</TD>
    <TD vAlign=top width="2%" bgColor=#ffffff></TD>
    <TD vAlign=top width="95%" bgColor=#ffffff></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.21* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>The Company&#146;s Board Compensation
      Policy, Amended and Restated in its entirety as of July 31,
      2006--incorporated by reference to Exhibit 10.22 to the Company&#146;s Annual
      Report on Form 10-K for the fiscal year ended September 30, 2006, SEC File
      No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.22* </FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0></TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Fiscal Year 2007 Summary of
      Compensation Arrangements for Named Executive Officers of the
      Company--incorporated by reference to Exhibit 10.24 to the Company&#146;s
      Annual Report on Form 10-K for the fiscal year ended September 30, 2006,
      SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.23*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Change in Control Agreement with
      Paul A. Lopez, dated November 15, 2006--incorporated by reference to
      Exhibit 10.27 to the Company&#146;s Annual Report on Form 10-K for the fiscal
      year ended September 30, 2006, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.24*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Description of certain retirement
      benefits for Dale R. Olseth--incorporated by reference to Exhibit 10.28 to
      the Company&#146;s Annual Report on Form 10-K for the fiscal year ended
      September 30, 2006, SEC File No. 0-23837.</FONT></P></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>50</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" width="2%">
      <P align=justify><B><FONT face=serif color=#231f20 size=2>Exhibit</FONT></B></P></TD>
    <TD width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.25+</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Exclusive License and Research
      Collaboration Agreement with Merck &amp; Co., Inc. dated June 26,
      2007--incorporated by reference to Exhibit 10.1 to the Company&#146;s Quarterly
      Report on Form 10-Q for the quarter ended June 30, 2007, SEC File No.
      0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.26+</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Supply Agreement with Merck &amp;
      Co., Inc. dated June 26, 2007--incorporated by reference to Exhibit 10.2
      to the Company&#146;s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2007, SEC File No. 0-23837.</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.27*</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Employment Agreement of Arthur J.
      Tipton, Ph.D., dated July 31, 2007.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>10.28</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Purchase Agreement with Vest
      Mykyng LLC, dated August 24, 2007.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>21</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Subsidiaries of the
      Registrant.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>23</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Consent of Deloitte &amp; Touche
      LLP.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>24</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Power of Attorney (included on
      signature page of this Form 10-K).**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>31.1</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Certification of Chief Executive
      Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>31.2</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Certification of Chief Financial
      Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0><FONT face=serif size=2>32.1</FONT></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Certification of Chief Executive
      Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002.**</FONT></P></TD></TR>
  <TR>
    <TD vAlign=top width="2%">&nbsp;</TD>
    <TD vAlign=top width="2%"></TD>
    <TD vAlign=top width="95%"></TD></TR>
  <TR>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>32.2</FONT></P></TD>
    <TD vAlign=top width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD vAlign=top width="95%" bgColor=#c0c0c0>
      <P align=justify><FONT face=serif size=2>Certification of Chief Financial
      Officer Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002.**</FONT></P></TD></TR></TABLE>____________________<BR><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>*</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Management contract or
      compensatory plan or arrangement</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>**&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Filed herewith</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap>&nbsp;</TD>
    <TD width="100%">&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT size=2>+&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT size=2>Confidential treatment requested as to
      portions of the exhibit. Confidential portions omitted and provided
      separately to the Securities and Exchange
Commission.</FONT></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>51</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM</FONT></B></P>
<P align=justify><FONT face=serif size=2>Board of Directors and
Stockholders<BR>SurModics, Inc.<BR></FONT><FONT face=serif size=2>Eden Prairie,
Minnesota</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
audited the accompanying consolidated balance sheets of SurModics and
subsidiaries (the &#147;Company&#148;) as of September 30, 2007 and 2006, and the related
consolidated statements of operations, stockholders&#146; equity, and cash flows for
each of the three years in the period ended September 30, 2007. These financial
statements are the responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of SurModics and subsidiaries as of September
30, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2007, in conformity
with accounting principles generally accepted in the United States of America.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company&#146;s internal control over financial
reporting as of September 30, 2007, based on the criteria established in
</FONT><I><FONT face=serif size=2>Internal Control&#151;Integrated
Framework</FONT></I><FONT face=serif size=2> issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
December 13, 2007 expressed an unqualified opinion on the Company&#146;s internal
control over financial reporting.</FONT></P>
<P align=justify><FONT face=serif size=2>DELOITTE &amp; TOUCHE LLP</FONT></P>
<P align=justify><FONT face=serif size=2>Minneapolis, Minnesota<BR>December 13,
2007</FONT></P>
<P align=center><FONT face=serif size=2>F-1</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>SurModics, Inc. and
Subsidiaries<BR></FONT></B><FONT face=serif size=2>Consolidated Balance
Sheets<BR>As of September 30 </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="3%"><FONT size=+0><B><I><FONT face=serif color=#231f20 size=1>(thousands, except share data)</FONT></I></B></FONT> </TD>
    <TD align=left width="83%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=center width="4%"><FONT size=+0><B><I><FONT face=serif size=1>2007</FONT></I></B></FONT> </TD>
    <TD align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=center width="7%" colSpan=2><FONT size=+0><B><I><FONT face=serif size=1>2006</FONT></I></B></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><B><FONT face=serif size=2>ASSETS</FONT></B></FONT> </TD>
    <TD align=left width="4%" bgColor=#c0c0c0></TD>
    <TD align=left width="2%" bgColor=#c0c0c0></TD>
    <TD align=left width="4%" bgColor=#c0c0c0></TD>
    <TD align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>Current Assets</FONT></FONT> </TD>
    <TD align=left width="4%"></TD>
    <TD align=left width="2%"></TD>
    <TD align=left width="4%"></TD>
    <TD align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Cash and cash
      equivalents</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp; 13,812</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp;&nbsp;&nbsp;3,751</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Short-term investments</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>12,496</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>55,062</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accounts receivable, net of
      allowance for doubtful accounts of $40 as of</FONT></FONT> </TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      September 30, 2007 and 2006</FONT> </FONT></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>16,138</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>14,493</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Inventories</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>2,497</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>952</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Deferred tax
      asset</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,116</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>435</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Prepaids and other</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>1,836</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>1,403</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Total Current Assets</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>47,895</FONT></FONT>
    </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>76,096</FONT></FONT>
    </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Property and equipment, net</FONT></FONT>
    </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>19,738</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>11,686</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Long-term
      investments</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>43,917</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>47,758</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Deferred tax asset</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>5,908</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>4,883</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Intangible assets,
      net</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>18,399</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,530</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Goodwill</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>15,686</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Other assets, net</FONT></FONT>
    </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>19,788</FONT></FONT>
    </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>11,449</FONT></FONT>
    </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Total Assets</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>$</FONT><FONT face=serif size=2>171,331</FONT> </FONT></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>$</FONT><FONT face=serif size=2>157,402</FONT> </FONT></TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR>
    <TD width="96%" colSpan=5>&nbsp;</TD>
    <TD width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><B><FONT face=serif size=2>LIABILITIES AND STOCKHOLDERS&#146;
      EQUITY</FONT></B></FONT> </TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>Current Liabilities</FONT></FONT> </TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable</FONT></FONT>
    </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp;&nbsp; 2,541</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 963</FONT></FONT>
    </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accrued liabilities:&nbsp;</FONT></FONT>
    </TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Compensation</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,137</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,275</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accrued
      income taxes payable</FONT> </FONT></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>6,227</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>1,910</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Accrued other</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,050</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,605</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Deferred revenue</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>5,586</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>2,236</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Other current
      liabilities</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,311</FONT></FONT>
    </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,000</FONT></FONT>
    </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </FONT><FONT face=serif size=2>Total Current Liabilities</FONT> </FONT></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>19,852</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>8,989</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Deferred revenue, less current portion</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>20,305</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,210</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>Other long-term liabilities</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>252</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>1,000</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Total Liabilities</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>40,409</FONT></FONT>
    </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>12,199</FONT></FONT>
    </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>Commitments and Contingencies (Note 6)</FONT></FONT> </TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Stockholders&#146; Equity</FONT></FONT> </TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Series A preferred stock - $.05 par value,
      450,000 shares authorized;</FONT></FONT> </TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="4%"></TD>
    <TD noWrap align=left width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; no shares
      issued and outstanding</FONT></FONT> </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Common stock - $.05 par value,
      45,000,000 shares authorized; 18,164,980</FONT></FONT> </TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      and 18,830,455 shares issued and outstanding</FONT></FONT> </TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>909</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>942</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Additional paid-in capital</FONT></FONT>
    </TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>76,670</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>96,281</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accumulated other comprehensive
      income (loss)</FONT> </FONT></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,723</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(293</FONT></FONT> </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0><FONT size=2>)</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Retained earnings</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>51,620</FONT></FONT> </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>48,273</FONT></FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Total Stockholders&#146; Equity</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>130,922</FONT></FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>145,203</FONT></FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="86%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Total Liabilities and Stockholders&#146; Equity</FONT></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>$</FONT><FONT face=serif size=2>171,331</FONT> </FONT></TD>
    <TD noWrap align=right width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%"><FONT size=+0><FONT face=serif size=2>$</FONT><FONT face=serif size=2>157,402</FONT> </FONT></TD>
    <TD noWrap align=right width="3%"></TD></TR></TABLE><BR>
<P align=justify><FONT face=serif size=2>The accompanying notes are an integral
part of these consolidated financial statements. </FONT></P>
<P align=center><FONT face=serif size=2>F-2</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>SurModics, Inc. and
Subsidiaries<BR></FONT></B><FONT face=serif size=2>Consolidated Statements of
Operations <BR>For the Years Ended September 30 </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0><B><I><FONT face=serif color=#231f20 size=1>(thousands, except net income per share)</FONT></I></B> </FONT></TD>
    <TD noWrap align=left width="88%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2007</FONT></I></B></FONT><FONT size=+0> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2006</FONT></I></B>
      </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2005</FONT></I></B>
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Revenue</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Royalties and license fees</FONT>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>52,679</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>53,008</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>47,582</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Product
      sales</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>13,543</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>11,172</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>9,403</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Research and
      development</FONT>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>6,942</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>5,704</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>5,396</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      Total revenue</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>73,164</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>69,884</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>62,381</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT face=serif size=2>Operating Costs and Expenses</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Product</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,584</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,399</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,855</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Research and
      development</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>28,465</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>20,391</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>16,072</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Selling, general and
      administrative</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>13,643</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>9,931</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>7,705</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Asset impairment
      charge</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,487</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Purchased in-process
      research &amp; development</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>15,573</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>30,277</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Total operating costs and expenses</FONT></FONT>
    </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>63,265</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>33,721</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>59,396</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Income from Operations</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>9,899</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>36,163</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,985</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT face=serif size=2>Other Income (Loss)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Investment
      income, net</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,844</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,210</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,967</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Impairment loss on
      investment</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(4,651</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Other loss, net</FONT>
      </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(75</FONT>
</FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(157</FONT>
    </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(602</FONT>
    </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT>
  </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Other income (loss), net</FONT></FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>4,769</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(598</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>1,365</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Income Before Income Taxes</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>14,668</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>35,565</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,350</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT face=serif size=2>Income Tax Provision</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;
      (11,321</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;
      (15,231</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;
      (12,596</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Net Income (Loss)</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,347</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>20,334</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(8,246</FONT>
    </FONT></TD>
    <TD style="PADDING-BOTTOM: 2pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT>
  </FONT></TD></TR>
  <TR>
    <TD noWrap width="100%" colSpan=13><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Basic net income (loss) per share</FONT>
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>0.19</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1.10</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(0.45</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT face=serif size=2>Diluted net income (loss) per share</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>0.18</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>1.09</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(0.45</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Weighted Average Shares Outstanding</FONT>
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Basic</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,033</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,527</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,131</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Dilutive effect of
      outstanding stock options</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>184</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>192</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Diluted</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,217</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,719</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,131</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp;
</FONT></TD></TR></TABLE><BR>
<P align=justify><FONT face=serif size=2>The accompanying notes are an integral
part of these consolidated financial statements.</FONT></P>
<P align=center><FONT face=serif size=2>F-3</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>SurModics, Inc. and
Subsidiaries<BR></FONT></B><FONT face=serif size=2>Consolidated Statements of
Stockholders&#146; Equity<BR></FONT><FONT face=serif size=2>For the Years Ended
September 30, 2007, 2006 and 2005</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;
</FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=center width="6%" colSpan=6><FONT size=+0>&nbsp;
      </FONT><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Accumulated</FONT></B> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;
</FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=center width="6%" colSpan=6><FONT size=+0>&nbsp;
      </FONT><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Additional</FONT></B> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Other</FONT></B> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Total</FONT></B> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;
</FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=center width="6%" colSpan=6><FONT size=+0><B><FONT face=serif size=1>Comm</FONT></B><B><FONT face=serif color=#231f20 size=1>on Stock</FONT></B></FONT><FONT size=+0> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Paid-In</FONT></B> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Unearned</FONT></B> </FONT></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=+0><FONT face=serif size=1><STRONG>Comprehensive</STRONG><FONT size=3>
      </FONT></FONT></FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;</TD>
    <TD noWrap align=center width="3%" colSpan=3><FONT size=1><STRONG>Retained</STRONG></FONT><FONT size=3> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;</TD>
    <TD noWrap align=center width="3%" colSpan=3><STRONG><FONT size=1>Stockholders&#146;</FONT></STRONG> </TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0><B><I><FONT face=serif color=#231f20 size=1>(in
      thousands)</FONT></I></B> </FONT></TD>
    <TD noWrap align=left width="71%">&nbsp;</TD>
    <TD noWrap align=right width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%" colSpan=2><FONT size=+0><B><FONT face=serif size=1>Shares</FONT></B>
      </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><FONT face=serif size=1><STRONG>Amou</STRONG></FONT><FONT face=serif size=1><STRONG>nt</STRONG><FONT size=3> </FONT></FONT></FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=1><STRONG>Capital</STRONG></FONT><FONT size=3>
    </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><STRONG><FONT size=1>Compensation</FONT></STRONG> </TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><STRONG><FONT size=1>Income (Loss)</FONT></STRONG> </TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Earnings</FONT></B>
      </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><FONT face=serif size=1>Equity</FONT></B>
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Balance September 30, 2004</FONT>
    </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>17,537</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>877</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>57,849</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$ &nbsp;(632</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;56</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&nbsp;$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>36,160</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp; 94,310</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Components of comprehensive loss,</FONT>
      </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>net of tax:</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Net loss</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(8,246</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(8,246</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Unrealized holding losses on available-</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>for-sale securities arising during
      the</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>period</FONT></FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(481</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(481</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Add reclassification for losses included in</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>net income (loss) net of tax</FONT></FONT>
    </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>65</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>65</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT>Comprehensive loss</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(8,662</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #ffffff 1pt solid" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Issuance of
      common stock</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>682</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>34</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>25,731</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>25,765</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Common stock options
      exercised, net</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>244</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>12</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,310</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,322</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Tax benefit from
      exercise of stock options</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,258</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,258</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Restricted stock
      activity</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>73</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>4</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,573</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,577</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Amortization of
      unearned compensation</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>588</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>588</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT face=serif size=2>Balance September 30, 2005</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>18,536</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>927</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>89,721</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,621</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(360</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>27,914</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>115,581</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Components
      of comprehensive income, net of</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>tax:</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Net income</FONT></FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>20,334</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>20,334</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Unrealized holding losses on available-</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>for-sale securities arising during
      the</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>period</FONT></FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(31</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(31</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Add reclassification for losses included in</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT><FONT face=serif>net income, net of tax</FONT></FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>98</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>98</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT>Comprehensive income</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>20,401</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Issuance of common
      stock</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>125</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>7</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>392</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>399</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Common stock options
      exercised, net</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>169</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>8</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,854</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,862</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Tax benefit from
      exercise of stock options</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>249</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>249</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Stock-based
      compensation</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,526</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,526</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Accounting change due
      to</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>adoption of SFAS 123R</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,461</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp;&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,621</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>25</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>185</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Balance September 30, 2006</FONT>
    </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>18,830</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>942</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>96,281</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(293</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>48,273</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>145,203</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Components of
      comprehensive income, net of</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>tax:</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Net income</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,347</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,347</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Unrealized holding gains on available-</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif size=2>for-sale securities arising during</FONT>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif size=2>the period</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>1,999</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>1,999</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Add reclassification for losses included in</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif size=2>net income, net of tax</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>48</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>17</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      </FONT>Comprehensive income</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>5,363</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Issuance of common
      stock</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>126</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>6</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>78</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>84</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Common stock
      repurchased</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(1,008</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(50</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(34,980</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(35,030</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Common stock options
      exercised, net</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>217</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>11</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,778</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,789</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Tax benefit from
      exercise of stock options</FONT> </FONT></TD>
    <TD noWrap align=right width="1%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>466</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>466</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Stock-based
      compensation</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>10,312</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>10,312</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" colSpan=2><FONT size=+0>&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>Other</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(265</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="1%">&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(265</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="72%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Balance September 30, 2007</FONT>
    </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&nbsp;18,165</FONT>
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>909</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&nbsp;$</FONT>
      </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>76,670</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp;&nbsp;&nbsp;&nbsp; &#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$1,754</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>51,620</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&nbsp;$
      130,922</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR></TABLE><BR>
<P align=justify><FONT face=serif size=2>The accompanying notes are an integral
part of these consolidated financial statements. </FONT></P>
<P align=center><FONT face=serif size=2>F-4</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>SurModics, Inc. and
Subsidiaries<BR></FONT></B><FONT face=serif size=2>Consolidated Statements of
Cash Flows<BR>For the Years Ended September 30</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0><B><FONT face=serif color=#231f20 size=1><EM>(in
      thousands)</EM></FONT></B></FONT>&nbsp;</TD>
    <TD noWrap align=left width="9%">&nbsp;</TD>
    <TD noWrap align=center width="79%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2007</FONT></I></B></FONT><FONT size=+0> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2006</FONT></I></B>
      </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>2005</FONT></I></B>
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Operating Activities</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Net income (loss)</FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,347</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>20,334</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(8,246</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Adjustments
      to reconcile net income (loss) to net cash provided by</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; operating
      activities</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Depreciation and amortization</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>4,214</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,710</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,733</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Loss on equity method investments and sales of
      investments</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>75</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>157</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>602</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Amortization of discount on
      investments</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(1,388</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(1,534</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Asset impairment charge</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>4,651</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,487</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#ffffff colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Stock-based compensation</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#ffffff></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#ffffff><FONT size=+0><FONT face=serif size=2>10,312</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#ffffff><FONT size=+0><FONT face=serif size=2>5,711</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#ffffff><FONT size=+0><FONT face=serif size=2>588</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Purchased in-process research &amp;
      development</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>15,573</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>30,277</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Deferred tax</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(9,434</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,134</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>5,143</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Tax benefit from exercise of stock
      options</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(466</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(249</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,258</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Loss (gain) on disposals of property and
      equipment</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>379</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(169</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(65</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Change in operating assets and
      liabilities:</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Accounts receivable</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>1,940</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(3,497</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,866</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Inventories</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(850</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>139</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(51</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Accounts payable and accrued liabilities</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,594</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(532</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>912</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Income taxes</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,501</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5,799</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(7,467</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Deferred revenue</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>19,166</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,489</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(81</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Prepaids and other</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(248</FONT>
    </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>404</FONT>
</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(274</FONT>
    </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT>
  </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Net cash provided by operating activities</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>50,715</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>35,279</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>25,950</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Investing Activities</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Purchases of property and equipment</FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(3,626</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(5,857</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(2,109</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Sales of
      property and equipment</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>37</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>238</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Purchases of
      available-for-sale investments</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp; (136,498</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp; (193,966</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp; (98,716</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Sales/maturities of available-for-sale
      investments</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>185,075</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>161,778</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>88,955</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Investment in other
      strategic assets</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(5,749</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(160</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(5,133</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Purchase of
      licenses</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(1,355</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(1,592</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(5,238</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Acquisitions, net of cash
      acquired</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(49,112</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(5,181</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; Repayment <FONT face=serif>of notes receivable</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>530</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>600</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Other investing
      activities</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(265</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Net cash used in investing activities</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(10,963</FONT>
      </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(38,959</FONT>
      </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>(27,422</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT>
  </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT face=serif size=2>Financing Activities</FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2><FONT face=serif>&nbsp;&nbsp;&nbsp;&nbsp; Tax benefit
      from exercise of stock options</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>466</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>249</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Issuance of common
      stock</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>4,873</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,261</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,684</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Repurchase
      of common stock</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(35,030</FONT>
      </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Net cash (used in) provided by financing
      activities</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(29,691</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,510</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>2,684</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif>Net change in cash and cash equivalents</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>10,061</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(170</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,212</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT face=serif size=2>Cash and Cash Equivalents</FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Beginning of
      year</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,751</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>3,921</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>2,709</FONT>
    </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>End of year</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>13,812</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,751</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3,921</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>Supplemental Information</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Cash paid for income
      taxes</FONT></FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>14,930</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>11,338</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>13,780</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0>&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Noncash
      proceeds from sale of property</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>6,655</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" colSpan=2><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Noncash
      transaction&#151;acquisition of property,</FONT></FONT> </FONT></TD>
    <TD noWrap align=left width="79%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="10%" bgColor=#c0c0c0 colSpan=2><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; plant, and
      equipment on account</FONT> </FONT></TD>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>252</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>989</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,268</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD></TR></TABLE><BR>
<P align=justify><FONT face=serif size=2>The accompanying notes are an integral
part of these consolidated financial statements. </FONT></P>
<P align=center><FONT face=serif size=2>F-5</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><B><FONT face=serif size=2>SurModics, Inc. and
Subsidiaries<BR></FONT></B><FONT face=serif size=2>Notes to Consolidated
Financial Statements <BR>September 30, 2007 and 2006</FONT></P>
<P align=justify><I><FONT face=serif size=2>1. Description</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics, Inc. (the Company) develops, manufactures and markets
innovative surface modification and drug delivery technologies for the
healthcare industry. The Company&#146;s revenue is derived from three primary
sources: (1) royalties and license fees from licensing its patented surface
modification and drug delivery technologies and </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostic formats to
customers; (2) the sale of reagent chemicals to licensees of its technologies;
substrates, antigens and stabilization products to the diagnostics industry;
coated slides to the genomics market; and synthetic ECM products to the cell
culture market; and (3) research and development fees generated on projects for
customers.</FONT></P>
<P align=justify><I><FONT face=serif size=2>2. Summary of Significant Accounting
Policies</FONT></I></P>
<P align=justify><I><FONT face=serif size=2>Cash and Cash
Equivalents</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Cash and
cash equivalents consist principally of money market instruments with original
maturities of three months or less and are stated at cost which approximates
fair value.</FONT></P>
<P align=justify><I><FONT face=serif size=2>Investments</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Investments consist principally of U.S. government and government agency
obligations and mortgage-backed securities and are classified as
available-for-sale as of September 30, 2007 and 2006. Available-for-sale
investments are reported at fair value with unrealized gains and losses net of
tax excluded from operations and reported as a separate component of
stockholders&#146; equity, except for other-than-temporary impairments, which are
reported as a charge to current operations and result in a new cost basis for
the investment.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
original cost, unrealized holding gains and losses, and fair value of
investments as of September 30 were as follows </FONT><I><FONT face=serif size=2>(in thousands):</FONT></I></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="14%" colSpan=14><FONT size=+0><B><I><FONT face=serif size=1>2</FONT></I></B><B><I><FONT face=serif size=1>00</FONT></I></B><B><I><FONT face=serif size=1>7</FONT></I></B></FONT><FONT size=+0> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Original
      Cost</FONT></I></B> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Unrealized
      Gains</FONT></I></B> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Unrealized
      L</FONT></I></B><B><I><FONT face=serif size=1>osses</FONT></I></B>
    </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%" colSpan=2><FONT size=+0><B><I><FONT face=serif size=1>Fair
      Valu</FONT></I></B><B><I><FONT face=serif size=1>e</FONT></I></B>
    </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>U.S. government obligations</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$19,744</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$101</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp; (65</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp; 19,780</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT face=serif size=2>Mortgage-backed securities</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>14,814</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>83</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(56</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>14,841</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>Municipal bonds</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>11,985</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>49</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(36</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>11,998</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT face=serif size=2>Asset-backed securities</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>8,899</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>14</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(39</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>8,874</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>Corporate bonds</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>915</FONT>
</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>5</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>0</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;
      </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>920</FONT>
  </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; Total</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$56,357</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$252</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$(196</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 1pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$&nbsp; 56,413</FONT>
      </FONT></TD></TR></TABLE>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD noWrap width="99%" colSpan=15><FONT size=+0>&nbsp;&nbsp; </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="14%" colSpan=14><FONT size=+0><B><I><FONT face=serif size=1>2</FONT></I></B><B><I><FONT face=serif size=1>00</FONT></I></B><B><I><FONT face=serif size=1>6</FONT></I></B>
      </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Original
      Cost</FONT></I></B> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Unrealized
      Gains</FONT></I></B> </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="3%" colSpan=3><FONT size=+0><B><I><FONT face=serif size=1>Unrealized
      L</FONT></I></B><B><I><FONT face=serif size=1>osses</FONT></I></B>
    </FONT></TD>
    <TD noWrap align=center width="1%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%" colSpan=2><FONT size=+0><B><I><FONT face=serif size=1>Fair
      Value</FONT></I></B> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>U.S. government obligations</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp; 70,085</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$ 18</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0>&nbsp;</FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$(227</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2></FONT></FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$&nbsp; 69,876</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT face=serif size=2>Mortgage-backed securities</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>12,312</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>42</FONT> </FONT></TD>
    <TD noWrap align=right width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(123</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>12,231</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>Municipal bonds</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>10,595</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>20</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(124</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>10,491</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT face=serif size=2>Asset-backed securities</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>8,658</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>3</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>(76</FONT> </FONT></TD>
    <TD noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>8,585</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>Corporate bonds</FONT>&nbsp; </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,639</FONT>
    </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>&#151;</FONT> </FONT></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>(2</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>1,637</FONT>
    </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="85%"><FONT size=+0><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif>Total</FONT></FONT>
      </FONT></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$103,289</FONT>
</FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$ 83</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$(552</FONT> </FONT></TD>
    <TD style="PADDING-BOTTOM: 2pt" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>)</FONT> </FONT></TD>
    <TD noWrap align=right width="1%"></TD>
    <TD noWrap align=right width="1%"><FONT size=+0>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$102,820</FONT>
  </FONT></TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>F-6</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>The original cost and fair value of
investments by contractual maturity at September 30, 2007 were as follows
</FONT><I><FONT face=serif size=2>(in thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="80%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="81%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%" colSpan=3><B><I><FONT face=serif size=1>Original Cost</FONT></I></B>&nbsp;
    </TD>
    <TD noWrap align=left width="2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%" colSpan=3><B><I><FONT face=serif size=1>Fair Value</FONT></I></B>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="81%" bgColor=#c0c0c0><FONT face=serif size=2>Debt securities due within:</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="81%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>One year</FONT> </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>$12,542</FONT>
    </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>$12,496</FONT>
    </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="81%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>One
      to five years</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>27,855</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>27,949</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="81%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Five years or more</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT face=serif size=2>15,960</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT face=serif size=2>15,968</FONT> </TD>
    <TD noWrap align=right width="2%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="81%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Total</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>$56,357</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>$56,413</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following table summarizes sales of available-for-sale securities for the years
ended September 30, 2007, 2006, and 2005 </FONT><I><FONT face=serif size=2>(in
thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="90%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="79%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0><FONT face=serif size=2>Proceeds from sales</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$185,075</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$161,778</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$88,955</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="79%"><FONT face=serif size=2>Gross realized
      gains</FONT> </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>$7</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>$24</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>$17</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="79%" bgColor=#c0c0c0><FONT face=serif size=2>Gross realized losses</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$(34</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$(181</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>$(119</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>Inventories</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Inventories are principally stated at the lower of cost or market using
the specific identification method and include direct labor, materials and
overhead. Inventories consisted of the following as of September
30</FONT><I><FONT face=serif size=2> (in thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="97%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="1%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="1%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="97%" bgColor=#c0c0c0><FONT face=serif size=2>Raw materials</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$1,241</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$512</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="97%"><FONT face=serif size=2>Finished
      products</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT face=serif size=2>1,256</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="1%"><FONT face=serif size=2>440</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="97%" bgColor=#c0c0c0><FONT face=serif size=2>Total</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$2,497</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$952</FONT>
</TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>Property and
Equipment</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Property
and equipment are stated at cost and are depreciated using the straight-line
method over 3 to 32 years, the estimated useful lives of the assets. The Company
recorded depreciation expense of $2.2 million, $2.0 million and $2.0 million for
the years ended September 30 2007, 2006 and 2005, respectively.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
September 30, 2007 and 2006 balances in construction-in-progress include the
cost of enhancing the capabilities of the Company&#146;s Eden Prairie facility. As
assets are placed in service, construction-in-progress is transferred to the
specific property and equipment categories and depreciated over the estimated
useful lives of the assets.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Property and equipment consisted of
the following components as of September 30 </FONT><I><FONT face=serif size=2>(in thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="90%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="75%">&nbsp; </TD>
    <TD noWrap align=center width="6%"><B><I><FONT face=serif size=1>Useful
      Life</FONT></I></B>&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD>
    <TD noWrap align=center width="6%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD>
    <TD noWrap align=center width="6%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%"><B><I><FONT face=serif size=1>(in Years)</FONT></I></B>&nbsp;
    </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%" colSpan=3>&nbsp; <B><I><FONT face=serif size=1>2007</FONT></I></B> &nbsp;
    </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%" colSpan=3>&nbsp; <B><I><FONT face=serif size=1>2006</FONT></I></B> &nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%" bgColor=#c0c0c0><FONT face=serif size=2>Laboratory fixtures and equipment</FONT> </TD>
    <TD noWrap align=center width="6%" bgColor=#c0c0c0><FONT face=serif size=2>3 to 10</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif size=2>13,673</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif size=2>10,531</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%"><FONT face=serif size=2>Building and
      improvements</FONT> </TD>
    <TD noWrap align=center width="6%"><FONT face=serif size=2>3 to 32</FONT>
    </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif size=2>16,619</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif size=2>12,083</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%" bgColor=#c0c0c0><FONT face=serif size=2>Office furniture and equipment</FONT> </TD>
    <TD noWrap align=center width="6%" bgColor=#c0c0c0><FONT face=serif size=2>3 to 10</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif size=2>3,940</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif size=2>3,022</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%"><FONT face=serif size=2>Capital
      work-in-progress</FONT> </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif size=2>1,244</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="6%"><FONT face=serif size=2>94</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%" bgColor=#c0c0c0><FONT face=serif size=2>Less accumulated depreciation</FONT> </TD>
    <TD noWrap align=left width="6%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>(15,738</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="6%" bgColor=#c0c0c0><FONT face=serif size=2>(14,044</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="75%"><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Property and equipment,
      net</FONT> </TD>
    <TD noWrap align=left width="6%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="6%"><FONT face=serif size=2>19,738</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="6%"><FONT face=serif size=2>11,686</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif size=2>F-7</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>Other Assets</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Other
assets consist principally of strategic investments, a note receivable, and
acquired patents. In fiscal 2007, the balance in other assets increased
primarily as a result of an investment in Paragon Intellectual Properties, LLC
and its subsidiary, Apollo Therapeutics, LLC; and an additional investment in
OctoPlus N.V., and the increased market value of OctoPlus during the year. In
addition to the investments, the Company has licensed its Finale&#153; prohealing
coating technology and provides development services on a time and materials
basis to Apollo. The Company&#146;s investments in Paragon and Apollo are accounted
for under the equity method.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, the Company made an equity investment of approximately $3.9
million in OctoPlus, a privately owned company based in the Netherlands active
in the development of pharmaceutical formulations incorporating novel
biodegradable polymers. In May 2006, the Company made an additional investment
of $160,000. As of September 30, 2006 the $4.1 million investment, which was
accounted for under the cost method, represented an ownership interest of less
than 20%. In October 2006, the Company made an additional investment of $1.9
million in OctoPlus. Also in October 2006, OctoPlus common stock began trading
on an international exchange following an initial public offering of its common
stock. With a readily determinable fair market value, the Company now treats the
investment in OctoPlus as an available-for-sale investment rather than a cost
method investment. Available-for-sale investments are reported at fair value
with unrealized gains and losses reported as a separate component of
stockholders&#146; equity, except for other-than-temporary impairments, which are
reported as a charge to current operations and result in a new cost basis for
the investment. As of September 30, 2007, the investment in OctoPlus represents
an ownership interest of less than 10%. As of September 30, 2007 the total cost
basis in OctoPlus was $6.0 million and the fair value was $8.7 million,
resulting in an unrealized gain of $2.7 million. The Company had no realized
gain or loss related to the investment in OctoPlus in fiscal 2007.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In May
2005, the Company invested $1.0 million in ThermopeutiX, an early stage company
developing novel medical devices for the treatment of vascular and neurovascular
diseases, including stroke. In addition to the investment, SurModics has
licensed its hydrophilic and hemocompatible coating technologies to ThermopeutiX
for use with its devices. In fiscal 2007, the Company invested an additional
$185,000 in ThermopeutiX. The Company&#146;s investment in ThermopeutiX, which is
accounted for under the cost method, represents an ownership interest of less
than 20%.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2005, the Company entered into an agreement to sell a contract
manufacturing facility and 27 acres of land located in Bloomington, Minnesota.
The terms of the sale agreement included a $100,000 cash down payment and a note
receivable of $6.9 million, which is collateralized by the property. The terms
of the note call for monthly installment payments of principal and interest at
6% with the remaining amount due and payable in September 2010. The $5.2 million
balance in other assets represents the long-term portion due on the
note.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
has invested a total of $5.2 million in Novocell, Inc., a privately-held Irvine,
California-based biotechnology firm that is developing a unique treatment for
diabetes using coated islet cells, the cells that produce insulin in the human
body. In fiscal 2006, the Company determined its investment in Novocell was
impaired and that the impairment was other-than-temporary. Accordingly, the
Company recorded an impairment loss of $4.7 million. The balance of the
investment, $559,000, which is accounted for under the cost method, is included
in other assets and represents less than a 5% ownership interest.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
January 2005, the Company entered into a merger agreement whereby SurModics
acquired all of the assets of InnoRx, Inc., an early stage company developing
drug delivery devices and therapies for the ophthalmology market, by paying
approximately $4.1 million in cash, issuing 600,064 shares of SurModics common
stock to InnoRx stockholders, and agreeing to issue up to an additional 600,073
shares if certain development and commercial milestones are met. In July 2005,
the Company issued 60,002 shares of SurModics&#146; common stock to the shareholders
of InnoRx upon the successful completion of the first milestone involving the
InnoRx technology acquired in the purchase of InnoRx. In March 2006, the Company
issued an additional 60,007 shares as a result of completion of the second
milestone. Upon the successful completion of the remaining development and
commercial milestones involving InnoRx technology acquired in the transaction,
SurModics will be required to issue up to approximately 480,059 additional
shares of its common stock to the stockholders of InnoRx. As the transaction was
accounted for as a purchase of assets, SurModics was required to determine the
fair value of the assets acquired and the total consideration given. The assets
of InnoRx the Company acquired consisted almost exclusively of in-process
research and development assets. In the second quarter of fiscal 2005, the
Company recorded a charge of $30.3 million </FONT></P>
<P align=center><FONT face=serif size=2>F-8</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>to write off the value of these
in-process research and development assets. In connection with the purchase, the
Company recorded an $8.1 million credit to additional paid-in capital to record
the aggregate estimated value of the contingent payment obligations. Since the
contingent payment obligations are recorded as additional paid-in capital, the
obligations will not have any impact on future results of operations.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Other assets consisted of the
following components as of September 30 </FONT><I><FONT face=serif size=2>(in
thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="80%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="86%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=2>&nbsp;<B><I><FONT face=serif size=1>2007</FONT></I></B>&nbsp;</TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="6%" colSpan=2>&nbsp;<B><I><FONT face=serif size=1>2006</FONT></I></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%" bgColor=#c0c0c0><FONT face=serif size=2>Investment in OctoPlus</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>8,762</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>4,095</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Long-term
      portion of note receivable</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>5,158</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>5,635</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%" bgColor=#c0c0c0><FONT face=serif size=2>Investment in Paragon and subsidiary</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>3,632</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Investment in
      ThermopeutiX</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>1,185</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>1,000</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%" bgColor=#c0c0c0><FONT face=serif size=2>Investment in Novocell</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>559</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>559</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Other</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="5%"><FONT face=serif size=2>492</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="5%"><FONT face=serif size=2>160</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="86%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Other assets,
      net</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>19,788</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>11,449</FONT>
</TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
fiscal years ended September 30, 2007, 2006 and 2005, the Company recognized
revenue of $909,000, $399,000 and $710,000, respectively, from activity with
companies in which it had a strategic investment.</FONT></P>
<P align=justify><I><FONT face=serif size=2>Intangible Assets</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Intangible assets consist principally of acquired patents and technology,
customer relationships, licenses, and trademarks. The Company recorded
amortization expense of $2.0 million, $1.7 million, and $1.7 million for the
years ended September 30, 2007, 2006 and 2005, respectively.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2004, the Company made a commitment to purchase for $7 million certain
additional sublicense rights and the accompanying future royalty revenue streams
under certain sublicenses through an amendment to the Company&#146;s diagnostic
format patent license with Abbott Laboratories. Prior to such amendment, the
Company was receiving only a portion of the royalties under such sublicenses.
The first $5 million installment was paid in fiscal 2005, and an additional $1
million installment was paid in fiscal 2007. The remaining $1 million
installment is reflected in other current liabilities.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Intangible assets consisted of the
following as of September 30</FONT><I><FONT face=serif size=2> (in
thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="80%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="78%">&nbsp; </TD>
    <TD noWrap align=center width="5%"><B><I><FONT face=serif size=1>Useful
      Life</FONT></I></B>&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="5%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="1%"></TD>
    <TD noWrap align=center width="5%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><B><I><FONT face=serif size=1>(in Years)</FONT></I></B>&nbsp;
    </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="7%" colSpan=3><B><I><FONT face=serif size=1>2007</FONT></I></B> &nbsp; </TD>
