VERMILLION, INC. (Form: 10-Q, Received: 11/14/2007 16:47:01)

Signature of Employee

Spouse’s Signature (If beneficiary other than spouse)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2007 .


o		Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to .

Commission File Number: 000-31617

Vermillion, Inc.

(Exact name of registrant as specified in its charter)


Delaware		33-0595156

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6611 Dumbarton Circle, Fremont, California		94555

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: ( 510) 505-2100

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 o No þ

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

As of October 31, 2007, the Registrant had 63,776,934 shares of common stock, par value $0.001 per share, outstanding.

Vermillion, Inc. and Subsidiaries
Table of Contents


	Page
PART I
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2007, and December 31, 2006		1
Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006		2
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive Loss for the nine months ended September 30, 2007 and 2006		3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006		4
Notes to Consolidated Financial Statements		5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3 Quantitative and Qualitative Disclosures About Market Risk		29
Item 4T Controls and Procedures		30

PART II
Item 1 Legal Proceedings		31
Item 1A Risk Factors		31
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3 Defaults Upon Senior Securities		40
Item 4 Submission of Matters to a Vote of Security Holders		40
Item 5 Other Information		40
Item 6 Exhibits		41

SIGNATURES		47
EXHIBIT 10.6
EXHIBIT 10.51
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.0

Vermillion is a trademark of Vermillion, Inc. ProteinChip is a registered trademark of Bio-Rad Laboratories, Inc. BioSepra is a registered trademark of Pall Corporation.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Vermillion, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in Thousands, Except Share and Par Value Amounts)
(Unaudited)


	September 30,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	19,498		$	17,711
Short-term investments, at fair value		4,000			—
Accounts receivable, net of allowance for doubtful accounts of $- and $2, respectively		—			29
Prepaid expenses and other current assets		1,101			2,300


Total current assets		24,599			20,040

Property, plant and equipment, net		1,613			2,260
Other assets		655			716


Total assets	$	26,867		$	23,016


Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	2,177		$	2,401
Accrued liabilities		3,863			4,600
Deferred revenue		31			45
Current portion of convertible senior notes, net of discounts		2,460			—


Total current liabilities		8,531			7,046

Long-term debt owed to related party		10,000			7,083
Convertible senior notes, net of discount		16,150			18,428
Other liabilities		278			360


Total liabilities		34,959			32,917


Commitments and contingencies (Note 8)

Stockholders’ deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at September 30, 2007, and December 31, 2006		—			—
Common stock, $0.001 par value, 150,000,000 and 80,000,000 shares authorized at September 30, 2007, and December 31, 2006, respectively; 63,776,934 and 39,220,437 shares issued and outstanding at September 30, 2007, and December 31, 2006, respectively		64			39
Additional paid-in capital		227,796			207,991
Accumulated deficit		(235,850	)		(217,860	)
Accumulated other comprehensive loss		(102	)		(71	)


Total stockholders’ deficit		(8,092	)		(9,901	)


Total liabilities and stockholders’ deficit	$	26,867		$	23,016

See accompanying notes to consolidated financial statements.

- 1 -

Vermillion, Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenue:
Products	$	—		$	2,697		$	—		$	10,702
Services		—			1,965			21			6,297


Total revenue		—			4,662			21			16,999


Cost of revenue:
Products		—			1,571			—			5,714
Services		—			910			15			3,118


Total cost of revenue		—			2,481			15			8,832


Gross profit		—			2,181			6			8,167


Operating expenses:
Research and development		2,182			2,914			6,297			8,780
Sales and marketing		516			3,204			1,440			10,652
General and administrative		2,090			2,541			8,626			7,549


Total operating expenses		4,788			8,659			16,363			26,981


Loss on sale of instrument business		—			—			(382	)		—


Loss from operations		(4,788	)		(6,478	)		(16,739	)		(18,814	)

Interest income		169			190			458			654
Interest expense		(596	)		(592	)		(1,727	)		(1,691	)
Other income (expense), net		95			(116	)		17			(174	)


Loss before income taxes		(5,120	)		(6,996	)		(17,991	)		(20,025	)
Income tax benefit (expense)		3			(20	)		1			(190	)


Net loss	$	(5,117	)	$	(7,016	)	$	(17,990	)	$	(20,215	)


Loss per share — basic and diluted	$	(0.11	)	$	(0.19	)	$	(0.43	)	$	(0.56	)


Shares used to compute basic and diluted loss per common share		48,056,582			36,075,163			42,214,245			36,041,625

See accompanying notes to consolidated financial statements.

- 2 -

Vermillion, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive Loss

(Dollars in Thousands, Except Share and Per Share Amounts)
(Unaudited)


										Accumulated
					Additional					Other			Total
	Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders’			Comprehensive
	Shares		Amount		Capital		Deficit			Loss ⁽¹⁾			Equity (Deficit)			Loss
Balance at December 31, 2005		35,998,881	$	36	$	202,485	$	(195,794	)	$	(204	)	$	6,523

Net loss		—		—		—		(20,215	)		—			(20,215	)	$	(20,215	)
Foreign currency translation adjustment		—		—		—		—			128			128			128

Comprehensive loss																$	(20,087	)

Common stock shares issued in connection with:
Exercise of stock options		1,670		—		2		—			—			2
Employee stock purchase plan		75,886		—		100		—			—			100
Stock compensation charge		—		—		1,338		—			—			1,338


Balance at September 30, 2006		36,076,437	$	36	$	203,925	$	(216,009	)	$	(76	)	$	(12,124	)


Balance at December 31, 2006		39,220,437	$	39	$	207,991	$	(217,860	)	$	(71	)	$	(9,901	)

Net loss		—		—		—		(17,990	)		—			(17,990	)	$	(17,990	)
Foreign currency translation adjustment		—		—		—		—			(31	)		(31	)		(31	)

Comprehensive loss																$	(18,021	)

Common stock shares issued in connection with:
Exercise of stock options		20,312		—		24		—			—			24
Employee stock purchase plan		23,093		—		21		—			—			21
Private offering, net of issuance costs and registration fees		24,513,092		25		19,076		—			—			19,101
Stock compensation charge		—		—		684		—			—			684


Balance at September 30, 2007		63,776,934	$	64	$	227,796	$	(235,850	)	$	(102	)	$	(8,092	)


⁽¹⁾		Accumulated Other Comprehensive Loss arises solely from foreign currency cumulative translation adjustment.

See accompanying notes to consolidated financial statements.

- 3 -

Vermillion, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in Thousands)
(Unaudited)


	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(17,990	)	$	(20,215	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on sale of instrument business		382			—
Depreciation and amortization		882			3,551
Stock-based compensation expense		684			1,338
Amortization of debt discount associated with beneficial conversion feature of convertible senior notes		182			399
Amortization of debt issuance costs		54			279
Accrued investment income		—			(5	)
Changes in operating assets and liabilities:
Decrease in accounts receivable		29			1,898
Decrease (increase) in prepaid expenses and other current assets		848			(779	)
Decrease in inventories		—			1,445
Decrease in other assets		19			95
Decrease in accounts payable and accrued liabilities		(1,004	)		(2,317	)
Decrease in deferred revenue		(14	)		(760	)
Decrease in other liabilities		(82	)		(187	)


Net cash used in operating activities		(16,010	)		(15,258	)


Cash flows from investing activities:
Purchase of property, plant and equipment		(235	)		(881	)
Maturities of short-term investment		—			2,245
Purchases of short-term investment		(4,000	)		—
Payment for license related to litigation settlement		—			(346	)


Net cash provided by (used in) investing activities		(4,235	)		1,018


Cash flows from financing activities:
Proceeds from exercises of stock options		24			—
Proceeds from purchase of common stock by employee stock purchase plan		21			100
Proceeds from private offering of common stock and common stock warrants, net of issuance costs and registration fees		19,101			—
Proceeds from secured line of credit with Quest Diagnostics Incorporated		2,917			3,749
Principal payments on capital lease obligations		—			(13	)
Repayments of long-term debt		—			(376	)


Net cash provided by financing activities		22,063			3,460


Effect of exchange rate changes on cash and cash equivalents		(31	)		66


Net increase (decrease) in cash and cash equivalents		1,787			(10,714	)
Cash and cash equivalents, beginning of period		17,711			25,738


Cash and cash equivalents, end of period	$	19,498		$	15,024


Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,603		$	1,595
Income taxes		197			7

Noncash investing and financing activities:
Transfer of fixed assets to inventory	$	—		$	100
Acquisition of property and equipment under capital leases		—			1

See accompanying notes to consolidated financial statements.

- 4 -

Vermillion, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1.		Organization, Basis of Presentation and Summary of Significant Accounting and Reporting Policies

		*The Company*

		At the annual stockholders’ meeting on June 29, 2007, the stockholders approved an amendment to the Certificate of Incorporation to change the name of the company from Ciphergen Biosystems, Inc. to Vermillion, Inc. (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as the “Company”). The name change represented the transition of the Company from its historical roots as a proteomics research products business to a specialty diagnostic testing business. On August 21, 2007, the Company amended its Certificate of Incorporation to reflect the name change.

		Prior to the November 13, 2006, sale of assets and liabilities of the Company’s protein research products and collaborative services business (the “Instrument Business”) to Bio-Rad Laboratories, Inc. (“Bio-Rad”), the Company developed, manufactured and sold ProteinChip Systems for life science research. This patented technology is recognized as Surface Enhanced Laser Desorption/Ionization (“SELDI”). The systems consist of ProteinChip Readers, ProteinChip Software and related accessories, which were used in conjunction with consumable ProteinChip Arrays. These products were sold primarily to pharmaceutical companies, biotechnology companies, academic research laboratories and government research laboratories. The Company also provided research services through its Biomarker Discovery Center laboratories, and offered consulting services, customer support services and training classes to its customers and collaborators. As a result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad on November 13, 2006, the Company does not expect to generate substantial revenues until certain diagnostic tests are cleared by the United States Food and Drug Administration (the “FDA”) and commercialized.

		Since the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, the Company has dedicated itself to the discovery, development and commercialization of specialty diagnostic tests that provide physicians with information with which to manage their patients’ care and to improve patient outcomes. The Company uses translational proteomics, which is the process of answering clinical questions by utilizing advanced protein separation methods, to identify and resolve variants of specific biomarkers, develop assays and commercialize diagnostic tests.

		The Company has incurred significant net losses and negative cash flows from operations since inception. At September 30, 2007, the Company had an accumulated deficit of $235,850,000. After completing the private placement sale of securities on August 29, 2007, management (“we”, “us” or “our”) believes the Company’s current available resources will be sufficient to maintain current and planned operations through the next twelve months. The Company will, however, be required to raise additional capital at some point in the future. At such time the Company requires additional funding, the Company may seek to raise such additional funding from various sources, including the public equity market, private financings, sales of assets, collaborative arrangements and debt. If additional capital is raised through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies or products that it might otherwise seek to retain. There can be no assurance that the Company will be able to obtain such financing, or obtain it on acceptable terms. If the Company is unable to obtain financing on acceptable terms, we may be unable to execute our business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not be able to pay off the convertible senior notes if and when they come due.

		*Basis of Presentation*

		The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q pursuant to Rule 10-01, Interim Financial Statements , of Regulation S-X promulgated by

- 5 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		the Securities and Exchange Commission (the “SEC”). Accordingly, the unaudited consolidated financial statements do not include all of the disclosures required by GAAP for complete financial statements. The December 31, 2006, consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on April 2, 2007.

		In the opinion of management, the unaudited consolidated financial statements contain all adjustments consisting only of a normal and recurring nature, which are considered necessary for a fair presentation of the financial condition and results of operations for such periods. The accompanying unaudited consolidated financial statements include the accounts of the Company. All intercompany transactions have been eliminated in consolidation. The results of operations for the interim periods shown herein are not necessarily indicative of operating results for the entire year or any other future interim period.

		*Use of Estimates in Preparation of Financial Statements*

		The preparation of financial statements in conformity with GAAP 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 revenues and expenses during the reporting period. Actual results could differ from those estimated results.

		*Income Taxes*

		On January 1, 2007, the Company adopted Financial Accounting Standards Board (the “FASB”) Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 , which clarifies the accounting for income tax uncertainties that have been recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxe s. The cumulative effect of adopting FIN 48 on January 1, 2007, resulted in no liability under FIN 48 on the balance sheet. There are open statutes of limitations for taxing authorities to audit the Company for federal and state jurisdictions from the year 2003 through the current period. Since the Company had a full valuation on all the deferred tax assets, FIN 48 had no impact on the Company’s effective tax rate. The Company is evaluating the net operating loss carryforwards, and research and development deferred tax assets to determine whether there is a limit due to prior year ownership changes. It is possible that a portion of these deferred tax assets may be limited in their use. The Company expects to complete the studies by the end of 2007.

		The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. Interest and penalties related to income taxes are recorded to interest and other expense of the consolidated statement of operations.

2.		Recent Accounting Pronouncements

		*Fair Value Option for Financial Assets and Financial Liabilities*

		In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 . SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.

- 6 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company’s adoption of SFAS No. 159 is not expected to have a material impact on its consolidated financial statements.

		*Fair Value Measurements*

		In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company’s adoption of SFAS No. 157 is not expected to have a material impact on its consolidated financial statements.

3.		Strategic Alliance with Quest Diagnostics Incorporated

		On July 22, 2005, Vermillion and Quest Diagnostics Incorporated (“Quest”) entered into a strategic alliance agreement, which focuses on commercializing up to three assays chosen from Vermillion’s pipeline. The term of the agreement ends on the later of (i) the three-year anniversary of the agreement and (ii) the date on which Quest commercializes the three diagnostic tests covered by such agreement. Pursuant to the agreement, Quest will have the non-exclusive right to commercialize these tests on a worldwide basis, with exclusive commercialization rights in territories where Quest has a significant presence for up to five years following commercialization. As part of the strategic alliance, there is a royalty arrangement under which Quest will pay royalties to Vermillion based on fees earned by Quest for applicable diagnostics services, and Vermillion will pay royalties to Quest based on Vermillion’s revenue from applicable diagnostics products. To date, no such royalties have been earned by either party.

		Quest also agreed to provide Vermillion with a $10,000,000 secured line of credit, which is collateralized by certain intellectual property of Vermillion, that may only be used for certain costs and expenses directly related to the strategic alliance. Under the terms of this secured line of credit, the interest rate is at the prime rate plus 0.5% and is payable monthly. Additionally, this secured line of credit contain provisions for Quest to forgive portions of the amounts borrowed that corresponds to Vermillion’s achievement of certain milestones related to development, regulatory approval and commercialization of certain diagnostic tests. The amounts to be forgiven and the corresponding milestones that Vermillion must achieve are (i) $1,000,000 for each application that allows a licensed laboratory test to be commercialized with a maximum of $3,000,000 for three applications that allows a licensed laboratory test to be commercialized; (ii) $3,000,000 for the commercialization of the first diagnostic test kit; and (iii) $2,000,000 for each subsequent commercialization of diagnostic test kits with a maximum of $4,000,000 for two subsequent commercialization of diagnostic test kits. Should Vermillion fail to achieve these milestones, it would be responsible for the repayment of the outstanding principal amount and any unpaid interest on the secured line of credit on or before July 22, 2010. Vermillion has drawn on this secured line of credit in monthly increments of $417,000 on the last day of each month during the first two years of the strategic alliance. As of September 30, 2007, and December 31, 2006, Vermillion has drawn $10,000,000 and $7,083,000, respectively, from this secured line of credit. From the inception of the strategic alliance through September 30, 2007, the Company had spent $10,000,000 of the amounts drawn on in-house research and development, as well as collaborations with others, directed towards achieving the milestones.

- 7 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

4.		Short-Term Investments

		Short-term investments available-for-sale are carried at fair value based on quoted market prices. The Company has no unrealized holding gains or losses based on the market value of the auction rate preferred securities at September 30, 2007. Short-term investments available-for-sale consist of the following at September 30, 2007 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
	Cost		Gain		Loss		Value
Auction rate preferred securities	$	4,000	$	—	$	—	$	4,000

The scheduled maturity dates for short-term investments available for sale at September 30, 2007, are as follows (in thousands):


			After 1 Year		After 5 Year
	Within		Through		Through		After
	1 Year		5 Years		10 Years		10 Years		Total
Auction rate preferred securities	$	4,000	$	—	$	—	$	—	$	4,000

5.		Receivables from and Payables to Bio-Rad

		In connection with the sale of assets and liabilities of the Company’s Instrument Business on November 13, 2006, Bio-Rad withheld $2,000,000 from the sales proceeds until the issuance of a reexamination certificate confirming United States Patent No. 6,734,022 (the “022 Patent”). If the United States Patent and Trademark Office (the “USPTO”) does not issue a reexamination certificate confirming the patentability of all of the claims as originally issued in the 022 Patent, or claims of equivalent scope, the Company will not be entitled to receive the $2,000,000 withheld by Bio-Rad. The 022 Patent is directed to a fundamental process of SELDI that involves capturing an analyte from a sample on the surface of a mass spectrometry probe derivatized with an affinity reagent, applying matrix and detecting the captured analyte by laser desorption mass spectrometry. In March 2007, the USPTO issued a final office action in the reexamination, rejecting all of the claims of the 022 Patent. Although the office action was designated “final”, Vermillion, under the USPTO rules, advocated the outstanding rejections and the patentability of the claimed invention with the patent examiners on March 30, 2007, and April 11, 2007. In addition, on April 18, 2007, Vermillion filed a response to the final office action with the USPTO. On June 28, 2007, the USPTO sent to Vermillion a notice of intent to issue a reexamination certificate of the 022 Patent (see further discussion in Note 13 “Subsequent Event”).

		Subsequent to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad on November 13, 2006, both the Company and Bio-Rad recognized business activities on behalf of each other. As of September 30, 2007, the Company owed Bio-Rad $20,000 for accounts receivable the Company collected on behalf of Bio-Rad. Similarly, Bio-Rad owed the Company $128,000, which consisted of $83,000 of invoices processed and paid by the Company on behalf of Bio-Rad and $45,000 for Bio-Rad’s portion of expenses related to facilities shared by the Company. Subsequent to September 30, 2007, the Company made no payments towards the $20,000 owed to Bio-Rad, and collected $45,000 related to the $128,000 owed by Bio-Rad. As of December 31, 2006, the Company owed Bio-Rad $1,571,000, which consisted of $1,511,000 for accounts receivable the Company collected on behalf of Bio-Rad, $8,000 for invoices processed by Bio-Rad on behalf of the Company and $52,000 for services Bio-Rad provided to the Company. Similarly, Bio-Rad owed the Company $619,000, which consisted of $174,000 for invoices processed by the Company on behalf of Bio-Rad, $200,000 for sales taxes on the sale of assets and $245,000 for unbilled receivables from Bio-Rad. Subsequent to December 31, 2006, the Company paid the $1,571,000 owed to Bio-Rad, and collected the $619,000 owed by Bio-Rad. Additionally, for the nine months ended September 30, 2007, the Company recorded a charge of $382,000 related to a post-closing adjustment resulting from the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

- 8 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		Additionally, as of September 30, 2007, the Company owed Bio-Rad $192,000 for laboratory supplies. Subsequent to September 30, 2007, the Company paid $160,000 related to the $192,000 owed to Bio-Rad.

6.		Warranties and Maintenance Contracts

		Prior to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad on November 13, 2006, the Company had product warranty activities and obligations to provide services for its products. The Company generally included a standard 12-month warranty on its ProteinChip Systems and certain accessories upon initial sale, after which maintenance and support was available under a separately priced contract or on an individual call basis. The Company also sold separately priced maintenance (extended warranty) contracts, which were generally for 12 or 24 months, upon expiration of the initial 12-month warranty. Coverage under both the standard and extended maintenance contracts was identical. Revenue for both the standard and extended maintenance contracts was deferred and recognized on a straight-line basis over the period of the applicable maintenance contract. Related costs were recognized as incurred.

		For the three and nine months ended September 30, 2007, the Company had no product warranty obligations or activity, as all warranty obligations were assumed by Bio-Rad as of November 13, 2006. Changes in product warranty obligations, including separately priced maintenance obligations, for the three and nine months ended September 30, 2006, were as follows (in thousands):


	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2006			2006
Balance at beginning of period	$	2,748		$	2,831

Add: Costs incurred for maintenance contracts		509			1,687
Revenue deferred for maintenance contracts		851			3,067

Less: Settlements made under maintenance contracts		(509	)		(1,687	)
Revenue recognized for maintenance contracts		(1,138	)		(3,437	)


Balance at end of period	$	2,461		$	2,461

7.		Long-Term Debt

		7.00% Convertible Senior Notes Due 2011

		On November 15, 2006, the Company closed the sale of $16,500,000 of convertible senior notes due September 1, 2011 (the “New Notes”). Offering costs were $104,000 and fees of $514,500, which were paid on behalf of the debt holders, were recorded as debt discount on the New Notes. Fees paid on behalf of debt holders included the fair value of two warrants issued to underwriters to purchase a total of 200,000 shares of common stock at $1.26 per share. The warrant was valued at approximately $140,000 based on the fair value as determined by a Black-Scholes model using the following assumptions: a risk free interest rate of 4.75%, 5 year contractual life, and 88% volatility rate. Interest on the New Notes is 7.00% per annum on the principal amount, payable semiannually on March 1 and September 1 of each year, beginning March 1, 2007. The New Notes were sold pursuant to separate exchange and redemption agreements between the Company and each of Highbridge International LLC, Deerfield International Limited, Deerfield Partners, L.P., Bruce Funds, Inc. and Professional Life & Casualty, each holders of the Company’s existing 4.50% convertible senior notes due September 1, 2008 (the “Old Notes”), pursuant to which holders of an aggregate of $27,500,000 of the Old Notes agreed to exchange and redeem their Old Notes for an aggregate of $16,500,000 in aggregate principal amount of the New Notes and $11,000,000 in cash, plus accrued and unpaid interest on the Old Notes of $254,000 through and including the day prior to the Closing. The transaction was treated as a debt extinguishment and accordingly, $613,000 of unamortized prepaid offering costs

- 9 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		and $868,000 of unamortized debt discount related to the Old Notes were charged to expense as loss on extinguishment of debt. Offering costs and debt discount related to the New Notes will be amortized to interest expense using the effective interest method. Amortization expense in 2006 for the New Notes was $15,000.

		The Company issued the New Notes pursuant to an indenture, dated November 15, 2006, between the Company and U.S. Bank National Association, as Trustee. Following the Closing, $2,500,000 in aggregate principal amount of the Old Notes remain outstanding.

		The New Notes are unsecured senior indebtedness of the Company and bear interest at the rate of 7.00% per annum, which may be reduced to 4.00% per annum if the Company receives approval or clearance for commercial sale of any of its ovarian cancer tests by the FDA. Interest is payable on March 1 and September 1 of each year, commencing March 1, 2007. The effective interest rate is 7.13% per annum.

		The New Notes are convertible at the option of each Holder, at any time on or prior to the close of business on the business day immediately preceding September 1, 2011, into shares of the Company’s common stock at a conversion price of $2.00 per share, equivalent to a conversion rate equal to 500 shares of common stock per $1,000 principal of the New Notes, subject to adjustment for standard anti-dilution provisions including distributions to common stockholders and stock splits as well as occurrence of a change in control, in which case the conversion rate is adjusted for a make-whole premium.

		The make-whole premium shall be equal to the principal amount of New Notes to be converted divided by $1,000 and multiplied by the applicable number of shares of common stock based upon the Company’s share prices as of the change of control date. Specifically, as the New Notes approach their redemption date of September 2009, as discussed below, the make-whole payment decreases. The Company is not required to make a make-whole payment if the Company’s stock price is less than $1.20 or greater than $8.00 as of the date of the change in control. The make-whole premium associated with the New Note sets a maximum additional 15,000,001 shares that may be issued on conversion (909.091 shares per $1,000 principal amount of New Notes).

		If a holder converts all or any portion of their New Notes prior to October 31, 2008, upon such conversion, in addition to the common stock such holder would receive, the holder will be entitled to receive with respect to each New Note so converted an amount in cash equal to the difference of (i) the amount of all interest that the Company would be required to pay on such New Note from the date of the indenture through October 31, 2008, and (ii) the amount of interest actually paid on such New Note by the Company prior to the time of conversion.

		Holders of the New Notes have the option to require the Company to repurchase the New Notes under certain circumstances, including at any time after September 1, 2009, if the Company has not received approval or clearance for commercial sale of any of its ovarian cancer test by the FDA. The Company may redeem the New Notes at its option, in whole or in part, at any time on or after September 1, 2009, at specified redemption prices plus accrued and unpaid interest; provided that the New Notes will be redeemable only if the closing price of the stock equals or exceeds 200.0% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of the notice of the optional redemption. The 8,250,000 shares that could be issued if all New Notes were converted into common stock have not been included in the calculation of loss per share, as these potential common shares are antidilutive. Upon a change of control, each holder of the New Notes may require the Company to repurchase some or all of the New Notes at specified redemption prices, plus accrued and unpaid interest. The debenture contains a put option that entitles the holder to require the Company to redeem the New Note at a price equal to 105.0% of the principal balance upon a change in control of the Company.

		The Company identified the guaranteed interest payment for any conversion of any New Note by a holder prior to October 31, 2008, and the written put option permitting the holder to put the debt at 105.0% of principal plus accrued and unpaid interest upon a change of control as a compound embedded derivative, which needs to be separated and measured at its fair value. The factors impacting the fair value of the guaranteed interest payment for

- 10 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		any conversion of any New Note by a holder prior to October 31, 2008, is based upon certain factors including the Company’s stock price, the time value of money and the likelihood holders would convert within the next two years. However, due to the Company’s current stock price at the date of New Note issuance and through December 31, 2006, resulting in the conversion feature being substantially out of the money, the likelihood of conversion was deemed to be remote. The factors impacting the fair value of the written put option permitting the holder to put the New Note at 105.0% of principal plus accrued and unpaid interest upon a change of control, is contingent upon a change of control. However, due to significant related party holdings of the Company’s common stock shares and the presence of certain anti-takeover provisions in the bylaws of the Company, a change of control is deemed to be remote. When the fair values of these two features are combined, the fair value of the compound embedded derivative had de minimis fair value on the date of inception and on December 31, 2006.

		The Company and the investors entered into a registration rights agreement in which the Company agrees to make “reasonable best efforts” to file a shelf registration and keep it effective permitting the New Note holders to sell the New Notes or the underlying common stock shares. In the circumstance of a failed registration, the Company agrees to pay interest as partial relief for the damages (“Liquidated Damages”) until the earlier of (1) the day on which the Registration Default has been cured and (2) the date the Shelf Registration Statement is no longer required to be kept effective, in an amount in cash equal to 1.5% of the aggregate outstanding principal amount of the New Notes until such Registration Default is cured; provided that in no event shall Liquidated Damages exceed 10.0% of the holder’s initial investment in the New Notes in the aggregate.

		The Company evaluated the Liquidated Damages according to guidance under FASB Staff Position No. Emerging Issues Task Force (“FSP EITF”) 00-19-2, Accounting for Registration Payment Arrangements , which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, shall be recognized and measured separately in accordance with SFAS No. 5, Accounting for Contingencies , and FIN 14, Reasonable Estimation of the Amount of a Loss . FSP EITF 00-19-2 further states that an entity should recognize and measure a registration payment arrangement as a separate unit of account from the financial instrument subject to that arrangement. Accordingly, the Company concluded that the transfer of consideration under a registration payment arrangement is not probable at the time of inception or December 31, 2006. Therefore a contingent liability under the registration payment arrangement was not recognized.

		The New Notes and common stock issuable upon conversion of the New Notes were registered with the SEC on Form S-3 on December 15, 2006, and at December 31, 2006, all New Notes remained issued and outstanding

8.		Commitments and Contingent Liabilities

		*Commitments*

		On November 17, 2000, the Company originally entered into a five-year research collaboration agreement with The Johns Hopkins University School of Medicine (“JHU”), which expired on November 30, 2005. The research collaboration agreement was directed at the discovery and validation of biomarkers in human subjects, including but not limited to clinical application of biomarkers in the understanding, diagnosis and management of human diseases. Since the expiration on November 30, 2005, the Company had extended the research collaboration agreement with JHU on a quarterly basis. Most recently, on September 26, 2007, the Company extended the research collaboration agreement with JHU through December 31, 2007, while continuing to negotiate a renewal collaboration agreement. Under the renewal collaboration agreement, it is anticipated that Vermillion will have an obligation to provide additional noncancelable collaboration funding of $600,000 for 2007 in addition to $73,000 owed for 2006. Under an extended research collaboration agreement with an expiration date of December 31, 2006, Vermillion had an outstanding obligation to pay $305,000. Subsequently, under an extended research collaboration agreement with an expiration date of March 31, 2007, the outstanding 2006 obligation of $305,000 was reduced to $73,000 during the three months ended March 31, 2007. For the nine months ended September 30, 2007, Vermillion paid $373,000 of collaboration expenses and as of September 30, 2007, Vermillion accrued $150,000 for collaboration expenses to

- 11 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		JHU. Collaboration costs related to this agreement were $150,000 and $218,000 for the three and nine months ended September 30, 2007, respectively, which reflects the $232,000 reduction in collaboration costs resulting from the extended collaboration agreement through September 30, 2007. Collaboration costs related to this agreement were $241,000 and $723,000 for the three and nine months ended September 30, 2006, respectively.