    <TD noWrap align=center width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="7%" colSpan=3><B><I><FONT face=serif size=1>2006</FONT></I></B> &nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%" bgColor=#c0c0c0><FONT face=serif size=2>Customer list</FONT>&nbsp; </TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2>9 - 11</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>7,340</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=2>$</FONT></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>&nbsp;&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%"><FONT face=serif size=2>Abbott
      license</FONT> </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2>4</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>7,037</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>7,037</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%" bgColor=#c0c0c0><FONT face=serif size=2>Core technology</FONT> </TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2>8 - 18</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>6,933</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%"><FONT face=serif size=2>Patents and
      other</FONT> </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2>3 - 20</FONT>
    </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>1,988</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>2,102</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%" bgColor=#c0c0c0><FONT face=serif size=2>Trademarks</FONT>&nbsp; </TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT size=2>12</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>580</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%"><FONT face=serif size=2>Less accumulated
      amortization</FONT> </TD>
    <TD noWrap align=left width="5%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="5%"><FONT face=serif size=2>(5,479</FONT> </TD>
    <TD style="BORDER-BOTTOM: #ffffff 1pt solid" noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="5%"><FONT face=serif size=2>(3,609</FONT> </TD>
    <TD style="BORDER-BOTTOM: #ffffff 1pt solid" noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="78%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Intangible assets, net</FONT> </TD>
    <TD noWrap align=left width="5%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>18,399</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>5,530</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;
</TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Based on
the intangible assets in service as of September 30, 2007, estimated
amortization expense for the next five fiscal years is as follows
(</FONT><I><FONT face=serif size=2>in thousands</FONT></I><FONT face=serif size=2>): </FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="46%" bgColor=#c0c0c0><FONT face=serif size=2>2008</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="52%" bgColor=#c0c0c0><FONT face=serif size=2>$3,009</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT face=serif size=2>2009</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="52%"><FONT face=serif size=2>1,761</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%" bgColor=#c0c0c0><FONT face=serif size=2>2010</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="52%" bgColor=#c0c0c0><FONT face=serif size=2>1,343</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%"><FONT face=serif size=2>2011</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="52%"><FONT face=serif size=2>1,343</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="46%" bgColor=#c0c0c0><FONT face=serif size=2>2012</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="52%" bgColor=#c0c0c0><FONT face=serif size=2>1,343</FONT> </TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif size=2>F-9</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>Goodwill </FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Goodwill
represents the excess of the cost of the acquired entities over the fair value
assigned to the assets purchased and liabilities assumed in connection with the
Company&#146;s acquisitions (described in Note 3). The carrying amount of goodwill is
evaluated annually, and between annual evaluations if events occur or
circumstances change indicating that the carrying amount of goodwill may be
impaired. </FONT></P>
<P align=justify><I><FONT face=serif size=2>Impairment of Long-Lived
Assets</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company periodically evaluates whether events and circumstances have occurred
that may affect the estimated useful life or the recoverability of the remaining
balance of long-lived assets, such as property and equipment and investments. If
such events or circumstances were to indicate that the carrying amount of these
assets would not be recoverable, the Company would estimate the future cash
flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) or other measure of fair value were less than the
carrying amount of the assets, the Company would recognize an impairment loss
reducing the carrying value to fair market value. In September 2005, the Company
signed an agreement to sell its Bloomington property and facility and based on
the selling price recorded a $2.5 million impairment charge.</FONT></P>
<P align=justify><I><FONT face=serif size=2>Revenue Recognition</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
accordance with SEC Staff Accounting Bulletin (&#147;SAB&#148;) No. 104, &#147;Revenue
Recognition,&#148; revenue is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) shipment has occurred or
delivery has occurred if the terms specify destination; (3) the sales price is
fixed or determinable; and (4) collectibility is reasonably assured. However,
when there are additional performance requirements, revenue is recognized when
all such requirements have been satisfied. Under revenue arrangements with
multiple deliverables, the Company utilizes Emerging Issues Task Force Issue No.
00-21, &#147;Accounting for Revenue Arrangements with Multiple Deliverables,&#148; (&#147;EITF
00-21&#148;) and recognizes each separable element as it is earned.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue
is derived from three primary sources: (1) royalties and license fees from
licensing patented surface modification and drug delivery technologies and
</FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2>
diagnostic formats to customers; (2) the sale of reagent chemicals to licensees,
stabilization products, antigens and substrates to the diagnostics industry, and
coated glass slides to the genomics market; and (3) research and development
fees generated on customer projects.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Royalties &amp; License Fees.</FONT></I><FONT face=serif size=2> The
Company licenses technology to third parties and collects royalties. Royalty
revenue is generated when a customer sells products incorporating the Company&#146;s
licensed technologies. Royalty revenue is recognized as licensees report it to
the Company, and payment is typically submitted concurrently with the report.
Generally, license fees are recognized as revenue when the Company receives
payment and the contract price is fixed or determinable. For stand-alone license
agreements, up-front license fees are recognized over the term of the related
licensing agreement.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue
related to a performance milestone is recognized upon the achievement of the
milestone, as defined in the respective agreements and provided the following
conditions have been met:</FONT></P>
<UL>
  <LI><FONT face=serif size=2>The milestone payment is
  non-refundable.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>The milestone is achieved, involves a significant
  degree of risk, and was not reasonably assured at the</FONT> <FONT face=serif size=2>inception of the arrangement.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>Accomplishment of the milestone involves
  substantial effort.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>The amount of the milestone payment is
  commensurate with the related effort and risk.<BR>&nbsp;</FONT>
  <LI><FONT face=serif size=2>A reasonable amount of time passes between the
  initial license payment and the first and subsequent</FONT> <FONT face=serif size=2>milestone payments.</FONT></LI></UL>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>If these
conditions have not been met, the milestone payment is deferred and recognized
over the term of the agreement.</FONT></P>
<P align=center><FONT face=serif size=2>F-10</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Product Sales.</FONT></I><FONT face=serif size=2> Product sales to third
parties are recognized at the time of shipment, provided that an order has been
received, the price is fixed or determinable, collectibility of the resulting
receivable is reasonably assured and returns can be reasonably estimated. The
Company&#146;s sales terms provide no right of return outside of the standard
warranty policy. Payment terms are generally set at 30-45 days.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Research and Development.</FONT></I><FONT face=serif size=2> The Company
performs third party research and development activities, which are typically
provided on a time and materials basis. Generally, revenue for research and
development is recorded as performance progresses under the applicable
contract.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Multiple element arrangements.</FONT></I><FONT face=serif size=2>
Arrangements such as license and development agreements are analyzed to
determine whether the deliverables, which often include a license and
performance obligations such as research and development, can be separated or
whether they must be accounted for as a single unit of accounting in accordance
with EITF 00-21. The Company recognizes up-front license payments under these
agreements as revenue upon delivery of the license only if the license has
stand-alone value and the fair value of the undelivered performance obligations
can be determined. If the fair value of the undelivered performance obligations
can be determined, such obligations would then be accounted for separately. If
the license is considered to either (i) not have stand-alone value or (ii) have
stand-alone value but the fair value of any of the undelivered performance
obligations cannot be determined, the arrangement would then be accounted for as
a single unit of accounting, and the license payments and payments for
performance obligations would be recognized as revenue over the estimated period
of when the performance obligations are performed, or the economic life of the
technology licensed to the customer. When the Company determines that an
arrangement should be accounted for as a single unit of accounting, it
recognizes the related revenue based on a time-based accounting model.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Merck
Agreement.</FONT></I><FONT face=serif size=2> On June 27, 2007 the Company
announced a license and research collaboration agreement with Merck. The
agreement calls for SurModics and Merck to pursue the joint development and
commercialization of SurModics&#146; I-vation sustained drug delivery system with TA
(triamcinolone acetonide), and other products combining certain of Merck&#146;s
proprietary drug compounds and the I-vation system for the treatment of serious
retinal diseases. Under the terms of the agreement, Merck will lead and fund
development and commercialization activities. SurModics received an up-front
license fee of $20 million and will be eligible to receive up to an additional
$288 million in fees and development milestones. In addition, the Company will
be paid for its activities in researching and developing the combination
products, and will be responsible for the manufacture and supply of the jointly
developed products. The Company will also receive royalties on product sales.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company will recognize revenue from the up-front license fee over the economic
life of the technology licensed to Merck, which is 16 years. As of September 30,
2007, $19.7 million of the up-front license fee remains in deferred revenue.
</FONT></P>
<P align=justify><I><FONT face=serif size=2>Deferred Revenue</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Amounts
received prior to satisfying the above revenue recognition criteria are recorded
as deferred revenue in the accompanying consolidated balance sheets, with
deferred revenue to be recognized beyond one year being classified as
non-current deferred revenue. As of September 30, 2007 and 2006, the Company
recorded deferred revenue of $25.9 million and $4.4 million,
respectively.</FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Costs related to products and
services delivered are recognized in the period revenue is recognized. Customer
advances are accounted for as a liability until all criteria for revenue
recognition have been met. </FONT></P>
<P align=justify><I><FONT face=serif size=2>Research and
Development</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Research
and development costs are expensed as incurred. Some research and development
costs are related to third party contracts, and the related revenue is
recognized as described in &#147;Revenue Recognition&#148; above.</FONT></P>
<P align=justify><I><FONT face=serif size=2>Use of Estimates</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates.</FONT></P>
<P align=center><FONT face=serif size=2>F-11</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>Reclassifications</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
fiscal 2007 and 2006 consolidated balance sheets present intangible assets and
other assets on separate lines; in previous financial statements these items
were presented as one line, &#147;Other Assets.&#148; Additionally, the consolidated
statements of operations present &#147;Selling, general and administrative&#148; expenses
as one line; in previous statements these items were reflected on two lines,
&#147;Sales and marketing&#148; and &#147;General and administrative.&#148;</FONT></P>
<P align=justify><I><FONT face=serif size=2>New Accounting
Pronouncements</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On July
13, 2006, the Financial Accounting Standards Board, (&#147;FASB&#148;) Interpretation
&#147;FIN&#148; No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise&#146;s financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The new FASB interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The provisions of FIN 48 are
effective for the Company beginning in fiscal 2008. The Company is currently
evaluating the effect that the adoption of FIN 48 will have on its results of
operations and financial condition.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
September 2006, the FASB issued Statement of Financial Accounting Standards
(&#147;SFAS&#148;) No. 157, Fair Value Measurements. This statement establishes a
consistent framework for measuring fair value and expands disclosures on fair
value measurements. SFAS No. 157 is effective for the Company starting in fiscal
2008. The Company has not determined the impact, if any, the adoption of this
statement will have on its consolidated financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. SFAS No. 159 is effective for the Company
in fiscal 2009. The Company is currently evaluating the impact, if any, the
adoption of SFAS No. 159 will have on the consolidated financial position and
results of operations.</FONT></P>
<P align=justify><I><FONT face=serif size=2>3. Acquisitions</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Brookwood Pharmaceuticals, Inc.</FONT></I><FONT face=serif size=2> On
July 31, 2007, the Company entered into a stock purchase agreement with Southern
Research Institute (SRI) whereby it acquired 100% of the capital stock of
Brookwood Pharmaceuticals, Inc. (&#147;Brookwood&#148;) held by SRI for $42.3 million
consisting of $40 million in cash on the closing date and $2.3 million in
transaction costs. SRI could receive up to an additional $22 million in cash
upon the successful achievement of specified milestones. Brookwood is a drug
delivery company based in Birmingham, Alabama that provides proprietary
polymer-based technologies to companies developing pharmaceutical products.
Brookwood, a wholly owned subsidiary of SurModics, will operate as a separate
business unit within the Drug Delivery operating segment. Management believes
this acquisition strengthens SurModics&#146; portfolio of drug delivery technologies
for the pharmaceutical and biotechnology industries in particular. Operating
results for the period from August 1, 2007 to September 30, 2007 have been
included in the Company&#146;s consolidated financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
purchase price was allocated to the fair value of the net tangible and
intangible assets acquired and liabilities assumed, with the excess purchase
price over fair value allocated to goodwill. The purchase price was allocated as
follows </FONT><I><FONT face=serif size=2>(in thousands)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>Net
      working capital</FONT> </TD>
    <TD align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT>
    </TD>
    <TD align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>5,348</FONT> </TD>
    <TD align=right width="1%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%"><FONT face=serif size=2>Property and
      equipment</FONT> </TD>
    <TD align=left width="1%">&nbsp; </TD>
    <TD align=right width="3%"><FONT face=serif size=2>7,300</FONT> </TD>
    <TD align=right width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>Core
      technology</FONT> </TD>
    <TD align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>6,400</FONT> </TD>
    <TD align=right width="1%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%"><FONT face=serif size=2>Customer
      relationships</FONT> </TD>
    <TD align=left width="1%">&nbsp; </TD>
    <TD align=right width="3%"><FONT face=serif size=2>2,900</FONT> </TD>
    <TD align=right width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>Other
      assets and liabilities, net</FONT> </TD>
    <TD align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(4,182</FONT> </TD>
    <TD align=left width="1%" bgColor=#c0c0c0><FONT size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%"><FONT face=serif size=2>In-process research and
      development</FONT> </TD>
    <TD align=left width="1%">&nbsp;</TD>
    <TD align=right width="3%"><FONT face=serif size=2>15,706</FONT> </TD>
    <TD align=right width="1%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>Goodwill</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>8,839</FONT> </TD>
    <TD align=right width="1%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="95%"><FONT face=serif size=2>Total purchase
      price</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" align=left width="1%"><FONT face=serif size=2>$ </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" align=right width="3%"><FONT size=2>42,311</FONT></TD>
    <TD align=right width="1%"></TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif size=2>F-12</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
acquired developed technology is amortized on a straight-line basis over 18
years, and customer relationships are amortized over 11 years. The weighted
average life of the developed technology and customer relationships is 15.8
years. Goodwill resulting from this transaction is not deductible for tax
purposes.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>BioFX
Laboratories, Inc.</FONT></I><FONT face=serif size=2> On August 13, 2007, the
Company acquired 100% of the capital stock of BioFX Laboratories, Inc., a
provider of substrates to the </FONT><I><FONT face=serif size=2>in vitro
</FONT></I><FONT face=serif size=2>diagnostics industry, for $11.6 million,
$11.3 million of which was in cash to the sellers and $300,000 in transaction
costs. The Company is also required to pay up to an additional $11.4 million in
cash upon the successful achievement of specified revenue targets. BioFX is a
wholly owned subsidiary of SurModics, and will operate within the In Vitro
Technologies business unit within the In Vitro operating segment. Management
believes the acquisition will enhance the Company&#146;s technological position in
the </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostics market. Operating results for the period from August 14,
2007 to September 30, 2007 have been included in the Company&#146;s consolidated
financial statements.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
purchase price was allocated to the fair value of the net tangible and
intangible assets acquired and liabilities assumed, with the excess purchase
price over fair value allocated to goodwill. The purchase price was allocated as
follows </FONT><I><FONT face=serif size=2>(in thousands)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="30%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Net working capital</FONT> </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,182</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Property and
      equipment</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>155</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Trademarks and trade name</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>580</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Core
      technology</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>530</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Customer relationships</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>4,440</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Other assets and
      liabilities, net</FONT> </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(2,134</FONT>
</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Goodwill</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>6,847</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Total purchase
      price</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT size=+0><FONT face=serif size=2>11,600</FONT> </FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR></TABLE></DIV><BR>
<P align=justify><FONT face=serif size=2>The acquired core technology is
amortized on a straight-line basis over 8 years, customer relationships are
amortized over 9 years and trademarks and trade name are amortized over 12
years. The weighted average life of the core technology and customer
relationships is 10.3 years. Goodwill resulting from this transaction is not
deductible for tax purposes.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following unaudited </FONT><I><FONT face=serif size=2>pro forma</FONT></I><FONT face=serif size=2> consolidated condensed financial results of operations for
the fiscal years 2007, and 2006 are presented as if the acquisitions had been
completed at the beginning of each period presented (</FONT><I><FONT face=serif size=2>in thousands</FONT></I><FONT face=serif size=2>).</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="89%">&nbsp; </TD>
    <TD noWrap align=center width="10%" colSpan=5>&nbsp;<B><FONT face=serif size=1>Years Ended</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="10%" colSpan=5>&nbsp;<B><FONT face=serif size=1>Sept</FONT></B><B><FONT face=serif size=1>embe</FONT></B><B><FONT face=serif size=1>r
      30,</FONT></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><FONT face=serif size=1>2007</FONT></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>2006</STRONG></FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0><FONT face=serif size=2>Pro forma revenues</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>89,708</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>84,738</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%"><FONT face=serif size=2>Pro forma income
      from operations</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>28,034</FONT>
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>37,393</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0><FONT face=serif size=2>Pro forma net income</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>17,735</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>18,377</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%"><FONT face=serif size=2>Pro forma basic
      earnings per share</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>.98</FONT> </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>.99</FONT>
</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0><FONT face=serif size=2>Pro forma diluted earnings per shares</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>.98</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>.98</FONT> </TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>4. Stockholders&#146;
Equity</FONT></I></P>
<P align=justify><I><FONT face=serif size=2>Stock Option Plans</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Commencing October 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123(R), &#147;Share Based Payment&#148; (&#147;SFAS 123(R)&#148;), which
requires all share-based payments, including grants of stock options, to be
recognized as an operating expense, based on their fair values, over the
requisite service period.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Prior to
adopting SFAS 123(R), the Company accounted for stock-based compensation under
the intrinsic value method pursuant to Accounting Principles Board Opinion No.
25, &#147;Accounting for Stock Issued to Employees.&#148; The Company has applied the
modified prospective method in adopting SFAS 123(R). Accordingly, periods prior
to </FONT></P>
<P align=center><FONT face=serif size=2>F-13</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>adoption have not been restated. The
Company did not amend or alter outstanding stock-based awards in anticipation of
adopting SFAS 123(R). The following table illustrates the effect on net loss and
loss per share if the fair value based method had been applied to the year ended
September 30, 2005</FONT><I><FONT face=serif size=2> (in thousands, except per
share data):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="94%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3>&nbsp;<B><I><FONT face=serif size=1>2005</FONT></I></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Reported net loss</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(8,246</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Restricted stock
      expense previously recorded, net of tax</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>374</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Stock-based compensation determined under fair value based
      method,</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>net of related tax effects</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(3,120</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%"><FONT face=serif size=2>Pro forma net
      loss</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT size=+0><FONT face=serif size=2>$</FONT>&nbsp; </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT size=+0><FONT face=serif size=2>(10,992</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #ffffff 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0><FONT face=serif size=2>Loss per common equivalent share:</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Basic - as reported</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(0.45</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Diluted - as reported</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(0.45</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Basic - pro forma</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(0.61</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="94%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Diluted - pro forma</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(0.61</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT> </TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As a
result of the adoption of SFAS 123(R), the Company has allocated stock-based
compensation expense for the years ended September 30 as follows </FONT><I><FONT face=serif size=2>(in thousands)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="89%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2>&nbsp;<B><I><FONT face=serif size=1>2007</FONT></I></B>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0><FONT face=serif size=2>Product</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>96</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>91</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%"><FONT face=serif size=2>Research and
      development</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>5,188</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>2,620</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%" bgColor=#c0c0c0><FONT face=serif size=2>Selling, general and administrative</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>5,028</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>3,000</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="89%"><FONT face=serif size=2>Total</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>10,312</FONT> </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>5,711</FONT>
</TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>As of
September 30, 2007, approximately $15.4 million of total unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of approximately 2.7 years.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company uses the Black-Scholes option pricing model to determine the weighted
average fair value of options. The weighted average fair value of options
granted during fiscal 2007, 2006, and 2005 was $17.42, $16.58, and $20.26,
respectively. The assumptions used as inputs in the model for the years ended
September 30 were as follows:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0><FONT face=serif size=2>Risk-free interest rates</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>4.50%</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>4.70%</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>3.77%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2>Expected
      life</FONT>&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>5.4 years</FONT>
    </TD>
    <TD noWrap align=right width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>4.8 years</FONT>
    </TD>
    <TD noWrap align=right width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>7.0 years</FONT>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0><FONT face=serif size=2>Expected volatility</FONT> </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>45%</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>46%</FONT> </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="5%" bgColor=#c0c0c0><FONT face=serif size=2>63%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2>Dividend
      yield</FONT> </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>0%</FONT> </TD>
    <TD noWrap align=right width="2%">&nbsp; </TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>0%</FONT> </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD noWrap align=right width="5%"><FONT face=serif size=2>0%</FONT>
  </TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
risk-free interest rate assumption was based on the U.S. Treasury&#146;s rates for
U.S. Treasury zero-coupon bonds with maturities similar to those of the expected
term of the award. The expected life of options granted is determined based on
the Company&#146;s experience. Expected volatility is based on the Company&#146;s stock
price movement. Based on management&#146;s judgment, dividend rates are expected to
be zero for the expected life of the options. The Company also estimates
forfeitures of options granted, which is based on historical
experience.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company&#146;s Incentive Stock Options (&#147;ISO&#148;) are granted at a price of at least
100% of the fair market value of the Common Stock on the date of the grant or
110% with respect to optionees who own more than 10% of the total combined
voting power of all classes of stock. Options expire in seven years or upon
termination of employment and are exercisable at a rate of 20% per year
commencing one year after the date of grant. Nonqualified stock options are
granted at fair market value on the date of grant. Options expire in 7 to 10
years and are exercisable at rates of 20% per year from the date of grant, or
20% to 33% per year commencing one year after the date of grant. The Company has
authorized 2,400,000 shares for grant under the 2003 Equity Incentive Plan (the
&#147;2003 Plan&#148;), of which 638,000 remain available for future awards. As of
September 30, 2007, the aggregate intrinsic value of the option shares
</FONT></P>
<P align=center><FONT face=serif size=2>F-14</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>outstanding and the option shares
exercisable was $24.8 million and $9.6 million, respectively with an average
remaining contractual life of 4.7 and 4.1 years, respectively. The intrinsic
value of options exercised during fiscal 2007, 2006, and 2005 was $4.4 million,
$3.6 million and $6.5 million, respectively.</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD noWrap align=center width="3%"></TD>
    <TD noWrap align=center width="1%">&nbsp; </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Weighted</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Number of</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Average</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Shares</STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Exercise Price</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0><FONT face=serif size=2>Outstanding at September 30, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; 1,510,780</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=3>&nbsp; </FONT>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>29.69</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Granted</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>166,400</FONT>
    </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT size=2><FONT face=serif>37.85</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Exercised</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(253,060</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>25.82</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Forfeited</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>(22,700</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT size=2><FONT face=serif>33.71</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0><FONT face=serif size=2>Outstanding at September 30, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,401,420</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>31.29</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%"><FONT face=serif size=2>Exercisable at
      September 30, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>574,666</FONT>
    </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT size=2><FONT face=serif>28.54</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp;
</TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>Restricted Stock
Awards</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company has entered into restricted stock agreements with certain key employees,
covering the issuance of Common Stock (&#147;Restricted Stock&#148;). Under SFAS 123(R),
these shares are considered to be non-vested shares. The Restricted Stock will
be released to the key employees if they are employed by the Company at the end
of the vesting period. Compensation has been recognized for the estimated fair
value of the 206,191 common shares and is being charged to income over the
vesting term. Stock compensation expense recognized related to these awards
totaled $1.2 million, $879,000 and $588,000 during fiscal 2007, 2006 and 2005,
respectively.</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR>
    <TD noWrap align=left width="90%"  ></TD>
    <TD noWrap align=left width="3%"  ></TD>
    <TD noWrap align=left width="1%"  ></TD>
    <TD noWrap align=left width="2%"  ></TD>
    <TD noWrap align=center width="4%"   colSpan=2>&nbsp;<STRONG><FONT size=1>A</FONT></STRONG> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Weighted</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Number of</STRONG></FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Average</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Shares</STRONG></FONT> </TD>
    <TD noWrap align=left width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG>Gr</STRONG></FONT><FONT face=serif size=1><STRONG>ant Price</STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0><FONT face=serif size=2>Balance at September 30, 2006</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; 153,000</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=3>&nbsp; </FONT>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>32.14&nbsp;&nbsp;&nbsp; </FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Granted</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>83,027</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT size=2><FONT face=serif>42.07</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Vested</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(24,836</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>37.87</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Forfeited</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>(5,000</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT size=2><FONT face=serif>34.56</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="90%" bgColor=#c0c0c0><FONT face=serif size=2>Balance at September 30, 2007</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>206,191</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=2><FONT face=serif>35.89</FONT>&nbsp;&nbsp;&nbsp;&nbsp;</FONT>&nbsp;
</TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>Performance Share
Awards</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company has entered into Performance Share agreements with certain key
employees, covering the issuance of Common Stock (&#147;Performance Shares&#148;). The
Performance Shares vest upon the achievement of all or a portion of certain
performance objectives, which must be achieved during the performance period.
Compensation is recognized in each period based on management&#146;s best estimate of
the achievement level of the specified performance objectives and the resulting
vesting amounts. Compensation has been recognized for the estimated fair value
of the 132,375 shares awarded in September 2006 that were estimated to vest
during fiscal 2007. Fiscal 2007 stock compensation expense related to the
Performance Share awards expected to vest totaled $4.8 million. The Company
recorded $764,000 in fiscal 2006 related to 21,000 Performance Shares. No such
expense was recorded in fiscal 2005.</FONT></P>
<P align=justify><I><FONT face=serif size=2>1999 Employee Stock Purchase
Plan</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Under the
1999 Employee Stock Purchase Plan (&#147;Stock Purchase Plan&#148;), the Company is
authorized to issue up to 200,000 shares of Common Stock. All full-time and
part-time employees can choose to have up to 10% of their annual compensation
withheld to purchase the Company&#146;s Common Stock at purchase prices defined
within the provisions of the Stock Purchase Plan. As of September 30, 2007 and
2006, there was $311,000 and $283,000 of employee contributions, respectively,
included in accrued liabilities in the accompanying consolidated balance sheets.
Stock compensation expense recognized related to the Stock Purchase Plan totaled
$156,000 and $162,000 during fiscal 2007 and 2006, respectively. No such expense
was recorded in fiscal 2005.</FONT></P>
<P align=center><FONT face=serif size=2>F-15</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>5. Income Taxes</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company utilizes the liability method to account for income taxes. Deferred
taxes are based on the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities given the provisions
of the enacted tax laws.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
deferred income tax provision reflects the net change during the year in
deferred tax assets and liabilities. Income taxes in the accompanying
consolidated statements of operations for the years ended September 30 were as
follows</FONT><I><FONT face=serif size=2> (in thousands):</FONT></I></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="77%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="8%" colSpan=3>&nbsp;<B><I><FONT face=serif size=1>2005</FONT></I></B>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%" bgColor=#c0c0c0><FONT face=serif size=2>Current provision:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Federal</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>19,069</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>14,701</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>7,059</FONT> </TD>
    <TD noWrap align=right width="3%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>State and foreign</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,732</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,501</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>371</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%">&nbsp; &nbsp; &nbsp; &nbsp; &nbsp;
      &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Total current
      provision</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>20,801</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>16,202</FONT>
</TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>7,430</FONT></TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%" bgColor=#c0c0c0><FONT face=serif size=2>Deferred provision (benefit):</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Federal</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(8,573</FONT>
</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(774</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>4,592</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>State</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(907</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(197</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>574</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%"><FONT face=serif size=2>Total deferred
      provision (benefit)</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif color=#231f20 size=2>(9,480</FONT> </TD>
    <TD style="BORDER-BOTTOM: #ffffff 1pt solid" noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>(971</FONT> </TD>
    <TD style="BORDER-BOTTOM: #ffffff 1pt solid" noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="4%"><FONT face=serif size=2>5,166</FONT> </TD>
    <TD noWrap align=right width="3%"></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="77%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Total
      provision</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>11,321</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>15,231</FONT> </FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="4%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif color=#231f20 size=2>12,596</FONT> </FONT></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0></TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
reconciliation of the difference between amounts calculated at the statutory
federal tax rate and the Company&#146;s effective tax rate was as follows
</FONT><I><FONT face=serif size=2>(in thousands)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0><FONT face=serif size=2>Amount at statutory federal income tax rate</FONT>&nbsp; </TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>5,067</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>12,440</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,513</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2>Change due
      to:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>State taxes</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>736</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>720</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>496</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Other</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(241</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(102</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(10</FONT> </TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Stock-based compensation</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>262</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>365</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Valuation allowance</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>1,808</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Write-off of in-process R&amp;D</FONT>&nbsp;
    </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>5,497</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>10,597</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Income
      tax provision</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>11,321</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>15,231</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>12,596</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In fiscal
2006, the Company recorded a $1.8 million valuation allowance against the
capital loss created by the impairment of the Novocell investment (see Note 2).
The valuation allowance was recorded because the Company does not currently
foresee future capital gains to offset this capital loss. As such, no tax
benefit has been recorded in the consolidated statements of
operations.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
components of deferred income taxes consisted of the following as of September
30 and result from differences in the recognition of transactions for income tax
and financial reporting purposes </FONT><I><FONT face=serif size=2>(in
thousands)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="87%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3>&nbsp;<B><I><FONT face=serif size=1>2007</FONT></I></B> </TD>
    <TD noWrap align=left width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3>&nbsp;<B><I><FONT face=serif size=1>2006</FONT></I></B> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Depreciable assets</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(4,279</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>2,192</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%"><FONT face=serif size=2>Deferred
      revenue</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>8,163</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>552</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Accruals and reserves</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>296</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>354</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%"><FONT face=serif size=2>Restricted stock
      amortization</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>&#151;</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>616</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Stock options</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>3,938</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,302</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%"><FONT face=serif size=2>Impaired
      asset</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>1,733</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>1,733</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Unrealized gains (losses)&nbsp;on investments</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(1,067</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>176</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%"><FONT face=serif size=2>Other</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>48</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>201</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Valuation allowance</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(1,808</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif color=#231f20 size=2>(1,808</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Total deferred tax asset</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>7,024</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>5,318</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%" bgColor=#c0c0c0><FONT face=serif size=2>Less current deferred tax asset</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(1,116</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(435</FONT> </TD>
    <TD style="BORDER-BOTTOM: #c0c0c0 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="87%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Noncurrent deferred tax asset</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>5,908</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%"><FONT face=serif size=2>$</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%"><FONT face=serif size=2>4,883</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif size=2>F-16</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>6. Commitments and Contingencies
</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Litigation.</FONT></I><FONT face=serif size=2> From time to time, the
Company may become involved in various legal actions involving its products and
technologies, including intellectual property disputes. The outcomes of these
legal actions are not within the Company&#146;s complete control and may not be known
for prolonged periods of time. In some actions, the claimants seek damages, as
well as other relief, including injunctions barring the sale of products that
are the subject of the lawsuit, which, if granted, could require significant
expenditures or result in lost revenues. In accordance with SFAS No. 5,
&#147;Accounting for Contingencies,&#148; the Company records a liability in the
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. If the
reasonable estimate of a known or probable loss is a range, and no amount within
the range is a better estimate, the minimum amount of the range is accrued. If a
loss is possible but not known or probable, and can be reasonably estimated, the
estimated loss or range of loss is disclosed. In most cases, significant
judgment is required to estimate the amount and timing of a loss to be recorded.
While it is not possible to predict the outcome for most of the actions
discussed below and the Company believes that it has meritorious defenses
against these matters, it is possible that costs associated with them could have
a material adverse impact on the Company&#146;s consolidated earnings, financial
condition or cash flows.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On May
22, 2007, the former stockholders of InnoRx (the &#147;Plaintiffs&#148;) filed a
declaratory judgment action in the U.S. District Court for the Southern District
of Alabama (the &#147;Alabama Case&#148;) against Michael Cooney, M.D. (&#147;Dr. Cooney&#148;) of
New York, New York. In the litigation, the Plaintiffs are seeking a
determination that Dr. Cooney was not a co-founder of InnoRx, and further that
he was not an inventor of certain patent rights covering technology for
delivering drugs to the eye, including certain patent rights exclusively
licensed by the Johns Hopkins University (&#147;JHU&#148;) to InnoRx (collectively, the
&#147;Patent Rights&#148;), and now controlled by the Company as successor-in-interest to
InnoRx pursuant to an agreement of merger between the Company and InnoRx made
effective on January 18, 2005 (the &#147;Merger Agreement&#148;). The Company is not a
party to the litigation.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On June
8, 2007, the Company was named as a defendant in litigation filed in the U.S.
District Court for the District of Minnesota by Dr. Cooney (the &#147;Minnesota
Case&#148;). JHU and certain former shareholders of InnoRx, among others, were also
named as defendants. The complaint alleges that Dr. Cooney was a co-founder of
InnoRx and an inventor of subject matter claimed in the Patent Rights. The
complaint seeks an order correcting inventorship, and certain unspecified
damages (including punitive damages) based on claims of unjust enrichment,
fraud, and breach of fiduciary duties. On October 5, 2007, the Minnesota Case
was transferred to the U.S. District Court for the Southern District of Alabama.
On October 22, 2007, Dr. Cooney amended his complaint to include a claim against
the Company for tortious interference with prospective economic advantage. The
Company is awaiting a ruling from the district court on its motion to dismiss
Dr. Cooney&#146;s tortious interference claim. The transferred Minnesota Case was
consolidated with the Alabama Case on November 2, 2007. The parties have
requested a trial in February 2009, but the district court has not yet set the
schedule in the case. As of September 30, 2007, the Company has incurred
approximately $365,000 in legal fees in connection with both the Alabama and
Minnesota Cases. Pursuant to the Merger Agreement, the Company has submitted a
demand to the former shareholder on InnoRX for indemnification of losses
(including without limitation, damages, expenses, reasonably attorneys&#146; fees,
and costs) incurred as a result of the litigation involving Dr. Cooney,
including both the Alabama and the Minnesota cases described above. The
Company&#146;s consolidated financial statements do not include any expenses or
liabilities related to the above actions as the probability of the outcome is
currently not determinable and any potential loss is not estimable. We believe
that we have meritorious defenses to Dr. Cooney&#146;s claims and will vigorously
defend and prosecute this matter.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>On June
18, 2007, the Company was named as an involuntary plaintiff in patent litigation
between Abbott Laboratories (&#147;Abbott&#148;) and Church &amp; Dwight, Inc. (&#147;Church
&amp; Dwight&#148;). In the litigation, Abbott is alleging that certain of Church
&amp; Dwight&#146;s products utilizing lateral flow technology for diagnostic
purposes infringe upon certain of the Company&#146;s patents that have been
exclusively licensed to Abbott under the terms of a license agreement between
the Company and Abbott dated May 30, 1989, as amended and restated (the &#147;License
Agreement&#148;). The suit was filed in the U.S. District Court for the Northern
District of Illinois seeking a finding of infringement, monetary damages and
injunctive relief. Pursuant to the terms of the License Agreement, Abbott is
responsible for reimbursing the Company for at least a portion of its costs and
fees incurred in connection with the suit. A trial has not yet been
scheduled.</FONT></P>
<P align=center><FONT face=serif size=2>F-17</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Investment Obligation.</FONT></I><FONT face=serif size=2> In July 2007,
the Company made equity investments in Paragon Intellectual Properties, LLC
(&#147;Paragon&#148;) and Apollo Therapeutics, LLC (&#147;Apollo&#148;), a Paragon subsidiary. The
Paragon and Apollo investments totaled $3.5 million. The arrangement calls for
SurModics to invest additional equity totaling $2.5 million upon successful
completion of specified development milestones, which it expects will occur no
later than the second quarter of fiscal 2008.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><I>Operating Leases.</I> The Company leases certain facilities under
noncancelable operating lease agreements. Rent expense for the years ended
September 30, 2007, 2006 and 2005 was $140,000, $77,000 and $19,000,
respectively. Annual commitments pursuant to operating lease agreements are as
follows:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="95%"><B><FONT face=serif size=1>Year Ending
      September 30,</FONT></B>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="3%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>2008</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>684,000</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="95%"><FONT face=serif size=2>2009</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>783,000</FONT>
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="95%" bgColor=#c0c0c0><FONT face=serif size=2>2010</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>746,000</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="95%"><FONT face=serif size=2>2011</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>130,000</FONT>
    </TD></TR>
  <TR>
    <TD noWrap align=left width="95%"   bgColor=#c0c0c0><FONT size=2>2012</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"   bgColor=#c0c0c0>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"   bgColor=#c0c0c0><FONT size=2>&#151;</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="95%" bgColor=#ffffff><FONT face=serif size=2>Total Minimum Lease Payments</FONT>&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=left width="1%" bgColor=#ffffff><FONT size=+0><FONT face=serif size=2>$</FONT>&nbsp;
      </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#ffffff><FONT size=+0><FONT face=serif size=2>2,343,000</FONT>
      </FONT></TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I><FONT face=serif size=2>Land
Purchase Commitment.</FONT></I><FONT face=serif size=2> In August 2007, the
Company entered into an agreement to purchase an undeveloped parcel of land in
Eden Prairie, Minnesota for approximately $3.6 million (including a
non-refundable deposit of $100,000 paid to the seller at the time the purchase
agreement was signed). The agreement requires that the Company complete the
purchase on or before August 24, 2008 (the &#147;Closing Date&#148;). While it is the
Company&#146;s intention to complete the purchase on or before the Closing Date, the
Company will be required to pay the seller $1.6 million if it fails to do so and
will have no further rights to acquire the land.</FONT></P>
<P align=justify><I><FONT face=serif size=2>7. Defined Contribution
Plan</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Company has a 401(k) retirement and savings plan for the benefit of qualifying
employees. The Company matches 50% of each dollar of the first 6% of the tax
deferral elected by each employee. Company contributions totaling $356,000,
$263,000 and $223,000 have been charged to income for the years ended September
30, 2007, 2006 and 2005, respectively.</FONT></P>
<P align=justify><I><FONT face=serif size=2>8. Operating Segments</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>SurModics
manages its business on the basis of the operating segments noted in the table
below, which are comprised of the Company&#146;s seven business units. The three
operating segments are aggregated into one reportable segment. The &#147;Drug
Delivery&#148; operating segment contains: (1) the Drug Delivery business unit, which
is responsible for technologies dedicated to site specific delivery of drugs;
(2) the Ophthalmology business unit, which is dedicated to the advancement of
treatments for eye diseases, such as age-related macular degeneration (AMD) and
diabetic macular edema (DME), two of the leading causes of blindness; and (3)
the Brookwood Pharmaceuticals unit, which provides proprietary polymer-based
technologies to companies developing improved pharmaceutical products. The
&#147;Hydrophilic and Other&#148; operating segment consists of three business units: (1)
the Hydrophilic Technologies business unit, which focuses on enhancing medical
devices with advanced lubricious coatings that facilitate their placement and
maneuverability in the body; (2) the Regenerative Technologies business unit,
which is developing platforms intended to augment or replace tissue/organ
function (e.g., cell encapsulation applications), or to modify medical devices
to facilitate tissue/organ recovery through natural repair mechanisms (e.g.,
hemo/biocompatible or prohealing coatings); and (3) the Orthopedics business
unit, which is committed to innovative solutions for orthopedics patients using
proven SurModics technologies, and creating new technology solutions to existing
patient care gaps in the orthopedics field. The &#147;In Vitro&#148; operating segment
contains the In Vitro Technologies (formerly Diagnostics and Drug Discovery)
business unit, which includes the Company&#146;s genomics slide technologies,
stabilization products, antigens and substrates for immunoassay diagnostics
tests, its </FONT><I><FONT face=serif size=2>in vitro</FONT></I><FONT face=serif size=2> diagnostic format technology and its synthetic ECM cell culture
products.</FONT></P>
<P align=center><FONT face=serif size=2>F-18</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Each
operating segment has similar economic characteristics, technology,
manufacturing processes, customers, regulatory environments, and shared
infrastructures. The Company manages its expenses on a company-wide basis, as
many costs and activities are shared among the business units. The focus of the
business units is providing solutions to customers and maximizing revenue over
the long-term. The accounting policies for segment reporting are the same as for
the Company as a whole. Revenue for each operating segment for the years ended
September 30 was as follows </FONT><I><FONT face=serif size=2>( in thousands
)</FONT></I><FONT face=serif size=2>:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="83%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="4%" colSpan=2><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="83%" bgColor=#c0c0c0><FONT face=serif size=2>Operating segment:</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="83%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2>Drug Delivery</FONT> </TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>26,488</FONT>
</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>32,918</FONT>
</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=right width="1%"><FONT face=serif size=2>$</FONT> </TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>29,678</FONT>
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="83%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Hydrophilic and Other</FONT> </TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>26,493</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>22,233</FONT> </TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>19,065</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="83%">&nbsp; &nbsp; &nbsp; &nbsp;<FONT face=serif size=2><EM>In Vitro</EM></FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>20,183</FONT> </TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT face=serif size=2>14,733</FONT> </TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=right width="3%"><FONT size=+0><FONT face=serif color=#231f20 size=2>13,638</FONT> </FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="83%" bgColor=#c0c0c0>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Total revenue</FONT> </TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>73,164</FONT>
    </FONT></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>69,884</FONT>
    </FONT></TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="1%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>$</FONT> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 2pt double" noWrap align=right width="3%" bgColor=#c0c0c0><FONT size=+0><FONT face=serif size=2>62,381</FONT>
    </FONT></TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>Major Customers</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Revenue
from customers that exceed 10% of total revenue was as follows for the years
ended September 30:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT size=+0><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT>
      </FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT size=+0><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT>
      </FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0><FONT face=serif size=2>Johnson&nbsp;&amp; Johnson</FONT> </TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>33%</FONT> </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>47%</FONT> </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>46%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2>Abbott
      Laboratories</FONT> </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>16%</FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>12%</FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>14%</FONT> </TD></TR></TABLE></DIV><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
revenue from each of the customers listed is derived from all three primary
sources: licensing, product sales, and research and development.</FONT></P>
<P align=justify><I><FONT face=serif size=2>Geographic Revenue</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Geographic revenue was as follows for the years ended September
30:</FONT></P>
<DIV align=center>
<TABLE cellSpacing=0 cellPadding=0 width="60%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="80%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT size=+0><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG><EM>2007</EM></STRONG></FONT>
      </FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT size=+0><FONT face=serif color=#231f20 size=1><FONT color=#000000 size=3>&nbsp;</FONT><STRONG><EM>2006</EM></STRONG></FONT>
      </FONT></TD>
    <TD noWrap align=center width="2%">&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%"><FONT face=serif size=1><FONT size=3>&nbsp;</FONT><STRONG><EM>2005</EM></STRONG></FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%" bgColor=#c0c0c0><FONT face=serif size=2>Domestic</FONT> </TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>81%</FONT> </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>84%</FONT> </TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>85%</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="80%"><FONT face=serif size=2>Foreign</FONT>
    </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>19%</FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>16%</FONT> </TD>
    <TD noWrap align=center width="2%">&nbsp; </TD>
    <TD noWrap align=center width="5%"><FONT face=serif size=2><FONT size=3>&nbsp;</FONT>15%</FONT> </TD></TR></TABLE></DIV><BR>
<P align=justify><I><FONT face=serif size=2>9. Subsequent Events</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
November 2007, the Company&#146;s Board of Directors authorized the repurchase of $35
million of the Company&#146;s common stock. The repurchase authorization does not
have a fixed expiration date.</FONT></P>
<P align=center><FONT face=serif size=2>F-19</FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><I><FONT face=serif size=2>10. Quarterly Financial Data
(Unaudited)</FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
following is a summary of the unaudited quarterly results for the years ended
September 30, 2007, 2006 and 2005 </FONT><I><FONT face=serif size=2>(in
thousands, except per share data )</FONT></I><FONT face=serif size=2>.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD noWrap align=left width="74%" colSpan=2></TD>
    <TD noWrap align=center width="5%" colSpan=2><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>First</STRONG></FONT>&nbsp;</TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%" colSpan=3><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Second</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%" colSpan=2><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Third</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD noWrap align=center width="2%"></TD>
    <TD noWrap align=center width="5%" colSpan=3><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Fourth</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap align=left width="74%" colSpan=2></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=2><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Quarter</STRONG></FONT>&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Quarter</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=2><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Quarter</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="2%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="5%" colSpan=3><FONT size=1><FONT size=3>&nbsp;</FONT><STRONG>Quarter</STRONG></FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><STRONG><FONT color=#231f20 size=2>Fiscal
      2007</FONT></STRONG>&nbsp;</TD>
    <TD noWrap align=left width="73%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0 colSpan=2></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0 colSpan=3></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0 colSpan=2></TD>
    <TD noWrap align=center width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=center width="5%" bgColor=#c0c0c0 colSpan=3></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Revenue</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>16,740</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%">&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>17,362</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="2%">&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>17,762</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%">&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>21,300</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Income (loss) from operations</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>8,109</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>8,085</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>7,518</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(13,813</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Net
      income (loss)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>5,992</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>5,675</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>5,587</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(13,907</FONT></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Net income (loss) per share:</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Basic</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.32</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>0.31</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.31</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(0.78</FONT></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Diluted</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.32</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>0.31</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.31</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(0.78</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%"><B><FONT face=serif color=#231f20 size=2>Fiscal
    2006</FONT></B>&nbsp;</TD>
    <TD noWrap align=left width="73%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Revenue</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>16,465</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>17,707</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>18,139</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>17,573</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Income
      from operations</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>8,580</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>8,953</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>9,463</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>9,167</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Net income</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>6,218</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>1,465</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>6,358</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>6,293</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Net
      income per share:</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="4%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="3%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Basic</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.34</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>0.08</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.34</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>0.34</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Diluted</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.33</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>0.08</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.34</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>0.34</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="1%" bgColor=#c0c0c0><B><FONT face=serif color=#231f20 size=2>Fiscal
      2005</FONT></B>&nbsp;</TD>
    <TD noWrap align=left width="73%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Revenue</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>14,069</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>15,705</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>16,518</FONT>&nbsp;</TD>
    <TD noWrap align=right width="2%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>$</FONT></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>16,090</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Income (loss) from operations</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>8,638</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(21,148</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>9,148</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>6,346</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2><FONT face=serif size=2>Net
      income (loss)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>5,237</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(24,371</FONT></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>6,095</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>4,793</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2><FONT face=serif size=2>Net income (loss) per share:</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="4%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="3%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" colSpan=2>&nbsp; &nbsp; &nbsp;
      &nbsp;<FONT face=serif size=2>Basic</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.30</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>(1.34</FONT></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="4%"><FONT face=serif size=2>0.33</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=right width="3%"><FONT face=serif size=2>0.26</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="74%" bgColor=#c0c0c0 colSpan=2>&nbsp; &nbsp;
      &nbsp; &nbsp;<FONT face=serif size=2>Diluted</FONT>&nbsp;</TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.29</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>(1.34</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0><FONT face=serif size=2>)</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="4%" bgColor=#c0c0c0><FONT face=serif size=2>0.32</FONT>&nbsp;</TD>
    <TD noWrap align=left width="2%" bgColor=#c0c0c0></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0></TD>
    <TD noWrap align=right width="3%" bgColor=#c0c0c0><FONT face=serif size=2>0.25</FONT></TD>
    <TD noWrap align=left width="1%" bgColor=#c0c0c0>&nbsp;</TD></TR></TABLE><BR>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
fourth quarter of fiscal 2007, the Company recorded a $15.6 million charge for
in-process research and development acquired in connection with the purchase of
Brookwood Pharmaceuticals.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
second quarter of fiscal 2006, the Company recorded a $4.7 million non-cash
impairment loss on the investment in Novocell, Inc.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
second quarter of fiscal 2005, the Company recorded a $30.3 million charge for
in-process research and development acquired in connection with the purchase of
InnoRx. In addition, fiscal 2005 fourth quarter results include a $2.5 million
impairment charge recorded against the Company&#146;s contract manufacturing
facility.</FONT></P>
<P align=center><FONT face=serif size=2>F-20</FONT></P>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>3
<FILENAME>exhibit3-2.htm
<DESCRIPTION>BYLAWS, AS AMENDED TO DATE
<TEXT>

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<P align=right><FONT face=serif><FONT face=serif size=2>Exhibit 3.2</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>RESTATED
BYLAWS</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>OF</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>SURMODICS,
INC.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2><BR><BR>ARTICLE
1.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>OFFICES</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT face=serif size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>1.1) <U>Offices</U>. The principal
office of the corporation shall be 6316 Barrie Road, Edina, Minnesota, and the
corporation may have offices at such other places within or without the State of
Minnesota as the Board of Directors shall from time to time determine or the
business of the corporation requires.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
2.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>MEETINGS OF
SHAREHOLDERS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.1) <U>Annual Meeting</U>. The
annual meeting of the shareholders of the corporation entitled to vote shall be
held at the principal office of the corporation or at such other place, within
or without the State of Minnesota, as is designated by the Board of Directors,
or by written consent of all the shareholders entitled to vote thereat, at such
time on such day of each year as shall be determined by the Board of Directors
or by the President. At the annual meeting, the shareholders, voting as provided
in the Articles of Incorporation, shall elect directors and shall transact such
other business as shall properly come before the meeting.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.2) <U>Special Meetings</U>.
Special meetings of the shareholders entitled to vote shall be called by the
Secretary at any time upon request of the Chairman of the Board, the President
or the Board of Directors (acting upon majority vote), or upon request by
shareholders holding ten percent (10%) or more of the voting power of the
shareholders.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.3) <U>Notice of Meetings</U>.
There shall be mailed to each shareholder entitled to vote, at his address as
shown by the books of the corporation, a notice setting out the place, date and
hour of the annual meeting or any special meeting, which notice shall be mailed
at least five (5) days prior to the date of the meeting; provided, that (i)
notice of a meeting at which an agreement of merger or consolidation is to be
considered shall be mailed to all shareholders of record, whether or not
entitled to vote, at least two (2) weeks prior thereto, (ii) notice of a meeting
at which a proposal to dispose of all, or substantially all, of the property and
assets of the corporation is to be considered shall be mailed to all
shareholders of record, whether or not entitled to vote, at least ten (10) days
prior thereto, and (iii) notice of a meeting at which a proposal to dissolve the
corporation or to amend the Articles of Incorporation is to be considered shall
be mailed to all shareholders of record, whether or not entitled to vote, at
least ten (10) days prior thereto. Notice of any special meeting shall state the
purpose or purposes of the proposed meeting, and the business transacted at all
special meetings shall be confined to purposes stated in the notice. Attendance
at a meeting by any shareholder, without objection in writing by him, shall
constitute his waiver of notice of the
meeting.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 1</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
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<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.4) <U>Quorum and Adjourned
Meetings</U>. The holders of a majority of all shares outstanding and entitled
to vote, represented either in person or by proxy, shall constitute a quorum for
the transaction of business at any annual or special meeting of the
shareholders. In case a quorum is not present at any meeting, those present
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until the requisite number of voting
shares shall be represented. At such adjourned meetings at which the required
amount of voting shares shall be represented, any business may be transacted
which might have been transacted at the original meeting.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.5) <U>Voting</U>. At each meeting
of the shareholders, every shareholder having the right to vote shall be
entitled to vote in person or by proxy duly appointed by an instrument in
writing subscribed by such shareholder. Each shareholder shall have one (1) vote
for each share having voting power standing in his name on the books of the
corporation except as may be otherwise required to provide for cumulative voting
(if not denied by the Articles). Upon the demand of any shareholder, the vote
for directors or the vote upon any question before the meeting shall be by
ballot. All elections shall be determined and all questions decided by a
majority vote of the number of shares entitled to vote and represented at any
meeting at which there is a quorum except in such cases as shall otherwise be
required by statute, the Articles of Incorporation or these Bylaws. Except as
may otherwise be required to conform to cumulative voting procedures, directors
shall be elected by a plurality of the votes cast by holders of shares entitled
to vote thereon.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.6) <U>Record Date</U>. The Board
of Directors may fix a time, not exceeding sixty (60) days preceding the date of
any meeting of shareholders, as a record date for the determination of the
shareholders entitled to notice of and to vote at such meeting, notwithstanding
any transfer of any shares on the books of the corporation after any record date
so fixed. The Board of Directors may close the books of the corporation against
transfer of shares during the whole or any part of such period. In the absence
of action by the Board, only shareholders of record twenty (20) days prior to a
meeting may vote at such meeting.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2.7) <U>Order of Business</U>. The
suggested order of business at the annual meeting and, to the extent
appropriate, at all other meetings of the shareholders shall, unless modified by
the presiding chairman, be:</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Call of roll</FONT><BR></FONT><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b)
Proof of due notice of meeting or waiver of notice&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(c)
Determination of existence of quorum&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(d)
Reading and disposal of any unapproved minutes&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(e)
Annual reports of officers and committees&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(f)
Election of directors&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(g)
Unfinished business&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(h)
New business&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i)
Adjournment.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 2</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
3.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>DIRECTORS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.1) <U><FONT face=serif>General
Powers</FONT></U>. The property, affairs and business of the corporation shall
be managed by a Board of Directors.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.2) <I><FONT face=serif>Number,
Term, Election and Qualifications</FONT></I>. At each annual meeting the
shareholders shall determine the number of directors, which shall be not less
than three; provided, that between annual meetings the authorized number of
directors may be increased by the shareholders or Board of Directors or
decreased by the shareholders. However, notwithstanding the foregoing no
increase or decrease in the number of directors may be effected except according
to the further provisions contained in this Section 3.2. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors. At the 1999 Annual Meeting
of Shareholders, Class I directors shall be elected for a one-year term, Class
II directors for a two-year term and Class III directors for a three-year term.
At each succeeding annual meeting of the shareholders beginning in 2000,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. A director shall hold office until the
annual meeting for the year in which his or her term expires and until his or
her successor shall be elected and shall qualify, or until his or her
resignation or removal from office. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain,
as nearly as possible, an equal number of directors in each class. In the event
an increase or decrease makes it impossible to maintain an equal number of
directors in each class, increases shall be allocated to the class or classes
with the longest remaining term, and decreases shall be allocated to the class
with the shortest remaining term. Any director elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class. In no event will a decrease in
the number of directors result in the elimination of an entire class of
directors, cause any class to contain a number of directors two or more greater
than any other class, or shorten the term of any incumbent director. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his or her
predecessor. No amendment to these Bylaws shall alter, change or repeal any of
the provisions of this Section 3.2 unless the amendment effecting such
alteration, change or repeal shall receive the affirmative vote of the holders
of two-thirds (2/3) of all shares of stock of the corporation entitled to vote
on all matters that may come before each meeting of shareholders.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.3) <U><FONT face=serif>Vacancies</FONT></U>. Vacancies on the Board of Directors shall be
filled by the remaining members of the Board, though less than a quorum;
provided that newly created directorships resulting from an increase in the
authorized number of directors shall be filled by two-thirds (2/3) of the
directors serving at the time of such increase. Persons so elected shall be
directors until their successors are elected by the shareholders, who may make
such election at their next annual meeting or at any special meeting duly called
for that purpose.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.4) <U><FONT face=serif>Quorum and
Voting</FONT></U>. A majority of the whole Board of Directors shall constitute a
quorum for the transaction of business except that when a vacancy or vacancies
exist, a majority of the remaining directors (provided such majority consists of
not less than two directors) shall
constitute a quorum. Except as otherwise provided in the Articles of
Incorporation or these Bylaws, the acts of a majority of the directors present
at a meeting at which a quorum is present shall be the acts of the Board of
Directors.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 3</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif size=2><FONT face=serif size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.5) <U>First Meeting</U>. As soon
as practicable after each annual election of directors, the Board of Directors
shall meet for the purpose of organization, electing or appointing officers of
the corporation, and transaction of other business, at the place where the
shareholders&#146; meeting is held or at the place where regular meetings of the
Board of Directors are held. No notice of such meeting need be given. Such first
meeting may be held at any other time and place specified in a notice given as
hereinafter provided for special meetings or in a waiver of notice signed by all
the directors.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.6) <U>Regular Meetings</U>.
Regular meetings of the Board of Directors shall be held from time to time at
such time and place as may from time to time be fixed by resolution adopted by a
majority of the entire Board of Directors. No notice need be given of any
regular meeting.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.7) <U>Special Meetings</U>.
Special meetings of the Board of Directors may be held at such time and place as
may be designated in the notice or the waiver of notice of the meeting. Special
meetings of the Board of Directors may be called by the Chairman of the Board,
the President or by any two (2) directors. Unless notice shall be waived by all
directors, notice of such special meeting (including a statement of the purposes
thereof) shall be given to each director at least twenty-four (24) hours in
advance of the meeting if oral or two (2) days in advance of the meeting if by
mail, telegraph or other written communication; provided, however, that meetings
may be held without waiver of notice from or giving notice to any director while
he is in the armed forces of the United States or outside the continental limits
of the United States. Attendance
at a meeting by any director, without objection in writing by him, shall
constitute a waiver of notice of such meeting.</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.8) <U>Compensation</U>. Directors
who are not salaried officers of the corporation shall receive such fixed sum
per meeting attended or such fixed annual sum as shall be determined from time
to time by resolution of the Board of Directors. Nothing herein contained shall
be construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.9) <U>Executive Committee</U>. The
Board of Directors may, by unanimous affirmative action of the entire Board,
designate two or more of its number to constitute an Executive Committee, which,
to the extent determined by unanimous affirmative action of the entire Board,
shall have and exercise the authority of the Board in the management of the
business of the corporation. Any such Executive Committee shall act only in the
interval between meetings of the Board and shall be subject at all times to the
control and direction of the Board.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.10) <U>Order of Business</U>. The
suggested order of business at any meeting of the Board of Directors shall, to
the extent appropriate and unless modified by the presiding chairman,
be:</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(a)
Roll call<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></FONT></FONT><FONT face=serif><FONT face=serif size=2>(b) Proof of due notice of meeting or waiver
of notice, or unanimous presence and declaration by President</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 4</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size=2>(c) Determination of existence of quorum</FONT><BR></FONT><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(d)
Reading and disposal of any unapproved minutes&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(e)
Reports of officers and committees&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(f)
Election of officers&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(g)
Unfinished business&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(h)
New business&nbsp;<BR><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i)
Adjournment.</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3.11) <I>Removal</I>. Directors may
be removed only for cause by vote of the shareholders or for cause by vote of a
majority of the entire Board of Directors. No amendment to these Bylaws shall
alter, change or repeal any of the provisions of this Section 3.2 unless the
amendment effecting such, alternation, change or repeal shall receive the
affirmative vote of the holders of two-thirds (2/3) of all shares of stock of
the corporation entitled to vote on all matters that may come before each
meeting of shareholders.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
4.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>OFFICERS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.1) <U>Number and Designation</U>.
The Board of Directors shall elect a President, a Secretary and a Treasurer, and
may elect or appoint a Chairman of the Board, one or more Vice Presidents, and
such other officers and agents as it may from time to time determine. Any two of
the offices except those of President and Vice President may be held by one
person.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.2) <U>Election, Term of Office and
Qualifications</U>. At each annual meeting of the Board of Directors, the Board
shall elect the officers provided for in Section 4.1 and such officers shall
hold office until the next annual meeting of the Board or until their successors
are elected or appointed and qualify; provided, however, that any officer may be
removed with or without cause by the affirmative vote of a majority of the
entire Board of Directors (without prejudice, however, to any contract rights of
such officer).</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.3) <U>Resignations</U>. Any
officer may resign at any time by giving written notice to the Board of
Directors or to the Chairman, President or Secretary. The resignation shall take
effect at the time specified in the notice and, unless otherwise specified
therein, acceptance of the resignation shall not be necessary to make it
effective.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.4) <U>Vacancies in Office</U>. If
there be a vacancy in any office of the corporation, by reason of death,
resignation, removal or otherwise, such vacancy shall be filled for the
unexpired term by the Board of Directors at any regular or special
meeting.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.5) <U>Chairman of the Board</U>.
The Board of Directors may, in its discretion elect one of its number as
Chairman of the Board. The Chairman shall preside at all meetings of the
shareholders and of the Board and shall exercise general supervision and
direction over the more significant matters of policy affecting the affairs of
the corporation, including particularly its financial and fiscal affairs. The
Chairman of the Board may call a meeting of the Board whenever he deems it
advisable.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 5</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.6) <U><FONT face=serif>President</FONT></U>. The President shall have general active
management of the business of the corporation. In the absence of the Chairman of
the Board, he shall preside at all meetings of the shareholders and Board of
Directors. He shall be the chief executive officer of the corporation and shall
see that all orders and resolutions are carried into effect. He shall be
ex-officio a member of all standing committees and shall perform all duties
usually incident to the office of President and such other duties as may from
time to time be assigned to him by the Board.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.7) <U><FONT face=serif>Vice
President</FONT></U>. Each Vice President shall have such powers and shall
perform such duties as may be specified in these Bylaws or prescribed by the
Board of Directors. In the event of absence or disability of the President, the
Board of Directors may designate a Vice president or Vice Presidents to succeed
to the powers and duties of the President.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.8) <U><FONT face=serif>Secretary</FONT></U>. The Secretary shall be secretary of and shall
attend all meetings of the shareholders and Board of Directors. He shall act as
clerk thereof and shall record all the proceedings of such meetings in the
minute book of the corporation. He shall give proper notice of meetings of
shareholders and directors. He may, with the Chairman of the Board, President or
Vice President, sign all certificates representing shares of the corporation and
shall perform the duties usually incident to his office and such other duties as
may be prescribed by the Board of Directors from time to time.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.9) <U><FONT face=serif>Treasurer</FONT></U>. The Treasurer shall keep accurate accounts of
all monies of the corporation received or disbursed, and shall deposit all
monies, drafts and checks in the name of and to the credit of the corporation in
such banks and depositories as the Board of Directors shall designate from time
to time. He shall have power to endorse for deposit the funds of the corporation
as authorized by the Board of Directors. He shall render to the Chairman of the
Board, President and the Board of Directors, whenever required, an account of
all of his transactions as Treasurer and statements of the financial condition
of the corporation, and shall perform the duties usually incident to his office
and such other duties as may be prescribed by the Board of Directors from time
to time.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4.10) <U><FONT face=serif>Other
Officers</FONT></U>. The Board of Directors may appoint one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers, agents
and employees as the Board may deem advisable. Each officer, agent or employee
so appointed shall hold office at the pleasure of the Board and shall perform
such duties as may be assigned to him by the Board, Chairman of the Board or
President.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
5.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>INDEMNIFICATION</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5.1) <U><FONT face=serif>Indemnification of Directors and Officers</FONT></U>. To the full
extent permitted by Minnesota Statutes, Section 301.095, as amended from time to
time, or by other provisions of law, each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, wherever brought, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the corporation or by reason of the fact that such person is or was
serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise at the request of the
corporation, shall be indemnified by the corporation against expenses, including
attorneys&#146; fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding; provided, however, that the indemnification with respect to a person
who is or was serving as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise shall apply
only to the extent such person is not indemnified by such other corporation,
partnership, joint venture, trust or other enterprise. The indemnification
provided by this section shall continue as to a person who has ceased to be a
director or officer of the corporation and shall inure to the benefit of the
heirs, executors and administrators of such
person.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 6</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif size=2><FONT face=serif size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5.2) <U>Indemnification of Employees
and Agents</U>. Each person who is not eligible for indemnification pursuant to
Section 5.1 above and who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, wherever
brought, whether civil, criminal, administrative or investigative, by reason of
the fact that such person is or was an employee or agent of the corporation or
by reason of the fact that such person is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified by the
corporation by action of the Board of Directors to the extent permitted and in
accordance with the procedures described by Minnesota Statutes, Chapter 301, as
amended from time to time, against expenses, including attorneys&#146; fees,
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection with such action, suit or proceeding;
provided, however, that the indemnification with respect to a person who is or
was serving as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall apply only to the
extent such person is not indemnified by such other corporation, partnership,
joint venture, trust or other enterprise. The indemnification provided by this
section shall continue as to a person who has ceased to be an employee or agent
and shall inure to the benefit of the heirs, executors and administrators of
such person.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5.3) <U>Nonexclusivity</U>. The
foregoing right of indemnification in the case of a director or officer and
permissive indemnification in the case of an agent or employee shall not be
exclusive of other rights to which a director, officer, employee or agent may be
entitled as a matter of law.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5.4) <U>Advance Payments</U>. To the
full extent permitted by Minnesota Statutes, Section 301.095, as amended from
time to time, or by other provisions of law, the corporation may pay in advance
of final disposition expenses incurred in actions, suits and proceedings
specified in Sections 5.1 and 5.2 above.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5.5) <U>Insurance</U>. To the full
extent permitted by Minnesota Statutes, Section 301.095, as amended from time to
time, or by other provisions of law, the corporation may purchase and maintain
insurance on behalf of any indemnified party against any liability asserted
against such person and incurred by such person in such capacity.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 7</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=center><FONT face=serif size=2>ARTICLE
6.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>SHARES AND THEIR
TRANSFER</FONT></FONT></P>
<P align=left><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>6.1) <U><FONT face=serif>Certificated and Uncertificated Shares</FONT></U>.</FONT></FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(a) <U><FONT face=serif>Form of
Shares</FONT></U>. The shares of the corporation shall be either certificated
shares or uncertificated shares. Each holder of duly issued certificated shares
is entitled to a certificate of shares.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b) <U><FONT face=serif>Form of
Certificates</FONT></U>. Each certificate of shares of the corporation shall
bear the corporate seal, if any, and shall be signed by the Chief Executive
Officer, or the President or any Vice President, and the Chief Financial
Officer, or the Secretary or any Assistant Secretary, but when a certificate is
signed by a transfer agent or a registrar, the signature of any such officer and
the corporate seal upon such certificate may be facsimiles, engraved or printed.
If a person signs or has a facsimile signature placed upon a certificate while
an officer, transfer agent or registrar of the corporation, the certificate may
be issued by the corporation, even if the person has ceased to serve in that
capacity before the certificate is issued, with the same effect as if the person
had that capacity at the date of its issue.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(c) <U><FONT face=serif>Designations</FONT></U>. A certificate representing shares issued by
the corporation shall, if the corporation is authorized to issue shares of more
than one class or series, set forth upon the face or back of the certificate, or
shall state that the corporation will furnish to any shareholder upon request
and without charge, a full statement of the designations, preferences,
limitations and relative rights of the shares of each class or series authorized
to be issued, so far as they have been determined, and the authority of the
Board of Directors to determine the relative rights and preferences of
subsequent classes or series.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(d) <U><FONT face=serif>Classes of
Uncertificated Shares</FONT></U>. The Board of Directors may determine that some
or all of any or all classes and series of the shares of the corporation will be
uncertificated shares. Any such determination shall not apply to shares
represented by a certificate until the certificate is surrendered to the
corporation.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>6.2) <U><FONT face=serif>Stock
Record</FONT></U>. As used in these Bylaws, the term &#147;shareholder&#148; shall mean
the person, firm or corporation in whose name outstanding shares of capital
stock of the corporation are currently registered on the stock record books of
the corporation. A record shall be kept of the name of the person, firm or
corporation owning the stock represented by such certificates respectively, the
respective dates thereof and, in the case of cancellation, the respective dates
of cancellation. Every certificate surrendered to the corporation for exchange
or transfer shall be cancelled and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled (except as provided for in Section 6.4 of this
Article 6).</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>6.3) <U><FONT face=serif>Transfer of
Shares</FONT></U>. Shares of the corporation may be transferred only on the
books of the corporation by the holder thereof, in person or by such person&#146;s
attorney. In the case of certificated shares, shares shall be transferred only
upon surrender and cancellation of certificates for a like number of shares. The
Board of Directors, however, may appoint one or more transfer agents and
registrars to maintain the share records of the corporation and to effect transfers of
shares.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 8</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>6.4) <U><FONT face=serif>Lost
Certificates</FONT></U>. Any shareholder claiming a certificate of stock to be
lost or destroyed shall make an affidavit or affirmation of that fact in such
form as the Board of Directors may require, and shall, if the Board of Directors
so requires, give the corporation a bond of indemnity in a form and with one or
more sureties satisfactory to the Board of Directors of at least double the
value, as determined by the Board of Directors, of the stock represented by such
certificate in order to indemnify the corporation against any claim that may be
made against it on account of the alleged loss or destruction of such
certificate, whereupon a new certificate may be issued in the same tenor and for
the same number of shares as the one alleged to have destroyed or
lost.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
7.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>GENERAL
PROVISIONS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7.1) <U><FONT face=serif>Dividends</FONT></U>. Subject to the provisions of the Articles of
Incorporation and of these Bylaws, the Board of Directors may declare dividends
from the net earnings or net assets of the corporation available for dividends
whenever and in such amounts as, in its opinion, the condition of the affairs of
the corporation shall render it advisable.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7.2) <U><FONT face=serif>Surplus and
Reserves</FONT></U>. Subject to the provisions of the Articles of incorporation
and of these Bylaws, the Board of Directors in its discretion may use and apply
any of the net earnings or net assets of the corporation available for such
purpose to purchase or acquire any of the shares of the capital stock of the
corporation in accordance with law, or any of its bonds, debentures, notes,
scrip or other securities or evidences of indebtedness, or from time to time may
set aside from its net assets or net earnings such sums as it, in its absolute
discretion, may think proper as a reserve fund to meet contingencies, for the
purpose of maintaining or increasing the property or business of the
corporation, or for any other purpose it may think conducive to the best
interests of the corporation.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7.3) <U><FONT face=serif>Fiscal
Year</FONT></U>. The fiscal year of the corporation shall be established by the
Board of Directors.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7.4) <U><FONT face=serif>Seal</FONT></U>. The corporation shall have such corporate seal or no
corporate seal as the Board of Directors shall from time to time
determine.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7.5) <U><FONT face=serif>Securities
of Other Corporations</FONT></U>.</FONT></FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(a)
<U><FONT face=serif>Voting Securities Held by the Corporation</FONT></U>. Unless
otherwise ordered by the Board of Directors, the President shall have full power
and authority on behalf of the corporation (i) to attend and to vote at any
meeting of security holders of other companies in which the corporation may hold
securities; (ii) to execute any proxy for such meeting on behalf of the
corporation and (iii) to execute a written action in lieu of a meeting of such
other company on behalf of this corporation. At such meeting, by such proxy or
by such writing in lieu of meeting, the President shall possess and may exercise
any and all rights and powers incident to the ownership of such securities that
the corporation might have possessed and exercised if it had been present. The
Board of Directors may, from time to time, confer like powers upon any other
person or
persons.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 9</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b) <U>Purchase and Sale of
Securities</U>. Unless otherwise ordered by the Board of Directors, the
President shall have full power and authority on behalf of the corporation to
purchase, sell, transfer or encumber any and all securities of any other company
owned by the corporation and may execute and deliver such documents as may be
necessary to effectuate such purchase, sale, transfer or encumbrance. The Board
of Directors may, from time to time, confer like powers upon any other person or
persons.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
8.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>MEETINGS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>8.1) <U>Waiver of Notice</U>.
Whenever any notice whatsoever is required to be given by these Bylaws, the
Articles of Incorporation or any of the laws of the State of Minnesota, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before, at or after the time stated therein, shall be deemed equivalent
to the actual required notice.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>8.2) <U>Participation by Conference
Telephone</U>. Members of the Board of Directors, or any committee designated by
the Board, may participate in a meeting of the Board of Directors or of such
committee by means of conference telephone or similar communications equipment
whereby all persons participating in the meeting can hear and communicate with
each other, and participation in a meeting pursuant to this Section shall
constitute presence in person at such meeting. The place of the meeting shall be
deemed to be the place of origination of the conference telephone call or
similar communication technique.</FONT><FONT face=serif></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>8.3) <U>Authorization Without
Meeting</U>. Any action of the shareholders, the Board of Directors, or any
lawfully constituted Executive Committee of the corporation which may be taken
at a meeting thereof, may be taken without a meeting if authorized by a writing
signed by all of the holders of shares who would be entitled to notice of a
meeting for such purpose, by all of the directors, or by all of the members of
such Executive Committee, as the case may be.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>ARTICLE
9.</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>AMENDMENTS OF
BYLAWS</FONT></FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>9.1) <I>Amendments.</I> Except as
otherwise provided in specific provisions of these Bylaws, these Bylaws may be
altered, amended, added to or repealed by the affirmative vote of a majority of
the members of the Board of Directors at any regular meeting of the Board or at
any special meeting of the Board called for that purpose, subject to the power
of the shareholders to change or repeal such Bylaws and subject to any other
limitations on such authority of the Board provided by the Minnesota Business
Corporation Act.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>- 10</FONT> <FONT face=serif size=2>-</FONT></FONT></P>
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<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>4
<FILENAME>exhibit10-27.htm
<DESCRIPTION>EMPLOYMENT AGREEMENT OF ARTHUR J. TIPTON, PH.D., DATED JULY 31, 2007
<TEXT>