		On September 22, 2005, the Company entered into a two year collaborative research agreement with University College London and UCL Biomedica Plc (together, “UCL”), which expired on September 30, 2007. The collaborative research agreement was directed at the utilization of Vermillion’s suite of proteomic solutions (Deep Proteome, Pattern Track Process and ProteinChip System) to further both parties’ ongoing research in ovarian cancer and breast cancer. Under the terms of the agreement, Vermillion had exclusive rights to license intellectual property resulting from discoveries made during the course of this collaboration for use in developing, manufacturing and commercializing products and services utilizing the intellectual property. Additionally, Vermillion had an obligation to contribute $2,131,000 in cash and $652,000 in the form of Vermillion equipment, software, arrays and consumable supplies as mutually agreed, valued at Vermillion’s list selling price, to cover part of the costs incurred by UCL specifically for this research program. $1,065,000 of the cash obligation was to be paid in the first year of the agreement and is noncancelable. The remaining $1,066,000 was to be paid in the second year of the agreement and was cancelable with three months advance notice. As of September 30, 2007, the Company had made cash contributions of $1,603,000 and accrued $567,000 related to this agreement. Additionally, the Company provided at its cost $112,000, or $546,000 valued at Vermillion’s list selling price, of equipment, software, arrays and consumable supplies. Collaboration costs, which are included in research and development expenses, related to this agreement were $285,000 and $832,000 for the three and nine months ended September 30, 2007, respectively, and $272,000 and $798,000 for the three and nine months ended September 30, 2006, respectively.

		On October 4, 2006, the Company entered into a one-year research and development agreement, which has automatic renewals for two additional one-year terms, with Katholieke Universiteit Leuven, Belgium, directed at discovery, validation and characterization of novel biomarkers related to gynecologic disease. Under the terms of the agreement, Vermillion will have exclusive rights to license discoveries made during the course of this collaboration. Vermillion will contribute €45,000 or $61,000 per year to fund sample collection at the Katholieke Universiteit Leuven from patients undergoing evaluation of a persistent pelvic mass who will undergo surgical intervention. The first year contribution of €45,000 or $61,000 is noncancelable. As of September 30, 2007, the Company has paid $61,000 related to this agreement. Collaboration costs related to this agreement were $15,000 and $61,000 for the three and nine months ended September 30, 2007, respectively.

		On October 13, 2006, the Company entered into a two-year research and collaboration agreement, which has automatic renewals of additional one-year terms, with The Ohio State University Research Foundation (“OSURF”) directed at discovery, purification, identification and/or validation of biomarkers related to thrombotic thrombocytopenic purpura (“TTP”) and production of associated technology. Under the terms of the agreement, Vermillion has an option to take an exclusive license to discoveries made during the course of this collaboration. During the first fifteen months of the agreement, Vermillion will pay a total of $150,000 in noncancelable financial contributions to OSURF in consideration for costs incurred specifically for this research program. There is no financial contribution obligation for the remaining initial term of the agreement. As of September 30, 2007, the Company has paid $94,000 and accrued $34,000 related to this agreement. Collaboration costs related to this agreement were $90,000 for the nine months ended September 30, 2007. The Company did not incur collaboration costs related to this agreement during the three months ended September 30, 2007.

		On December 11, 2006, Vermillion entered into a consulting agreement with PrecisionMed International (“PrecisionMed”), which was subsequently amended on April 5, 2007. Under the terms of the amended agreement, PrecisionMed will collect whole blood specimens from up to 1,000 research subjects for the purposes of Vermillion’s whole blood collection protocol for its OvaRI Assay clinical trial. The amended agreement provides for a maximum payment of $1,335,000 for 500 research subjects and a maximum payment of $1,788,000 for 1,000 research subjects. As of September 30, 2007, Vermillion has paid a total of $1,103,000, including travel expenses of

- 12 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		$50,000, and accrued $329,000 related to this amended agreement. These costs, which are included in research and development expenses, related to this agreement were $488,000 and $1,288,000 for the three and nine months ended September 30, 2007, respectively.

		On June 1, 2007, Vermillion entered into a nonexclusive license agreement with the National Cardiovascular Center (“NCVC”), an entity organized and existing under the laws of Japan. Under this agreement, Vermillion obtained a ten-year worldwide nonexclusive license with the right to extend the term for the life of the licensed patent, which includes a United States Patent Application, a Japan Patent and a Patent Cooperation Treaty (“PCT”) Application, for technology used in our TTP diagnostic test kit that is under development. Under this agreement, Vermillion will pay NCVC a non-refundable license fee of $50,000. The payment terms are $20,000 upon execution of this agreement, $10,000 upon submission of an in vitro diagnostic test to the FDA for clearance, $10,000 upon the first commercial sale of such in vitro diagnostic test kit and $10,000 upon achievement of $500,000 in net sales of such in vitro diagnostic test kits. Additionally, Vermillion will pay royalties to NCVC for net sales to customers located in the United Sates, Japan, Europe and China. As of September 30, 2007, Vermillion has paid $20,000 related to the execution of this agreement.

		In conjunction with the sale of assets and liabilities of the Company’s Instrument Business on November 13, 2006, Vermillion also entered into a manufacture and supply agreement with Bio-Rad. Under the terms of the manufacture and supply agreement, Vermillion has a commitment to purchase 10 systems and 30,000 arrays in the first year, 13 systems and 30,000 arrays in the second year and 20 systems and 30,000 arrays for the third year in order to support its collaboration agreements with Quest, which may be used as inventory for resale, fixed assets for collaboration purposes or supplies for research and development. The Company has estimated cost to be $63,000 per system and $20 per array. As of September 30, 2007, the Company had purchased and expensed $212,000 of arrays.

		*Contingent Liabilities*

		On September 17, 2007, Vermillion was served with a complaint filed in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad as defendants and Molecular Analytical Systems (“MAS”) as plaintiff. The complaint alleges, among other things, that Vermillion is in breach of its license agreement with MAS relating to SELDI technology as a result of Vermillion’s entry into a sublicense agreement with Bio-Rad. In connection with the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, Vermillion sublicensed to Bio-Rad certain rights to the SELDI technology that Vermillion obtained under the MAS license for use outside of the clinical diagnostics field. Vermillion retained exclusive rights to the technology for use in the field of clinical diagnostics for a five-year period, after which it will retain nonexclusive rights in that field. Given the early stage of this action, we cannot predict the ultimate outcome of this matter at this time.

		On June 26, 2006, Health Discovery Corporation filed a lawsuit against Vermillion in the United States District Court for the Eastern District of Texas, Marshall Division (the “Court”), claiming that software used in certain of Vermillion’s ProteinChip Systems infringes on three of its United States patents. Health Discovery Corporation sought injunctive relief as well as unspecified compensatory and enhanced damages, reasonable attorney’s fees, prejudgment interest and other costs. On August 1, 2006, Vermillion filed an unopposed motion with the Court to extend the deadline for Vermillion to answer or otherwise respond until September 2, 2006. Vermillion filed its answer and counterclaim to the complaint with the Court on September 1, 2006. Concurrent with its answer and counterclaims, Vermillion filed a motion to transfer the case to the Northern District of California. On January 10, 2007, the court granted Vermillion’s motion to transfer the case to the Northern District of California. The parties met for a scheduled mediation on May 7, 2007. On July 10, 2007, Vermillion entered into a license and settlement agreement with Health Discovery Corporation (the “HDC Agreement”) pursuant to which it licensed more than 25 patents covering Health Discovery Corporation’s support vector machine technology for use with SELDI technology. Under the terms of the HDC Agreement, Vermillion receives a worldwide, royalty-free, non-exclusive license for life sciences and diagnostic applications of the technology and has access to any future patents resulting from the underlying intellectual property in conjunction with use of SELDI systems. Pursuant to the HDC

- 13 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		Agreement, Vermillion paid $200,000 to Health Discovery Corporation upon entry into the agreement on July 10, 2007. The remaining $400,000 under the HDC agreement is payable as follows: $100,000 three months following the date of the agreement, $150,000 twelve months following the date of the agreement and $150,000 twenty-four months following the date of the agreement. The total settlement of $600,000 was expensed for nine months ended September 30, 2007. The HDC Agreement settles all disputes between Vermillion and Health Discovery Corporation.

9.		Common Stock

		*Authorized Shares*

		At the annual stockholders’ meeting on June 29, 2007, the stockholders approved an amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 80,000,000 to 150,000,000. On July 13, 2007, the Company amended and restated its Certificate of Incorporation with the State of Delaware for the increased authorized shares.

		*Private Placement Sale*

		On August 29, 2007 (the “Closing Date”), Vermillion completed a private placement sale of 24,513,092 shares of its common stock and warrants to purchase up to an additional 19,610,470 shares of its common stock with an exercise price of $0.925 per share and expiration date of August 29, 2012, to a group of new and existing investors for $20,591,000 in gross proceeds. The net proceeds of the transaction will be used for general working capital needs. Existing investors included affiliates of the Company, who purchased 9,642,856 shares of common stock and warrants to purchase up to an additional 7,714,284 shares of common stock for $8,100,000. In connection with Quest’s participation in this transaction, Vermillion amended a warrant originally issued to Quest on July 22, 2005. Pursuant to the terms of the amendment, the exercise price for the purchase of Vermillion’s common stock was reduced from $3.50 per share to $2.50 per share and the expiration date of such warrant was extended from July 22, 2010, to July 22, 2011. For services as placement agent, Vermillion paid Oppenheimer & Co. Inc. (“Oppenheimer”) $1,200,000 and issued a warrant to purchase up to 921,000 shares of Vermillion’s common stock with an exercise price of $0.925 per share and expiration date of August 29, 2012. The warrants issued to the investors and Oppenheimer were valued at $7,194,000 and $581,000, respectively, based on the fair value as determined by the Black-Scholes model. The amended value of the warrant issued to Quest on July 22, 2005, increased by $356,000, which is reflected in additional paid-in capital. Assumptions used to value the warrants issued to the investors and Oppenheimer, and the amended value of the warrant issued to Quest were as follows:


	Private			Amendment to
	Investors and			Quest
	Oppenheimer			Diagnostics
	& Co. Inc.			Incorporated
Dividend yield		0.00	%		0.00	%
Volatility		80.14	%		82.92	%
Risk-free interest rate		4.31	%		4.24	%
Expected lives (years)		5.00			3.90

Under the terms of the securities purchase agreement, the Company is required to prepare and file with the SEC a Shelf Registration Statement and have the Registration Statement be declared effective by the SEC. The Company shall pay each investor liquidated damages of 1/13 of 1.5% of the aggregate purchase price with respect to any shares not previously sold or transferred for the following events:

•

Each day in excess of 30 days from the Closing Date until the Shelf Registration Statement is filed with the SEC.

- 14 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

	•		Each day in excess of 90 days from the Closing Date until the Registration Statement is declared effective by the SEC if no SEC review of the Shelf Registration Statement, or each day in excess of 120 days from the Closing Date until the Registration Statement is declared effective by the SEC in the event of an SEC review of the Registration Statement.

	•		Each day for a period in excess of 20 consecutive days or 45 total days in any 12-month period that the SEC issues a stop order to suspend the effectiveness of the Registration Statement.

		The maximum cumulative liquidated damages are 10.0% of the aggregate purchase price. Payment of liquidated damages is due 30 days after coming into compliance with above events. Interest is 1.5% every 30 days for delinquent payments.

		The Company evaluated the liquidated damages provision according to guidance under FSP EITF 00-19-2, which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, shall be recognized and measured separately in accordance with SFAS No. 5 and FIN 14. FSP EITF 00-19-2 further states that an entity should recognize and measure a registration payment arrangement as a separate unit of account from the financial instrument subject to that arrangement. The Company filed a Form S-1, Shelf Registration Statement, with the SEC on September 27, 2007, and is currently under review by the SEC. The Company considers the likelihood of the Registration Statement not being declared effective within the prescribed timeframe and the SEC suspension of the effectiveness of the Registration Statement for a period of 20 consecutive days or not more than 45 days in any 12-month period to be remote. As a result, to date no contingent liability was recorded related to this registration payment arrangement. As of September 30, 2007, the Company has incurred costs of $290,000 in connection with the registration of these securities, which is reflected as a reduction to additional paid-in capital.

		*NASDAQ Listing Requirements Compliance Notification*

		On August 15, 2007, Vermillion was notified by NASDAQ Listing Qualifications that it did not comply with Marketplace Rule 4310(c)(3) for continue inclusion, and as required by Marketplace Rule 4310(c)(8)(C), Vermillion had 30 days, or until September 14, 2007, to regain compliance. Marketplace Rule 4310(c)(3) requires Vermillion to (A) have minimum stockholders’ equity of $2,500,000, (B) have a minimum common stock market value of $35,000,000 or (C) have net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. Subsequently, on September 14, 2007, NASDAQ Listing Qualifications notified Vermillion it had regained compliance with Marketplace Rule 4310(c)(3) with the market value of Vermillion common stock exceeding $35,000,000 for 10 consecutive business days

		Additionally, on September 6, 2007, Vermillion was notified by NASDAQ Listing Qualifications that Vermillion’s common stock bid price closed below the minimum $1.00 per share requirement for continued inclusion by Marketplace Rule 4310(c)(4), and as required by Marketplace Rule 4310(c)(8)(D), Vermillion had 180 days, or until March 4, 2008, to regain compliance. To regain compliance, the bid price of Vermillion’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days.

- 15 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

10.		Stock-Based Compensation

		Options for 233,500 shares were granted with an exercise price of $1.02, and options for 1,667,700 shares were granted with an average exercise price of $1.26 during the three and nine months ended September 30, 2007, respectively. The allocation of stock-based compensation expense by functional area for the three and nine months ended September 30, 2007 and 2006, was as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Cost of products revenue	$	—	$	46	$	1	$	140
Research and development		52		79		129		273
Sales and marketing		20		66		66		252
General and administrative		166		223		488		673


Total	$	238	$	414	$	684	$	1,338

11.		Loss Per Share

		Basic loss per share is calculated using the weighted average number of common shares outstanding during the period. Because the Company is in a net loss position, diluted loss per share is calculated using the weighted average number of common shares outstanding and excludes the effects of 37,440,001 and 12,173,606 potential common shares as of September 30, 2007 and 2006, respectively, that are antidilutive. Potential common shares include common shares issuable upon conversion of all convertible senior notes, common stock issuable under the Company’s 2000 Employee Stock Purchase Plan, and incremental shares of common stock issuable upon the exercise of outstanding stock options and warrants.