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<P align=right><FONT face=serif><FONT face=serif size=2>Exhibit
10.27</FONT></FONT></P>
<P align=center><B><FONT face=serif size=2>E</FONT></B><B><FONT face=serif size=1>MPLOYMENT </FONT></B><B><FONT face=serif size=2>A</FONT></B><B><FONT face=serif size=1>GREEMENT</FONT></B><FONT face=serif size=2> </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>This
EMPLOYMENT AGREEMENT (this &#147;Agreement&#148;) is entered into as of July 31, 2007, by
and between SurModics, Inc., a Delaware corporation (the &#147;Company&#148;), and Arthur
J. Tipton, Ph.D. (&#147;Executive&#148;).</FONT><B><FONT face=serif size=2>
</FONT></B></P>
<P align=center><B><FONT face=serif size=2>B</FONT></B><B><FONT face=serif size=1>ACKGROUND</FONT></B><B><FONT face=serif size=2> </FONT></B></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A.</FONT><FONT face=sans-serif> </FONT><FONT face=serif size=2>Executive
currently serves as President and Chief Executive Officer</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>of Brookwood
Pharmaceuticals, Inc. a Delaware corporation (&#147;Brookwood&#148;). </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>B.</FONT><FONT face=sans-serif> </FONT><FONT face=serif size=2>The
Company, Brookwood and others have entered into a Stock Purchase Agreement,
dated as of the date hereof, under which Brookwood became a wholly-owned
subsidiary of the Company (the &#147;Purchase Agreement&#148;). The date on which such
transaction closes shall be the &#147;Effective Date&#148; for purposes of this
Agreement.</FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>C.</FONT><FONT face=sans-serif> </FONT><FONT face=serif size=2>The
Company and Executive desire that Executive be employed by the Company, under
the terms of this Agreement. </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>D.</FONT><FONT face=sans-serif> </FONT><FONT face=serif size=2>It is
desirable and in the best interests of the Company to protect confidential,
proprietary, and trade secret information of the Company, to prevent unfair
competition by former executives of the Company following separation of their
employment with the Company, and to secure cooperation from former executives
with respect to matters related to their employment with the Company.
</FONT></P>
<P align=center><B><FONT face=serif size=2>A</FONT></B><B><FONT face=serif size=1>GREEMENT</FONT></B><FONT face=serif size=2> </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In
consideration of the foregoing premises and the respective agreements of the
Company and Executive set forth below, the parties, intending to be legally
bound, agree as follows: </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>1.
</FONT><U><FONT face=serif size=2>E</FONT></U><U><FONT face=serif size=1>MPLOYMENT</FONT></U><FONT face=serif size=2>. Executive&#146;s employment
under this Agreement shall commence on the Effective Date and shall continue in
effect for three (3) years, unless earlier terminated in accordance with Section
5 of this Agreement (the &#147;Term&#148;). Following expiration of the Term, if Executive
then remains employed by the Company such continued employment shall be on such
terms and conditions as may be established from time to time by the
Company.</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>2. </FONT><U><FONT face=serif size=2>P</FONT></U><U><FONT face=serif size=1>OSITION AND </FONT></U><U><FONT face=serif size=2>D</FONT></U><U><FONT face=serif size=1>UTIES</FONT></U><FONT face=serif size=2>. During Executive&#146;s employment under this Agreement,
</FONT><FONT face=serif size=2>Executive will have the following position,
duties, and responsibilities: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) </FONT><U><FONT face=serif size=2>Position with the
Company</FONT></U><FONT face=serif size=2>. Executive will serve as Vice
President of the Company and President of Brookwood, and will perform such
duties and responsibilities of an executive nature or a similar nature as the
Company may reasonably assign to him from time to time. </FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) </FONT><U><FONT face=serif size=2>Performance of Duties
and Responsibilities</FONT></U><FONT face=serif size=2>. Executive will serve
the Company faithfully using his reasonable best efforts and will devote
Executive&#146;s full working time, attention, and efforts to the business of the
Company. Executive will follow applicable policies and procedures adopted by the
Company from time to time. Executive will not engage in other employment or
other material business activity, except as approved in writing by the Company.
Executive hereby represents and confirms that Executive is under no contractual
or legal commitments that would prevent him from fulfilling Executive&#146;s duties
and responsibilities as set forth in this Agreement. Notwithstanding the
foregoing, it shall not be a violation of this Section 2 for Executive to (i)
serve on civic or charitable boards or committees, (ii) deliver lectures or
fulfill speaking engagements (provided that such activities do not relate to the
business or operations of the Company, in which case any such activities by
Executive must be consistent with Company policies and practices with respect to
lectures and/or public communications), (iii) with the prior written consent of
the Company, which shall not be unreasonably withheld, serve on boards or
committees of for-profit entities that do not compete with the Company, or (iv)
manage personal investments, in each case so long as such activities do not
materially interfere with the performance of Executive&#146;s responsibilities and
duties hereunder and are not inconsistent with Executive&#146;s obligations under
this Agreement, any exhibits hereto, or any other written agreement that may be
entered into by the Company and Executive. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>3. </FONT><U><FONT face=serif size=2>C</FONT></U><U><FONT face=serif size=1>OMPENSATION</FONT></U><FONT face=serif size=2>. During Executive&#146;s employment under this Agreement,
</FONT><FONT face=serif size=2>Executive will be provided with the following
compensation and benefits: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Base Salary</FONT></U><FONT face=serif size=2>. The Company will pay to
Executive for services provided hereunder a base salary at an annualized rate of
$275,000.00, which base salary will be paid in accordance with the Company&#146;s
normal payroll policies and procedures, but in any event not less frequently
than monthly. The Company&#146;s board of directors or authorized committee of the
board (the &#147;Board&#148;) will review Executive&#146;s performance on an annual basis and
determine any adjustments to Executive&#146;s base salary in its sole discretion;
provided, however, that no pay adjustment shall occur before October 1,
2008.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Bonus</FONT></U><FONT face=serif size=2>. For fiscal year 2007, Executive
shall continue to participate in the Brookwood bonus program based on
performance through December 31, 2007. </FONT><FONT face=serif size=2>Thereafter, commencing January 1, 2008, Executive shall be entitled to
participate in the Company&#146;s Incentive Compensation Program, or such replacement
program as in effect from time to time for senior managers of the Company of
comparable position and status (any such program a &#147;Company Incentive Program&#148;),
based upon achievement of objectives established by the Company and/or the
Board. For fiscal year 2008, </FONT><FONT face=serif size=2>Executive&#146;s
participation in the Company&#146;s Incentive Compensation Program shall be pro-rated
based on his participation in the program during the period from January 1, 2008
through September 30, 2008. Executive must be employed by the Company on the
date of payment of any bonus award in order to be eligible for any such award.
</FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Initial Equity Grant</FONT></U><FONT face=serif size=2>. Within 90 days
after commencement of Executive&#146;s employment with the Company, the Company will
grant to Executive equity awards with an aggregate value, as determined by the
Board in accordance with Section 7.8(a) of the Purchase Agreement, equal to
$900,000, 70% in the form of restricted stock and 30% in the form of performance
shares under the Company&#146;s Performance Share Award Program. The awards shall be
pursuant to the Company&#146;s 2003 Equity Incentive Plan and definitive restricted
stock and/or performance share agreements to be entered into between the Company
and Executive.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Other Equity</FONT></U><FONT face=serif size=2>. Executive shall be
entitled to participate in the Company&#146;s Performance Share Award Program as in
effect from time to time for officers of the Company of comparable position and
status, upon such terms and conditions established by the Board (the &#147;PSA
Program&#148;).</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Employee Benefits</FONT></U><FONT face=serif size=2>. Executive will be
entitled to participate in all employee benefit plans and programs (including
without limitation vacation time off) generally available to executive employees
of the Company to the extent that Executive meets the eligibility requirements
for each individual plan or program. Executive&#146;s participation in any plan or
program will be subject to the provisions, rules, and regulations of, or
applicable to, the plan or program. The Company provides no assurance as to the
adoption or continuation of any particular employee benefit plan or program.
With respect to any employee benefit plans or programs of the Company that base
the availability, amount or duration of benefits on time of service, the Company
shall grant to Executive credit for the period of time he was employed by
Brookwood and SRI&nbsp;prior to the Effective Date. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f)</FONT><FONT face=sans-serif> </FONT><U><FONT face=serif size=2>Expenses</FONT></U><FONT face=serif size=2>. The Company will promptly
reimburse Executive for all reasonable and necessary out-of-pocket business,
travel, and entertainment expenses incurred by Executive in the performance of
Executive&#146;s duties and responsibilities to the Company, subject to the Company&#146;s
normal policies and procedures for expense verification and documentation.
</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>4. </FONT><U><FONT face=serif size=2>R</FONT></U><U><FONT face=serif size=1>ELATED </FONT></U><U><FONT face=serif size=2>A</FONT></U><U><FONT face=serif size=1>GREEMENTS</FONT></U><FONT face=serif size=2>. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) </FONT><U><FONT face=serif size=2>Confidential
Information/Restrictive Covenants</FONT></U><FONT face=serif size=2>. In
consideration for Executive&#146;s employment hereunder, the compensation and
benefits to be provided hereunder and otherwise in connection with Executive&#146;s
employment with the Company, Executive agrees to execute a Non-Competition,
Invention, and Non-Disclosure Agreement in the form attached as </FONT><U><FONT face=serif size=2>Exhibit A</FONT></U><FONT face=serif size=2> hereto.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) </FONT><U><FONT face=serif size=2>Change of
Control</FONT></U><FONT face=serif size=2>. In recognition of Executive&#146;s key
position with the Company, the uncertainty that can be created for executives in
the event of a change of control and the Company&#146;s desire to retain Executive&#146;s
full attention and commitment to the Company in the event of any potential
change of control of the Company, the Company and Executive agree to execute a
Change of Control Agreement in the form attached as </FONT><U><FONT face=serif size=2>Exhibit B</FONT></U><FONT face=serif size=2> hereto. </FONT></P>
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<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>5. </FONT><U><FONT face=serif size=2>T</FONT></U><U><FONT face=serif size=1>ERMINATION OF </FONT></U><U><FONT face=serif size=2>E</FONT></U><U><FONT face=serif size=1>MPLOYMENT</FONT></U><FONT face=serif size=2>.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) The Executive&#146;s employment with the Company under this
Agreement will terminate upon: </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i) expiration of the Term;
</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(ii) the Company providing written
notice to Executive of the termination of Executive&#146;s employment, effective as
of the date stated in such notice; </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iii) the Company&#146;s receipt of
Executive&#146;s written resignation from the Company, effective as of the date
indicated in such resignation or at such earlier date as the Company in its sole
discretion shall determine; </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iv) Executive&#146;s Disability; or
</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(v) Executive&#146;s death. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) The date upon which Executive&#146;s termination of employment
with the Company is effective is the &#147;Termination Date.&#148; </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>6. </FONT><U><FONT face=serif size=2>P</FONT></U><U><FONT face=serif size=1>AYMENTS UPON </FONT></U><U><FONT face=serif size=2>T</FONT></U><U><FONT face=serif size=1>ERMINATION OF
</FONT></U><U><FONT face=serif size=2>E</FONT></U><U><FONT face=serif size=1>MPLOYMENT</FONT></U><FONT face=serif size=2>. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) </FONT><U><FONT face=serif size=2>Termination Without
Cause or For Good Reason</FONT></U><FONT face=serif size=2>. If, prior to the
expiration of the Term, Executive&#146;s employment with the Company is terminated
(i) by the Company for any reason other than for Cause or (ii) by Executive for
Good Reason, then, in addition to such base salary, paid time off and other
vested benefits that have been earned but not paid to Executive as of the
Termination Date (collectively, the &#147;Earned Compensation&#148;), the Company will:
</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i) pay to Executive severance pay
in an amount equal to Executive&#146;s then-current annual base salary (but such
amount not to exceed two times the annual compensation limit in effect as of the
Termination Date pursuant to Section 401(a)(17) of the Internal Revenue Code),
payable in equal installments on the Company&#146;s regular payroll schedule over a
12-month period following the Termination Date;</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>and </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(ii) if Executive is eligible for
and elects continuation of group medical and/or dental insurance coverage with
the Company following the Termination Date in accordance with applicable laws
and plans, reimburse Executive for the premium costs of such continuation
coverage, at the same level of coverage that was in effect as of the Termination
Date, at the election of Executive for up to 18 consecutive months following the
Termination Date or, if earlier, until such continuation coverage is no longer
available to Executive under applicable laws and plans. </FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) </FONT><U><FONT face=serif size=2>Other
Termination</FONT></U><FONT face=serif size=2>. If prior to the expiration of
the Term Executive&#146;s employment with the Company is terminated by reason of:
</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i) Executive&#146;s resignation for any
reason other than Good Reason,</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(ii) termination of Executive&#146;s
employment by the Company for Cause, or </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iii) Executive&#146;s death or
Disability,</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2>then the
Company will pay to Executive, or Executive&#146;s beneficiary or estate, as the case
may be, the Earned Compensation. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(c) </FONT><U><FONT face=serif size=2>Cause</FONT></U><FONT face=serif size=2>. &#147;Cause&#148; hereunder
means:</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i) Executive&#146;s commission of any
act constituting a felony, or Executive&#146;s conviction or guilty or no contest
plea to any criminal misdemeanor or more serious act; </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(ii) any intentional or willful act
of fraud or dishonesty by Executive related to or connected with Executive&#146;s
employment by the Company or otherwise likely to cause material harm to the
Company or its reputation;</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iii) the willful or continued
failure, neglect, or refusal by Executive to perform Executive&#146;s employment
duties with the Company or to fulfill Executive&#146;s fiduciary responsibilities to
the Company, which failure, neglect, or refusal has not been cured by Executive
within 15 days after written notice thereof to Executive from the
Company;</FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iv) a material violation by
Executive of the Company&#146;s policies or codes of conduct; or </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(v) the willful and/or material
breach of this Agreement by Executive. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) <U><FONT face=serif>Disability</FONT></U>. &#147;Disability&#148;
hereunder means the inability of Executive to perform on a full-time basis the
duties and responsibilities of Executive&#146;s employment with the Company by reason
of Executive&#146;s illness or other physical or mental impairment or condition, if
such inability continues for an uninterrupted period of 120 days or more during
any 180-day period. A period of inability is &#147;uninterrupted&#148; unless and until
Executive returns to full-time work for a continuous period of at least 30 days.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e) <U>Good Reason</U>. Resignation for &#147;Good Reason&#148;
hereunder means that Executive has provided written notice to the Company within
90 days following the occurrence of any of the following events, which notice
describes the event giving rise to the resignation, and the Company has not
cured the event within 30 days after receiving such notice from Executive:
</FONT></P>
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<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(i) the assignment of Executive
without Executive&#146;s consent to a position with material responsibilities or
duties of a lesser status or degree than the position of Vice President of the
Company; </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(ii) the relocation of Executive&#146;s
principal office for Company business, without Executive&#146;s consent, to a
location more than fifty (50) miles outside the Executive&#146;s work location as of
the Effective Date; or </FONT></P>
<P style="PADDING-LEFT: 30pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iii) a material breach of this
Agreement by the Company. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) </FONT><U><FONT face=serif size=2>Other
Obligations</FONT></U><FONT face=serif size=2>. In the event of termination of
Executive&#146;s employment, the sole obligation of the Company under this Agreement
will be its obligation to make the payments called for by Sections 6(a) or 6(b)
hereof, as the case may be, and the Company will have no other obligation to
Executive or to Executive&#146;s beneficiary or estate. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(g) </FONT><U><FONT face=serif size=2>Conditions</FONT></U><FONT face=serif size=2>. Notwithstanding the
foregoing provisions of this Section 6, the Company will not be obligated to
make any payments to Executive under Section 6(a) hereof unless: (i) Executive
has signed a release of claims in favor of the Company and its affiliates and
related entities, and their directors, officers, insurers, employees and agents;
(ii) all applicable rescission periods provided by law for releases of claims
shall have expired and Executive shall have signed and not rescinded the release
of claims; and (iii) Executive is in strict compliance with the terms of this
Agreement as of the dates of such payments. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(h) </FONT><U><FONT face=serif size=2>Offset</FONT></U><FONT face=serif size=2>. In the event that Executive is eligible for any benefits
following termination of employment under the Change of Control Agreement
referenced in Section 4(b) above, or under any other agreement, plan, program or
applicable law relating to the provision of notice or payment of severance or
similar pay and benefits following termination of Executive&#146;s employment with
the Company, then the amounts payable by the Company under Section 10(a) of this
Agreement shall be reduced by all notice, pay and benefits to which Executive is
entitled under such other agreement, plan, program or law. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7. </FONT><U><FONT face=serif size=2>O</FONT></U><U><FONT face=serif size=1>THER </FONT></U><U><FONT face=serif size=2>P</FONT></U><U><FONT face=serif size=1>OST</FONT></U><U><FONT face=serif size=2>-T</FONT></U><U><FONT face=serif size=1>ERMINATION
</FONT></U><U><FONT face=serif size=2>O</FONT></U><U><FONT face=serif size=1>BLIGATIONS</FONT></U><FONT face=serif size=2>. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Immediately upon termination of Executive&#146;s employment
with the Company for any reason, Executive will resign all positions then held
as a director or officer of the Company and of affiliated entity of the Company.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Upon termination of Executive&#146;s employment with the
Company, Executive shall promptly deliver to the Company any and all Company
records and any and all Company property in Executive&#146;s possession or under
Executive&#146;s control, including without limitation manuals, books, blank forms,
documents, letters, memoranda, notes, notebooks, reports, printouts, computer
disks, computer tapes, source codes, data, tables or calculations and all copies
thereof, documents that in whole or in part contain any trade secrets or
confidential, proprietary or other secret information of the Company and all
copies thereof, and keys, access cards, access codes, passwords, credit cards,
personal computers, telephones, and other electronic equipment belonging to the
Company. </FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>(c) Following termination of Executive&#146;s employment with the
Company for any reason, Executive will, upon reasonable request of the Company
or its designee, cooperate with the Company in connection with the transition of
Executive&#146;s duties and responsibilities for the Company; consult with the
Company regarding business matters that Executive was directly and substantially
involved with while employed by the Company; and be reasonably available, with
or without subpoena, to be interviewed, review documents or things, give
depositions, testify, or engage in other reasonable activities in connection
with any litigation or investigation, with respect to matters that Executive
then has or may have knowledge of by virtue of Executive&#146;s employment by or
service to the Company or any related entity; provided, however, that (i) the
Company shall not unreasonably request such cooperation of Executive, (ii) the
Company shall reimburse Executive or pay directly any reasonable expenses
actually incurred in connection with such cooperation and assistance by
Executive, and (iii) Executive shall not be required to assist or cooperate with
the Company to the extent such assistance or cooperation would prevent Executive
from performing, or would materially interfere with Executive&#146;s performance of,
the duties or responsibilities of his then-current occupation. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp; </FONT>(d) Executive will not at any time
disparage, defame, or besmirch the reputation, character, image, products, or
services of the Company or any of its affiliates, or the reputation or character
of any of its current or former directors, officers, employees, or agents;
provided that nothing in this Section 11(d) is intended to prevent or interfere
with Executive making any required or reasonable communications with, or
providing information to, any governmental, law enforcement, or stock exchange
agency or representative, or in connection with any governmental investigation,
court, administrative or arbitration proceeding. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>(e) The Company will not at any time disparage, defame, or
besmirch the reputation, character, or image of Executive; provided that nothing
in this Section 11(e) is intended to prevent or interfere with the Company
making any required or reasonable communications with, or providing information
to, any governmental, law enforcement, or stock exchange agency or
representative, or in connection with any governmental investigation, court,
administrative or arbitration proceeding. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>12. </FONT><U><FONT face=serif size=2>M</FONT></U><U><FONT face=serif size=1>ISCELLANEOUS</FONT></U><FONT face=serif size=2>. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp; </FONT>(a) <U>Tax Withholding</U>. The Company
may withhold from any amounts payable under this Agreement such federal, state,
and local income and employment taxes as the Company shall reasonably determine
are required to be withheld pursuant to any applicable law or regulation.
</FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b) </FONT><U><FONT face=serif size=2>Section 409A</FONT></U><FONT face=serif size=2>. This Agreement is
intended to satisfy the requirements of Section 409A(a)(2), (3) and (4) of the
Internal Revenue Code of 1986, as amended (the &#147;Code&#148;), including current and
future guidance and regulations interpreting such provisions, and should be
interpreted accordingly.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) </FONT><U><FONT face=serif size=2>Governing
Law</FONT></U><FONT face=serif size=2>. All matters relating to the
interpretation, construction, application, validity, and enforcement of this
Agreement will be governed by the laws of the State of Minnesota</FONT><B><FONT face=serif size=2>, </FONT></B><FONT face=serif size=2>without giving effect to
any choice or conflict of law provision or rule, whether of the State of
Minnesota</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>or any other jurisdiction, that would cause the application of laws of
any jurisdiction other than the State of Minnesota. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) </FONT><U><FONT face=serif size=2>Jurisdiction and
Venue</FONT></U><FONT face=serif size=2>. The parties consent to jurisdiction of
the courts of the State of Minnesota</FONT><B><FONT face=serif size=2>
</FONT></B><FONT face=serif size=2>and/or the United States District Court,
District of Minnesota, for the purpose of resolving all issues of law, equity,
or fact arising out of or in connection with this Agreement. Any action
involving claims of a breach of this Agreement must be brought in such courts.
Each party consents to personal jurisdiction over such party in the state and/or
federal courts of Minnesota</FONT><B><FONT face=serif size=2> </FONT></B><FONT face=serif size=2>and hereby waives any defense of lack of personal
jurisdiction.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(e) </FONT><U><FONT face=serif size=2>Waiver of Jury Trial</FONT></U><FONT face=serif size=2>. To the extent
permitted by law, the parties waive any and all rights to a jury trial with
respect to any dispute arising out of or relating to this Agreement. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(f) </FONT><U><FONT face=serif size=2>Entire Agreement</FONT></U><FONT face=serif size=2>. This Agreement
contains the entire agreement of the parties relating to Executive&#146;s employment
with the Company and supersedes all prior agreements and understandings with
respect to such subject matter, and the parties hereto have made no agreements,
representations, or warranties relating to the subject matter of this Agreement
that are not set forth herein.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(g) </FONT><U><FONT face=serif size=2>No Violation of Other Agreements</FONT></U><FONT face=serif size=2>.
Executive hereby represents and agrees that neither (i) Executive&#146;s entering
into this Agreement nor (ii) Executive&#146;s carrying out the provisions of this
Agreement, will violate any other agreement (oral, written, or other) to which
Executive is a party or by which Executive is bound.</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(h) </FONT><U><FONT face=serif size=2>Assignment</FONT></U><FONT face=serif size=2>. This Agreement shall not
be assignable, in whole or in part, by either party without the written consent
of the other party, except that the Company may, without the consent of
Executive, assign its rights and obligations under this Agreement to the Buyer
or any of its affiliated entities. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(i) </FONT><U><FONT face=serif size=2>Amendments</FONT></U><FONT face=serif size=2>. No amendment or
modification of this Agreement will be effective unless made in writing and
signed by the parties hereto. </FONT></P>
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<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(j) </FONT><U><FONT face=serif size=2>Counterparts</FONT></U><FONT face=serif size=2>. This Agreement may be
executed by facsimile signature and in any number of counterparts, and such
counterparts executed and delivered, each as an original, will constitute but
one and the same instrument. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(k) </FONT><U><FONT face=serif size=2>Severability</FONT></U><FONT face=serif size=2>. To the extent that any
portion of any provision of this Agreement is held invalid or unenforceable, it
will be considered deleted herefrom and the remainder of such provision and of
this Agreement will be unaffected and will continue in full force and effect.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(l) </FONT><U><FONT face=serif size=2>Survival</FONT></U><FONT face=serif size=2>. The provisions of this Agreement that by their terms or
implication extend beyond the Term shall survive the termination or expiration
of the Term and termination of Executive&#146;s employment with the Company for any
reason. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(m) </FONT><U><FONT face=serif size=2>Captions and
Headings</FONT></U><FONT face=serif size=2>. The captions and paragraph headings
used in this Agreement are for convenience of reference only and will not affect
the construction or interpretation of this Agreement or any of the provisions
hereof. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(n) </FONT><U><FONT face=serif size=2>Notices</FONT></U><FONT face=serif size=2>. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given when
(i) delivered personally; (ii) sent by facsimile or other similar electronic
device with confirmation; (iii) delivered by reliable overnight courier; or (iv)
three business days after being sent by registered or certified mail, postage
prepaid, and in the case of (iii) and (iv) addressed as follows: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=left><FONT face=serif size=2>[Insert contact
information] </FONT></P>
<P align=left>&nbsp;</P>
<P align=center><FONT face=serif size=2>[Signature page follows] </FONT></P>
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<PAGE>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>The parties have
executed this Agreement effective as of the date set forth in the first
paragraph. </FONT></P>
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    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>SURMODICS, INC.</FONT> </TD></TR>
  <TR>
    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp; </TD></TR>
  <TR>
    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp;</TD></TR>
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    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="2%"><FONT size=2>By:&nbsp;</FONT><FONT size=3> </FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="48%"><FONT face=serif size=2>/s/ Bruce J Barclay</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="48%"><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bruce J Barclay</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="48%"><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Its President and Chief Executive
      Officer</FONT>&nbsp; </TD></TR>
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    <TD width="50%"></TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD></TR>
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    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp;</TD></TR>
  <TR>
    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp;</TD></TR>
  <TR>
    <TD width="50%"></TD>
    <TD width="2%"></TD>
    <TD width="48%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="48%"><FONT face=serif size=2>/s/ Arthur J. Tipton,
      Ph.D</FONT>&nbsp; </TD></TR>
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    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="2%"></TD>
    <TD noWrap align=left width="48%"><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Arthur J. Tipton, Ph.D.</FONT>&nbsp;
    </TD></TR></TABLE><BR>
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    <TD style="BORDER-TOP: #000000 1pt solid" width="100%">
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<P align=center><B><FONT face=serif size=4>NON-COMPETITION, INVENTION,
NON-DISCLOSURE AGREEMENT </FONT></B></P>
<P align=left><FONT face=serif size=2>THIS AGREEMENT is &nbsp;made between
SurModics, Inc., a Minnesota corporation (hereinafter &#147;SurModics&#148;) and
</FONT><U><FONT face=serif size=2>Arthur J. Tipton, Ph.D</FONT></U><FONT face=serif size=2>. (hereinafter &#147;Employee&#148;) and shall become binding upon
Employee&#146;s signing. </FONT></P>
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  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>I.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>DEFINITIONS</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;SurModics&#148; means
      SurModics, Inc., and any existing or future SurModics subsidiaries or
      affiliates, owned or controlled, directly or indirectly, by SurModics, and
      any successor in interest to SurModics.</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>B.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;Confidential
      Information&#148; means information not generally known about SurModics&#146;
      processes and products, including but not limited to information relating
      to research, development, manufacturing, purchasing, accounting,
      engineering, marketing, merchandising, licensing and selling. All
      information disclosed to Employee or to which Employee obtains access or
      creates while employed by SurModics, which Employee has a basis to believe
      to be Confidential Information, or which is treated by SurModics as
      Confidential Information, shall be presumed to be Confidential
      Information.</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>C.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;Inventions&#148; means
      discoveries, developments, improvements and ideas (whether or not shown or
      described in writing or reduced to practice and whether patentable or
      not):</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD></TD>
    <TD></TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>relating to SurModics&#146;
      business, including but not limited to manufacturing, research,
      development or other investigations; or</FONT></I></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>2.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>relating to ideas, work, or
      investigations conceived or carried on by Employee, solely or jointly with
      others, in connection with or because of Employee&#146;s employment by
      SurModics, or about which Employee acquires Confidential
      Information.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>D.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;Copyrightable Works&#148;
      means all subject matter which is copyrightable and created by Employee,
      alone or jointly with another, within the scope of Employee&#146;s employment
      with SurModics or using SurModics&#146; time, equipment, or Confidential
      Information.</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>E.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;Competitor&#148; means any
      person or entity that researches, develops, produces, markets, sells,
      licenses, or leases products or processes that are the same as or similar
      to, or compete with, products or processes that Employee worked on or was
      involved with at SurModics, or about which Employee learned Confidential
      Information.</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>F.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&#147;Competing Product&#148;
      means any product or process by a Competitor that is the same or similar
      to, or competes with, any product or process that Employee worked on or
      was involved with at SurModics, or about which Employee learned
      Confidential Information.</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>II.</FONT></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>EMPLOYEE IS EMPLOYED OR
      DESIRES TO BE EMPLOYED BY SURMODICS IN A CAPACITY IN WHICH EMPLOYEE MAY
      RECEIVE OR CONTRIBUTE TO CONFIDENTIAL INFORMATION. EMPLOYEE MAY BECOME
      FAMILIAR WITH UNIQUE BUSINESS METHODS AND PROCEDURES USED BY SURMODICS AND
      MAY BECOME FAMILIAR WITH SURMODICS&#146; CUSTOMERS. IN CONSIDERATION OF SUCH
      EMPLOYMENT OR CONTINUED EMPLOYMENT AND IN CONSIDERATION OF BEING GIVEN
      ACCESS TO CONFIDENTIAL INFORMATION IT IS HEREBY AGREED:</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>A.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Except as specifically
      disclosed on the form entitled &#147;Conflict of Interest Disclosure
      Statement&#148;, Employee warrants that no conflicts of interest exist which
      prevent the Employee from entering into this Agreement, including but not
      limited to:</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>1.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Contractual arrangements that
      restrict Employee from performing any of his or her current or anticipated
      duties at SurModics, including but not limited to confidentiality,
      non-disclosure, or noncompetition agreements and/or employee agreements
      with current and former employers or
contractors.</FONT></I></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="50%"><IMG src="exhibit10-27x11x1.jpg" border=0></TD>
    <TD align=right width="50%">
      <P align=right><FONT face=serif size=1></FONT><B><FONT face=serif><U>Exhibit A<BR></U></FONT></B><FONT face=serif size=1>Page 1
      </FONT></P></TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>NON-COMPETITION, INVENTION,
NON-DISCLOSURE AGREEMENT </FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Activities for, or duties to,
      any third party for which Employee will receive monetary payment or
      compensation.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>3.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Outside activities and
      involvements of employee including ownership in competing or related
      businesses or in suppliers of products or services to
    SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>4.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>The interest of any immediate
      family member of Employee in any entity that directly competes with any
      existing or planned activity of SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>5.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Any other partnerships,
      inventions or development of Employee which may possibly interfere with
      the Employee&#146;s current or anticipated duties at
SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees to
      refrain from using or disclosing any information to SurModics which
      Employee knows, or has reason to know, infringes any trade secret or other
      proprietary right of any third party.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; C.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>With respect to any
      Invention and Copyrightable Works made, authored, conceived, or reduced to
      practice by Employee, either solely or jointly with others, 1) during
      Employee&#146;s employment by SurModics, whether or not during normal working
      hours or whether or not at SurModics&#146; premises, or 2) within one (1) year
      after termination of such employment, Employee agrees:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>1.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>To keep accurate, complete and
      timely records (in accordance with SurModics&#146; policies) for such
      Inventions and Copyrightable Works, which records shall be SurModics&#146;
      property and be retained on SurModics&#146; premises.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>2.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>To promptly and fully disclose
      and describe such Inventions in writing to SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>3.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>To assign (and Employee hereby
      does assign) and to hold in trust for the sole right and benefit of
      SurModics all of Employee&#146;s right, title and interest in and to such
      Inventions and to any applications for letters patent pertaining to such
      Inventions in all countries and to any letters patent granted upon such
      Inventions in all countries.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>4.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Upon SurModics&#146; request, to
      acknowledge and deliver promptly to SurModics (without charge to
      SurModics) such written instruments, and to do such other acts as may be
      necessary or appropriate in the opinion of SurModics, to permit SurModics
      to obtain, maintain and enforce its rights in such Inventions and
      Copyrightable Works and to vest the entire right and title thereto in
      SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; D.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Notwithstanding any
      other provision of this Agreement, it is further agreed, and Employee is
      hereby notified that the above agreement to and assignment of Inventions
      to SurModics does not apply to any discoveries, developments, improvements
      and ideas for which no equipment, supplies, facility or trade secrets of
      SurModics was used and which was developed entirely on Employee&#146;s own
      time, and</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>1.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Which does not relate: a)
      directly to the business of SurModics, or b) to SurModics&#146; actual or
      demonstrably anticipated research or development; or</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>2.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>Which does not result from any
      work performed by Employee for SurModics.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; E.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees to
      maintain in strict confidence and make no use of any Confidential
      Information for the benefit of any party other than SurModics.
      Furthermore, except as necessary for Employee to perform his or her duties
      under this Agreement, Employee shall not, without written authorization of
      SurModics or its legal counsel, directly or indirectly divulge
      Confidential Information to or for any third party. SurModics and Employee
      agree that any Confidential Information received by the Employee shall not
      be governed by this Agreement if the Employee can demonstrate by clear and
      convincing documentary evidence that such Confidential
    Information:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>1.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>was lawfully in the possession
      of the Employee prior to lawfully obtaining it from SurModics;
      or</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><I><FONT face=serif size=2>2.</FONT></I></TD>
    <TD width="100%"><I><FONT face=serif size=2>is or becomes part of the
      public knowledge or literature through no act or failure to act of the
      Employee; or</FONT></I></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=bottom width="50%"><IMG src="exhibit10-27x11x1.jpg" border=0></TD>
    <TD vAlign=bottom align=right width="50%">
      <P align=right><FONT face=serif size=1>Page 2
</FONT></P></TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>NON-COMPETITION, INVENTION,
NON-DISCLOSURE AGREEMENT </FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD>&nbsp;</TD>
    <TD>
      <P><I><FONT face=serif size=2>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></I></P></TD>
    <TD width="100%"><I><FONT face=serif size=2>is or becomes available to the
      Employee from an unrestricted third party without breach of a confidential
      relationship.</FONT></I></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Upon termination of
      Employee&#146;s employment with SurModics, Employee agrees that all SurModics&#146;
      property, including but not limited to all records containing Confidential
      Information and copies thereof, which are in Employee&#146;s possession,
      whether prepared by Employee or others, will be left with or delivered to
      Employee&#146;s supervisor.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Except as specifically
      disclosed on the form entitled &#147;Inventions and Developments Prior to
      Employment with SurModics&#148;, reviewed and signed by both Employee and
      SurModics, Employee will not assert any rights under any Inventions as
      having been made or acquired by Employee prior to the employment of
      Employee by SurModics.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;H.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees that
      during Employee&#146;s employment and for a period of two (2) years immediately
      following termination of employment with SurModics, Employee will not
      render services anywhere in the United States, directly or indirectly, to
      or for any Competitor. Provided, however, that Employee may render
      services for a Competitor during the two-year period following termination
      of Employee&#146;s employment with SurModics if: (1) Employee&#146;s services do not
      include any responsibilities for, or in connection with, a Competing
      Product at any time during such two-year period, (2) such services will
      not at any time involve the use or disclosure, or likely use or
      disclosure, of Confidential Information, and (3) SurModics receives
      written assurances satisfactory to it from the Competitor and Employee
      that Employee&#146;s services for the Competitor will not violate this
      Agreement and that Competitor has received a copy of this Agreement.
      &#147;Render services&#148; as used in this paragraph shall include directly or
      indirectly owning, managing, operating, controlling, being employed by,
      providing services to, consulting for, or otherwise participating with,
      any Competitor.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees that,
      during Employee&#146;s employment and for a period of two (2) years immediately
      following termination of Employee, Employee shall not, directly or
      indirectly, sell, or solicit for the purpose of selling, any Competing
      Product to any SurModics&#146; customer or potential customer (1) with whom
      Employee (or his/her supervisees) had contact on SurModics&#146; behalf within
      the last two (2) years of employment or (2) about whom Employee received
      or contributed Confidential Information during Employee&#146;s employment with
      SurModics. For purposes of this paragraph &#147;sell&#148; or &#147;selling&#148; shall
      include selling, leasing, marketing, licensing, or otherwise providing
      products or services.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;J.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees that
      during Employee&#146;s employment and for a period of two (2) years immediately
      following termination of employment with SurModics, Employee will not hire
      or solicit for the purpose of hiring or inducing to leave SurModics, any
      SurModics employee. For purposes of this paragraph, &#147;SurModics employee&#148;
      shall include any current SurModics employee and any person who was
      employed by SurModics at any time during the last six (6) months of
      Employee&#146;s employment.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;K.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee agrees that
      the restrictions and obligations contained in this Agreement shall survive
      termination of Employee&#146;s employment with SurModics and shall apply to
      Employee regardless of the reason for termination of Employee&#146;s
      employment, whether voluntary or involuntary. Employee agrees Employee&#146;s
      employment with SurModics is at will and that nothing in this Agreement
      alters Employee&#146;s at-will employment.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;L.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Employee and SurModics
      acknowledge and agree that SurModics informed Employee, as part of the
      offer of employment and prior to Employee&#146;s accepting employment with
      SurModics, that noncompetition, invention and confidentiality provisions
      would be required as part of the terms and conditions of Employee&#146;s
      employment. Employee and SurModics further acknowledge and agree that the
      geographic and duration restrictions set forth in the above noncompetition
      provisions have been carefully considered and negotiated between Employee
      and SurModics. Employee and SurModics agree that the restrictions
      contained in this Agreement are reasonable and will not unduly restrict
      Employee in securing other employment in the event of Employee&#146;s
      termination.</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;M.</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>SurModics&#146; action in
      not enforcing a breach of any part of this Agreement shall not constitute
      a waiver or prevent SurModics from enforcing the Agreement as to such
      breach or any other breach of this
Agreement.</FONT></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="50%"><IMG src="exhibit10-27x11x1.jpg" border=0></TD>
    <TD vAlign=bottom align=right width="50%">
      <P align=right><FONT face=serif size=1>Page 3
</FONT></P></TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>NON-COMPETITION, INVENTION,
NON-DISCLOSURE AGREEMENT </FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;N.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Employee expressly acknowledges
      and agrees that any violation or threatened violation of any term of this
      Agreement shall entitle SurModics to issuance of a temporary restraining
      order and/or other injunction against Employee (in addition to any other
      legal or equitable remedies available to SurModics) and to collect from
      Employee SurModics&#146; reasonable attorney&#146;s fees incurred in bringing such
      legal or equitable action or otherwise enforcing the terms and conditions
      of the Agreement.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;O.</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>If any term of this Agreement is
      deemed unenforceable, void, voidable or illegal, SurModics and Employee
      agree that a court of competent jurisdiction shall modify such term to
      make it enforceable to the maximum extent possible and thereafter enforce
      such term. If such term cannot be so modified, such term shall be deemed
      severable from all other terms of this Agreement and all other such terms
      shall otherwise continue in full force and effect.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;P.</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>The terms of the Agreement shall
      bind and inure to the benefits of SurModics and its successors and
      assigns.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q.</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>This Agreement incorporates the
      entire understanding between the parties as to its subject matter and may
      only be cancelled, modified, or otherwise changed by written agreement
      signed by SurModics&#146; authorized officer.</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;R.</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>This Agreement shall be construed
      and enforced in accordance with the laws of the State of
    Minnesota.</FONT></TD></TR></TABLE>
<P align=left><FONT face=serif size=2><BR>IN WITNESS WHEREOF, SurModics and
Employee have caused this Agreement to be executed in the manner appropriate for
each. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="2%"><FONT face=serif size=2>By:&nbsp;</FONT>
    </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="56%" colSpan=2><FONT face=serif size=2>/s/ Arthur J. Tipton, Ph.D</FONT>&nbsp;
    </TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="40%"><FONT size=2>31 July 2007</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="56%" colSpan=2><I><FONT face=serif size=2>Employee Signature</FONT></I>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=center width="40%"><I><FONT face=serif size=2>Date</FONT></I> </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="6%" colSpan=2><FONT face=serif size=2>Printed
      Name:&nbsp;<FONT size=3> </FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="52%"><FONT size=2>Arthur J. Tipton, Ph.D.</FONT> </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="40%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="58%" colSpan=3><B><FONT face=serif size=2>SurModics, Inc.</FONT></B>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="40%">&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="2%"><FONT face=serif size=2>By:&nbsp;</FONT>
    </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="56%" colSpan=2><FONT face=serif size=2>/s/ Bruce J Barclay</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="40%"><FONT size=2>July 31, 2007</FONT> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="56%" colSpan=2><I><FONT face=serif size=2>Bruce J Barlcay</FONT></I>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=center width="40%"><I><FONT face=serif size=2>Date</FONT></I> </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="2%">&nbsp; </TD>
    <TD noWrap align=left width="56%" colSpan=2><I><FONT face=serif size=2>President and Chief Executive Officer</FONT></I>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="40%">&nbsp; </TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="50%"><IMG src="exhibit10-27x11x1.jpg" border=0></TD>
    <TD vAlign=bottom align=right width="50%">
      <P align=right><FONT face=serif size=1>Page&nbsp;4
  </FONT></P></TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif size=2>CHANGE OF CONTROL
AGREEMENT</FONT></B><FONT face=serif size=2> </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="20%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="28%"><FONT face=serif size=2>Parties:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>
    </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>SurModics,
      Inc.</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>(&#147;Company&#148;)</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>9924 West 74th
      Street</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>Eden Prairie, MN
      55344-3523</FONT> </TD></TR>
  <TR>
    <TD width="99%" colSpan=2>&nbsp;&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="71%"><FONT face=serif size=2>Arthur J. Tipton, Ph.D.</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%">&nbsp; </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>(&#147;Executive&#148;)</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="28%"></TD>
    <TD noWrap align=left width="71%">&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="28%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="71%"><FONT size=2>[address]</FONT> </TD></TR>
  <TR>
    <TD noWrap align=left width="28%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="71%">&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=2>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=2>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="28%"><FONT face=serif size=2>Date:</FONT> </TD>
    <TD noWrap align=left width="71%"><FONT face=serif size=2>______________,
      2007</FONT>&nbsp; </TD></TR></TABLE><BR>
<P align=left><FONT face=serif size=2>RECITALS: </FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>1. Executive
currently serves as Vice President of the Company and as President of Brookwood
Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company, and Executive
has extensive knowledge and experience relating to the Company&#146;s business.
</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>2. The parties recognize that a &#147;Change of Control&#148; may materially change
or diminish Executive&#146;s responsibilities and substantially frustrate Executive&#146;s
commitment to the Company. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>3. The parties further recognize that it is in the best interests of the
Company and its stockholders to provide certain benefits payable upon a &#147;Change
of Control Termination&#148; to encourage Executive to continue in his position in
the event of a Change of Control, although no such Change of Control is now
contemplated or foreseen. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>4. The parties further desire to provide certain benefits payable upon a
termination of Executive&#146;s employment following a Change of Control. </FONT></P>
<P align=left><FONT face=serif size=2>AGREEMENTS: </FONT></P>
<P align=left><B><FONT face=serif size=2></FONT></B><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp; </FONT>1.</FONT><B><FONT face=serif size=2> Term of Agreement</FONT></B><FONT face=serif size=2>. Except as
otherwise provided herein, this Agreement shall commence on the date executed by
the parties and shall continue in effect until the third anniversary of the date
set forth above; provided, however, that if a Change of Control of the Company
shall occur during the term of this Agreement, this Agreement shall continue in
effect for a period of twelve (12) months</FONT><B><FONT face=serif size=2>
</FONT></B><FONT face=serif size=2>beyond the date of such Change of Control.
If, prior to the earlier of the third anniversary of this Agreement or a Change
of Control, Executive&#146;s employment with the Company terminates for any reason or
no reason, or if Executive no longer serves as an executive officer of the
Company, this Agreement shall immediately terminate, and Executive shall not be
entitled to any of the compensation and benefits described in this Agreement.
Any rights and obligations accruing before the termination or expiration of this
Agreement shall survive to the extent necessary to enforce such rights and
obligations. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>2. </FONT><FONT face=serif size=2><B>&#147;Change of Control.&#148;</B> For
purposes of this Agreement, &#147;Change of Control&#148; shall mean any one or more of
the following events occurring after the date of this Agreement: </FONT></P>
<P align=right><B><U><FONT face=serif size=2>EXHIBIT B</FONT></U></B></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=2> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The purchase or other
      acquisition by any one person, or more than one person acting as a group,
      of stock of the Company that, together with stock held by such person or
      group, constitutes more than 50% of the total combined value or total
      combined voting power of all classes of stock issued by the Company;
      provided, however, that if any one person or more than one person acting
      as a group is considered to own more than 50% of the total combined value
      or total combined voting power of such stock, the acquisition of
      additional stock by the same person or persons shall not be considered a
      Change of Control;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>A merger or
      consolidation to which the Company is a party if the individuals and
      entities who were shareholders of the Company immediately prior to the
      effective date of such merger or consolidation have, immediately following
      the effective date of such merger or consolidation, beneficial ownership
      (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of
      less than fifty percent (50%) of the total combined voting power of all
      classes of securities issued by the surviving entity for the election of
      directors of the surviving corporation;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Any one person, or more
      than one person acting as a group, acquires or has acquired during the
      twelve (12) month period ending on the date of the most recent acquisition
      by such person or persons, direct or indirect beneficial ownership (as
      defined in Rule 13d-3 under the Securities Exchange Act of 1934) of stock
      of the Company constituting thirty-five percent (35%) or more of the total
      combined voting power of all classes of stock issued by the
    Company;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The purchase or other
      acquisition by any one person, or more than one person acting as a group,
      of substantially all of the total gross value of the assets of the Company
      during the twelve-month period ending on the date of the most recent
      purchase or other acquisition by such person or persons. For purposes of
      this Section 2(d), &#147;gross value&#148; means the value of the assets of the
      Company or the value of the assets being disposed of, as the case may be,
      determined without regard to any liabilities associated with such
      assets;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>A change in the
      composition of the Board of the Company at any time during any consecutive
      twelve (12) month period such that the &#147;Continuity Directors&#148; cease for
      any reason to constitute at least a fifty percent (50%) majority of the
      Board. For purposes of this event, &#147;Continuity Directors&#148; means those
      members of the Board who either:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>were directors at the beginning
      of such consecutive twelve (12) month period; or</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(2)</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>were elected by, or on the
      nomination or recommendation of, at least a two-thirds (2/3) majority of
      the then-existing Board of Directors.</FONT></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="2%"><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="98%">
      <P align=left><FONT face=serif size=2>In all cases, the determination of
      whether a Change of Control has occurred shall be made in accordance with
      Internal Revenue Code of 1986, as amended (the &#147;Code&#148;), Section 409A and
      the regulations, notices and other guidance of general applicability
      issued thereunder.</FONT></P></TD></TR></TABLE>
<P align=right><FONT face=serif size=1>Page 2 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>3.
</FONT><B><FONT face=serif size=2>&#147;Change of Control Termination.&#148;
</FONT></B><FONT face=serif size=2>For purposes of this Agreement, &#147;Change of
Control Termination&#148; shall mean any of the following events occurring upon or
within twelve (12) months after a Change of Control: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>The termination of
      Executive&#146;s employment by the Company for any reason, with or without
      cause, except for termination resulting from conduct by Executive
      constituting (i) a felony involving moral turpitude under either federal
      law or the law of the state of the Company&#146;s incorporation, or (ii)
      Executive&#146;s willful failure to fulfill his employment duties with the
      Company; provided, however, that for purposes of this clause (ii), an act
      or failure to act by Executive shall not be &#147;willful&#148; unless it is done,
      or omitted to be done, in bad faith and without any reasonable belief that
      Executive&#146;s action or omission was in the best interests of the Company;
      or</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)</FONT></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>The termination of
      employment with the Company by Executive for &#147;Good Reason.&#148; Such
      termination shall be accomplished by, and effective upon, Executive giving
      written notice to the Company of his decision to terminate. &#147;Good Reason&#148;
      shall mean a good faith determination by Executive, in Executive&#146;s sole
      and absolute judgment, that any one or more of the following events has
      occurred, at any time during the term of this Agreement or after a Change
      of Control; provided, however, that such event shall not constitute Good
      Reason if Executive has expressly consented to such event in writing or if
      Executive fails to provide written notice of his decision to terminate
      within ninety (90) days of the occurrence of such event:</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>A change in Executive&#146;s
      reporting responsibilities, titles or offices, or any removal of Executive
      from or any failure to re-elect Executive to any of such positions, which
      has the effect of diminishing Executive&#146;s responsibility or
      authority;</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(2)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>A reduction by the
      Company in Executive&#146;s base salary (as increased from time to
    time);</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(3)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>A requirement imposed
      by the Company on Executive that results in Executive being based at a
      location that is outside of a twenty-five (25) radius mile of Executive&#146;s
      prior job location;</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(4)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Without the adoption of
      a replacement plan, program or arrangement that provides benefits to
      Executive that are equal to or greater than those benefits that are
      discontinued or adversely affected:</FONT></TD></TR>
  <TR>
    <TD colSpan=4>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(A)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>The failure by the Company to
      continue in effect, within its maximum stated term, any pension, bonus,
      incentive, stock ownership, stock purchase, stock option, life insurance,
      health, accident, disability, or any other employee compensation or
      benefit plan, program or arrangement, in which Executive is or has been
      participating; or</FONT></TD></TR></TABLE>
<P align=right><FONT face=serif size=1>Page 3 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(B)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>The taking of any action by the
      Company that would adversely affect Executive&#146;s participation or
      materially reduce Executive&#146;s benefits under any of such plans, programs
      or arrangements;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(5)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Any action by the
      Company that would materially adversely affect the physical conditions in
      or under which Executive performs his employment duties; or</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(6)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Any material breach by
      the Company of any employment agreement between Executive and the Company
      or its subsidiary.</FONT></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="2%"><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="98%">
      <P align=left><FONT face=serif size=2>Termination for &#147;Good Reason&#148; shall
      not include Executive&#146;s death or a termination for any reason other than
      one of the events specified in clauses (1) through (6)
  above.</FONT></P></TD></TR></TABLE>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>4.
</FONT><B><FONT face=serif size=2>Compensation and Benefits</FONT></B><FONT face=serif size=2>. Subject to the limitations contained in this Agreement, upon
a Change of Control Termination, Executive shall be entitled to all of the
following compensation and benefits: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>Within five (5)
      business days after a Change of Control Termination, the Company shall pay
      to Executive:</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>All salary and other compensation
      earned by Executive through the date of the Change of Control Termination
      at the rate in effect immediately prior to such Termination;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(2)</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>All other amounts to which
      Executive may be entitled to receive under any compensation plan
      maintained by the Company, subject to any distribution requirements
      contained in such compensation plans; and</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD>&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>(3)</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>A severance payment equal to one
      (1) times the average annual cash compensation paid to Executive by the
      Company (or any predecessor entity or related entity) and includible in
      Executive&#146;s gross income for federal income tax purposes during the
      Executive&#146;s </FONT><B><FONT face=serif size=2>three </FONT></B><FONT face=serif size=2>most recent taxable years in effect immediately prior to
      such Termination. For purposes of this paragraph, &#147;annual cash
      compensation&#148; shall mean the Executive&#146;s annual base salary and cash
      bonuses. Further, for purposes of this paragraph, &#147;predecessor entity&#148; and
      &#147;related entity&#148; shall have the meaning set forth in Section 280G of the
      Internal Revenue Code of 1986, as amended, and the regulations issued
      thereunder;</FONT></TD></TR>
  <TR>
    <TD colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)</FONT></TD>
    <TD width="100%" colSpan=2><FONT face=serif size=2>The Company shall
      continue to provide Executive with coverage under life, health, dental or
      disability benefit plans at a level comparable to the benefits which
      Executive was receiving or entitled to receive immediately prior to the
      Termination or, if greater, at a level comparable to the benefits which
      Executive was receiving immediately prior to the event which constituted
      Good Reason. Such coverage shall continue for eighteen (18) months
      following such Change of Control Termination or, if earlier, until
      Executive is eligible to be covered for such benefits through his
      employment with another employer. The Company may, in its sole discretion,
      provide such coverage through the purchase of individual insurance
      contracts for Executive;</FONT></TD></TR></TABLE>
<P align=right><FONT face=serif size=1>Page 4 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>All outstanding Options or Stock
      Appreciation Rights shall become immediately exercisable, and the risks of
      forfeiture on any outstanding Restricted Stock Awards or Restricted Stock
      Unit Awards shall immediately lapse. For purposes of this Agreement,
      &#147;Option,&#148; &#147;Stock Appreciation Rights,&#148; &#147;Restricted Stock Awards&#148; and
      &#147;Restricted Stock Unit Awards&#148; shall have the meaning set forth in the
      SurModics, Inc. 2003 Equity Incentive Plan, or any successor plan;
      and</FONT></TD></TR>
  <TR>
    <TD colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>A percentage of the shares or
      units subject to all outstanding Performance Awards shall become
      immediately vested and payable. Such percentage shall be equal to
      Executive&#146;s average percentage achievement under all Performance Awards
      granted to Executive and for which the Performance Period ended in each of
      the three calendar years immediately prior to such Change of Control
      Termination; provided, however, that if Executive was not granted
      Performance Awards with Performance Periods ending during such entire
      three-year period, the percentage that shall become immediately vested and
      payable shall be equal to Executive&#146;s average percentage achievement under
      all Performance Awards granted to Executive and for which the Performance
      Period ended in each of the two calendar years immediately prior to such
      Change of Control Termination; and provided, further, that if Executive
      was not granted Performance Awards with Performance Periods ending during
      such entire two-year period, the percentage that shall become immediately
      vested and payable shall equal fifty percent (50%). For purposes of this
      Agreement, &#147;Performance Awards&#148; and &#147;Performance Period&#148; shall have the
      meaning set forth in the SurModics, Inc. 2003 Equity Incentive Plan, or
      any successor plan.</FONT></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD width="2%"><FONT size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="98%">
      <P align=left><FONT face=serif size=2>Notwithstanding the foregoing, if
      any of the payments described in Section 4 above are subject to the
      requirements of Code Section 409A and the Company determines that
      Executive is a &#147;specified employee&#148; as defined in Code Section 409A as of
      the date of the Change of Control Termination, such payments shall not be
      paid or commence earlier than the date that is six months after the Change
      of Control Termination, but shall be paid or commence during the calendar
      year following the year in which the Change of Control Termination occurs
      and within 30 days of the earliest possible date permitted under Code
      Section 409A. Further, in no event shall the benefits described in Section
      4(b) extend beyond December 31<SUP>st</SUP> of the second calendar year
      following the calendar year in which the Change of Control Termination
      occurs.</FONT></P></TD></TR></TABLE>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>5.
</FONT><B><FONT face=serif size=2>Limitation on Change of Control Payments.
</FONT></B><FONT face=serif size=2>This Section 5 applies only in the event the
Company determines that this Agreement is subject to the limitations of Section
280G of the Code, or any successor provision, and the regulations issued
thereunder. In the event any Change of Control Benefit, as defined below,
payable to Executive would constitute an &#147;excess parachute payment&#148; as defined
in Code Section 280G, Executive shall receive a &#147;tax gross-up&#148; payment
sufficient to pay the initial excise tax applicable to such excess parachute
payment (but excluding the income and excise taxes, if any, applicable to the
tax gross-up payment). Such additional cash payment shall be made within sixty
(60) days following the effective date of the Change of Control. For purposes of
this Section 5, a &#147;Change of Control Benefit&#148; shall mean any payment, benefit or
transfer of property in the nature of compensation paid to or for the benefit of
Executive under any arrangement which is considered contingent on a Change of
Control for purposes of Code Section 280G, including, without limitation, any
and all of the Company&#146;s salary, bonus, incentive, restricted stock, stock
option, equity-based compensation or benefit plans, programs or other
arrangements, and shall include benefits payable under this Agreement.
</FONT></P>
<P align=right><FONT face=serif size=1>Page 5 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>6.
</FONT><B><FONT face=serif size=2>Withholding Taxes</FONT></B><FONT face=serif size=2>. The Company shall be entitled to deduct from all payments or benefits
provided for under this Agreement any federal, state or local income and
employment-related taxes required by law to be withheld with respect to such
payments or benefits. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>7. </FONT><B><FONT face=serif size=2>Successors and Assigns</FONT></B><FONT face=serif size=2>. This Agreement
shall inure to the benefit of and shall be enforceable by Executive, his heirs
and the personal representative of his estate, and shall be binding upon and
inure to the benefit of the Company and its successors and assigns. The Company
will require the transferee of any sale of all or substantially all of the
business and assets of the Company or the survivor of any merger, consolidation
or other transaction expressly to agree to honor this Agreement in the same
manner and to the same extent that the Company would be required to perform this
Agreement if no such event had taken place. Failure of the Company to obtain
such agreement before the effective date of such event shall be a breach of this
Agreement and shall entitle Executive to the benefits provided in Sections 4 and
5 as if Executive had terminated employment for Good Reason following a Change
in Control.</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>8. </FONT><FONT face=serif size=2><STRONG>Notices</STRONG>.<STRONG> </STRONG></FONT><FONT face=serif size=2>For the purpose of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt. All notices to the Company shall be directed to the attention
of the Board of Directors of the Company. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>9. </FONT><B><FONT face=serif size=2>Captions</FONT></B><FONT face=serif size=2>. The headings or captions set
forth in this Agreement are for convenience only and shall not affect the
meaning or interpretation of this Agreement. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>10. </FONT><B><FONT face=serif size=2>Governing Law</FONT></B><FONT face=serif size=2>. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Minnesota.</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>11. </FONT><B><FONT face=serif size=2>Construction</FONT></B><FONT face=serif size=2>. Wherever possible, each
term and provision of this Agreement shall be interpreted in such manner as to
be effective and valid under applicable law. If any term or provision of this
Agreement is invalid or unenforceable under applicable law, (a) the remaining
terms and provisions shall be unimpaired, and (b) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is valid
and enforceable and that comes closest to expressing the intention of the
unenforceable term or provision.</FONT></P>
<P align=left><B><FONT face=serif size=2></FONT></B><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>12. </FONT><B><FONT face=serif size=2>Amendment; Waivers</FONT></B><FONT face=serif size=2>. This
Agreement may not be modified, amended, waived or discharged in any manner
except by an instrument in writing signed by both parties hereto. The waiver by
either party of compliance with any provision of this Agreement by the other
party shall not operate or be construed as a waiver of any other provision of
this Agreement, or of any subsequent breach by such party of a provision of this
Agreement. Notwithstanding anything in this Agreement to the contrary, the
Company expressly reserves the right to amend this Agreement without Executive&#146;s
consent to the extent necessary or desirable to comply with Code Section 409A,
and the regulations, notices and other guidance of general applicability issued
thereunder.</FONT></P>
<P align=right><FONT face=serif size=1>Page 6 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>13.
</FONT><B><FONT face=serif size=2>Entire Agreement</FONT></B><FONT face=serif size=2>. This Agreement sets forth Executive&#146;s sole and exclusive remedy with
respect to severance benefits payable to Executive upon a Change of Control
Termination, and supersedes all prior or contemporaneous negotiations,
commitments, agreements (written or oral) and writings between the Company and
Executive with respect to the subject matter hereof, including but not limited
to any negotiations, commitments, agreements or writings relating to any
severance benefits payable to Executive, and constitutes the entire agreement
and understanding between the parties hereto. All such other negotiations,
commitments, agreements and writings will have no further force or effect, and
the parties to any such other negotiation, commitment, agreement or writing will
have no further rights or obligations thereunder. For the sake of clarity, in
the event Executive&#146;s employment with the Company is terminated without cause,
and such termination is not a Change of Control Termination, Executive may be
entitled to benefits pursuant to Executive&#146;s Employment Agreement dated
_______________, 2007.</FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>14. </FONT><B><FONT face=serif size=2>Counterparts</FONT></B><FONT face=serif size=2>. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument. </FONT></P>
<P align=left><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;
</FONT>15. </FONT><B><FONT face=serif size=2>Arbitration</FONT></B><FONT face=serif size=2>. Any dispute arising out of or relating to this Agreement or
the alleged breach of it, or the making of this Agreement, including claims of
fraud in the inducement, shall be discussed between the disputing parties in a
good faith effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration. Judgment upon the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. The arbitrator shall be a
retired state or federal judge or an attorney who has practiced securities or
business litigation for at least 10 years. If the parties cannot agree on an
arbitrator within 20 days, any party may request that the chief judge of the
District Court for Hennepin County, Minnesota, select an arbitrator. Arbitration
will be conducted pursuant to the provisions of this </FONT><FONT face=serif size=2>Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that a court
of this state could order or grant; provided, however, that punitive or
exemplary damages shall not be awarded. Unless otherwise ordered by the
arbitrator, the parties shall share equally in the payment of the fees and
expenses of the arbitrator. The arbitrator may award to the prevailing party, if
any, as determined by the arbitrator, all of the prevailing party&#146;s costs and
fees, including the arbitrator&#146;s fees, and expenses, and the prevailing party&#146;s
travel expenses, out-of-pocket expenses and reasonable attorneys&#146; fees. Unless
otherwise agreed by the parties, the place of any arbitration proceedings shall
be Hennepin County, Minnesota. </FONT></P>
<P align=center><FONT face=serif size=2>[signature page follows]</FONT></P>
<P align=right><FONT face=serif size=1>Page 7 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=left><B><FONT face=serif size=1>CHANGE OF CONTROL AGREEMENT
</FONT></B><B><I><FONT face=serif size=1>(Continued)</FONT></I></B><B><FONT face=serif size=1> </FONT></B></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be duly executed and
delivered as of the day and year first above written. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="50%" colSpan=3><B><FONT face=serif size=2>SURMODICS, INC.</FONT></B>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="50%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="50%" colSpan=3>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>By:&nbsp;</FONT>
    </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="49%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="1%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Its<FONT size=3> </FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="48%">&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="50%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="48%"></TD></TR>
  <TR>
    <TD noWrap align=left width="50%">&nbsp;</TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="48%"></TD></TR>
  <TR>
    <TD noWrap align=left width="50%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="50%" colSpan=3>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"></TD>
    <TD noWrap align=left width="50%" colSpan=3><FONT face=serif size=2>Executive</FONT>&nbsp; </TD></TR></TABLE><BR>
<P align=right><FONT face=serif size=1>Page 8 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>