12.		Segment Information and Geographic Data

		As a result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad on November 13, 2006, management has determined that the Company operates one reportable segment, specialty diagnostic tests. Prior to November 13, 2006, the Company operated one reportable segment, which was the protein research products and collaborative services business.

		Prior to November 13, 2006, the Company sold most of its products and services directly to customers in North America, Western Europe and Japan, and through distributors in other parts of Europe, Asia and in Australia. Revenue for geographic regions reported below is based upon the customers’ locations. The following is a summary of the geographic information related to revenue for the three and nine months ended September 30, 2007 and 2006 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
United States	$	—	$	1,393	$	21	$	4,706
Canada		—		300		—		926
Europe		—		1,652		—		6,651
Asia-Pacific		—		1,317		—		4,716


Total	$	—	$	4,662	$	21	$	16,999

Sales to customers in Japan represented 25.1% and 24.0% of revenue for the three and nine months ended September 30, 2006. Additionally, sales to customers in the United Kingdom represented 7.7% and 10.3% of

- 16 -

Vermillion, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — Continued
(Unaudited)

		revenue for the three and nine months ended September 30, 2006. No other country outside the United States accounted for 10% or more of total revenue during these periods.

		Long-lived assets, primarily machinery and equipment, are reported based on the location of the assets. Long-lived asset information by geographic area as of September 30, 2007, and December 31, 2006, were as follows (in thousands):


	September 30,		December 31,
	2007		2006
United States	$	1,607	$	2,244
Europe		6		16


Total	$	1,613	$	2,260

13.		Subsequent Event

		On October 23, 2007, the USPTO issued a reexamination certificate of the 022 Patent to Vermillion. Accordingly, the Company has submitted the 022 Patent reexamination certificate to Bio-Rad in order to claim the $2,000,000 withheld from the sales proceeds. On November 9, 2007, the Company received from Bio-Rad the $2,000,000 withheld from the sales proceeds.

- 17 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

Vermillion, Inc. (“Vermillion”), formerly Ciphergen Biosystems, Inc., and its wholly-owned subsidiaries (collectively the “Company”) has made statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-Q that are deemed forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The Company claims the protection of such safe harbor, and disclaims any intent or obligation to update any forward-looking statement. You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “could”, “should” and “continue” or similar words. These forward-looking statements may also use different phrases. The Company has based these forward-looking statements on management’s (“we”, “us” or “our”) current expectations and projections about future events. Examples of forward-looking statements include the following statements:

•		projections of the Company’s future revenue, results of operations and financial condition;

•		anticipated deployment, capabilities and uses of the Company’s products and the Company’s product development activities and product innovations;

•		the importance of proteomics as a major focus of biology research;

•		competition and consolidation in the markets in which the Company competes;

•		existing and future collaborations and partnerships;

•		the utility of biomarker discoveries;

•		our belief that biomarker discoveries may have diagnostic and/or therapeutic utility;

•		our plans to develop and commercialize diagnostic tests through the Company’s strategic alliance with Quest Diagnostics Incorporated (“Quest”);

•		our ability to comply with applicable government regulations;

•		our ability to expand and protect the Company’s intellectual property portfolio;

•		our ability to decrease general and administrative costs;

•		our ability to decrease sales and marketing costs;

•		our ability to decrease research and development costs;

•		anticipated future losses;

•		expected levels of capital expenditures;

•		forgiveness of the outstanding principal amounts of the secured line of credit by Quest;

•		the period of time for which the Company’s existing financial resources, debt facilities and interest income will be sufficient to enable the Company to maintain current and planned operations; and

•		the market risk of the Company’s investments.

These statements are subject to significant risks and uncertainties, including those identified in the section of this Form 10-Q entitled “Risk Factors”, that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to generate sales after completing development of new diagnostic products; managing the Company’s operating expenses and cash resources that is consistent with our plans; our evaluation of the net operating loss carryforwards and research and development deferred tax credits to determine whether there is a limit due to prior year ownership changes; our ability to conduct new diagnostic product development using both the Company’s internal research and development resources, and collaboration partners within the budgets and time frames we have established; the ability of the ProteinChip technology to discover protein biomarkers that have diagnostic, theranostic and/or drug development utility; the continued emergence of proteomics as a major focus of biological research and drug discovery; and our ability to protect and promote the Company’s proprietary technologies. We believe it is important to communicate our expectations to Vermillion’s investors. However, there may be events in the future that we are not able to accurately predict or that we do not fully control that could cause actual results to differ materially from those expressed or implied in the Company’s forward-looking statements.

- 18 -

OVERVIEW

Vermillion was originally incorporated in California on December 9, 1993, under the name Abiotic Systems. In March 1995, Abiotic Systems changed its corporate name to Ciphergen Biosystems, Inc., and subsequently in May 2000, it reincorporated in Delaware. Under the name Ciphergen Biosystems, Inc., Vermillion had its initial public offering on September 28, 2000. On November 13, 2006, the Company sold assets and liabilities of its protein research products and collaborative services business (the “Instrument Business”) to Bio-Rad Laboratories, Inc. (“Bio-Rad”) in order to concentrate the Company’s resources on developing clinical protein biomarker diagnostic products and services. On August 21, 2007, Ciphergen Biosystems, Inc. changed its corporate name to Vermillion, Inc. In conjunction with the name change, Vermillion changed its common stock ticker symbol on NASDAQ Capital Markets from “CIPH” to “VRML”.

Prior to the November 13, 2006, sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, the Company developed, manufactured and sold ProteinChip Systems for life science research. This patented technology is recognized as Surface Enhanced Laser Desorption/Ionization (“SELDI”). The systems consist of ProteinChip Readers, ProteinChip Software and related accessories, which were used in conjunction with consumable ProteinChip Arrays. These products were sold primarily to pharmaceutical companies, biotechnology companies, academic research laboratories and government research laboratories. The Company also provided research services through its Biomarker Discovery Center laboratories, and offered consulting services, customer support services and training classes to its customers and collaborators.

Since the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, the Company has dedicated itself to the discovery, development and commercialization of specialty diagnostic tests that provide physicians with information with which to manage their patients’ care and to improve patient outcomes. The Company uses translational proteomics, which is the process of answering clinical questions by utilizing advanced protein separation methods to identify and resolve variants of specific biomarkers, developing assays, and commercializing tests.

Through collaborations with leading academic and research institutions, including The Johns Hopkins School of Medicine, The University of Texas M.D. Anderson Cancer Center, University College London, The University of Texas Medical Branch, The Katholieke Universiteit Leuven, The Ohio State University Research Foundation, and Stanford University, we plan to develop diagnostic tests in the fields of hematology/oncology, cardiovascular disease and women’s health. The clinical questions the Company is addressing include early disease detection, treatment response, monitoring of disease progression, prognosis and others. In July 2005, Vermillion entered into a strategic alliance agreement with Quest pursuant to which the parties have agreed to develop and commercialize up to three diagnostic tests. The term of the agreement ends on the later of (i) the three-year anniversary of the agreement and (ii) the date on which Quest commercializes the three diagnostic tests.

The Company’s most established programs are in the field of ovarian cancer. Commonly known as the “silent killer”, ovarian cancer leads to approximately 15,000 deaths each year in the United States. Approximately 20,000 new cases are diagnosed each year, with the majority of in patients at the late stage of the disease, where the cancer has spread beyond the ovary. Unfortunately, the prognosis is poor with these patients, leading to the high mortality rates from this disease. We believe that one unmet clinical need is a diagnostic test that can provide adequate predictive value to stratify patients with a pelvic mass into those with a high risk of invasive ovarian cancer versus those with a low risk. We believe that there are at least 5 million testing opportunities each year related to this need. Vermillion has developed a panel of biomarkers we believe provides risk stratification information for ovarian cancer based on a series of studies involving over 2,500 clinical samples from more than five sites. In a cohort study, the Company was able to show, in 525 consecutively sampled women, a significant increase in the positive predictive value using the Company’s marker panel over the baseline level. This translates into the potential to enrich the concentration of ovarian cancer cases referred to the gynecologic oncologist by more than two-fold. The Company is undertaking a prospective clinical trial to support submission to the United States Food and Drug Administration (“FDA”), for approval as an in vitro diagnostic (“IVD”) test kit.

We expect to incur losses for at least the next year. Due to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, the Company will have limited revenues until its diagnostic tests are developed and successfully commercialized. To become profitable, the Company will need to complete development of key

- 19 -

diagnostic tests, obtain FDA approval and successfully commercialize its products. The Company has a limited history of operations in developing diagnostic tests, and we anticipate that the Company’s quarterly results of operations will fluctuate for the foreseeable future due to several factors, including market acceptance of current and new products, the timing and results of the Company’s research and development efforts, the introduction of new products by the Company’s competitors and possible patent or license issues. The Company’s limited operating history as a diagnostics business makes accurate prediction of future results of operations difficult.

RECENT DEVELOPMENTS

Effective November 1, 2007, Debra A. Young resigned from her position as Vice President and Chief Financial Officer of the Company for personal reasons. In connection with her resignation, the Company and Ms. Young entered into a Separation Agreement and Release. Under the terms of this agreement, Ms. Young agreed to resign from her position with the Company and release any claims she may have against the Company. As consideration for entering into this agreement, the Company agreed to pay Ms. Young the equivalent of her base salary for a period of six months for an aggregate amount of $113,000 and to continue Ms. Young’s health and dental coverage through April 2008. Immediately upon Ms. Young’s resignation from the Company, Qun Zhou, the Company’s Corporate Controller, was appointed to serve as Chief Financial Officer on an interim basis. Ms. Zhou currently receives an annual basis salary of $160,000, owns 2,500 shares of Vermillion common stock and has options to purchase an additional 57,800 shares of Vermillion common stock. Ms. Zhou, age 39, has served as Corporate Controller for the Company since February 2007. Prior to joining the Company, Ms. Zhou served as Controller for ViOptix, Inc., a developer and manufacturer of oxygen measuring devices in the biotechnology industry, from May 2005 through February 2007. From April 2000 through May 2005, Ms. Zhou served in several capacities, most recently as Business Unit Controller with Philips Medical Systems, a global leader in the medical device and diagnostic industry. Ms. Zhou has over eleven years of accounting and corporate finance experience and holds a M.B.A. from Boston College.

On September 17, 2007, Vermillion was served with a complaint filed in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad as defendants and Molecular Analytical Systems (“MAS”) as plaintiff. The complaint alleges, among other things, that Vermillion is in breach of its license agreement with MAS relating to SELDI technology as a result of Vermillion’s entry into a sublicense agreement with Bio-Rad. In connection with the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, Vermillion sublicensed to Bio-Rad certain rights to the SELDI technology that Vermillion obtained under the MAS license for use outside of the clinical diagnostics field. Vermillion retained exclusive rights to the technology for use in the field of clinical diagnostics for a five-year period, after which it will retain nonexclusive rights in that field. Given the early stage of this action, we cannot predict the ultimate outcome of this matter at this time.

On August 15, 2007, Vermillion was notified by NASDAQ Listing Qualifications that it did not comply for with Marketplace Rule 4310(c)(3) for continue inclusion, and as required by Marketplace Rule 4310(c)(8)(C), Vermillion had 30 days, or until September 14, 2007, to regain compliance. Marketplace Rule 4310(c)(3) requires Vermillion to (A) have minimum stockholders’ equity of $2,500,000, (B) have a minimum common stock market value of $35,000,000 or (C) have net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. Subsequently, on September 14, 2007, NASDAQ Listing Qualifications notified Vermillion it had regained compliance with Marketplace Rule 4310(c)(3) with the market value of Vermillion common stock exceeding $35,000,000 for 10 consecutive business days

Additionally, on September 6, 2007, Vermillion was notified by NASDAQ Listing Qualifications that Vermillion’s common stock bid price closed below the minimum $1.00 per share requirement for continued inclusion by Marketplace Rule 4310(c)(4), and as required by Marketplace Rule 4310(c)(8)(D), Vermillion had 180 days, or until March 4, 2008, to regain compliance. To regain compliance, the bid price of Vermillion’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days.

On August 29, 2007, Vermillion completed a private placement sale of 24,513,092 shares of its common stock and warrants to purchase up to an additional 19,610,470 shares of its common stock with an exercise price of $0.925 per share and an expiration date of August 29, 2012, to a group of new and existing investors for $20,591,000 in gross proceeds. The net proceeds of the transaction will be used for general working capital needs. In connection with Quest’s participation in this transaction, Vermillion amended a warrant originally issued to Quest on July 22, 2005. Pursuant to the terms of the amendment, the exercise price for the purchase of Vermillion’s common stock under such warrant was reduced from $3.50 per share to $2.50 per share and the expiration date of such warrant was

- 20 -

extended from July 22, 2010, to July 22, 2011. For services as placement agent, Vermillion paid Oppenheimer & Co. Inc. $1,200,000 and issued a warrant to purchase up to 921,000 shares of Vermillion’s common stock with an exercise price of $0.925 per share and expiration date of August 29, 2012.

In August 2007, the Company announced the discovery of biomarkers that could assist in the diagnosis of peripheral artery disease (“PAD”). These findings, which were made in collaboration with Stanford University, form the basis of a novel blood test for PAD. The biomarkers are currently undergoing validation. The results were published in the journal Circulation , which is published by the American Heart Association. Quest has accepted the PAD test for further development under the strategic alliance agreement.

On June 26, 2006, Health Discovery Corporation filed a lawsuit against Vermillion in the United States District Court for the Eastern District of Texas, Marshall Division (the “Court”), claiming that software used in certain of Vermillion’s ProteinChip Systems infringes on three of its United States patents. Health Discovery Corporation sought injunctive relief as well as unspecified compensatory and enhanced damages, reasonable attorney’s fees, prejudgment interest and other costs. On August 1, 2006, Vermillion filed an unopposed motion with the Court to extend the deadline for Vermillion to answer or otherwise respond until September 2, 2006. Vermillion filed its answer and counterclaim to the complaint with the Court on September 1, 2006. Concurrent with its answer and counterclaims, Vermillion filed a motion to transfer the case to the Northern District of California. On January 10, 2007, the court granted Vermillion’s motion to transfer the case to the Northern District of California. The parties met for a scheduled mediation on May 7, 2007. On July 10, 2007, Vermillion entered into a license and settlement agreement with Health Discovery Corporation (the “HDC Agreement”) pursuant to which it licensed more than 25 patents covering Health Discovery Corporation’s support vector machine technology for use with SELDI technology. Under the terms of the HDC Agreement, Vermillion receives a worldwide, royalty-free, non-exclusive license for life sciences and diagnostic applications of the technology and has access to any future patents resulting from the underlying intellectual property in conjunction with use of SELDI systems. Pursuant to the HDC Agreement, Vermillion paid $200,000 to Health Discovery Corporation upon entry into the agreement in July 2007. The remaining $400,000 under the HDC agreement is payable as follows: $100,000 three months following the date of the agreement, $150,000 twelve months following the date of the agreement and $150,000 twenty-four months following the date of the agreement. The HDC Agreement settles all disputes between Vermillion and Health Discovery Corporation.

At the annual stockholders’ meeting on June 29, 2007, the stockholders approved amendments to the Certificate of Incorporation to increase the number of authorized shares of common stock from 80,000,000 to 150,000,000 and to change the name of the company from Ciphergen Biosystems, Inc. to Vermillion, Inc. On July 13, 2007, Vermillion amended and restated its Certificate of Incorporation with the State of Delaware for the increased authorized shares. Vermillion amended its Certificate of Incorporation to reflect the name change on August 21, 2007.

In connection with the sale of assets and liabilities of the Company’s Instrument Business on November 13, 2006, Bio-Rad withheld $2,000,000 from the sales proceeds until the issuance of a reexamination certificate confirming United States Patent No. 6,734,022 (the “022 Patent”). If the United States Patent and Trademark Office (the “USPTO”) does not issue a reexamination certificate confirming the patentability of all of the claims as originally issued in the 022 Patent, or claims of equivalent scope, the Company will not be entitled to receive the $2,000,000 withheld by Bio-Rad. The 022 Patent is directed to a fundamental process of SELDI that involves capturing an analyte from a sample on the surface of a mass spectrometry probe derivatized with an affinity reagent, applying matrix and detecting the captured analyte by laser desorption mass spectrometry. In March 2007, the USPTO issued a final office action in the reexamination, rejecting all of the claims of the 022 Patent. Although the office action was designated “final”, Vermillion, under the USPTO rules, advocated the outstanding rejections and the patentability of the claimed invention with the patent examiners on March 30, 2007, and April 11, 2007. In addition, on April 18, 2007, Vermillion filed a response to the final office action with the USPTO. On June 28, 2007, the USPTO sent Vermillion a notice of intent to issue a reexamination certificate of the 022 Patent. On October 23, 2007, the USPTO issued a reexamination certificate of the 022 Patent to Vermillion. The Company has submitted the 022 Patent reexamination certificate to Bio-Rad in order to claim the $2,000,000 withheld from the sales proceeds. On November 9, 2007, the Company received from Bio-Rad the $2,000,000 withheld from the sales proceeds.

- 21 -

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

Other than as discussed below, the Company has made no significant changes in its critical accounting policies and significant estimates from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Income Taxes

On January 1, 2007, the Company adopted Financial Accounting Standards Board (the “FASB”) Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 , which clarifies the accounting for income tax uncertainties that have been recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxe s. The cumulative effect of adopting FIN 48 on January 1, 2007, resulted in no liability under FIN 48 on the balance sheet. There are open statutes of limitations for taxing authorities to audit the Company for federal and state jurisdictions from the year 2003 through the current period. Since the Company had a full valuation on all the deferred tax assets, FIN 48 had no impact on the Company’s effective tax rate. The Company is evaluating the net operating loss carryforwards, and research and development deferred tax assets to determine whether there is a limit due to prior year ownership changes. It is possible that a portion of these deferred tax assets may be limited in their use. The Company expects to complete the studies by the end of 2007.

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. Interest and penalties related to income taxes are recorded to interest and other expense of the consolidated statement of operations.

Recent Accounting Pronouncements

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 . SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company’s adoption of SFAS No. 159 is not expected to have a material impact on its consolidated financial statements.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company’s adoption of SFAS No. 157 is not expected to have a material impact on its consolidated financial statements.

- 22 -

RESULTS OF OPERATIONS

Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006

The selected summary financial and operating data of Vermillion for the three months ended September 30, 2007 and 2006, were as follows (dollars in thousands):


	Three Months Ended
	September 30,						Increase (Decrease)
	2007			2006			Amount			%
Revenue:
Products	$	—		$	2,697		$	(2,697	)		(100.00	)
Services		—			1,965			(1,965	)		(100.00	)


Total revenue		—			4,662			(4,662	)		(100.00	)


Cost of revenue:
Products		—			1,571			(1,571	)		(100.00	)
Services		—			910			(910	)		(100.00	)


Total cost of revenue		—			2,481			(2,481	)		(100.00	)


Gross profit		—			2,181			(2,181	)		(100.00	)


Operating expenses:
Research and development		2,182			2,914			(732	)		(25.12	)
Sales and marketing		516			3,204			(2,688	)		(83.90	)
General and administrative		2,090			2,541			(451	)		(17.75	)


Total operating expenses		4,788			8,659			(3,871	)		(44.70	)


Loss from operations		(4,788	)		(6,478	)		(1,690	)		(26.09	)

Interest income		169			190			(21	)		(11.05	)
Interest expense		(596	)		(592	)		4			0.68
Other income (expense), net		95			(116	)		(211	)		(181.90	)


Loss before income taxes		(5,120	)		(6,996	)		(1,876	)		(26.82	)
Income tax benefit (expense)		3			(20	)		(23	)		(115.00	)


Net loss	$	(5,117	)	$	(7,016	)	$	(1,899	)		(27.07	)

Products Revenue . There was no products revenue for the three months ended September 30, 2007, compared to $2,697,000 for the same period in 2006. The decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Services Revenue . There was no services revenue for the three months ended September 30, 2007, compared to $1,965,000 for the same period in 2006. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Cost of Products Revenue . There was no cost of products revenue for the three months ended September 30, 2007, compared to $1,571,000 for the same period in 2006. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad

Cost of Services Revenue . There was no cost of services revenue for the three months ended September 30, 2007, compared to $910,000 for the same period in 2006. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Research and Development Expenses . Research and development expenses decreased by $732,000, or 25.1%, to $2,182,000 for the three months ended September 30, 2007, from $2,914,000 for the same period in 2006. This decrease is primarily due to the Company’s transition from its historical roots as a proteomics research products

- 23 -

business to a specialty diagnostic testing business following the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad. This transition resulted in reductions in employee headcount to twelve at September 30, 2007, from twenty-seven at September 30, 2006, and, correspondingly, salaries, payroll taxes, employee benefits and stock-based compensation decreased by $496,000; materials and supplies used in the development of new products decreased by $351,000; equipment related expenses decreased by $106,000; and other operating costs of $135,000. These decreases were offset by the increased collaboration cost spending of $458,000, most of which is attributable to the ovarian tumor triage clinical trial. Stock-based compensation expense included in research and development expenses was $52,000 and $79,000 for the three months ended September 30, 2007 and 2006, respectively.

Sales and Marketing Expenses . Sales and marketing expenses decreased to $516,000 for the three months ended September 30, 2007, from $3,204,000 for the same period in 2006. The decrease was largely due to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad. Correspondingly, employee headcount decreased to five at September 30, 2007, from sixty-two at September 30, 2006, which resulted in a decline in salaries, payroll taxes, employee benefits and stock-based compensation of $1,578,000. This also resulted in reductions in travel by $291,000; internal consumption of ProteinChip Arrays and other consumables for customer demonstrations and support by $215,000; outside services by $111,000; sales and marketing costs of $116,000; and equipment related expenses by $334,000. Stock-based compensation expense included in sales and marketing expenses was $20,000 and $66,000 for the three months ended September 30, 2007 and 2006, respectively.

General and Administrative Expenses . General and administrative expenses decreased $451,000, or 17.8%, to $2,090,000 for the three months ended September 30, 2007, from $2,541,000 for the same period in 2006. The decrease was primarily due to the reductions in costs to support finance of $119,000 and other operating expenses of $176,000, which included bad debt expense of $66,000 for the three months ended September 30, 2006. Employee headcount declined to thirteen at September 30, 2007, from sixteen at September 30, 2006. Stock-based compensation expense included in general and administrative expenses was $166,000 and $223,000 for the three months ended September 30, 2007 and 2006, respectively.

Interest and Other Expense, Net . Interest income was $169,000 for the three months ended September 30, 2007, compared to $190,000 for the same period in 2006. Interest income decreased primarily due to the liquidation of short-term investments during 2006 to fund operations.

Interest expense was $596,000 for the three months ended September 30, 2007, compared to $592,000 for the same period in 2006. Interest expense in both periods consisted largely of interest related to our convertible senior notes and borrowings from Quest. Interest expense included the amortization of the beneficial conversion feature associated with the convertible senior notes amounting to $57,000 and $135,000 for the three months ended September 30, 2007 and 2006, respectively.

Net other income was $95,000 for the three months ended September 30, 2007, compared to net other expense of $116,000 for the same period in 2006. The increase to net other income includes the reduction of offering costs amortization related to the convertible senior notes amounting to $17,000 for the three months ended September 30, 2007, from $93,000 for the same period in 2006. Additionally, realized foreign currency exchange resulted in a gain of $110,000 for the three months ended September 30, 2007, as compared to a loss of $20,000 for the same period in 2006. The change in realized foreign currency exchange is due to the Company’s foreign operations and foreign subsidiary balances, and increase in foreign currency exchange rates.

Income Tax Benefit (Expense) . Income taxes for the three months ended September 30, 2007, were a benefit of $3,000 compared to an expense $20,000 for the same period in 2006. The decrease in expense was primarily due to reduction of net income in our foreign operations as a result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

- 24 -

Nine months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006

The selected summary financial and operating data of Vermillion for the nine months ended September 30, 2007 and 2006, were as follows (dollars in thousands):


	Nine Months Ended
	September 30,						Increase (Decrease)
	2007			2006			Amount			%
Revenue:
Products	$	—		$	10,702		$	(10,702	)		(100.00	)
Services		21			6,297			(6,276	)		(99.67	)


Total revenue		21			16,999			(16,978	)		(99.88	)


Cost of revenue:
Products		—			5,714			(5,714	)		(100.00	)
Services		15			3,118			(3,103	)		(99.52	)


Total cost of revenue		15			8,832			(8,817	)		(99.83	)


Gross profit		6			8,167			(8,161	)		(99.93	)


Operating expenses:
Research and development		6,297			8,780			(2,483	)		(28.28	)
Sales and marketing		1,440			10,652			(9,212	)		(86.48	)
General and administrative		8,626			7,549			1,077			14.27


Total operating expenses		16,363			26,981			(10,618	)		(39.35	)


Loss on sale of instrument business		(382	)		—			(382	)		—


Loss from operations		(16,739	)		(18,814	)		(2,075	)		(11.03	)

Interest income		458			654			(196	)		(29.97	)
Interest expense		(1,727	)		(1,691	)		36			2.13
Other income (expense), net		17			(174	)		(191	)		(109.77	)


Loss before income taxes		(17,991	)		(20,025	)		(2,034	)		(10.16	)
Income tax benefit (expense)		1			(190	)		(191	)		(100.53	)


Net loss	$	(17,990	)	$	(20,215	)	$	(2,225	)		(11.01	)

Products Revenue . There was no products revenue for the nine months ended September 30, 2007, compared to $10,702,000 for the same period in 2006. The decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Services Revenue . Services revenue decreased to $21,000 for the nine months ended September 30, 2007, from $6,297,000 for the same period in 2006. Services revenue for the nine months ended September 30, 2007, was from ongoing support services provided to a customer. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Cost of Products Revenue . There was no cost of products revenue for the nine months ended September 30, 2007, compared to $5,714,000 for the same period in 2006. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad

Cost of Services Revenue . Cost of services revenue decreased to $15,000 for the nine months ended September 30, 2007, from $3,118,000 for the same period in 2006. Cost of services revenue for the nine months ended September 30, 2007, was from ongoing support services provided to a customer. This decrease was the result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

- 25 -

Research and Development Expenses . Research and development expenses decreased by $2,483,000, or 28.3%, to $6,297,000 for the nine months ended September 30, 2007, from $8,780,000 for the same period in 2006. This decrease is primarily due to the Company’s transition from its historical roots as a proteomics research products business to a specialty diagnostic testing business following the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad. This transition resulted in reductions in employee headcount to twelve at September 30, 2007, from twenty-seven at September 30, 2006, and, correspondingly, salaries, payroll taxes, employee benefits and stock-based compensation decreased by $1,736,000; materials and supplies used in the development of new products decreased by $721,000; equipment related expenses decreased by $400,000; occupancy costs decreased by $168,000; outside services decreased by $125,000; and other operating costs decreased by $258,000. These decreases were offset by the increased collaboration cost spending of $1,021,000. Stock-based compensation expense included in research and development expenses was $129,000 and $273,000 for the nine months ended September 30, 2007 and 2006, respectively.

Sales and Marketing Expenses . Sales and marketing expenses decreased to $1,440,000 for the nine months ended September 30, 2007, from $10,652,000 for the same period in 2006. The decrease was largely due to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad. Correspondingly, employee headcount decreased to five at September 30, 2007, from sixty-two at September 30, 2006, which resulted in a decline in salaries, payroll taxes, employee benefits and stock-based compensation of $5,699,000. This also resulted in reductions in travel by $1,122,000; internal consumption of ProteinChip Arrays and other consumables for customer demonstrations and support by $670,000; outside services by $432,000; and equipment related expenses by $1,169,000. Stock-based compensation expense included in sales and marketing expenses was $66,000 and $252,000 for the nine months ended September 30, 2007 and 2006, respectively.

General and Administrative Expenses . General and administrative expenses increased to $8,626,000 for the nine months ended September 30, 2007, from $7,549,000 for the same period in 2006, an increase of $1,077,000 or 14.3%. The increase was primarily due to the settlement of the Health Discovery Corporation lawsuit of $600,000; increased professional services of $201,000 primarily from the Company name change and printing costs associated with the annual proxy and annual financial report; increased legal fees of $266,000 primarily due to filings of new patent applications, costs incurred from the Health Discovery Corporation lawsuit and costs incurred from the 022 Patent reexamination; and increased accounting and audit fees of $414,000 due to the timing of domestic and international services performed. These increases were offset by a decrease in equipment related expense of $109,000 and other operating expenses of $312,000, primarily from the reduction in postage and shipping costs attributable to reduced activity resulting from the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad. Employee headcount declined to thirteen at September 30, 2007, from sixteen at September 30, 2006. Stock-based compensation expense included in general and administrative expenses was $488,000 and $673,000 for the nine months ended September 30, 2007 and 2006, respectively.

Loss on Sale of Instrument Business . Loss on sale of the Instrument Business of $382,000 for the nine months ended September 30, 2007, resulted from a post-closing adjustment related to the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

Interest and Other Expense, Net . Interest income was $458,000 for the nine months ended September 30, 2007, compared to $654,000 for the same period in 2006. Interest income decreased primarily due to the liquidation of short-term investments during 2006 to fund operations.