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end
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>6
<FILENAME>exhibit10-28.htm
<DESCRIPTION>PURCHASE AGREEMENT WITH VEST MYKYNG LLC, DATED AUGUST 24, 2007
<TEXT>

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<P align=right><FONT face=serif><FONT face=serif size=2>Exhibit
10.28</FONT></FONT></P>
<P align=center><B><U><FONT face=serif size=2>PURCHASE
AGREEMENT</FONT></U></B><B><FONT face=serif size=2> </FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>THIS
AGREEMENT is made and entered into this 24th day of August, 2007, by and between
SurModics, Inc., a Minnesota corporation, with its principal place of business
at 9924 West 74th Street, Eden Prairie, MN 55344 (hereinafter called
&#147;Purchaser&#148;), and Vest Mykyng LLC, a Minnesota limited liability company, with
its principal place of business at 6138 Arctic Way, Edina, Minnesota 55436
(hereinafter called &#147;Seller&#148;). </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2><STRONG>WITNESSETH THAT, WHEREAS: </STRONG></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A. Seller
is the owner of the parcel of land consisting of approximately 4.92 acres, which
is described on Exhibit A attached hereto, and all easements, rights of way,
privileges, appurtenances, and rights to same belonging to or enuring to the
benefit of said parcel of land or its owner (hereinafter called the &#147;Land&#148;)
lying and being in the City of Eden Prairie, County of Hennepin, and State of
Minnesota. </FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>B. Seller desires to sell to
Purchaser, and Purchaser desires to purchase from Seller, </FONT><FONT face=serif size=2>subject to the terms, covenants and conditions hereinafter
contained: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>1. The Land, together with any improvements thereon and
appurtenances thereto; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>2. All rights appurtenant to the Land as to any roadways
adjacent to the Land; and </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>3. All right, title and interest of Seller in and to all
easements of record benefiting the Land (or the owner or users thereof) over
other property, if any (such property hereinafter is collectively called the
&#147;Subject Property&#148;). </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>NOW,
THEREFORE, in consideration of the foregoing, and in consideration of the mutual
covenants herein contained, which each of the parties hereto acknowledges as
adequate and sufficient, it is hereby agreed as follows: </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>1.
<U>Purchase and Permitted Encumbrances</U>. Subject to the terms and conditions
herein, Seller does hereby agree to sell to Purchaser, and Purchaser does hereby
agree to purchase from Seller, the Subject Property, subject only to the
following encumbrances (hereinafter called &#147;Permitted Encumbrances&#148;):
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Building, zoning and subdivision ordinances, and State and
Federal regulations, subject to the other terms and conditions herein in respect
thereto. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Real estate taxes and installments of special assessments
which are not yet due and payable as of the Closing Date. Seller and Purchaser
shall allocate/prorate real estate taxes and special assessments (including
interest included in such installments) payable in the year of Closing in the
manner provided in Subparagraph 12(c) hereof. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) Those easements, encumbrances, and restrictions set forth
on Exhibit B and the title commitment provided for herein which are not objected
to by Purchaser in connection with Purchaser&#146;s examination of title and survey
and made a part hereof and such other easements, encumbrances and restrictions
as may be approved or waived by Purchaser pursuant to the terms of this
Agreement. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>2.
</FONT><U><FONT face=serif size=2>Representations of Seller; &#147;As Is&#148;
Purchase</FONT></U><FONT face=serif size=2>. Except as disclosed on Exhibit D
attached hereto (&#147;Seller&#146;s Disclosure&#148;) Seller states, warrants and represents
as of the date hereof as follows: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Seller has full right and authority to execute and deliver
this Agreement and all documents and instruments required hereunder to be
executed and delivered by Seller. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Neither the entering into of this Agreement nor the
consummation of the transaction contemplated hereby will constitute or result in
a violation or breach by Seller of any judgment or decree issued against or
imposed upon Seller, or of any agreement to which Seller is a party or which
binds the Subject Property. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) To Seller&#146;s knowledge, there are no underground storage
tanks on the Subject Property. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) Seller is neither a &#147;foreign person&#148; nor a &#147;foreign
corporation&#148; (as those terms are defined in Section 1445 of the Internal Revenue
Code of 1986, as amended). </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e) To Seller&#146;s knowledge, there are no wells or private
sewage disposal or septic systems on the Subject Property. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) To Seller&#146;s knowledge, no environmental reports have been
made or prepared in connection for the Subject Property except those certain
reports and correspondence listed in the Disclosure and Disclosure Documents
attached hereto as Exhibit D, true and complete copies of which Seller has
delivered to Purchaser; provided, however, Seller discloses that certain dumping
may have occurred in approximately the early 1980s and believes any
contamination in connection therewith was cleaned up in accordance with law and
reports may have been generated in connection therewith, copies of which Seller
cannot locate in his possession. </FONT></P>
<P align=center><FONT face=serif size=2>2 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(g) Seller has received no notice of condemnation of any
portion of the Subject Property from any governmental authority. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(h) Solely for purposes of satisfying the requirements of
Minn. Stat. &#167; 115.55, to Seller&#146;s knowledge there is no &#147;individual sewage
treatment system&#148; (within the meaning of that statute) on or serving the Subject
Property. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(i) To Seller&#146;s knowledge, there are no actions, suits,
agreements or proceedings before any judicial or quasi-judicial body, pending,
or to Seller&#146;s knowledge, threatened, against or affecting all or any portion of
the Subject Property which would impair Seller&#146;s ability to close the
transaction contemplated hereby in accordance with the terms hereof. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(j) Seller is not in violation of any laws relating to
terrorism or money laundering (&#147;Anti-Terrorism Laws&#148;), including Executive Order
No. 13224 on Terrorist Financing, effective September 24, 2001 (the &#147;Executive
Order&#148;), and the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law
107-56. Seller or, to the knowledge of Seller, one of its agents acting or
benefiting in any capacity in connection with the transaction is any of the
following: </FONT></P>
<TABLE style="TEXT-ALIGN: justify" cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>i.</FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that is listed
      in the annex to, or is otherwise subject to the provisions of, the
      Executive Order;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>ii.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity owner or
      controlled by, or acting for or on behalf of, any Person or entity that is
      listed in the annex to, or is otherwise subject to the provisions of, the
      Executive Order;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>iii.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity with which
      Seller is prohibited from dealing or otherwise engaging in any transaction
      by any Anti-Terrorism Law;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>iv.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that commits,
      threatens or conspires to commit or supports &#147;terrorism&#148; as defined in the
      Executive Order; or</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>v.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that is named as
      a &#147;specially designated national and blocked person&#148; on the most current
      list published by the U.S. Treasury Department Office of Foreign Asset
      Control at its official website or any replacement website or other
      replacement official publication of such list.</FONT></TD></TR></TABLE>
<P align=center><FONT face=serif size=2>3 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(k) The Seller or, to the knowledge of Seller, any of its
agents acting in any capacity in connection with the transaction does not (i)
conduct any business or engage in making or receiving any contribution of funds,
goods or services to or for the benefit of any person described above, (ii) deal
in, or otherwise engage in any transaction relating to, any property or
interests in property blocked pursuant to the Executive Order, or (iii) engages
in or conspires to engage in any transaction that evades or avoids, or has the
purpose of evading or avoiding, or attempts to violate, any of the prohibitions
set forth in any Anti-Terrorism Law. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>To the
extent any of the above representations or warranties are made to the knowledge
of Seller, such representations shall be deemed made only as to the actual
knowledge of Sigmund J. Helle without having made any investigation or inquiry
except those resulting in the creation of the materials listed on or contained
in the documents, if any, listed on Exhibit D. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Prior to
Closing, Seller will give Purchaser prompt written notice of any occurrence that
would change the truth of any of the foregoing representations and warranties or
any other representation or warranty of Seller herein, if then made. If there is
a material adverse change in any of the foregoing representations and warranties
prior to Closing, Purchaser will have the right to terminate this Agreement by
giving written notice to Seller within ten (10) days after it receives written
notice of such material change. If Purchaser so terminates this Agreement, the
initial $100,000 Earnest Money Deposit shall be retained by Seller and any
Additional Earnest Money Deposit (hereafter defined) shall be returned to
Purchaser and neither party shall have further rights or obligations hereunder
except for any obligations contained in this Agreement which expressly survive
termination. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>PURCHASER
ACKNOWLEDGES THAT PURSUANT TO THIS AGREEMENT IT WILL HAVE PRIOR TO CLOSING THE
OPPORTUNITY TO PERFORM ALL SUCH TESTS, INVESTIGATIONS AND ANALYSES CONCERNING
THE SUBJECT PROPERTY AS IT DEEMS NECESSARY OR DESIRABLE. PURCHASER AGREES THAT
EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER EXPRESSLY CONTAINED IN
THIS PARAGRAPH 2 AND IN THE CLOSING DOCUMENTS, IN PURCHASING THE SUBJECT
PROPERTY, PURCHASER IS NOT RELYING ON ANY REPRESENTATION, WARRANTY OR PROMISE BY
OR ON BEHALF OF SELLER CONCERNING THE PROPERTY OR ANY ASPECT THEREOF, INCLUDING,
WITHOUT LIMITATION, ANY CONCERNING THE QUALITY, VALUE, PHYSICAL ASPECTS,
PROSPECTS, COMPLIANCE WITH LAWS OR CONDITION OF THE SUBJECT PROPERTY,
ENVIRONMENTAL OR OTHERWISE, OR THE FITNESS OR SUITABILITY OF THE SUBJECT
PROPERTY FOR ANY PARTICULAR USE, AND, EXCEPT FOR THE REPRESENTATIONS AND
WARRANTIES EXPRESSLY CONTAINED IN THIS PARAGRAPH 2 AND IN THE CLOSING DOCUMENTS,
PURCHASER IS PURCHASING THE SUBJECT PROPERTY BASED UPON PURCHASER&#146;S OWN
INSPECTIONS AND EXAMINATIONS THEREOF IN ITS &#147;AS IS&#148; AND &#147;WHERE IS&#148; CONDITION,
AND &#147;WITH ALL FAULTS.&#148; </FONT></P>
<P align=center><FONT face=serif size=2>4 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>3.
<U>Representation of Purchaser</U>. Purchaser warrants and represents as of the
date hereof as follows: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Purchaser has full right and authority to execute and
deliver this Agreement and all documents and instruments required hereunder to
be executed and delivered by Purchaser. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) The consummation of the transactions contemplated by this
Agreement will not constitute a default or result in the breach of any term or
provision of any contract or written agreement to which Purchaser is a party so
as to adversely affect the consummation of such transactions. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) Purchaser is not in violation of any Anti-Terrorism Laws,
including the Executive Order, and the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, Public Law 107-56. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) Purchaser or, to the knowledge of Purchaser, none of its
agents acting or benefiting in any capacity in connection with the transaction
is any of the following: </FONT></P>
<P align=center><FONT face=serif size=2>5 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE><BR>
<TABLE style="TEXT-ALIGN: justify" cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>i.</FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that is listed
      in the annex to, or is otherwise subject to the provisions of, the
      Executive Order;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>ii.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity owner or
      controlled by, or acting for or on behalf of, any Person or entity that is
      listed in the annex to, or is otherwise subject to the provisions of, the
      Executive Order;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>iii.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity with which
      Purchaser is prohibited from dealing or otherwise engaging in any
      transaction by any Anti-Terrorism Law;</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>iv.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that commits,
      threatens or conspires to commit or supports &#147;terrorism&#148; as defined in the
      Executive Order; or</FONT></TD></TR>
  <TR>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>v.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%"><FONT face=serif size=2>Person or entity that is named as
      a &#147;specially designated national and blocked person&#148; on the most current
      list published by the U.S. Treasury Department Office of Foreign Asset
      Control at its official website or any replacement website or other
      replacement official publication of such list.</FONT></TD></TR></TABLE>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) The Purchaser or, to the knowledge of Purchaser, any of
its agents acting in any capacity in connection with the transaction does not
(i) conduct any business or engage in making or receiving any contribution of
funds, goods or services to or for the benefit of any Person described above,
(ii) deal in, or otherwise engage in any transaction relating to, any property
or interests in property blocked pursuant to the Executive Order, or (iii)
engages in or conspires to engage in any transaction that evades or avoids, or
has the purpose of evading or avoiding, or attempts to violate, any of the
prohibitions set forth in any Anti-Terrorism Law. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>4.
</FONT><U><FONT face=serif size=2>Purchase Price</FONT></U><FONT face=serif size=2>. Purchaser shall pay to Seller, in consideration for the purchase of the
Subject Property, the sum of Three Million Six Hundred Thousand and no/100
Dollars ($3,600,000.00) (the &#147;Purchase Price&#148;). The Purchase Price shall be paid
as follows: One Hundred Thousand and 00/100 Dollars ($100,000.00) upon execution
of this Agreement (hereinafter called &#147;Earnest Money Deposit&#148;) shall be
deposited with Seller by Purchaser. Such initial $100,000.00 Earnest Money
Deposit shall be non-refundable to Purchaser; provided, however, it shall be
subject to claims of Purchaser in the event this Agreement is terminated by
Purchaser pursuant to the provisions of Paragraph 13(A) by reason of Seller&#146;s
breach of this Agreement. The balance of said Purchase Price plus or minus (as
the case may be) an amount which equals the cumulative result of all cash
adjustments and prorations required by this Agreement, shall be payable to
Seller on the Date of Closing by means of a wire transfer to be received on the
Date of Closing in Seller&#146;s designated bank account. Purchaser and Seller shall
each pay one-half of the costs of establishing and maintaining the escrow of the
Additional Earnest Money Deposit, if any (described hereafter). In the event of
a Closing, all of the Earnest Money Deposit will be credited to the Purchase
Price. </FONT></P>
<P align=center><FONT face=serif size=2>6 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>5.
</FONT><U><FONT face=serif size=2>Evidence of Title/Survey</FONT></U><FONT face=serif size=2>. Not later than the date ten (10) days after the date of this
Agreement, Seller shall furnish to Purchaser at Seller&#146;s cost, except as
hereafter provided, a current commitment for an Owner&#146;s current ALTA policy of
title insurance (including a special assessment search) as to the Subject
Property issued by Title Company covering the Land provided for herein, and in
an amount equal to the Purchase Price for the Subject Property, in which Title
Company also indicates its requirements to provide extended coverage over the
standard exceptions. Such commitment shall also include copies of all recorded
documents referred to in the commitment. Purchaser shall be allowed until that
date which is seventeen (17) days after receipt of the commitment examination of
title and survey and the making of any objections thereto, said objections to be
made in writing or deemed waived. For purposes of this Agreement, Permitted
Encumbrances shall not be title objections. If any objections are so made,
Seller shall be allowed five (5) days after the notice of objection to make such
title marketable. Seller shall not be required to cure title or survey
objections. Seller shall pay off and satisfy of record any monetary and
mechanic&#146;s liens (including any medical assistance lien) and mortgages against
the Subject Property at Closing and shall take such action as is necessary to
remove from the commitment the requirement to secure and record an Affidavit
showing compliance with the required Notice to the Commissioner of Human
Services pursuant to Minn. Stat. 524-801(d) for the Estate of Herliev Helle for
the Deed of Distribution to Sigmund J. Helle filed as Document No. 7363899.
</FONT></P>
<P align=center><FONT face=serif size=2>7 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>If title
and survey objections are not cured and title is not made marketable all on or
before the end of the five (5) day period above described, Purchaser shall by
written notice to Seller either: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Terminate this Agreement, and, in such event, Purchaser
shall be entitled to a refund of all of the Additional Earnest Money Deposit
(described hereafter), if any, and neither party will have further rights or
obligations hereunder except such obligations as expressly survive termination;
or </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Waive any uncured objected to defects in title without any
reduction in the Purchase Price. </FONT></P>
<P align=justify><FONT face=serif size=2>Purchaser will make its election within
seven (7) days after expiration of Seller&#146;s five (5) day cure period. A failure
by Purchaser to waive its objections within such seven (7) day period pursuant
to clause (b) shall be deemed an election to terminate under clause (a).
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Further,
not later than the date twenty (20) days after the date of this Agreement,
Purchaser shall secure and deliver to Seller (at Purchaser&#146;s sole cost and
expense) a current survey of the Subject Property (herein called the &#147;Survey&#148;)
prepared by a surveyor licensed in the State of Minnesota and reasonably
acceptable to Purchaser, certified to Seller, Purchaser and Title Company and
Purchaser&#146;s lender, if any, in a manner satisfactory to Purchaser, by such
surveyor as being true, accurate and having been prepared in accordance with the
current minimum detail and Table A requirements for an Urban Land Title Survey
as jointly established and adopted by the American Land Title Association and
the American Congress on Surveying and Mapping, and setting forth: (i) the legal
description of the Subject Property; (ii) the location of all improvements
thereon; (iii) all boundaries, courses and dimensions of the Land, and the
dimensions of said improvements; (iv) all easements, building lines, curb cuts,
parking, loading areas, sewage, water, electricity, gas and other utility
facilities (together with the recording information concerning the documents
creating any easements and building lines); (v) roads and means of ingress and
egress to and from the Subject Property to all public roadways; and (vi) the
gross square footage of the Subject Property. The Survey shall reveal any
encroachments onto the Subject Property from any adjacent property, any
encroachments by or from the Subject Property onto any adjacent property, and
any violation by any of the improvements on the Subject Property of any building
line or easement or restriction affecting the Subject Property. The Survey shall
also certify whether or not the Subject Property is in an area identified by an
agency or department of the Federal, State or local government as having special
flood or mudslide hazards whether or not such identification would require flood
insurance under any flood insurance laws and shall state whether the Subject
Property includes any area identified or designated by Federal, State or local
government as a wetland. Such survey shall be delivered in the form of paper
copies and on computer disk form in Auto CADD (latest format). </FONT></P>
<P align=center><FONT face=serif size=2>8 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>6.
</FONT><U><FONT face=serif size=2>Delivery of Possession</FONT></U><FONT face=serif size=2>. Physical possession of the Subject Property shall be
delivered to Purchaser on the Date of Closing. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>7.
</FONT><U><FONT face=serif size=2>Closing</FONT></U><FONT face=serif size=2>.
The Closing of this transaction shall take place at the office of Purchaser&#146;s
counsel or other mutually acceptable location in Minneapolis, Minnesota, on the
date one (1) year subsequent to the date hereof (herein called the &#147;Date of
Closing&#148;). Purchaser may accelerate the date of Closing to a date selected by
Purchaser provided Purchaser gives Seller forty (40) days prior written notice
of such Closing Date and along with such notice Purchaser delivers to Title
Company an additional Six Hundred Thirty Thousand and no/100 Dollars
($630,000.00) as additional Earnest Money Deposit (the &#147;Additional Earnest Money
Deposit&#148;). Such Additional Earnest Money Deposit shall be deposited with Old
Republic National Title Insurance Company (&#147;Title Company&#148;) by Purchaser, and
shall be held by such Title Company in an interest bearing account. Purchaser
shall execute the W-9 form in connection therewith. Any interest earned on said
Additional Earnest Money Deposit, if any, shall become a part of the Additional
Earnest Money Deposit. Purchaser shall bear the risk of loss with respect to the
Additional Earnest Money Deposit. In the event such notice of acceleration is
given, the Purchase Price will escalate by Six Hundred Thirty Thousand and
no/100 Dollars ($630,000.00) to Four Million Two Hundred Thirty Thousand and
no/100 Dollars ($4,230,000.00). Notwithstanding the above, Seller may accelerate
the date of Closing to a date after the date forty-five (45) days after the date
of this Agreement and at least twenty (20) days subsequent to Seller&#146;s notice of
acceleration of the date of Closing; provided, however, if Seller accelerates
the Closing there shall be no increase in the Purchase Price. </FONT></P>
<P align=center><FONT face=serif size=2>9 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>8.
<U>Documents to be Delivered at Closing</U>. At Closing, Seller shall deliver to
Purchaser: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(i) Limited Warranty Deed conveying to Purchaser fee title to
the Subject Property, subject only to Permitted Encumbrances and such Deed shall
contain a representation by Seller that Seller does not know of any wells on the
Subject Property unless Seller provides a well disclosure certificate with
respect to any wells of which Seller has knowledge;</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(ii) &#147;FIRPTA&#148; affidavit in the form of Exhibit D attached
hereto and made a part hereof; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(iii) Seller&#146;s Affidavit in the form
of Exhibit G attached hereto. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(iv) Such other documents and instruments as may reasonably be
required to carry out the terms of this Agreement. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(v) Taxpayer Identification and/or Federal I.D. Number
Certificate as required by Title Company. </FONT></P>
<P align=justify><FONT face=serif size=2>Purchaser shall deliver to Seller the
following instruments and documents: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(a) The Purchase Price in accordance
with Paragraph 4 hereof </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Such other documents and instruments as may reasonably be
required to carry out the terms of this Agreement. </FONT></P>
<P align=center><FONT face=serif size=2>10 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>At Closing, Seller and Purchaser shall
jointly deliver a closing statement to each other, and Purchaser shall provide
the certificate of real estate value, if any is required in connection with the
filing of said Limited Warranty Deed. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>9.
<U>Purchaser&#146;s Entry Prior to Closing</U>. At any time prior to the earlier of
(a) Closing or (b) the date of termination of this Agreement, Purchaser shall
have the right at reasonable times to enter upon the Subject Property solely to
examine, survey, inspect and to take soil boring tests or tests for
environmental contamination at Purchaser&#146;s sole risk, cost and expense in order
to determine the characteristics of the Subject Property. Purchaser shall pay
all costs of such survey, inspection, soil borings and tests. Purchaser shall
notify Seller at least 48 hours prior to each entry for such purposes so that
Seller may attend such activity. Purchaser shall promptly provide to Seller
copies of all reports of its examinations, surveys, inspections and tests
without cost to Seller. Purchaser shall also be responsible for damages suffered
by Seller arising out of Purchaser&#146;s breach of the provisions of this Paragraph
9. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Purchaser
hereby agrees to defend, indemnify and save Seller, its agents, employees and
contractors harmless from all liability, damage, cost and expense (including,
but not limited to, reasonable attorney&#146;s fees) in connection with all claims,
suits, actions of every name, kind and description brought against Seller, its
agents, employees or contractors by any person or entity to the extent arising
or alleged to have arisen out of the acts or omissions of Purchaser, its agents
or employees in exercising its rights under the right of entry granted herein
unless and except to the extent the same arise out of the negligence or wrongful
act of Seller, its agents, employees and contractors. Purchaser&#146;s obligation to
indemnify, defend and save Seller harmless shall survive Closing or termination
of this Agreement. </FONT></P>
<P align=center><FONT face=serif size=2>11 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>10. </FONT><U><FONT face=serif size=2>Condition Allowing Termination by Purchaser</FONT></U><FONT face=serif size=2>. If any of the following conditions </FONT><FONT face=serif size=2>(which shall be for Purchaser&#146;s benefit and may be waived by Purchaser)
occur: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Purchaser in its sole discretion disapproves the condition
of the soil, title, survey or environmental issues relating to the Subject
Property or its potential found or determined to exist, as deemed appropriate by
Purchaser, in respect to the Subject Property whether found during its due
diligence effort or otherwise; or Purchaser determines that utilities, including
electricity, storm sewer, sanitary sewer, gas and water utilities do not exist
or are insufficient in capacity to serve Purchaser&#146;s proposed improvements under
current zoning relating to the Subject Property; </FONT></P>
<P align=justify><FONT face=serif size=2>then, and in any such event, Purchaser
shall have the right to terminate this Agreement by written notice to Seller
given on or before the date forty-five (45) days after the date hereof, and on
such termination all payments of the Additional Earnest Money Deposit described
in Paragraph 7, if any, received by Title Company pursuant to this Agreement
together with accrued interest shall be paid by Title Company to Purchaser.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>11.
</FONT><U><FONT face=serif size=2>Brokerage Fees</FONT></U><FONT face=serif size=2>. Purchaser represents that Purchaser is represented by Northstar
Partners as Purchaser&#146;s broker in connection with the transaction contemplated
hereby. Purchaser and Seller each represent and warrant to the other that
(except as to the fees payable by Purchaser to the party or parties identified
in the preceding sentence of this Paragraph) they have not incurred any
obligation or liability, contingent or otherwise, for brokerage or finder&#146;s fee
or agent&#146;s commissions or other like payment in connection with this Agreement
or the transaction contemplated hereby, and Purchaser and Seller each agree to
indemnify, defend and hold the other harmless against and in respect of any such
obligation and liability based in any way upon any other agreements,
arrangements or understandings made or claimed to have been made by the
indemnifying party with any third person. Purchaser will pay all fees payable to
Northstar Partners and its agents and co-brokers. </FONT></P>
<P align=center><FONT face=serif size=2>12 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>12.
</FONT><U><FONT face=serif size=2>Costs</FONT></U><FONT face=serif size=2>. The
costs to be incurred in closing the transaction contemplated by this Agreement
shall be allocated to Seller and Purchaser in the event of Closing in the
following manner: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) Seller shall pay for any transfer, excise or deed tax to
be incurred in connection with the conveyance or in recording the Limited
Warranty Deed to be delivered by Seller on the Date of Closing. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Purchaser shall pay for the recording fees incurred in
recording the Limited Warranty Deed to be delivered by Seller to Purchaser on
the Date of Closing. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) Seller shall pay all real estate taxes excluding, except
as otherwise provided, special assessments certified for payment therewith,
payable in respect to the Subject Property in the calendar year prior to the
calendar year in which Closing occurs and prior years. Further, all levied and
pending special assessments as of the date of this Agreement shall be paid in
full by Seller at or before Closing. Real estate taxes in respect to the Subject
Property (other than special assessments, which shall be paid by Seller to the
extent provided in the immediately preceding sentence) due and payable in the
calendar year in which Closing occurs shall be prorated between Seller and
Purchaser, with Purchaser paying that percentage equal to the number of days in
such year subsequent to the Tax Date divided by 365 and Seller paying the
balance. For purposes of this subparagraph (c), the Tax Date shall be deemed to
be the day immediately prior to the Date of Closing. If on the Date of Closing
the current year&#146;s taxes are not available, the proration and allocation for
such tax parcels shall be based on the previous year&#146;s payment and an adjustment
shall be made in cash on the date ten (10) days after the date when the current
year&#146;s taxes and installments of special assessments are known. Special
assessments first pending after the date of this Agreement shall be paid by
Purchaser. In the event Seller has paid prior to Closing installments (including
any interest allocable thereto) of special assessments which are Purchaser&#146;s
responsibility herein, Purchaser shall reimburse Seller for same at Closing.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) Seller shall pay for the State Deed Tax and the cost of
furnishing a title commitment to Purchaser in the manner required by the
provisions of Paragraph 5 hereof, and Purchaser shall pay for the Survey and the
cost of any title insurance policy and all endorsements issued in connection
therewith. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e) Purchaser and Seller shall each pay one-half (1/2) of all
costs of establishing and maintaining the escrow of the Earnest Money Deposit.
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) Seller and Purchaser shall each pay one-half (1/2) of any
closing fee required by Title Company to close the transaction contemplated by
this Agreement. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(g) Seller and Purchaser shall each pay all of the costs and
fees charged by their respective legal counsel. </FONT></P>
<P align=center><FONT face=serif size=2>13 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>13. <U>Remedies</U>.</FONT> </P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>A. In the
event Seller shall default in any material respect in the performance of any of
its obligations hereunder prior to Closing and continues in default for a period
of thirty (30) days after written notice of such default from Purchaser to
Seller, Purchaser shall have the right to terminate this Agreement, in which
event Escrow Agent shall return to Purchaser the entire Earnest Money Deposit
and all payments theretofore made to or for the benefit of Seller.
Notwithstanding anything contained in this Agreement to the contrary, such right
and remedy of Purchaser shall not deprive Purchaser of the right of commencing
legal proceedings for damages. Purchaser shall also have the option of enforcing
specific performance of this Agreement, provided this Agreement has not been
terminated as aforesaid and provided action to enforce such specific performance
is commenced within six (6) months after any such right of action arises.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>B. In the
event Purchaser shall default in any material respect in the performance of any
of its obligations hereunder other than obligations to close and continues in
default for a period of thirty (30) days after written notice of such default
from Seller to Purchaser, Seller shall have the right to terminate this
Agreement prior to the required Closing Date in accordance with applicable
Minnesota law, in which event Seller shall be entitled to retain, free of any
claim by Purchaser, the initial $100,000.00 Earnest Money Deposit as
non-refundable Earnest Money Deposit and as liquidated damages (except for
Purchaser&#146;s obligations under Paragraphs 9 and 26 hereof) and not as a penalty.
Purchaser agrees that, in the event of such a default by Purchaser hereunder,
Seller&#146;s damages would be difficult or impossible to determine and that an
amount equal to the initial $100,000.00 Earnest Money Deposit and such other
payments by Purchaser to Seller is a fair estimate thereof. </FONT></P>
<P align=center><FONT face=serif size=2>14 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>C. In the
event Purchaser shall default on or after the required Closing Date in any
material respect in connection with Purchaser&#146;s obligations hereunder to close
and continues in default for a period of thirty (30) days after written notice
of such default from Seller to Purchaser, Seller shall have the right to
terminate this Agreement on or after the required Closing Date in accordance
with applicable Minnesota law, in which event Seller shall be entitled to, and
Escrow Agent shall pay to Seller upon Seller&#146;s demand, $1,600,000.00 as
liquidated damages (except for Purchaser&#146;s obligations under Paragraphs 9 and
26) and not as a penalty. Purchaser agrees that, in the event of such a default
by Purchaser hereunder, Seller&#146;s damages would be difficult or impossible to
determine and that an amount equal to $1,600,000.00 is a fair estimate thereof.
In such case, the Title Company shall be entitled to draw on the letter of
credit in order to make the required $1,500,000.00 payment ($1,600,000.00 less
the initial $100,000.00 Earnest Money Deposit) to Seller provided for herein.
Notwithstanding anything herein to the contrary, such right and remedy of Seller
shall be Seller&#146;s sole remedy in the event of a default by Purchaser in its
obligation to close hereunder and Purchaser shall not be liable for other
damages or for specific performance except for damages under Purchaser&#146;s
obligations under Paragraphs 9 and 26. Purchaser&#146;s obligation to indemnify,
defend and save Seller harmless under Paragraph 9 hereof shall survive any such
termination of this Agreement. The provisions of this Agreement shall survive
termination and/or Closing in order to effectuate the provisions of this
Paragraph 13. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>D. For
avoidance of doubt, the parties confirm that it is their intent that if this
Agreement is terminated pursuant to Section 13.B., Purchaser&#146;s maximum liability
hereunder is $100,000.00 (plus obligations owing pursuant to Paragraphs 9 and
26, if any); if this Agreement is terminated pursuant to Section 13.C.,
Purchaser&#146;s maximum liability is $1,600,000.00 (plus obligations owing pursuant
to Paragraphs 9 and 26, if any). </FONT></P>
<P align=center><FONT face=serif size=2>15 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>14.
</FONT><U><FONT face=serif size=2>Notice</FONT></U><FONT face=serif size=2>. All
communications, demands, notices or objections permitted or required to be given
or served under this Agreement shall be in writing and shall be deemed to have
been duly given or served if (i) delivered in person, upon delivery, or (ii)
deposited in the United States mail, postage prepaid, for mailing by certified
or registered mail, return receipt requested, on the date of depositing the same
in the mail, (iii) by recognized overnight delivery service providing for
positive tracking of items (for example, Federal Express), on the date of
depositing the same with the delivery service, and addressed to a party to this
Agreement to the address set forth below: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>(a)</FONT></TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="10%"><FONT face=serif size=2>If to
      Purchaser:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>SurModics,
      Inc.</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>9924 West 74th
      Street</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Eden Prairie, MN
      55344</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>Attn: Bryan
    Phillips</FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"><FONT face=serif size=2>with a copy
      to:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Faegre &amp;
      Benson</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>2200 Wells Fargo
      Center</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>90 South 7th
    Street</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Minneapolis, MN
      55402</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>Attn: Charlie
    Ferrell</FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>(b)</FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"><FONT face=serif size=2>If to
      Purchaser:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Vest Mykyng
      LLC</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>6138 Arctic
Way</FONT></TD></TR>
  <TR>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>Edina, MN
55436</FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="12%" colSpan=3><FONT face=serif size=2>with a
      copy to</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>James L. Tucker,
      Esq.</FONT>&nbsp; </TD></TR>
  <TR>
    <TD noWrap align=left width="12%" colSpan=3></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>Gray, Plant,
    Mooty,</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT size=2>&nbsp;&nbsp;Mooty &amp;
      Bennett, P.A.</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>500 IDS
      Center</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>80 South Eighth
      Street</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Minneapolis, MN
      55402-3796</FONT>&nbsp; </TD></TR>
  <TR>
    <TD width="99%" colSpan=5>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif size=2>(c)</FONT></TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%"><FONT face=serif size=2>If to Title
      Company:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Old Republic
      National Title Insurance Company</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>400 Second
      Avenue South</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Minneapolis, MN
      55401-2499</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="10%">&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="86%"><FONT face=serif size=2>Attn: Rick
      Zilka</FONT>&nbsp; </TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>16 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2>Any party hereto may, by at least ten
(10) days notice to the other parties hereto as provided </FONT><FONT face=serif size=2>above, designate such other address for the giving of notices as deemed
necessary. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>15.
</FONT><U><FONT face=serif size=2>Continued Enforceability of
Provisions</FONT></U><FONT face=serif size=2>. Any covenants contained herein
that are not completed or satisfied prior to the Date of Closing shall continue
in full force and effect in accordance with their terms subsequent to the Date
of Closing and shall not merge in the Closing documents. All representations and
warranties shall survive Closing and shall not merge in the Closing documents.
Any conditions to Closing shall be deemed waived at Closing unless otherwise
agreed in writing contemporaneous with Closing. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>16.
<U>Entire Agreement; Amendments</U>. This Agreement constitutes the entire
agreement between the parties and no other agreements prior to this Agreement or
contemporaneous herewith (except written contemporaneous agreements) shall be
effective except as expressly set forth or incorporated herein. Neither Seller
nor Purchaser shall be bound by, or be liable for, any other warranties or other
representations made by any person, partnership, corporation or other entity
unless such other warranties or representations are set forth in a written
instrument duly executed by such respective party subsequent to the date hereof.
Any purported amendment hereto shall not be effective unless it shall be set
forth in writing and executed by the parties hereto, or their respective
successors or assigns. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>17.
<U>Binding Effect; Assignment; Waiver</U>. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns; provided, however, neither Purchaser nor Seller shall be
released from its liability hereunder and the applicable assignee shall
expressly assume in writing the obligations of its assignor thereunder in a form
reasonably acceptable to the other party. Notwithstanding the foregoing,
Purchaser may assign this Agreement prior to or contemporaneous with Closing or
designate any third party to take title at Closing; provided, however, no such
assignment or designation shall release Purchaser from liability hereunder. No
waiver of any provision of this Agreement shall be effective unless it is in
writing, signed by the party against whom it is asserted and any such written
waiver shall only be applicable to the specific instance to which it relates and
shall not be deemed to be a continuing or future waiver. Purchaser may designate
a nominee to take title to the Subject Property and to receive all assignments
and transfers to be provided by Seller to Purchaser herein. </FONT></P>
<P align=center><FONT face=serif size=2>17 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>18. </FONT><U><FONT face=serif size=2>Rules of Interpretation</FONT></U><FONT face=serif size=2>. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) This Agreement shall be interpreted and governed by the
laws of the State of Minnesota. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) The headings of paragraphs and sections contained herein
are for convenience only and in no way define, limit or describe the scope or
intent of this Agreement. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) Time shall be of the essence of this contract. </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) Words of any gender used in this Agreement shall be held
and construed to include any other gender, and words in the singular number
shall be held to include the plural, and vice versa, unless the context requires
otherwise. </FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>19. <U>Exhibits</U>. The following
exhibits are attached hereto and made a part hereof: </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="9%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      A:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Legal
      Description</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      B:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Permitted
      Encumbrances</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      C:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>FIRPTA
      Affidavit</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      D:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Seller&#146;s</FONT>&nbsp;<FONT face=serif size=2>Disclosures</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      E:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Seller&#146;s</FONT>&nbsp;<FONT face=serif size=2>Documents</FONT>&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Schedule
      1:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Form Letter of
      Credit</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      F:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Memorandum of
      Purchase Agreement</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="9%"></TD>
    <TD noWrap align=left width="9%"><FONT face=serif size=2>Exhibit
      G:</FONT>&nbsp; </TD>
    <TD noWrap align=left width="1%"></TD>
    <TD noWrap align=left width="81%"><FONT face=serif size=2>Seller&#146;s</FONT>&nbsp;<FONT face=serif size=2>Affidavit</FONT>&nbsp;
    </TD></TR></TABLE><BR>
<P align=center><FONT face=serif size=2>18 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>20.
<U>Liability of Title Company</U>. The sole duties of Title Company under this
Agreement shall be those described herein, and Title Company shall be under no
obligation to determine whether the other parties hereto are complying with any
requirements of law or the terms and conditions of any other agreements among
said parties. Title Company may conclusively rely upon and shall be protected in
acting upon any notice, consent, order or other document believed by it to be
genuine and to have been signed or presented by the proper party or parties.
Title Company shall have no duty or liability to verify any such notice,
consent, order or other document, and its sole responsibility shall be to act as
expressly set forth in this Agreement. Title Company shall be under no
obligation to institute or defend any action, suit or proceeding in connection
with this Agreement unless first indemnified to its satisfaction. Title Company
may consult with respect to any question arising under this Agreement and shall
not be liable for any action taken or omitted in good faith upon advice of such
counsel. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Title
Company shall hold any monies paid to it pursuant to this Agreement in escrow
and shall endeavor to invest such monies in certificates of deposit or interest
bearing accounts with a national banking association fully insured by the FDIC
as reasonably determined by Title Company. </FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Nothing in this Paragraph 20 relates
to any obligation of Title Company under any title </FONT><FONT face=serif size=2>commitment or policy. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>21.
</FONT><U><FONT face=serif size=2>Relationship</FONT></U><FONT face=serif size=2>. Nothing contained in this Agreement shall constitute or be construed to
be or create a partnership, joint venture or any other relationship between
Seller and Purchaser other than the relationship of a buyer and seller of real
or personal property as set forth in this Agreement. </FONT></P>
<P align=center><FONT face=serif size=2>19 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>22.
</FONT><U><FONT face=serif size=2>Exhibits/Modifications</FONT></U><FONT face=serif size=2>. All exhibits attached hereto contain additional terms of
this Agreement. Typewritten or handwritten provisions inserted in this form or
attached hereto shall control all printed provisions in conflict therewith.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>23.
<U>Condemnation or Eminent Domain</U>. In the event of any condemnation or
eminent domain proceedings for any public or quasi-public purposes at any time
prior to Closing resulting in the taking or proposed taking of any part or all
of the Subject Property, Purchaser shall close the transaction contemplated by
this Agreement subject to any such taking, in which event the purchase price
shall not be abated, provided, however, at Closing, Seller shall assign to
Purchaser and Purchaser shall be entitled to the entire award paid or payable in
respect to such taking. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>24.
<U>Captions and Paragraph Headings</U>. The captions and paragraph headings
contained in this Agreement are for convenience and reference only and in no way
define, describe, extend or limit the scope or intent of this Agreement, nor the
intent of any provisions hereof. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>25.
</FONT><U><FONT face=serif size=2>Attorneys&#146; Fees</FONT></U><FONT face=serif size=2>. If either Seller or Purchaser files any action or brings any proceeding
against the other arising out of this Agreement, or is made a party to any
action or proceeding brought by a third party arising out of this Agreement
without fault of the defending party, then as between Seller and Purchaser, the
prevailing party in any such action or proceeding shall be entitled to recover,
as an element of its costs of suit and not as damages, reasonable attorneys&#146;
fees to be fixed by the court. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>26.
</FONT><U><FONT face=serif size=2>Delivery of Information</FONT></U><FONT face=serif size=2>. Seller hereby agrees to deliver to Purchaser (unless already
delivered), within five (5) business days following the mutual execution of this
Agreement, copies of all those geotechnical reports, environmental reports, and
surveys related to the Subject Property in Seller&#146;s possession or control,
including without limitation, those documents set forth on Exhibit E, which
Seller can find upon reasonably diligent search. Purchaser agrees to provide
within five (5) days after Purchaser&#146;s receipt copies of all reports prepared by
or for Purchaser in connection with the transaction contemplated hereby,
including, but not limited to, surveys, geotechnical reports, environmental
reports, property condition reports. The provisions of this Paragraph 26 shall
survive Closing or termination of this agreement and shall not be subject to the
&#147;liquidated damages&#148; provisions herein. </FONT></P>
<P align=center><FONT face=serif size=2>20 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>27.
</FONT><U><FONT face=serif size=2>Authority</FONT></U><FONT face=serif size=2>.
The parties executing this agreement on behalf of Purchaser and Seller,
respectively, represent and warrant that they have secured all required
approvals and consents to execute this Agreement so that upon execution it is
the valid and binding agreement of Purchaser and Seller, respectively.
</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>28.
<U>Condition</U>. This Agreement shall be void if not executed by Seller and
delivered to Purchaser on or before August 27,
2007. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>29.
</FONT><U><FONT face=serif size=2>Tax Deferred Exchange</FONT></U><FONT face=serif size=2>. Purchaser acknowledges that Seller may desire to utilize a
tax-deferred exchange to sell the Property to Purchaser. Purchaser shall not be
required to participate in any such exchange unless (a) Seller is not released
from any of its obligations herein, (b) Purchaser is not required to assume any
additional risks, costs, or obligations by reason thereof, (c) such exchange
will not delay the closing in any manner, (d) Seller shall pay all of
Purchaser&#146;s increased costs (including reasonable attorney&#146;s fees for review of
documentation) arising out of such exchange or proposed exchange, and (e)
Purchaser shall not be required to take title to any property other than the
Subject Property. </FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>Seller acknowledges that Purchaser
may desire to utilize a tax-deferred exchange </FONT><FONT face=serif size=2>to
purchase the Property from Seller. Seller shall not be required to participate
in any such exchange unless (a) Purchaser is not released from any of its
obligations herein, (b) Seller is not required to assume any additional risks,
costs, or obligations by reason thereof, (c) such exchange will not delay the
closing in any manner, (d) Purchaser shall pay all of Seller&#146;s increased costs
(including reasonable attorney&#146;s fees for review of documentation) arising out
of such exchange or proposed exchange, and (e) Seller shall not be required to
take title to any property other than the Subject Property. </FONT></P>
<P align=center><FONT face=serif size=2>21 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>30. </FONT><U><FONT face=serif size=2>Additional Earnest Money Deposit/Letter of Credit</FONT></U><FONT face=serif size=2>. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(1) In the event that Purchaser has not terminated this
Agreement on or before the date forty-five (45) days after the date of this
Agreement pursuant to the provisions of Paragraph 10 hereof, Purchaser shall
deliver to Title Company, on or before such date, as further Additional Earnest
Money Deposit an unconditional, irrevocable standby letter of credit (&#147;Letter of
Credit&#148;). This Letter of Credit and any replacements thereof shall conform in
form and substance to the attached Schedule 1 (or shall be otherwise acceptable
to Seller) and shall: </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) be issued by Wells Fargo Bank Minnesota, N.A. or any other
national bank with principal offices located in the state of Minnesota,
reasonably acceptable to Seller; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b) name Title Company as
beneficiary thereunder; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) have a term ending not less than fourteen (14) months
after the date of issuance; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(d) automatically renew for one-year periods unless issuer
notifies beneficiary in writing, at least sixty (60) days prior to the
expiration date, that issuer elects not to renew the Letter of Credit;
</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e) provide for payment to beneficiary of $1,600,000.00 in
immediately available funds, denominated in United States dollars, upon
presentation of a Sight Draft substantially conforming to the form attached as
Exhibit A to the Letter of Credit; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) provide that draws may be presented, and are payable, at a
specified office of the issuer in Minneapolis, Minnesota; </FONT></P>
<P align=center><FONT face=serif size=2>22 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(g) be payable against Sight Drafts which only require the
beneficiary to state that a Draw Event (as that term is defined below) has
occurred, specifying the specific nature of the Draw Event, and stating that the
draw is payable to the order of beneficiary as a result; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(h) permit partial and multiple
draws; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(i) permit multiple transfers by beneficiary, provided that
any transferee shall be a subsequent holder of beneficiary&#146;s obligations under
this Agreement and/or any escrow agreements in connection therewith; </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(j) waive any rights issuer may have, at law or otherwise, to
subrogate to any claims beneficiary may have against applicant; and </FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(k) is governed by the International Standby Practices 1998,
published by the International Chamber of Commerce. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
Letter of Credit (as the same is transferred, extended, renewed or replaced)
must be maintained until the Letter of Credit has been returned to Purchaser, if
at all, pursuant to the terms of this Agreement or until such time as the amount
available under the Letter of Credit has been reduced to zero by draws made
thereon and no amount remains available thereunder pursuant to the provisions
hereof. The Letter of Credit shall be returned to Purchaser at Closing and
satisfaction of all Purchaser&#146;s obligations under this Agreement. </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>In the
event Purchaser fails to provide the initial Letter of Credit as required herein
on or before the date forty-five (45) days after the date hereof, such failure
shall be deemed an election by Purchaser to terminate this Agreement under
Paragraph 10 and the Additional Earnest Money Deposit, if any, shall be
transferred by Title Company to Purchaser and neither party shall have any
further obligation to the other except pursuant to Paragraph 9 and Paragraph 26
hereof </FONT></P>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(2) Title Company may freely
transfer the Letter of Credit to a subsequent holder of Title Company&#146;s
obligations under this Agreement accruing subsequent to the applicable transfer
without (i) Purchaser&#146;s consent, (ii) restriction on the number of transfers, or
(iii) condition, other than presentment to issuer of the original Letter of
Credit and a duly executed transfer document conforming to the form attached as
Exhibit B to the Letter of Credit. Purchaser is solely responsible for any bank
fees or charges imposed by issuer in connection with the issuance of the Letter
of Credit or any transfer, renewal, extension, or replacement thereof. If
Purchaser fails to timely pay such transfer fees, Seller or Title Company may,
at their option and without notice to Purchaser, elect to pay any transfer fees
to issuer when due, and upon payment, such amount will become immediately due
and payable from Purchaser to the party advancing such payment together with
interest at eight percent (8%) per annum.</FONT></P>
<P align=center><FONT face=serif size=2>23 </FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(3) <U><FONT face=serif>Definition
of Draw Event</FONT></U>. &#147;Draw Event&#148; means the occurrence of any of the
</FONT></FONT><FONT face=serif><FONT face=serif size=2>following
events:</FONT></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(a) Purchaser&#146;s breach of any of its
obligations to close the transaction contemplated hereby and such failure
continues for a period of ten (10) days after notice of such failure has been
given by Seller to Purchaser as certified by Seller to Title Company in writing;
or</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(b) Purchaser fails to timely cause
the Letter of Credit to be renewed or replaced, as required in subparagraph (6)
below; or</FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(c) Termination of this Agreement by
Seller pursuant to Paragraph 13(C) hereof.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(4)
<U>Draw and Draw Proceeds</U>. Immediately upon the occurrence and during the
continuance of a Draw Event, Title Company may draw on the Letter of Credit and
continue to hold the proceeds as a part of Additional Earnest Money Deposit;
provided that Title Company shall provide Purchaser and Seller with written
notice of Title Company&#146;s draw not later than three (3) business days following
such draw. The term &#147;Draw Proceeds&#148; means the cash proceeds of any draw or draws
made by Title Company under the Letter of Credit. Any delays by Title Company in
drawing on the Letter of Credit or using the Draw Proceeds will not constitute a
waiver by Seller or Title Company of any of their respective rights hereunder
with respect to the Letter of Credit or the Draw Proceeds. The Draw Proceeds
shall be subject to the provisions relating to disposition of the Additional
Earnest Money Deposit and the &#147;liquidated damages&#148; provisions as set forth in
this Agreement.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>24</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(5)
<U><FONT face=serif>Renewal and Replacement</FONT></U>. The Letter of Credit
must provide that it will be automatically renewed unless issuer provides
written notice of non-renewal to Seller and Title Company at least sixty (60)
days prior to the expiration of the Letter of Credit. If written notice of
non-renewal is received from issuer, Purchaser must renew the Letter of Credit
or replace it with a new Letter of Credit at least thirty (30) days and no more
than sixty (60) days prior to the date of expiration date of the then current
Letter of Credit. Any renewal or replacement Letter of Credit must meet the
criteria set forth in Paragraph (1) above, and must have a term commencing no
later than the stated expiration date of the immediately prior Letter of Credit.
Failure to provide a renewal or replacement Letter of Credit as provided above
will, at Seller&#146;s election be deemed an uncured and uncureable default under
this Agreement.</FONT><FONT face=serif></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(6) <U><FONT face=serif>Additional
Agreements of Purchaser</FONT></U>. Purchaser expressly acknowledges and
</FONT></FONT><FONT face=serif><FONT face=serif size=2>agrees
that:</FONT></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(a) the Letter of Credit constitutes a separate and
independent contract between Title Company and issuer, and Purchaser has no
right to submit a draw to issuer under the Letter of Credit;</FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(b) Purchaser is not a third party beneficiary of such
contract, and Title Company&#146;s ability to either draw under the Letter of Credit
or the full or any partial amount thereof or to apply Draw Proceeds may not, in
any way, be conditioned, restricted, limited, altered, impaired or discharged by
virtue of any laws to the contrary, including, but not limited to, any laws that
restrict, limit, alter, impair, discharge or otherwise affect any liability that
Purchaser may have under this Agreement or any claim that Seller has or may have
against Purchaser;</FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(c) Neither the Letter of Credit nor any Draw Proceeds will be
or become the property of Purchaser, and Purchaser does not and will not have
any property right or interest therein;</FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify><FONT face=serif><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>(d) Purchaser is not
entitled to any interest on any Draw Proceeds;</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>25</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(e) Neither the Letter of Credit nor any Draw Proceeds
constitute an advance payment of the Purchase Price unless and until applied by
Title Company to the Purchase Price in connection with Closing;</FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(f) Neither the Letter of Credit nor any Draw Proceeds
constitute a measure of Seller&#146;s damages resulting from any Draw Event, event of
default, or other breach, failure, or default (past, present, or future) under
this Agreement; and</FONT><FONT face=serif></FONT></P>
<P style="PADDING-LEFT: 15pt" align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(g) Purchaser will cooperate with Seller and Title Company, at
Purchaser&#146;s own expense, in promptly executing and delivering to Title Company
all modifications, amendments, renewals, extensions and replacements of the
Letter of Credit, as Title Company may reasonably request to carry out the terms
and provisions of this subparagraph 6.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(7)
<U><FONT face=serif>Purchaser&#146;s Actions</FONT></U>. If Purchaser, or any person
or entity on Purchaser&#146;s behalf or at Purchaser&#146;s discretion or direction,
brings any proceeding or action to contest, enjoin, interfere with, restrict or
limit, in any way whatsoever, any one or more draw requests or payments under
the Letter of Credit, and if Purchaser does not prevail in such action,
Purchaser will be liable for any and all direct damages resulting therefrom or
arising in connection therewith, including, without limitation, reasonable
attorney&#146;s fees and costs.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>(8)
Provided that the transaction contemplated hereby is closed in accordance with
its terms with or without use of any Draw Proceeds, or in the event this
Agreement is terminated by reason of Seller&#146;s default, Title Company shall
return the Letter of Credit to the issuer for cancellation and any unused Draw
Proceeds to Purchaser.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>31.
Purchaser agrees, which agreement shall survive Closing and delivery of the
deed, that in the event Purchaser sells or conveys an interest or makes an
agreement to sell or convey an interest or grants an option to purchase an
interest in the Subject Property to a third party on or before the date three
(3) years after the date of Closing, Purchaser agrees to pay to Seller an amount
equal to the amount that the gross net selling price (after deducting from the
gross selling price all direct expenses of sale, such as expenses of brokers,
title insurance, survey and soil testing costs) or other consideration received
by Purchaser for the Subject Property exceeds the Purchase Price paid by
Purchaser to Seller under this Agreement. Such payment, if any, shall be payable
upon closing of the sale or transfer of the Subject Property or a portion
thereof. If Purchaser shall have made improvements to the Subject Property, an
amount equal to the lower of (a) the fair market value of such improvements or
(b) the actual cost of such improvements shall be excluded in determining the
price or consideration received by Purchaser. Notwithstanding anything to the
contrary, the provisions of this Section 31 shall not apply to: (i) any sale or
transfer by Purchaser to an entity under the control of Purchaser or an entity
under common control with Purchaser, or (ii) sale of all or substantially all of
Purchaser&#146;s assets. For clarity, this Section 31 does not apply to transfers of
stock or other equity interests in Purchaser.</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>26</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>32.
<U><FONT face=serif>Quit Claim Deed</FONT></U>. In the event of termination of
this Agreement for any reason, within ten (10) days after Seller&#146;s request,
Purchaser will deliver to Seller in form and substance acceptable to Seller, a
quit claim deed to the Subject Property in recordable form. In the event
Purchaser fails to so deliver such quit claim deed, Purchaser will indemnify,
defend and hold harmless Purchaser from all loss, claim, damage and expense
arising out of Purchaser&#146;s failure to deliver such quit claim deed.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>33.
<U>Confidentiality</U>. Except as set forth in the Memorandum of Purchase
Agreement as set forth in Section 34 below, Purchaser agrees to hold in
confidence until Closing or termination of this Agreement, the terms and
contents of this Agreement and not to disclose such matters to any third party
without the prior written consent of Seller except after the date forty-five
(45) days after the date of this Agreement with regard to Purchaser&#146;s mandatory
reporting obligations, if any, as a public company and except as reasonably
necessary on an absolute &#147;need-to-know&#148; basis to coordinate with any contractors
or the City of Eden Prairie or other governmental body for Purchaser&#146;s due
diligence and planning for use and improvements of the Subject Property.
Notwithstanding the above, prior to the date forty-five (45) days after the date
of this Agreement, Purchase may make a Form 8-K disclosure to the Securities and
Exchange Commission as follows:</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>27</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P style="PADDING-LEFT: 15pt" align=justify><I><FONT face=serif><FONT face=serif size=2>On August ____, 2007, SurModics, Inc. (the &#147;Company&#146;) entered into a
Purchase Agreement (the &#147;Agreement&#146;) with Vest Mykyng LLC (the &#147;Seller&#146;),
pursuant to which, subject to the terms and conditions of the Agreement, the
Company will purchase a parcel of land from the Seller. The Agreement is a
&#147;Material Contract&#148; as defined under Item 601(b)(10)(ii)(C) of Regulation S-K
under the Securities Exchange Act of 1934 because the Agreement is a contract
calling for the acquisition of property for consideration exceeding 15% of the
book value of the property, plant and equipment of the Company on a consolidated
basis. However, the consummation of the transactions contemplated by the
Agreement will not be deemed to involve a &#147;significant amount of assets&#148; under
Instruction 4 to Item 2.01 of Form 8-K because the amount to be paid for the
land will not exceed 10% of the total assets of the Company on a consolidated
basis. The transactions contemplated by the Agreement are expected to close
between 45 days and one year after the date of the
Agreement.</FONT></FONT></I></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>34.
<U><FONT face=serif>Memorandum of Purchase Agreement</FONT></U>. Purchaser and
Seller shall sign, upon execution hereof, the Memorandum of Purchase Agreement
in the form attached hereto as Exhibit F, to be held by Title Company pursuant
to the provisions hereof, which shall at Purchaser&#146;s request to Title Company,
and at Purchaser&#146;s expense be recorded by Title Company at the Office of the
County Recorder or Registrar of Titles, as applicable, in Hennepin County,
Minnesota. Such Memorandum of Purchase Agreement may only be recorded after the
date which is the later of (a) the date forty-five (45) days after the date
hereof, or (b) the date Purchaser delivers to Title Company the initial Letter
of Credit set forth in Paragraph 30 hereof. Within five (5) days after
termination of this Agreement or Closing, Purchaser shall cause an instrument to
be recorded to release such Memorandum of Purchase Agreement of record. In the
event Purchaser fails to do so, Purchaser shall indemnify and defend Seller from
all loss, claim, damage, or expense arising out of Purchaser&#146;s failure to do so.
The provisions of this Paragraph 34 shall survive Closing and/or termination of
this Agreement.</FONT><FONT face=serif></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>28</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>35.
<U><FONT face=serif>Mortgaging of Subject Property</FONT></U>. Purchaser shall
have the right to subject the Subject Property or any portion thereof to a
mortgage in the amount of $1,500,000.00 or less. Said mortgage must be pursuant
to an arm&#146;s length mortgage transaction with a bona fide third-party lender.
Purchaser agrees that it will subordinate its rights under this Agreement to the
mortgagee&#146;s interest in the Subject Property under the mortgage and collateral
mortgage documents. Such mortgagee shall be required to provide to Purchaser
notice of foreclosure at the time of publication of any notice of
foreclosure.</FONT><FONT face=serif></FONT></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>(Signature page
follows.)</FONT></FONT></B></P>
<P align=center><FONT face=serif><FONT face=serif size=2>29</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>IN WITNESS
WHEREOF, the parties hereto have set their hands as of the day and year first
above written.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>Dated:&nbsp; 24 August,
      2007&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD>
    <TD align=left width="49%" colSpan=2><FONT face=serif size=2>SELLER:&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD align=left width="50%"></TD>
    <TD align=left width="49%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%">&nbsp;</TD>
    <TD align=left width="49%" colSpan=2><FONT face=serif size=2>Vest Mykyng
      LLC&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=left width="1%"><FONT face=serif size=2>By:<FONT size=3>&nbsp;</FONT>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="48%"><FONT face=serif size=2>/s/ [Illegible]&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=left width="1%"><FONT face=serif size=2>Its:<FONT size=3>&nbsp;</FONT>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="48%"><FONT face=serif size=2>PRESIDENT&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>Dated:&nbsp; Aug 24,
      2007&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD>
    <TD align=left width="49%" colSpan=2><FONT face=serif size=2>PURCHASER:&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD align=left width="50%"></TD>
    <TD align=left width="49%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=left width="49%" colSpan=2><FONT face=serif size=2>SurModics,
      Inc.&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=left width="1%"><FONT face=serif size=2>By:<FONT size=3>&nbsp;</FONT>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="48%"><FONT face=serif size=2>/s/ Bruce J Barclay&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=left width="1%"><FONT face=serif size=2>Its:&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="48%"><FONT face=serif size=2>President &amp; CEO&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR></TABLE><BR>
<P align=center><FONT face=serif><FONT face=serif size=2>30</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>CONSENT</FONT></FONT></U></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
undersigned, Old Republic National Title Insurance Company, hereby consents to
the terms and conditions relating to escrow of the Additional Earnest Money
Deposit, if any, and the Letter of Credit described in the foregoing Purchase
Agreement.</FONT><FONT face=serif></FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="99%" colSpan=2><FONT face=serif size=2>OLD REPUBLIC
      NATIONAL TITLE&nbsp;<FONT size=3> </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="99%" colSpan=2><FONT face=serif size=2>INSURANCE
      COMPANY&nbsp;<FONT size=3> </FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=2><FONT face=serif size=2>&nbsp;<FONT size=3>
      </FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=2><FONT face=serif size=2>&nbsp;<FONT size=3>
      </FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=2>&nbsp;&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif size=2>By:&nbsp;<FONT size=3>
      </FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="98%"><FONT face=serif size=2>/s/ [Illegible]&nbsp;<FONT size=3> </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif size=2>Its:<FONT size=3>&nbsp;</FONT>&nbsp;</FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="98%"><FONT face=serif size=2>Assistant Vice President&nbsp;<FONT size=3>
      </FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=2><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="99%" colSpan=2><FONT face=serif size=2>Dated: August
      24, 2007&nbsp;<FONT size=3> </FONT></FONT></TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif><FONT face=serif size=2>31</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
A</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>Legal
Description</FONT></FONT></B></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>Lot 2, Block 1,
Norseman Industrial Park Sixth Addition, according to the recorded plat thereof,
Hennepin County, Minnesota.</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
B</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1.</FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Building, zoning and subdivision
      ordinances, state and federal regulations.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Real estate taxes not yet due and
      payable.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>3.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>All exceptions to title shown on
      the Commitment or Survey waived or not objected to by
    Purchaser.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>4.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>If Purchaser fails to obtain the
      Survey in accordance with the requirements herein, matters which would be
      shown on an accurate survey of the Subject Property.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR></TABLE>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
C</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>NON-FOREIGN
TRANSFEROR&#146;S CERTIFICATION <BR>(Entity Transferor)</FONT></FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>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. For
U.S. tax purposes (including section 1445), the owner of a disregarded entity
(which has legal title to a U.S. real property interest under local law) will be
the transferor of the property and not the disregarded entity. To inform the
transferee that withholding of tax is not required upon the disposition of a
U.S. real property interest by [<I>name of transferor</I>], the undersigned
hereby. certifies the following on behalf of [<I>name of
transferor</I>]:</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>1.
[<I>Name of transferor</I>] 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);</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp; <FONT face=serif size=2>2. [<I>Name of
transferor</I>]&#146;s U. S. employer identification number is
______________________________________________;</FONT><FONT face=serif></FONT></P>
<P align=left>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>3. [<I>Name
of transferor</I>]&#146;s office address is
_______________________________________________________________
<BR>____________________________________________________; and</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>4.
[<I>Name of transferor</I>] is not a &#147;disregarded entity&#148; as defined in IRS
Regulation 1.1445-2 (b)(iii).</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>[<I>Name
of transferor</I>] understands that this certification may be disclosed to the
Internal Revenue Service by transferee and that any false statement contained
herein could be punished by fine, imprisonment or both.</FONT><FONT face=serif></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Under
penalties of perjury, I declare that I have examined this certification 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
[<I>name of transferor</I>].</FONT><FONT face=serif></FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="50%"><FONT face=serif><FONT face=serif size=2>Date:
      ___________, 20__&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="30%">&nbsp;&nbsp;</TD>
    <TD align=left width="20%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%">&nbsp;</TD>
    <TD align=left width="30%"><FONT face=serif><FONT face=serif size=2>Signature&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD align=left width="20%"></TD></TR>
  <TR>
    <TD width="80%" colSpan=2>&nbsp;</TD>
    <TD width="20%"></TD></TR>
  <TR>
    <TD width="50%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" width="30%">&nbsp;&nbsp;</TD>
    <TD width="20%"></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="50%">&nbsp;</TD>
    <TD align=left width="30%"><FONT face=serif><FONT face=serif size=2>Title&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD align=left width="20%"></TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT size=2>EXHIBIT
D</FONT></FONT></U></B></P>
<P align=center><B><FONT face=serif><FONT size=2>DISCLOSURES AND DISCLOSURE
DOCUMENTS</FONT></FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1.</FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Seller discloses that dumping of
      debris and materials on the Subject Property has occurred from time to
      time which was unauthorized by Seller.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Seller discloses matters set
      forth and/or referred to in letter from Darwin Schulz, Hennepin County
      Department of Environmental Services dated May 10, 2007.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;</TD></TR></TABLE>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>SCHEDULE
1</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>FORM OF LETTER OF
CREDIT</FONT></FONT></B></P>
<P align=center><FONT face=serif><FONT face=serif size=2>[LETTERHEAD OF ISSUING
BANK]</FONT></FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%" colSpan=3><FONT face=serif><FONT face=serif size=2>IRREVOCABLE STANDBY LETTER&nbsp;<FONT size=3>&nbsp;
      </FONT></FONT></FONT></TD>
    <TD noWrap align=left width="1%"><FONT face=serif><FONT face=serif size=2>DATE OF ISSUANCE:<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="24%">&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif><FONT face=serif size=2>OF CREDIT NO:&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%">&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif><FONT face=serif size=2>EXPIRATION DATE:<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="24%">&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="50%" colSpan=3>&nbsp;</TD>
    <TD noWrap align=left width="49%" colSpan=3></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%" colSpan=3><FONT face=serif><FONT face=serif size=2>BENEFICIARY:&nbsp;<FONT size=3>&nbsp;
      </FONT></FONT></FONT></TD>
    <TD noWrap align=left width="49%" colSpan=3><FONT face=serif><FONT face=serif size=2>APPLICANT:&nbsp;<FONT size=3>&nbsp;
    </FONT></FONT></FONT></TD></TR>
  <TR>
    <TD noWrap align=left width="50%" colSpan=3>&nbsp;</TD>
    <TD noWrap align=left width="49%" colSpan=3></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="1%"><FONT face=serif><FONT face=serif size=2>(TITLE COMPANY)<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%">&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD>
    <TD noWrap align=left width="1%"><FONT face=serif><FONT face=serif size=2>(PURCHASER)&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="24%">&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="26%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="26%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="26%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%" colSpan=2>&nbsp; </TD>
    <TD noWrap align=left width="24%">&nbsp;</TD></TR></TABLE><BR>
<P align=justify><FONT face=serif><FONT face=serif size=2>AS THE ISSUING BANK
(&#147;ISSUER&#148;), WE HEREBY ESTABLISH THIS IRREVOCABLE STANDBY LETTER OF CREDIT
NO.</FONT> <FONT face=serif size=2>______________ </FONT><FONT face=serif size=2>IN FAVOR OF THE ABOVE-NAMED BENEFICIARY (&#147;BENEFICIARY&#148;) FOR THE ACCOUNT
OF THE ABOVE-NAMED APPLICANT (&#147;APPLICANT&#148;) IN THE AMOUNT OF USD $ </FONT><FONT face=serif size=2>_____________ </FONT><FONT face=serif size=2>U.S.
DOLLARS).</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>BENEFICIARY MAY DRAW
ALL OR ANY PORTION OF THIS LETTER OF CREDIT AND ISSUER WILL MAKE FUNDS
IMMEDIATELY AVAILABLE TO BENEFICIARY UPON PRESENTATION OF BENEFICIARY&#146;S DRAFT(S)
AT SIGHT IN SUBSTANTIALLY THE FORM ATTACHED HERETO AS EXHIBIT &#147;A&#148; (&#147;SIGHT
DRAFT&#148;), DRAWN ON ISSUER AND ACCOMPANIED BY THIS LETTER OF CREDIT. ALL SIGHT
DRAFT(S) MUST BE SIGNED AND ENDORSED ON BEHALF OF BENEFICIARY, INDICATE THE
SIGNATOR&#146;S TITLE OR OTHER OFFICIAL CAPACITY, AND BE ACCOMPANIED BY BENEFICIARY&#146;S
AFFIDAVIT ATTESTING TO THE FACT THAT A DRAW EVENT HAS OCCURRED AND SPECIFYING
THE NATURE OF THAT EVENT. THE ISSUER WILL EFFECT PAYMENT UNDER THIS LETTER OF
CREDIT NOT LATER THAN THE CLOSE OF BUSINESS ON THE NEXT BUSINESS DAY FOLLOWING
PRESENTMENT OF THE SIGHT DRAFT(S).</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>ISSUER WILL HONOR ANY
SIGHT DRAFT(S) PRESENTED IN SUBSTANTIAL COMPLIANCE WITH THE TERMS OF THIS LETTER
OF CREDIT AT ISSUER&#146;S OFFICE LOCATED IN MINNEAPOLIS, MINNESOTA, ON OR BEFORE THE
ABOVE STATED EXPIRATION DATE, AS SUCH EXPIRATION DATE MAY BE EXTENDED HEREUNDER.
PARTIAL AND MULTIPLE DRAWS ARE PERMITTED ON ANY NUMBER OF OCCASIONS. FOLLOWING
ANY PARTIAL DRAW, ISSUER WILL ENDORSE THIS LETTER OF CREDIT AND RETURN THE
ORIGINAL TO BENEFICIARY..</FONT></FONT></P>
<P align=justify><FONT face=serif size=2><FONT face=serif>ISSUER ACKNOWLEDGES
THAT THIS LETTER OF CREDIT IS ISSUED PURSUANT TO THE PROVISIONS OF THAT CERTAIN
PURCHASE AGREEMENT BETWEEN SIGMUND J. HELLE AND SURMODICS, INC. FOR LAND LOCATED
IN EDEN PRAIRIE, MINNESOTA (&#147;PURCHASE AGREEMENT&#148;). NOTWITHSTANDING ANY REFERENCE
IN THIS LETTER OF CREDIT TO THE PURCHASE AGREEMENT OR ANY OTHER DOCUMENTS,
INSTRUMENTS OR AGREEMENTS, OR REFERENCES IN THE PURCHASE AGREEMENT OR ANY OTHER
DOCUMENTS, INSTRUMENTS OR AGREEMENTS TO THIS LETTER OF CREDIT, THIS LETTER OF
CREDIT CONTAINS THE ENTIRE AGREEMENT BETWEEN BENEFICIARY AND ISSUER RELATING TO
THE OBLIGATIONS OF ISSUER HEREUNDER.</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif><FONT face=serif size=2>THIS LETTER OF CREDIT
WILL BE AUTOMATICALLY EXTENDED EACH YEAR WITHOUT AMENDMENT FOR A PERIOD OF ONE
YEAR FROM THE EXPIRATION DATE HEREOF, AS EXTENDED, UNLESS AT LEAST SIXTY (60)
DAYS PRIOR TO THE EXPIRATION DATE, ISSUER NOTIFIES BENEFICIARY BY REGISTERED
MAIL THAT IT ELECTS NOT TO EXTEND THIS LETTER OF CREDIT FOR SUCH ADDITIONAL
PERIOD. NOTICE OF NON-EXTENSION WILL BE GIVEN BY ISSUER TO BENEFICIARY AT
BENEFICIARY&#146;S ADDRESS SET FORTH HEREIN OR AT SUCH OTHER ADDRESS AS BENEFICIARY
MAY DESIGNATE TO ISSUER IN WRITING AT ISSUER&#146;S LETTERHEAD
ADDRESS.</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>THIS LETTER OF CREDIT
IS FREELY TRANSFERABLE IN WHOLE OR IN PART, AND THE NUMBER OF TRANSFERS IS
UNLIMITED. ISSUER AGREES THAT IT WILL EFFECT ANY TRANSFERS IMMEDIATELY UPON
PRESENTATION TO ISSUER OF THIS LETTER OF CREDIT AND A WRITTEN TRANSFER REQUEST
SUBSTANTIALLY IN THE FORM OF THE COMPLETED TRANSFER FORM ATTACHED HERETO AS
EXHIBIT &#147;B.&#148; SUCH TRANSFER WILL BE EFFECTED AT NO COST TO BENEFICIARY. ANY
TRANSFER FEES ASSESSED BY ISSUER WILL BE PAYABLE SOLELY BY APPLICANT, AND THE
PAYMENT OF ANY TRANSFER FEES WILL NOT BE A CONDITION TO THE VALIDITY OR
EFFECTIVENESS OF THE TRANSFER OR THIS LETTER OF CREDIT.</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>ISSUER WAIVES ANY
RIGHTS IT MAY HAVE, AT LAW OR OTHERWISE, TO SUBROGATE TO ANY CLAIMS BENEFICIARY
MAY HAVE AGAINST APPLICANT OR APPLICANT MAY HAVE AGAINST
BENEFICIARY.</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>EXCEPT AS OTHERWISE
EXPRESSLY MODIFIED HEREIN, THIS STANDBY LETTER OF CREDIT IS SUBJECT TO THE
INTERNATIONAL STANDBY PRACTICES 1998, PUBLISHED BY THE INTERNATIONAL CHAMBER OF
COMMERCE.</FONT></FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="2%" colSpan=2><FONT face=serif><FONT face=serif size=2>ISSUER:&nbsp;</FONT></FONT></TD>
    <TD align=left width="97%"><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>By:&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="98%" colSpan=2>&nbsp; <FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD align=center width="98%" colSpan=2><FONT face=serif size=2>AUTHORIZED
      SIGNATURE&nbsp;</FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>Its:&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="98%" colSpan=2>&nbsp; <FONT face=serif size=2>&nbsp;</FONT></TD></TR></TABLE></DIV><BR>
<P align=center><FONT face=serif><FONT face=serif size=2>2</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
&#147;A&#148;</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>TO LETTER OF
CREDIT</FONT></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>SIGHT
DRAFT</FONT></FONT></B></P>
<P align=center><FONT face=serif><FONT face=serif size=2>Sight
Draft</FONT></FONT></P>
<P align=justify><FONT face=serif size=2>$_____________________ </FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>At sight,
pay to the order of [Name of Beneficiary to be inserted], the amount of USD
$______________ (__________________ and 00/100ths U.S. Dollars).</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Drawn
under [Name of Issuer to be inserted] Standby Letter of Credit No.</FONT><FONT face=serif><FONT face=serif size=2>_________________</FONT><FONT face=serif size=2>.</FONT></FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif><FONT face=serif size=2>Dated:</FONT> <FONT face=serif size=2>_________________</FONT><FONT face=serif size=2>, 20__&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif size=2>[Name of
      Beneficiary to be inserted]&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=2><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>By:&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Its
      Authorized Representative and [Title or Other Official&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capacity to
      be inserted]&nbsp;<FONT size=3>&nbsp;</FONT></FONT></TD></TR></TABLE></DIV><BR>
<P align=justify><FONT face=serif size=2>To: [Name and Address of Issuer to be
inserted]</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>3</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
&#147;B&#148;</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>TO LETTER OF
CREDIT</FONT></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>FORM OF TRANSFER
REQUEST</FONT></FONT></B></P>
<P align=justify><FONT face=serif size=2>IRREVOCABLE STANDBY LETTER OF
<BR>CREDIT NO: _____________________</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="99%" colSpan=4><FONT face=serif><FONT face=serif size=2>CURRENT
      BENEFICIARY:&nbsp;</FONT></FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      <FONT face=serif><FONT face=serif size=2>APPLICANT:&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="40%">&nbsp;
    </TD>
    <TD align=left width="10%">&nbsp;</TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="39%">&nbsp;
    </TD>
    <TD align=left width="10%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="40%">&nbsp;</TD>
    <TD align=left width="10%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="39%">&nbsp;</TD>
    <TD align=left width="10%"></TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="40%">&nbsp;</TD>
    <TD align=left width="10%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="39%">&nbsp;</TD>
    <TD align=left width="10%"></TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="40%">&nbsp;</TD>
    <TD align=left width="10%"></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="39%">&nbsp;</TD>
    <TD align=left width="10%"></TD></TR></TABLE><BR>
<P align=justify><FONT face=serif><FONT face=serif size=2>TO: [NAME OF ISSUING
BANK]</FONT></FONT></P>
<P align=justify><FONT face=serif size=2><FONT face=serif>The undersigned, as
the current &#147;Beneficiary&#148; of the above referenced Letter of Credit, hereby
requests that you reissue the Letter of Credit in favor of the transferee named
below [INSERT TRANSFEREE NAME AND ADDRESS BELOW]:</FONT></FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%"><FONT face=serif><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp;&nbsp;
      </FONT></FONT></FONT></TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;</TD></TR></TABLE>
<P align=justify><FONT face=serif><FONT face=serif size=2>From and after the
date this transfer request is delivered to the Issuer, the transferee shall be
the &#147;Beneficiary&#148; under the Letter of Credit for all purposes and shall be
entitled to exercise and enjoy all of the rights, privileges and benefits
thereof.</FONT></FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="49%"><FONT face=serif><FONT face=serif size=2>DATED:&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD align=left width="50%" colSpan=2><FONT face=serif><FONT face=serif size=2>[NAME OF BENEFICIARY]&nbsp;</FONT></FONT></TD></TR>
  <TR>
    <TD width="99%" colSpan=3><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp; </FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%"><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>By&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="49%">&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%"><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>Name&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="49%">&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="49%"><FONT face=serif size=2>&nbsp;<FONT size=3>&nbsp; </FONT></FONT></TD>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>Title&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="49%">&nbsp;
    </TD></TR>
  <TR>
    <TD align=left width="49%">&nbsp;</TD>
    <TD align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD align=left width="49%">&nbsp;</TD>
    <TD align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD align=left width="49%">&nbsp;</TD>
    <TD align=left width="50%" colSpan=2>
      <P align=justify><FONT face=serif><FONT face=serif size=2>[NOTARY
      ACKNOWLEDGMENT]<FONT size=3>&nbsp;</FONT></FONT></FONT></P></TD></TR></TABLE><BR>
<P align=justify><FONT face=serif><FONT face=serif size=2>[TO BE SIGNED BY A
PERSON PURPORTING TO BE AN AUTHORIZED </FONT></FONT><FONT face=serif><FONT face=serif size=2>REPRESENTATIVE OF THE BENEFICIARY AND INDICATING THEIR TITLE
OR OTHER OFFICIAL CAPACITY, AND ACKNOWLEDGED BY A NOTARY
PUBLIC.]</FONT></FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>4</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
E</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>SELLER&#146;S
DOCUMENTS</FONT></FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif><FONT face=serif size=2>1.</FONT></FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif><FONT face=serif size=2>Certificate of
      Survey/Topography by Ron Kreuger and Associates dated January
      1989.</FONT></FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif><FONT face=serif size=2>2.</FONT></FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif><FONT face=serif size=2>Soil Test Report
      by Braun Engineering dated 23/5/89.</FONT></FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif><FONT face=serif size=2>3.</FONT></FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif><FONT face=serif size=2>Letter from
      Darwin Schulz, Hennepin County Department of Environmental Services dated
      May 10, 2007.</FONT></FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif><FONT face=serif size=2>4.</FONT></FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif><FONT face=serif size=2>ALTA survey of
      Lot 1 dated 9/14/98.</FONT></FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif><FONT face=serif size=2>5.</FONT></FONT></TD>
    <TD vAlign=top noWrap>&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%">
      <P align=justify><FONT face=serif><FONT face=serif size=2>City Engineering
      documents relating to road and utilities last revised 9/27/84, Sheets 1,
      3, 4 and 5.</FONT></FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=3><FONT face=serif size=2>&nbsp;</FONT></TD></TR></TABLE>
<P align=center><FONT face=serif><FONT face=serif size=2>5</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
F</FONT></FONT></U></B><B><FONT face=serif></FONT></B></P>
<P align=center><B><FONT face=serif><FONT face=serif size=2>MEMORANDUM OF
PURCHASE AGREEMENT</FONT></FONT></B></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>THIS
MEMORANDUM OF PURCHASE AGREEMENT, made this __ day of ___________________, 2007,
by SurModics, Inc., a Minnesota corporation (&#147;Purchaser&#148;), and Vest Mykyng LLC,
a Minnesota limited liability company (&#147;Seller&#148;).</FONT></P>
<P align=center><FONT face=serif><FONT face=serif size=2>RECITALS</FONT></FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Seller
and Purchaser are parties to a Purchase Agreement dated as of
______________________, 2007 (the &#147;Purchase Agreement&#148;) providing for sale to
Purchaser of the real estate in Hennepin County, Minnesota, described on
<U>Exhibit A</U> hereto (the &#147;Property&#148;), and desire to provide recordable
evidence thereof.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>NOW, THEREFORE, the parties hereto hereby agree as
follows:</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>1.
Subject to and on the terms, conditions, and provisions of the Purchase
Agreement, Seller has agreed and hereby agrees to sell, and Purchaser has agreed
and hereby agrees to buy, the Property.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>2. This
Memorandum may be executed in counterparts each of which shall be considered an
original.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>3. This
Memorandum is solely to give notice of the existence of such Purchase
Agreement.</FONT></P>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>IN
WITNESS WHEREOF, the parties hereto have caused these presents to be made as of
the day and year first above stated.</FONT></P>
<P align=center><I><FONT face=serif><FONT face=serif size=2>Signature page
follows.</FONT></FONT></I></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif><FONT face=serif size=2>SIGNATURE PAGE
TO<BR></FONT></FONT></B><B><FONT face=serif><FONT face=serif size=2>MEMORANDUM
OF PURCHASE AGREEMENT</FONT></FONT></B></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif><FONT face=serif size=2>SELLER:&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif><FONT face=serif size=2>Vest Mykyng LLC&nbsp;<FONT size=3>&nbsp;
</FONT></FONT></FONT></TD></TR>
  <TR>
    <TD align=left width="100%" colSpan=2>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>By:&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;
    </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>Its:&nbsp;<FONT size=3>&nbsp; </FONT></FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;
    </TD></TR></TABLE></DIV><BR>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR>
    <TD noWrap width="1%"><FONT size=2>STATE OF MINNESOTA<FONT size=3>&nbsp;</FONT>&nbsp;&nbsp; </FONT></TD>
    <TD width="99%"><FONT size=2>)&nbsp;</FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap width="1%"></TD>
    <TD width="99%"><FONT size=2>) ss.&nbsp;&nbsp;</FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap width="1%"><FONT size=2>COUNTY OF HENNEPIN</FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD width="99%"><FONT size=2>)</FONT>&nbsp;</TD></TR></TABLE>
<P align=justify><FONT face=serif size=2><FONT size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT>The foregoing instrument was
acknowledged before me this __ day of ____________________, 2007, by
____________________________ the ______________________ of Vest Mykyng LLC, a
Minnesota limited liability company, on behalf of the limited liability
company.</FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="100%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%"><FONT face=serif><FONT face=serif size=2>Notary Public&nbsp;<FONT size=3>&nbsp;
  </FONT></FONT></FONT></TD></TR></TABLE></DIV><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><FONT face=serif><FONT face=serif size=2>SIGNATURE PAGE
TO<BR></FONT></FONT></B><B><FONT face=serif><FONT face=serif size=2>MEMORANDUM
OF PURCHASE AGREEMENT</FONT></FONT></B></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif><FONT face=serif size=2>PURCHASER:&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD></TR>
  <TR>
    <TD align=left width="100%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%" colSpan=2><FONT face=serif><FONT face=serif size=2>SurModics, Inc.&nbsp;<FONT size=3>&nbsp;</FONT></FONT></FONT></TD></TR>
  <TR>
    <TD align=left width="100%" colSpan=2>&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>By:&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="1%"><FONT face=serif><FONT face=serif size=2>Its:&nbsp;</FONT></FONT></TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="99%">&nbsp;</TD></TR></TABLE></DIV><BR>
<TABLE cellSpacing=0 cellPadding=0 width="40%" border=0>