Interest expense was $1,727,000 for the nine months ended September 30, 2007, compared to $1,691,000 for the same period in 2006. Interest expense in both periods consisted largely of interest related to our convertible senior notes and borrowings from Quest. Interest expense included the amortization of the beneficial conversion feature associated with the convertible senior notes amounting to $182,000 and $400,000 for the nine months ended September 30, 2007 and 2006, respectively.

Net other income was $17,000 for the nine months ended September 30, 2007, compared to net other expense of $174,000 for the same period in 2006. Net other income for the nine months ended September 30, 2006, included $160,000 received in settlement of a claim against a service provider. The increase to net other income also includes the reduction of offering costs amortization related to the convertible notes amounting to $54,000 for the nine months ended September 30, 2007, from $280,000 for the same period in 2006. Additionally, realized foreign

- 26 -

currency exchange resulted in a gain of $83,000 for the nine months ended September 30, 2007, as compared to a loss of $46,000 for the same period in 2006. The change in realized foreign currency exchange is due to the Company’s foreign operations and foreign subsidiary balances, and increase in foreign currency exchange rates.

Income Tax Expense . Income tax benefit for the nine months ended September 30, 2007, was $1,000 compared to $190,000 for the same period in 2006. The decrease in expense was primarily due to reduction of net income in our foreign operations as a result of the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad.

LIQUIDITY AND CAPITAL RESOURCES

From the Company’s inception through September 30, 2007, the Company has financed its operations principally with $229,269,000 from the sales of products and services to customers and $182,950,000 of net proceeds from debt and equity financings. This includes net proceeds of $92,435,000 from the Company’s initial public offering on September 28, 2000; net proceeds of $26,902,000 from the Company’s Series E Preferred Stock financing in March 2000; net proceeds of $14,954,000 from the sale of 6,225,000 shares of the Company’s common stock and a warrant to purchase 2,200,000 shares of the Company’s common stock to Quest on July 22, 2005; net proceeds of $18,218,000 in connection with the sale of assets and liabilities of the Company’s Instrument Business and 3,086,420 shares of the Company’s common stock to Bio-Rad on November 13, 2006; and net proceeds of $19,101,000 from the sale of 24,513,092 shares of the Company’s common stock and warrants for 19,610,470 shares of the Company’s common stock to a group of new and existing investors on August 29, 2007. Additionally, in connection with the strategic alliance agreement dated July 22, 2005, with Quest, we have drawn $10,000,000 from this secured line of credit as of September 30, 2007, solely to fund certain development activities related to our strategic alliance. Under the terms of this secured line of credit, the interest rate is at the prime rate plus 0.5% and is payable monthly. We also received net proceeds of $27,011,000 from the sale of our BioSepra business on November 24, 2004, and an additional $1,000,000 held in an interest-bearing escrow account for one year after the sale and $21,000 of related interest on December 1, 2005.

Cash and cash equivalents at September 30, 2007, were $19,498,000. Working capital at September 30, 2007, was $16,068,000. The increase in working capital for the nine months ended September 30, 2007, was principally due to the net proceeds of $19,101,000 from the sale 24,513,092 shares of the Company’s common stock and warrants to purchase 19,610,470 shares of the Company’s common stock to a group of investors, offset by funds used to finance operating losses of $17,990,000.

Net cash used in operating activities was $16,010,000 for the nine months ended September 30, 2007, primarily as a result of the $17,990,000 net loss reduced by $2,184,000 of noncash expenses including the loss on the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, depreciation and amortization, stock-based compensation and amortization of debt issuance costs and increased by $204,000 of cash usage from changes in operating assets and liabilities.

Net cash used in investing activities was $4,235,000 for the nine months ended September 30, 2007, which resulted from the purchases of short-term investments and the acquisition of robotics machinery and other equipment for laboratory use and service of collaboration partner instruments.

Net cash provided by financing activities was $22,063,000 for the nine months ended September 30, 2007, which primarily resulted from the net proceeds of $19,101,000 from the sale of 24,513,092 shares of the Company’s common stock and warrants to purchase 19,610,470 shares of the Company’s common stock to a group of investors and the receipt of $2,917,000 in proceeds from the secured line of credit with Quest.

The Company has incurred significant net losses and negative cash flows from operations since inception. At September 30, 2007, the Company had an accumulated deficit of $235,850,000. After completing the private placement sale of securities on August 29, 2007, management believes the Company’s current available resources will be sufficient to maintain current and planned operations through the next twelve months. The Company will, however, be required to raise additional capital at some point in the future. At such time the Company requires additional funding, the Company may seek to raise such additional funding from various sources, including the public equity market, private financings, sales of assets, collaborative arrangements and debt. If additional capital is raised through the issuance of securities convertible into equity, stockholders will experience dilution, and such

- 27 -

securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies or products that it might otherwise seek to retain. There can be no assurance that the Company will be able to obtain such financing, or obtain it on acceptable terms. If the Company is unable to obtain financing on acceptable terms, we may be unable to execute our business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not be able to pay off the convertible senior notes if and when they come due.

- 28 -

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion regarding market risk disclosure for Vermillion, Inc. (“Vermillion”), formerly known as Ciphergen Biosystems, Inc., and its wholly-owned subsidiaries (collectively the “Company”) involves forward-looking statements. The Company is exposed to market risk related mainly to changes in interest rates. The Company does not invest in derivative financial instruments.

INTEREST RATE RISK

The Company’s exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income the Company can earn on its money market accounts and investment portfolio, and to the increase or decrease in the amount of interest expense the Company must pay with respect to its secured line of credit with Quest Diagnostics Incorporated (“Quest”). The primary objective of the Company’s investment activities is to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The Company’s investment policy, which has been approved by the Board of Directors, specifies credit quality standards for the Company’s investments and limits the amount of credit exposure to any single issue, issuer or type of investment. The Company does not use or plan to use derivative financial instruments in its investment portfolio.

As of September 30, 2007, the Company had cash equivalents of $18,526,000 held in money market accounts and short-term investments available for sale of $4,000,000 invested in auction rate preferred securities with maturities of less than 90 days. Management (“we” or “our”) believes that, in the near term, we will maintain the Company’s available funds in money market accounts or in short-term investments with original maturities at the date of purchase of less than 90 days. If market interest rates were to increase by 100 basis points, or 1.00%, over the September 30, 2007, interest rates, the Company’s annual interest income for the money market accounts would increase by $185,000 and the investment portfolio value would decrease by $37,000.

As of September 30, 2007, the Company has outstanding balance of $10,000,000 on a secured line of credit with Quest. The secured line of credit with Quest is subject to floating interest rate. The Company’s convertible senior notes have a fixed interest rate and therefore are not subject to interest rate risk. If interest rates were to increase by 100 basis points, or 1.00%, the Company’s annual interest expense related to the secured line of credit with Quest would increase by $100,000.

FOREIGN CURRENCY EXCHANGE RISK

As a result of the sale of assets and liabilities of the Company’s protein research products and collaborative services business to Bio-Rad Laboratories, Inc., there is currently no foreign currency exchange risk related to the Company’s revenues. However, the Company has a foreign subsidiary, Ciphergen Biosystems KK of which the functional currency is the Japanese yen. Accordingly, the accounts of this operation are translated from the Japanese yen to the United States dollar using the current exchange rate in effect at the balance sheet date for the balance sheet accounts, and using the average exchange rate during the period for revenue and expense accounts. The effects of translation are recorded to accumulated other comprehensive loss of stockholders’ deficit.

The accounts of all other foreign operations are remeasured to the United States dollar, which is the functional currency. Accordingly, all monetary assets and liabilities of these foreign operations are translated into United States dollars at current period-end exchange rates, and non-monetary assets and related elements of expense are translated using historical rates of exchange. Income and expense elements are translated to United States dollars using average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded to interest and other expense, net in the consolidated statement of operations. The net tangible assets of the Company’s foreign operations, excluding intercompany debt, were $1,212,000 at September 30, 2007.

The Company did not enter into any forward contracts during the nine months ended September 30, 2007. Although we will continue to monitor the Company’s exposure to currency fluctuations, we cannot provide assurance that exchange rate fluctuations will not harm the Company’s business in the future.

- 29 -

Item 4T. Controls and Procedures

At the end of the period covered by this report, Vermillion, Inc. (“Vermillion”; Vermillion and its wholly owned subsidiaries are collectively referred to as the “Company”), formerly known as Ciphergen Biosystems, Inc., carried out an evaluation, under the supervision and with the participation of the Company’s management, including Vermillion’s Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon this evaluation, Vermillion’s Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 30 -

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On June 26, 2006, Health Discovery Corporation filed a lawsuit against Vermillion, Inc. (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as the “Company”), formerly known as Ciphergen Biosystems, Inc., in the United States District Court for the Eastern District of Texas, Marshall Division (the “Court”), claiming that software used in certain Vermillion ProteinChip Systems infringes on three of its United States patents. Health Discovery Corporation sought injunctive relief as well as unspecified compensatory and enhanced damages, reasonable attorney’s fees, prejudgment interest and other costs. On August 1, 2006, Vermillion filed an unopposed motion with the Court to extend the deadline for Vermillion to answer or otherwise respond until September 2, 2006. Vermillion filed its answer and counterclaim to the complaint with the Court on September 1, 2006. Concurrent with its answer and counterclaims, Vermillion filed a motion to transfer the case to the Northern District of California. On January 10, 2007, the court granted Vermillion’s motion to transfer the case to the Northern District of California. The parties met for a scheduled mediation on May 7, 2007. On July 10, 2007, Vermillion entered into a license and settlement agreement with Health Discovery Corporation (the “HDC Agreement”) pursuant to which it licensed more than 25 patents covering Health Discovery Corporation’s support vector machine technology for use with Surface Enhanced Laser Desorption/Ionization (“SELDI”) technology. Under the terms of the HDC Agreement, Vermillion receives a worldwide, royalty-free, non-exclusive license for life sciences and diagnostic applications of the technology and it has access to any future patents resulting from the underlying intellectual property in conjunction with use of SELDI systems. Pursuant to the HDC Agreement, Vermillion paid $200,000 to Health Discovery Corporation upon entry into the agreement on July 10, 2007. The remaining $400,000 under the HDC Agreement is payable as follows: $100,000 three months following the date of the agreement, $150,000 twelve months following the date of the agreement and $150,000 twenty-four months following the date of the agreement. The HDC Agreement settles all disputes between Vermillion and Health Discovery Corporation.

On September 17, 2007, Vermillion was served with a complaint filed in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad Laboratories, Inc (“Bio-Rad”) as defendants and Molecular Analytical Systems (“MAS”) as plaintiff. The complaint alleges, among other things, that Vermillion is in breach of its license agreement with MAS relating to SELDI technology as a result of Vermillion’s entry into a sublicense agreement with Bio-Rad. In connection with the sale of assets and liabilities of the Company’s Instrument Business to Bio-Rad, Vermillion sublicensed to Bio-Rad certain rights to the SELDI technology that Vermillion obtained under the MAS license for use outside of the clinical diagnostics field. Vermillion retained exclusive rights to the technology for use in the field of clinical diagnostics for a five-year period, after which it will retain nonexclusive rights in that field. Given the early stage of this action, management cannot predict the ultimate outcome of this matter at this time.

Item 1a. Risk Factors

An investment in Vermillion, Inc.’s (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as the “Company”), formerly known as Ciphergen Biosystems, Inc., common stock involves a high degree of risk. You should carefully consider the following risk factors together with all of the other information contained in this Quarterly Report on Form 10-Q, including the Company’s consolidated financial statements and the notes thereto, before deciding whether to invest in shares of Vermillion’s common stock. Each of these risks could harm the Company’s business, operating results, financial condition and/or growth prospects. As a result, the trading price of Vermillion’s common stock could decline and you might lose all or part of your investment. Additional risks and uncertainties not presently known to management (“we”, “us” or “our”) or that we currently deem immaterial may also impair the Company’s operations.

Risks Related to the Company’s Business

We expect to continue to incur net losses in 2007 and 2008. If we are unable to significantly increase the Company’s revenue, the Company may never achieve profitability.

- 31 -

From the Company’s inception through September 30, 2007, the Company has generated cumulative revenue from the sale of products and services to customers of $229,269,000 and has incurred net losses of $235,850,000. The Company has experienced significant operating losses each year since its inception and we expect these losses to continue for at least the next several quarters, resulting in an expected net loss for 2007 and 2008. For example, the Company experienced net losses of $22,066,000 in 2006 and $17,990,000 for the nine months ended September 30, 2007. The Company’s losses have resulted principally from costs incurred in research and development, sales and marketing, litigation, and general and administrative costs associated with the Company’s operations. These costs have exceeded the Company’s gross profit which, to date, has been generated principally from product sales derived from a business that the Company sold to Bio-Rad Laboratories, Inc. (“Bio-Rad”) on November 13, 2006. We expect to incur additional operating losses that may be substantial. The Company may never achieve profitability. Even if the Company does achieve profitability, the Company may not be able to sustain or increase profitability on a quarterly or annual basis.

We will need to raise additional capital for the Company in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan.

We believe that the Company’s current cash balances may not be sufficient to fund planned expenditures beyond 12-months. Additional financing opportunities may not be available, or if available, may not be on favorable terms. The availability of financing opportunities will depend, in part, on market conditions, and the outlook for the Company. Any future equity financing would result in substantial dilution to Vermillion’s stockholders. If we raise additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If adequate and acceptable financing is not available, we may have to delay development or commercialization of certain Company products or license to third parties the rights to commercialize certain Company products or technologies that we would otherwise seek to commercialize. We may also reduce the Company’s marketing or other resources devoted to the Company’s products. Any of these options could reduce our ability to successfully execute our business plan.

Substantial leverage and debt service obligations may adversely affect the Company’s cash flows.

As of September 30, 2007, the Company had $19,000,000 of convertible senior notes outstanding and $10,000,000 outstanding under the Company’s secured line of credit with Quest Diagnostics Incorporated (“Quest”). As a result of this indebtedness, the Company has high principal and interest payment obligations. The degree to which the Company is leveraged could, among other things:

•		make it difficult for the Company to make payments on the convertible senior notes and secured line of credit;

•		make it difficult for the Company to obtain financing for working capital, acquisitions or other purposes on favorable terms, if at all;

•		make the Company more vulnerable to industry downturns and competitive pressures; and

•		limit our flexibility in planning for or reacting to changes in the Company’s business.

The Company’s ability to meet its debt service obligations will depend upon the Company’s future performance, which will be subject to financial, business and other factors affecting the Company’s operations, many of which are beyond our control.

The Company may not succeed in developing diagnostic products and. even if the Company does succeed in developing diagnostic products, the diagnostic products may never achieve significant commercial market acceptance.