  <TR>
    <TD noWrap width="1%"><FONT size=2>STATE OF MINNESOTA<FONT size=3>&nbsp;</FONT>&nbsp;&nbsp; </FONT></TD>
    <TD width="99%"><FONT size=2>)&nbsp;</FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap width="1%"></TD>
    <TD width="99%"><FONT size=2>) ss.&nbsp;&nbsp;</FONT><FONT size=3>&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap width="1%"><FONT size=2>COUNTY OF HENNEPIN</FONT><FONT size=3>&nbsp;</FONT></TD>
    <TD width="99%"><FONT size=2>)</FONT><FONT size=3>&nbsp;</FONT></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>The
foregoing instrument was acknowledged before me this __ day of
____________________, 2007, by ____________________________, the
______________________ of SurModics, Inc., a Minnesota corporation, on behalf of
the corporation.</FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" align=left width="100%">&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD align=left width="100%"><FONT face=serif><FONT face=serif size=2>Notary Public&nbsp;<FONT size=3>&nbsp;
  </FONT></FONT></FONT></TD></TR></TABLE></DIV><BR>
<P align=justify><FONT face=serif><FONT face=serif size=2>THIS INSTRUMENT WAS
DRAFTED BY:</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>Faegre &amp; Benson
LLP (AW) <BR>2200 Wells Fargo Center <BR>90 South Seventh Street
<BR>Minneapolis, MN 55402 <BR>Phone: (612) 766-7000</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT face=serif size=2>EXHIBIT
A</FONT></FONT></U></B><FONT face=serif></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2>Lot 2, Block 1,
Norseman Industrial Park Sixth Addition, according to the recorded plat thereof,
Hennepin County, Minnesota</FONT></FONT></P>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=center><B><U><FONT face=serif><FONT size=2>EXHIBIT
G</FONT></FONT></U></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD noWrap width="2%"><FONT face=serif size=2>STATE OF
      MINNESOTA&nbsp;</FONT></TD>
    <TD width="48%">)&nbsp;</TD>
    <TD width="50%"></TD></TR>
  <TR>
    <TD width="2%"><FONT face=serif size=3><FONT size=3></FONT></FONT></TD>
    <TD width="48%">)ss.<FONT size=3></FONT></TD>
    <TD width="50%"></TD></TR>
  <TR>
    <TD noWrap width="2%"><FONT face=serif size=2>COUNTY OF
      HENNEPIN&nbsp;&nbsp;</FONT></TD>
    <TD width="48%">)&nbsp;</TD>
    <TD align=right width="50%"><FONT face=serif size=2><STRONG>Affidavit
      Regarding Seller(s)</STRONG><FONT size=3></FONT></FONT></TD></TR></TABLE><BR>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD noWrap><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>____________________________ , being first duly sworn, on oath
      say(s) that:</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>(They are) (__he is) the
      ________________ and ____________________ of Vest Mykyng LLC, a Minnesota
      limited liability company, the company named as _____________________ in
      the document dated August ____, 2007, and filed for record
      _________________________, 2007, as Document No. _________________, (or in
      Book ____________________, of ___________________, Page _____________), in
      the Office of the County Recorder of Hennepin County,
    Minnesota.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>Said entity&#146;s principal place of
      business is at 6138 Arctic Way, Edina, Minnesota 55436, and said company&#146;s
      previous principal place(s) of business during the past ten years
      (has)(have) been at:</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>3.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>There have been
      no:</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>a.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Bankruptcy, divorce or
      dissolution proceedings involving said person during the time said person
      has had any interest in the premises described in the above document
      (&#147;Premises&#148;);</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>b.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%">
      <P align=justify><FONT face=serif size=2>Unsatisfied judgments of record
      against said persons nor any actions pending in any courts, which affect
      the Premises;</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD noWrap><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD noWrap></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>c.</FONT></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%"><FONT face=serif size=2>Tax liens against said
      person(s);</FONT></TD></TR>
  <TR>
    <TD noWrap><FONT face=serif size=2>&nbsp;</FONT></TD>
    <TD noWrap></TD>
    <TD width="100%" colSpan=3><FONT face=serif size=2>except as herein
      stated:</FONT></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>4.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>Any bankruptcy or dissolution
      proceedings of record against entities with the same or similar names,
      during the time period in which the above named entity had any interest in
      the Premises, are not against the above named entity.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>5.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>Any judgments, or tax liens of
      record against entities with the same or similar names are not against the
      above named entity except as recorded.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>6.</FONT></TD>
    <TD vAlign=top noWrap></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>There has been no labor or
      materials furnished to the Premises for which payment has not been
      made.</FONT></P></TD></TR>
  <TR>
    <TD width="100%" colSpan=5><FONT face=serif size=2>&nbsp;&nbsp;</FONT></TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>7.</FONT></TD>
    <TD vAlign=top noWrap><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD width="100%" colSpan=3>
      <P align=justify><FONT face=serif size=2>There are no persons in
      possession of any portion of the Premises other than pursuant to a
      recorded document except as stated herein:</FONT></P></TD></TR></TABLE>
<P align=justify>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face=serif size=2>Affiants
know the matters herein stated are true and make(s) this Affidavit for the
purpose of inducing the passing of title to the Premises.</FONT></P>
<DIV align=right>
<TABLE cellSpacing=0 cellPadding=0 width="50%" border=0>

  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" width="100%">&nbsp;</TD></TR>
  <TR>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" width="100%">&nbsp;</TD></TR></TABLE></DIV><BR>
<HR align=center width="100%" noShade SIZE=2>
<PAGE>
<P align=justify><FONT face=serif><FONT face=serif size=2>Subscribed and sworn
to before me this</FONT> <BR><FONT face=serif size=2>_____ </FONT><FONT face=serif size=2>day of </FONT><FONT face=serif size=2>____________</FONT><FONT face=serif size=2>, 2007</FONT></FONT></P>
<P align=justify><FONT face=serif><FONT face=serif size=2></FONT></FONT>&nbsp;</P>
<P align=justify><FONT face=serif><FONT face=serif size=2>______________________________<BR></FONT></FONT><FONT face=serif><FONT face=serif size=2>Notary Public</FONT></FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD style="BORDER-TOP: #000000 1pt solid; BORDER-LEFT: #000000 1pt solid; BORDER-BOTTOM: #000000 1pt solid" vAlign=top align=left width="49%" rowSpan=7><FONT face=serif size=1><BR>&nbsp;&nbsp; NOTARIAL STAMP OR SEAL (OR OTHER TITLE OR
      RANK)</FONT></TD>
    <TD style="BORDER-RIGHT: #000000 1pt solid; BORDER-TOP: #000000 1pt solid; BORDER-LEFT: #000000 1pt solid; BORDER-BOTTOM: #000000 1pt solid" vAlign=top align=center width="50%" rowSpan=7><B><FONT face=serif size=1>THIS INSTRUMENT WAS DRAFTED BY</FONT></B><BR><B><FONT face=serif size=1>(NAME AND ADDRESS):</FONT></B><BR><FONT face=serif size=1>Gray,
      Plant, Mooty, Mooty &amp; Bennett, P.A.</FONT><BR><FONT face=serif size=1>500 IDS Center<BR></FONT><FONT face=serif size=1>80 South Eighth
      Street</FONT><BR><FONT face=serif size=1>Minneapolis, MN
      55402<BR></FONT><FONT face=serif size=1>(JLT)</FONT>&nbsp;</TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>