The Company’s success depends on our ability to develop and commercialize diagnostic products. There is considerable risk in developing diagnostic products based on the Company’s biomarker discovery efforts as potential tests may fail to validate results in larger clinical studies and may not achieve acceptable levels of clinical sensitivity and specificity. If we do succeed in developing diagnostic tests with acceptable performance characteristics, we may not succeed in achieving significant commercial market acceptance for those tests. Our ability to successfully commercialize diagnostic products that the Company may develop, such as tests, kits and devices, will depend on several factors, including:

- 32 -

•		our ability to convince the medical community of the safety and clinical efficacy of the Company’s products and its advantages over existing diagnostic products;

•		our ability to further establish business relationships with other diagnostic companies that can assist in the commercialization of these products; and

•		the agreement by Medicare and third-party payers to provide full or partial reimbursement coverage for the Company’s products, the scope and extent of which will affect patients’ willingness to pay for the Company’s products and will likely heavily influence physicians’ decisions to recommend the Company’s products.

These factors present obstacles to significant commercial acceptance of the Company’s potential diagnostic products, which we will have to spend substantial time and the Company’s financial resources to overcome, if we can do so at all. Our inability to successfully do so would prevent the Company from generating revenue from diagnostic products and from developing a profitable business.

Our ability to commercialize the Company’s potential diagnostic tests is heavily dependent on our strategic alliance with Quest.

On July 22, 2005, Vermillion and Quest entered into a strategic alliance, which focuses on commercializing up to three assays chosen from Vermillion’s pipeline. The term of the agreement ends on the later of (i) the three-year anniversary of the agreement and (ii) the date on which Quest commercializes the three diagnostic tests covered by such agreement. If this strategic alliance does not continue for its full term or if Quest fails to proceed to diligently perform its obligations as a part of the strategic alliance, such as independently developing, validating, and commercializing potential diagnostics tests, our ability to commercialize the Company’s potential diagnostic tests would be seriously harmed. Due to the current uncertainty with regard to United States Food and Drug Administration (the “FDA”) regulation of analyte specific reagents (“ASRs”) or, for other reasons, Quest may elect to forgo development of ASR “home brew” laboratory tests and instead elect to wait for the development of in vitro diagnostic (“IVD”) test kits, which would adversely affect the Company’s revenues. If we elect to increase the Company’s expenditures to fund in-house diagnostic development programs or research programs, the Company will need to obtain additional capital, which may not be available on acceptable terms, or at all. If we fail to develop diagnostic tests, it would jeopardize the Company’s ability to continue as a business.

The commercialization of the Company’s diagnostic tests may be adversely affected by changing FDA regulations.

The current regulatory environment with regard to ASRs and in vitro diagnostic multivariate index assays (“IVDMIAs”), such as the Company’s potential ovarian cancer diagnostic test, is unclear. To the extent the FDA requires that the Company’s potential diagnostic tests receive FDA 510(k) clearance or FDA pre-market approval, our ability to develop and commercialize the Company’s potential diagnostic tests may be prevented or significantly delayed, which would adversely affect the Company’s revenues.

If we fail to continue to develop the Company’s technologies, we may not be able to successfully foster adoption of the Company’s products and services or develop new product offerings.

The Company’s technologies are new and complex, and are subject to change as new discoveries are made. New discoveries and advancements in the diagnostic field are essential if we are to foster the adoption of the Company’s product offerings. Development of these technologies remains a substantial risk to the Company due to various factors, including the scientific challenges involved, our ability to find and collaborate with others working in the diagnostic field, and competing technologies, which may prove more successful than the Company’s technologies. In addition, we have reduced the Company’s research and development headcount and expenditures, which may adversely affect the Company’s ability to further develop its technologies.

If we fail to maintain the Company’s rights to utilize intellectual property directed to diagnostic biomarkers, the Company may not be able to offer diagnostic tests using those biomarkers.

One aspect of our business plan is to develop diagnostic tests based on certain biomarkers, which the Company has the right to utilize through licenses with its academic collaborators, such as The Johns Hopkins University School of Medicine and The University of Texas M.D. Anderson Cancer Center. In some cases, the Company’s collaborators

- 33 -

own the entire right to the biomarkers. In other cases, the Company co-owns the biomarkers with its collaborators. If, for some reason, the Company loses its license to biomarkers owned entirely by our collaborators, the Company may not be able to use those biomarkers in diagnostic tests. If the Company loses its exclusive license to biomarkers co-owned by the Company and its collaborators, the Company’s collaborators may license their share of the intellectual property to a third party that may compete with the Company in offering diagnostic tests.

The Company has drawn $10,000,000 from the secured line of credit provided by Quest. If the Company fails to achieve the milestones for the forgiveness of the secured line of credit set forth therein, the Company will be responsible for full repayment of the secured line of credit.

As of September 30, 2007, the Company has drawn $10,000,000 from the secured lined of credit in connection with the strategic alliance with Quest. The Company borrowed in monthly increments of $417,000 over a two-year period, and made monthly interest payments. Funds from this secured line of credit may only be used for certain costs and expenses directly related to the strategic alliance, with forgiveness of the repayment obligations based upon the Company’s achievement of milestones related to the development, regulatory approval and commercialization of certain diagnostic tests. Should the Company fail to achieve these milestones, the Company would be responsible for the repayment of the outstanding principal amount and any unpaid interest on the secured line of credit on or before July 22, 2010.

If a competitor infringes the Company’s proprietary rights, the Company may lose any competitive advantage it may have as a result of diversion of our time, enforcement costs and the loss of the exclusivity of the Company’s proprietary rights.

The Company’s success depends in part on our ability to maintain and enforce the Company’s proprietary rights. The Company relies on a combination of patents, trademarks, copyrights and trade secrets to protect its technology and brand. In addition to the Company’s licensed SELDI technology, the Company has also submitted patent applications directed to subsequent technological improvements and utilization of the SELDI technology, including patent applications covering biomarkers that may have diagnostic or therapeutic utility. The Company’s patent applications may not result in additional patents being issued.

If competitors engage in activities that infringe the Company’s proprietary rights, our focus will be diverted and the Company may incur significant costs in asserting its rights. We may not be successful in asserting the Company’s proprietary rights, which could result in the Company’s patents being held invalid or a court holding that the

- 34 -

competitor is not infringing, either of which would harm the Company’s competitive position. We cannot be sure that competitors will not design around the Company’s patented technology.

The Company also relies upon the skills, knowledge and experience of its technical personnel. To help protect the Company’s rights, we require all employees and consultants to enter into confidentiality agreements that prohibit the disclosure of confidential information. These agreements may not provide adequate protection for the Company’s trade secrets, knowledge or other proprietary information in the event of any unauthorized use or disclosure.

If others successfully assert their proprietary rights against the Company, the Company may be precluded from making and selling its products or the Company may be required to obtain licenses to use their technology.

The Company’s success depends on avoiding infringing on the proprietary technologies of others. If a third party were to assert claims that the Company is violating their patents, the Company might incur substantial costs defending itself in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology. Any such lawsuit may not be decided in the Company’s favor, and if the Company is found liable, it may be subject to monetary damages or injunction against using the technology. The Company may also be required to obtain licenses under patents owned by third parties and such licenses may not be available commercially on reasonable terms, if at all.

Current and future litigation against the Company could be costly and time consuming to defend.

The Company is from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by the Company’s clients in connection with commercial disputes, employment claims made by current or former employees, and claims brought by third parties alleging infringement on their intellectual property rights. In addition, the Company may bring claims against third parties for infringement on its intellectual property rights. Litigation may result in substantial costs and may divert our attention and Company resources, which may seriously harm the Company’s business, financial condition and results of operations.

An unfavorable judgment against the Company in any legal proceeding or claim could require the Company to pay monetary damages. In addition, an unfavorable judgment in which the counterparty is awarded equitable relief such as an injunction could have an adverse impact on the Company’s licensing and sublicensing activities, which could harm the Company’s business, financial condition and results of operations.

On September 17, 2007, Vermillion was served with a complaint naming Vermillion and Bio-Rad as defendants and Molecular Analytical Systems (“MAS”) as the plaintiff. In the complaint, MAS alleges that Vermillion is in breach of its license agreement with MAS relating to SELDI technology as a result of Vermillion’s entry into a sublicense agreement with Bio-Rad. Given the early stage of this action, we cannot predict the ultimate outcome of this matter at this time.

The Company depends on a single supplier to manufacture and supply its products and any interruption in this supplier relationship could materially and adversely affect the Company’s operating results.

In connection with the sale of assets and liabilities of the Company’s Instrument Business, Vermillion entered into a manufacture and supply agreement with Bio-Rad pursuant to which Bio-Rad manufactures and supplies the Company’s SELDI instruments and consumables. The initial term of the agreement expires on November 12, 2011, and is renewable for two additional two-year terms. If the manufacture and supply agreement is terminated or is not renewed or if Bio-Rad ceases manufacturing the Company’s products for another reason, we would have to find another third party supplier or begin manufacturing and supplying the Company’s products ourselves. The Company or another third-party supplier may not be able to produce those products at a cost, quantity or quality that are available from Bio-Rad. In addition, any such interruption could delay or diminish the Company’s ability to satisfy its customers’ orders, which could reduce the Company’s revenues, adversely affect the Company’s relationship with its customers, and materially and adversely affect the Company’s operating results.

If the Company or its suppliers fail to comply with FDA requirements, the Company may not be able to market its products and services and may be subject to stringent penalties; further improvements to our manufacturing operations may be required that would entail additional costs.

- 35 -

The commercialization of the Company’s products could be delayed, halted or prevented by applicable FDA regulations. If the FDA were to view any of the Company’s actions as non-compliant, it could initiate enforcement actions, such as a warning letter and possible imposition of penalties. In addition, ASRs that the Company may provide will be subject to a number of FDA requirements, including compliance with the FDA’s Quality System Regulations (“QSRs”), which establish extensive requirements for quality assurance and control as well as manufacturing procedures. Failure to comply with these regulations could result in enforcement actions for the Company or its potential suppliers. Adverse FDA actions in any of these areas could significantly increase the Company’s expenses and limit its revenue and profitability. Although the Company is ISO 9001:2000 certified with respect to its manufacturing processes used for the Company’s previous ProteinChip products, the Company will need to undertake additional steps to maintain its operations in line with FDA QSR requirements. The Company’s suppliers’ manufacturing facilities will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies. If and when the Company begins commercializing and assembling its products itself, the Company’s facilities will be subject to the same inspections. The Company or its suppliers may not satisfy such regulatory requirements, and any such failure to do so would have an adverse effect on the Company’s diagnostics efforts.

Because the Company’s business is highly dependent on key executives and employees, our inability to recruit and retain these people could hinder the Company’s business plans.

The Company is highly dependent on its executive officers and certain key employees. Effective November 1, 2007, the Chief Financial Officer resigned from the Company for personal reasons. Upon the Chief Financial Officer’s resignation from the Company, the Company’s Corporate Controller, was appointed to serve as Chief Financial Officer on an interim basis. The Company is currently searching for a new Chief Financial Officer. The resignation of the Chief Financial Officer and loss of service to any other executive officers or certain key employees could delay or curtail the Company’s research, development and commercialization objectives.. To continue the Company’s research and product development efforts, the Company needs people skilled in areas such as bioinformatics, biochemistry and information services. Competition for qualified employees is intense.

The Company’s diagnostic efforts may cause it to have significant product liability exposure.

The testing, manufacturing and marketing of medical diagnostic tests entails an inherent risk of product liability claims. Potential product liability claims may exceed the amount of the Company’s insurance coverage or may be excluded from coverage under the terms of the policy. The Company’s existing insurance will have to be increased in the future if the Company is successful at introducing diagnostic products and this will increase the Company’s costs. In the event that the Company is held liable for a claim against which it is not indemnified or for damages exceeding the limits of the Company’s insurance coverage, may require the Company to make substantial payments. This could adversely affect the Company’s cash position and results of operations and could increase the volatility of Vermillion’s common stock price.

Business interruptions could limit the Company’s ability to operate its business.

The Company’s operations, as well as those of the collaborators on which the Company depends, are vulnerable to damage or interruption from fire, natural disasters, computer viruses, human error, power shortages, telecommunication failures, international acts of terror and similar events. The Company’s primary facility is located in Fremont, California, where it also has laboratories. Although we have certain business continuity plans in place, we have not established a formal comprehensive disaster recovery plan, and the Company’s back-up operations and business interruption insurance may not be adequate to compensate it for losses the Company may suffer. A significant business interruption could result in losses or damages incurred by the Company and require the Company to cease or curtail its operations.

Legislative actions resulting in higher compliance costs are likely to adversely affect the Company’s future financial position, cash flows and results of operations.

Compliance with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Security Exchange Commission (the “SEC”) regulations and NASDAQ listing requirements, are resulting in increased compliance costs. The Company, like all other public companies, is incurring expenses and we are diverting time in an effort to comply with Section 404 of the Sarbanes-Oxley Act of

- 36 -

2002. The Company is a non-accelerated filer, and has completed the process documentation of its systems of internal control and is currently evaluating its systems of internal control. The Company is required to assess its compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the year ending December 31, 2007. We expect to devote the necessary resources, including additional internal and supplemental external resources, to support the Company’s assessment. In the future, if we identify one or more material weaknesses, or the Company’s independent registered public accounting firm is unable to attest that our report is fairly stated or to express an opinion on the effectiveness of the Company’s internal controls, this could result in a loss of investor confidence in the Company’s financial reports, have an adverse effect on Vermillion’s stock price and/or subject the Company to sanctions or investigation by regulatory authorities. Compliance with these evolving standards will result in increased general and administrative expenses and may cause a diversion of our time and attention from revenue-generating activities to compliance activities.

Limitations on net loss carryforwards, and research and development deferred tax assets related to federal and state income taxes may have an impact on our future results of operations.

The Company is evaluating the net operating loss carryforwards, and research and development deferred tax assets to determine whether there is a limit due to prior year ownership changes. It is possible that a portion of these deferred tax assets may be limited in their use. The Company expects to complete the studies by the end of 2007.

The Company is subject to environmental laws and potential exposure to environmental liabilities.

The Company is subject to various international, federal, state and local environmental laws and regulations that govern the Company’s operations, including the handling and disposal of nonhazardous and hazardous wastes, the recycling and treatment of electrical and electronic equipment, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. The Company is also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties affected by such contamination. The presence of, or failure to remediate properly, such substances could adversely affect the value and the ability to transfer or encumber such property. Based on currently available information, although there can be no assurance, we believe that such costs and liabilities have not had and will not have a material adverse impact on the Company’s financial results.

Risks Related to Owning Vermillion’s Stock

Vermillion’s principal stockholders own a significant percentage of Vermillion’s outstanding common stock, and are and will continue to be able to exercise significant influence over the Company’s affairs.