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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>7
<FILENAME>exhibit21.htm
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>

<HTML>
<HEAD>
   <TITLE></TITLE>
</HEAD>

<BODY bgcolor="#ffffff">

<P align=right><B><FONT face=serif size=2>Exhibit 21 </FONT></B></P>
<P align=center><B><FONT face=serif size=2>SUBSIDIARIES </FONT></B></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><U><FONT face=serif size=2>Name</FONT></U>&nbsp; </TD>
    <TD noWrap align=left width="50%"><U><FONT face=serif size=2>State of
      incorporation</FONT></U>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>BioFX Laboratories,
      Inc.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Maryland</FONT>&nbsp;
  </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Brookwood Pharmaceuticals,
      Inc.</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Delaware</FONT>&nbsp;
  </TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>



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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>8
<FILENAME>exhibit23.htm
<DESCRIPTION>CONSENT OF DELOITTE & TOUCHE LLP
<TEXT>

<HTML>
<HEAD>
   <TITLE></TITLE>
</HEAD>

<BODY bgcolor="#ffffff">

<P align=right><FONT face=serif size=2><STRONG>Exhibit 23</STRONG></FONT></P>
<P align=center><FONT face=serif size=2><STRONG>CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM</STRONG></FONT></P>
<P align=left><FONT face=serif size=2>We consent to the incorporation by
reference in Registration Statement No. 333-123524 on Form S-3 and Registration
Statement Nos. 333-104258, 333-64171, 333-64173, 333-79741, 333-54266 and
333-123521 on Form S-8 of our reports dated December 13, 2007, relating to the
consolidated financial statements of SurModics, Inc., and management's report on
the effectiveness of internal control over financial reporting, appearing in
this Annual Report on Form 10-K of SurModics, Inc. for the year ended September
30, 2007.</FONT></P>
<P align=left><FONT face=serif size=2><STRONG><I>DELOITTE &amp; TOUCHE
LLP</I></STRONG></FONT></P>
<P align=left><FONT face=serif size=2><STRONG>Minneapolis, Minnesota<BR>December
13, 2007</STRONG></FONT></P>

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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>9
<FILENAME>exhibit31-1.htm
<DESCRIPTION>CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OX
<TEXT>
<HTML>
<HEAD>
   <TITLE></TITLE>
</HEAD>

<BODY bgcolor="#ffffff">
<P align=right><B><FONT face=serif size=2>Exhibit 31.1 </FONT></B></P>
<P align=center><B><FONT face=serif size=2>CERTIFICATIONS</FONT></B></P>
<P style="TEXT-ALIGN: left"><FONT face=serif size=2>I, Bruce J Barclay, Chief
Executive Officer of SurModics, Inc., certify that:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1.</FONT></TD>
    <TD vAlign=top noWrap >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>I have reviewed this
      Annual Report on Form 10-K of SurModics, Inc.;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=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;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>3.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>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;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>4.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>The registrant&#146;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:</FONT></TD></TR></TABLE>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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; </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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; </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(c)
evaluated the effectiveness of the registrant&#146;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 </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(d)
disclosed in this report any change in the registrant&#146;s internal control over
financial reporting that occurred during the registrant&#146;s most recent fiscal
quarter (the registrant&#146;s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant&#146;s internal control over financial reporting; and </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>5.</FONT></TD>
    <TD noWrap >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD width="100%"><FONT face=serif size=2>The registrant&#146;s other certifying
      officer and I have disclosed, based on our most recent evaluation of
      internal control over financial reporting, to the registrant&#146;s auditors
      and the audit committee of registrant&#146;s board of directors (or persons
      performing the equivalent functions):</FONT></TD></TR></TABLE>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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&#146;s ability to record, process, summarize and
report financial information; and</FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial
reporting.</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="49%"><FONT face=serif size=2>Date: December 14,
      2007</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD width="99%" colSpan=3>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%"><FONT face=serif size=2>/s/ Bruce J Barclay</FONT>&nbsp; </TD>
    <TD noWrap align=left width="25%" >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Bruce J Barclay</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="49%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Chief Executive Officer</FONT>&nbsp; </TD></TR></TABLE><BR>
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<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>10
<FILENAME>exhibit31-2.htm
<DESCRIPTION>CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OX
<TEXT>
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<P align=right><B><FONT face=serif size=2>Exhibit 31.2 </FONT></B></P>
<P align=center><B><FONT face=serif size=2>CERTIFICATIONS</FONT></B></P>
<P align=left><FONT face=serif size=2>I, Philip D. Ankeny, Chief Financial
Officer of SurModics, Inc., certify that:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>1.</FONT></TD>
    <TD vAlign=top noWrap >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>I have reviewed this
      Annual Report on Form 10-K of SurModics, Inc.;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>2.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=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;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>3.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>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;</FONT></TD></TR>
  <TR>
    <TD vAlign=top width="100%" colSpan=3>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>4.</FONT></TD>
    <TD vAlign=top noWrap ></TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>The registrant&#146;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:</FONT></TD></TR></TABLE>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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; </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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; </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(c)
evaluated the effectiveness of the registrant&#146;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 </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(d)
disclosed in this report any change in the registrant&#146;s internal control over
financial reporting that occurred during the registrant&#146;s most recent fiscal
quarter (the registrant&#146;s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant&#146;s internal control over financial reporting; and </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 border=0>

  <TR>
    <TD vAlign=top noWrap><FONT face=serif size=2>5.</FONT></TD>
    <TD vAlign=top noWrap >&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </TD>
    <TD vAlign=top width="100%"><FONT face=serif size=2>The registrant&#146;s other
      certifying officer and I have disclosed, based on our most recent
      evaluation of internal control over financial reporting, to the
      registrant&#146;s auditors and the audit committee of registrant&#146;s board of
      directors (or persons performing the equivalent
  functions):</FONT></TD></TR></TABLE>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(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&#146;s ability to record, process, summarize and
report financial information; and </FONT></P>
<P style="PADDING-LEFT: 23pt; TEXT-ALIGN: left"><FONT face=serif size=2>(b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial
reporting. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Date: December 14,
      2007</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD width="100%" colSpan=3>&nbsp;&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%"><FONT face=serif size=2>/s/ Philip D. Ankeny</FONT>&nbsp; </TD>
    <TD noWrap align=left width="25%" >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Philip D. Ankeny</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Chief
      Financial Officer</FONT>&nbsp; </TD></TR></TABLE><BR>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>11
<FILENAME>exhibit32-1.htm
<DESCRIPTION>CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF SARBANES-OX
<TEXT>
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<P align=right><B><FONT face=serif size=2>Exhibit 32.1 </FONT></B></P>
<P align=center><B><FONT face=serif size=2>CERTIFICATION PURSUANT TO
<BR></FONT></B><B><FONT face=serif size=2>18 U.S.C. SECTION 1350, <BR>AS ADOPTED
PURSUANT TO <BR></FONT></B><B><FONT face=serif size=2>SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 </FONT></B></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; In connection
with the Annual Report of SurModics, Inc. (the &#147;Company&#148;) on Form 10-K for the
year ended September 30, 2007 as filed with the Securities and Exchange
Commission (the &#147;Report&#148;), I, Bruce J Barclay, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. &#167;1350, as adopted pursuant to &#167;906 of
the Sarbanes-Oxley Act of 2002, that: </FONT></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; (1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and </FONT></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Date: December 14,
      2007</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="50%" >&nbsp;</TD>
    <TD noWrap align=left width="50%"  colSpan=2></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%"><FONT face=serif size=2>/s/ Bruce J Barclay</FONT>&nbsp; </TD>
    <TD noWrap align=left width="25%" >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Bruce
      J Barclay</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Chief
      Executive Officer</FONT>&nbsp; </TD></TR></TABLE><BR>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>12
<FILENAME>exhibit32-2.htm
<DESCRIPTION>CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF SARBANES-OX
<TEXT>
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<P align=right><B><FONT face=serif size=2>Exhibit 32.2 </FONT></B></P>
<P align=center><B><FONT face=serif size=2>CERTIFICATION PURSUANT
TO&nbsp;<BR></FONT></B><B><FONT face=serif size=2>18 U.S.C. SECTION 1350, <BR>AS
ADOPTED PURSUANT TO <BR></FONT></B><B><FONT face=serif size=2>SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 </FONT></B></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; In connection
with the Annual Report of SurModics, Inc. (the &#147;Company&#148;) on Form 10-K for the
year ended September 30, 2007 as filed with the Securities and Exchange
Commission (the &#147;Report&#148;), I, Philip D. Ankeny, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. &#167;1350, as adopted pursuant to &#167;906 of
the Sarbanes-Oxley Act of 2002, that: </FONT></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; (1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and </FONT></P>
<P align=left><FONT face=serif size=2>&nbsp;&nbsp;&nbsp;&nbsp; (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. </FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR vAlign=bottom>
    <TD noWrap align=left width="50%"><FONT face=serif size=2>Date: December 14,
      2007</FONT>&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2>&nbsp;</TD></TR>
  <TR>
    <TD noWrap align=left width="50%" >&nbsp;</TD>
    <TD noWrap align=left width="50%"  colSpan=2></TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD style="BORDER-BOTTOM: #000000 1pt solid" noWrap align=left width="25%"><FONT face=serif size=2>/s/ Philip D. Ankeny</FONT>&nbsp; </TD>
    <TD noWrap align=left width="25%" >&nbsp;</TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Philip D. Ankeny</FONT>&nbsp; </TD></TR>
  <TR vAlign=bottom>
    <TD noWrap align=left width="50%">&nbsp; </TD>
    <TD noWrap align=left width="50%" colSpan=2><FONT face=serif size=2>Chief Financial Officer</FONT>&nbsp; </TD></TR></TABLE><BR>
<HR align=center width="100%" noShade SIZE=2>
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