As of September 30, 2007, 2007, Quest possessed voting power over 8,605,952 shares, or 13.49%, and Phronesis Partners, L.P. (“Phronesis”), possessed voting power over 6,665,678 shares, or 10.45%, of Vermillion’s outstanding common stock. As a result, Quest and Phronesis are able to determine a significant part of the composition of Vermillion’s Board of Directors, hold significant voting power with respect to matters requiring stockholder approval and to exercise significant influence over the Company’s operations. The interests of Quest and Phronesis may be different than the interests of other stockholders on these and other matters. This concentration of ownership also could have the effect of delaying or preventing a change in the Company’s control or otherwise discouraging a potential acquirer from attempting to obtain control of the Company, which could reduce the price of Vermillion’s common stock.

Although Vermillion currently meets the standards for continued listing on the NASDAQ Capital Market, there is no guarantee that Vermillion will continue to meet these standards in the future and if Vermillion is delisted the value of your investment in Vermillion may substantially decrease.

To remain listed on the NASDAQ Capital Market, NASDAQ requires that the bid price for a company’s securities may not fall below $1.00 per share for more than 30 consecutive business days. Vermillion received a second delisting notice on September 6, 2007, following a period of 30 consecutive business days in which the bid price for

- 37 -

Vermillion’s common stock was below $1.00. Vermillion has until March 4, 2008, to regain compliance otherwise NASDAQ may provide written notification that Vermillion’s common stock will be delisted, at which time, the Company may appeal NASDAQ’s decision.

There is no guarantee that Vermillion will continue to meet the standards for listing in the future. Upon delisting from the NASDAQ Capital Market, Vermillion’s common stock would be traded over-the-counter (“OTC”). OTC transactions involve risks in addition to those associated with transactions in securities traded on the NASDAQ Capital Market. Many OTC stocks trade less frequently and in smaller volumes than NASDAQ listed stocks. Accordingly, delisting from the NASDAQ Capital Market would adversely affect the trading price of Vermillion’s common stock, significantly limit the liquidity of Vermillion’s common stock and impair the Company’s ability to raise additional funds.

Anti-takeover provisions in Vermillion’s charter, bylaws and stockholder rights plan and under Delaware law could make a third party acquisition of the Company difficult.

Vermillion’s certificate of incorporation, bylaws and stockholder rights plan contain provisions that could make it more difficult for a third party to acquire the Company, even if doing so might be deemed beneficial by Vermillion’s stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of Vermillion’s common stock. Vermillion is also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of the Company. The rights issued pursuant to Vermillion’s stockholder rights plan will become exercisable the tenth day after a person or group announces acquisition of 15% or more of Vermillion’s common stock or announces commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of Vermillion’s common stock. If the rights become exercisable, the holders of the rights (other than the person acquiring 15% or more of Vermillion’s common stock) will be entitled to acquire, in exchange for the rights’ exercise price, shares of Vermillion common stock or shares of any company in which the Company is merged, with a value equal to twice the rights’ exercise price.

Because we do not intend to pay dividends, Vermillion’s stockholders will benefit from an investment in Vermillion’s common stock only if it appreciates in value.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain the Company’s future earnings, if any, to finance the expansion of the Company’s business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in Vermillion’s common stock will depend entirely upon any future appreciation. There is no guarantee that Vermillion’s common stock will appreciate in value or even maintain the price at which its investor purchased his shares.

Vermillion’s stock price has been highly volatile, and an investment in Vermillion’s stock could suffer a decline in value.

The trading price of Vermillion’s common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond the Company’s and our control, including:

•		failure to commercialize diagnostic tests and significantly increase revenue;

•		actual or anticipated period-to-period fluctuations in financial results;

•		failure to achieve, or changes in, financial estimates by securities analysts;

•		announcements or introductions of new products or services or technological innovations by the Company or its competitors;

•		publicity regarding actual or potential discoveries of biomarkers by others;

•		comments or opinions by securities analysts or major stockholders;

•		conditions or trends in the pharmaceutical, biotechnology and life science industries;

•		announcements by the Company of significant acquisitions and divestitures, strategic partnerships, joint ventures or capital commitments;

•		developments regarding the Company’s patents or other intellectual property or that of the Company’s competitors;

- 38 -

•		litigation or threat of litigation;

•		additions or departures of key personnel;

•		sales of Vermillion common stock;

•		limited daily trading volume;

•		delisting from NASDAQ Capital Market; and

•		economic and other external factors, disasters or crises.

In addition, the stock market in general, and the NASDAQ Capital Market and the market for technology companies, in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been significant volatility in the market prices of securities of life science companies. These broad market and industry factors may seriously harm the market price of Vermillion common stock, regardless of the Company’s operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against Vermillion could result in substantial costs, potential liabilities and the diversion of our attention and Company resources.

The Company may need to sell additional shares of Vermillion common stock or other securities to meet the Company’s capital requirements. If the Company needs to sell additional shares of Vermillion common stock or other securities to meet the Company’s capital requirements, or upon conversion of the Company’s senior convertible notes and exercises of currently outstanding options and warrants, the ownership interests of Vermillion’s current stockholders could be substantially diluted. The possibility of dilution posed by shares available for future sale could reduce the market price of Vermillion’s common stock and could make it more difficult for the Company to raise funds through equity offerings in the future.

As of September 30, 2007, Vermillion had 63,776,934 shares of common stock outstanding and 7,678,795 shares of common stock reserved for future issuance to employees, Directors and consultants pursuant to the Company’s employee stock plans, of which 5,940,555 shares of common stock were subject to outstanding options. In addition, as of September 30, 2007, warrants to purchase 22,931,470 shares of common stock were outstanding at exercise prices ranging from $0.925 to $2.50 per share, with a weighted exercise price of $1.079 per share. In addition, there are 272,082 shares of common stock reserved for issuance upon conversion of our outstanding 4.5% convertible senior notes due September 1, 2008 and 8,250,000 shares of common stock reserved for issuance upon conversion of our 7.0% convertible senior notes due September 1, 2011. The exercise or conversion of all or a portion of these securities would dilute the ownership interests of Vermillion’s stockholders. Furthermore, future sales of substantial amounts of Vermillion’s common stock in the public market, or the perception that such sales are likely to occur, could affect prevailing trading prices of Vermillion’s common stock and the value of the notes.

- 39 -

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

On August 29, 2007, Vermillion, Inc. (“Vermillion”) completed a private placement sale of 24,513,092 shares of its common stock and warrants to purchase up to an additional 19,610,470 shares of its common stock with an exercise price of $0.925 per share and expiration date of August 29, 2012, to a group of existing and new investors for $20,591,000 in gross proceeds. The net proceeds of the transaction will be used for general working capital needs. In connection with Quest Diagnostics Incorporated’s (“Quest”) participation in this transaction, Vermillion amended a warrant originally issued to Quest on July 22, 2005. Pursuant to the terms of the amendment, the exercise price for the purchase of Vermillion’s common stock under such warrant was reduced from $3.50 per share to $2.50 per share and the expiration date of the warrant was extended from July 22, 2010, to July 22, 2011. The sale, offer and issuance of the securities was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act, as a transaction not involving a public offering because, among other things, the investors were accredited investors at the time of the transaction and appropriate legends were affixed to the instruments representing such securities issued in such transaction.

As partial consideration for services as placement agent in connection with the August 29, 2007, private placement sale, Vermillion issued a warrant to Oppenheimer & Co. Inc. to purchase up to 921,000 shares of Vermillion’s common stock with an exercise price of $0.925 per share and expiration date of August 29, 2012. Vermillion’s Board of Directors determined the value of such warrants to be equal to the price paid for the warrants by the investors in the offering, or $0.125 per warrant share, for an aggregate value of approximately $115,000. The sale, offer and issuance of the securities was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act, as a transaction not involving a public offering, because among other things, Oppenheimer was an accredited investor at the time of the transaction and appropriate legends were affixed to the instruments representing such securities issued in such transaction.

Item 3. Defaults Upon Senior Securities

None.

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

None

Item 5. Other Information

In September 2005, the Board of Directors approved the following amendments to the 2000 Employee Stock Purchase Plan (the “Plan”), which were effective as of November 1, 2005: (i) reduced the offering period from 24 months to 6 months, (ii) eliminated the ability to increase the payroll deduction during a given purchase period, and (iii) reduced the number of times a participant can decrease the deduction during any given purchase period to one. In October 2007, the Plan was amended and restated to reflect these amendments.

- 40 -

Item 6. Exhibits

Index to Exhibits


Exhibit		Incorporated by Reference					Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
2.1	Share Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and LumiCyte, Inc. dated May 28, 2003	8-K	000-31617		2.1	June 11, 2003

2.2	Asset Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Pall Corporation dated October 27, 2004	8-K	000-31617		2.1	December 6, 2004

3.1	Second Amended and Restated Certificate of Incorporation of Vermillion, Inc.	S-1	333-146354		3.1	September 27, 2007

3.2	Amended and Restated Bylaws of Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.)	S-1	333-32812		3.3	September 28, 2000

3.3	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.)	8-A	000-31617		3.5	March 21, 2002

4.1	Form of Vermillion, Inc.’s (formerly Ciphergen Biosystems, Inc.) Common Stock Certificate	S-1	333-32812		4.1	September 28, 2000

4.2	Indenture between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and U.S. Bank National Association dated August 22, 2003	S-3	333-109556		4.1	October 8, 2003

4.3	Preferred Shares Rights Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Continental Stock Transfer & Trust Company dated March 20, 2002	8-A	000-31617		4.2	March 21, 2002

4.4	Amendment to Rights Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Wells Fargo Bank, N.A. dated July 22, 2005	8-K	000-31617		4.4	July 28, 2005

4.5	Second Amendment to Rights Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Wells Fargo Bank, N.A. dated September 30, 2005	8-K	000-31617		4.5	October 4, 2005

4.6	Third Amendment to Rights Agreement between Vermillion, Inc. and Wells Fargo Bank, N.A., dated September 11, 2007	8-K	333-146354		10.1	September 12, 2007

10.1	Form of Preferred Stock Purchase Agreement	S-1	333-32812		10.1	September 28, 2000

- 41 -


Exhibit		Incorporated by Reference					Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.2	Fourth Amended and Restated Investors Rights Agreement dated March 3, 2000	S-1	333-32812		10.2	September 28, 2000

10.3	1993 Stock Option Plan	S-1	333-32812		10.3	September 28, 2000

10.4	Form of Stock Option Agreement	S-1	333-32812		10.4	September 28, 2000

10.5	2000 Stock Plan and related form of Stock Option Agreement	S-1	333-32812		10.5	September 28, 2000

10.6	Amended and Restated 2000 Employee Stock Purchase Plan							ü

10.7	401(k) Plan	10-K	000-31617		10.7	March 22, 2005

10.8	Form of Warrant	S-1	333-32812		10.8	September 28, 2000

10.9	Form of Proprietary Information Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and certain of its employees	S-1	333-32812		10.9	September 28, 2000

10.10	Lease Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and John Arrillaga, Trustee of the John Arrillaga Survivor’s Trust and Richard T. Peery, Trustee of the Richard T. Peery Separate Property Trust, dated January 28, 2000, and Amendment No. 1 dated August 8, 2000	S-1	333-32812		10.12	September 28, 2000

10.11	MAS License Agreement with IllumeSys Pacific, Inc. dated April 7, 1997	S-1	333-32812		10.23	September 28, 2000

10.12	MAS License Agreement with Ciphergen Technologies, Inc. (formerly ISP Acquisition Corporation) dated April 7, 1997	S-1	333-32812		10.24	September 28, 2000

10.13	Sublicense Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006	S-1	333-146354		10.13	September 27, 2007

10.14	Joint Venture Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Sumitomo Corporation	S-1	333-32812		10.25	September 28, 2000

10.15	Distribution and Marketing Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Ciphergen Biosystems KK dated March 24, 1999	S-1	333-32812		10.26	September 28, 2000

- 42 -


Exhibit		Incorporated by Reference					Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.16	Joint Development Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Stanford Research Systems, Inc. dated February 2, 1995 and amendment thereto	S-1	333-32812		10.27	September 28, 2000

10.17	Asset Purchase Agreement by and between Invitrogen Corporation and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated June 25, 2001	10-Q	000-31617		10.28	June 30, 2001

10.18	OEM Agreement between Salford Systems and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated February 27, 2001	10-K	000-31617		10.29	April 1, 2002

10.19	Supply Agreement between Beckman Coulter, Inc. and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated November 2, 2001	10-K	000-31617		10.30	April 1, 2002

10.20	Stock Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and SC Biosciences Corporation dated August 30, 2002	10-K	000-31617		10.32	March 31, 2003

10.21	First Amendment to the Joint Venture Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo Corporation, SC Biosciences Corporation (a subsidiary of Sumitomo Corporation) and Ciphergen Biosystems KK dated March 15, 2002	10-K	000-31617		10.33	March 31, 2003

10.22	Second Amendment to Joint Venture Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo Corporation, SC Biosciences Corporation (a subsidiary of Sumitomo Corporation) and Ciphergen Biosystems KK dated November 15, 2002	10-K	000-31617		10.34	March 31, 2003

10.23	Third Amendment to Joint Venture Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo Corporation, SC Biosciences Corporation (a subsidiary of Sumitomo Corporation) and Ciphergen Biosystems KK dated November 15, 2002	10-K	000-31617		10.35	March 31, 2003

10.24	Exhibit A, which amends the Supply Agreement between Beckman Coulter, Inc. and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated November 2, 2001	10-K	000-31617		10.36	March 31, 2003

- 43 -


Exhibit		Incorporated by Reference					Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.25	Lease Agreement between Symbion and Ciphergen Biosystems A/S dated February 24, 2003	10-K	000-31617		10.37	March 31, 2003

10.26	Service and Support Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Applied Biosystems/MDS Sciex dated April 2, 2001	10-K	000-31617		10.38	March 31, 2003

10.27	Employment Agreement between Gail Page and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated December 31, 2005	10-K	000-31617		10.39	March 17, 2006

10.28	Registration Rights Agreement dated August 22, 2003	S-3	000-31617		10.1	October 8, 2003

10.29	Extension of Term of Service and Support Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Applied Biosystems/MDS Sciex dated March 10, 2004	10-K	000-31617		10.43	March 15, 2004

10.30	Asset Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Pall Corporation dated October 27, 2004	8-K	000-31617		2.1	December 6, 2004

10.31	Stock Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated July 22, 2005	8-K	000-31617		10.45	July 28, 2005

10.32	Letter Agreement dated August 29, 2007 between Vermillion, Inc. and Quest Diagnostics Incorporated	S-1	333-146354		10.38	September 27, 2007

10.33	Warrant between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated July 22, 2005	10-K	000-31617		10.51	March 17, 2006

10.34	Memorialization Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated January 12, 2006*	S-1	333-146354		10.41	September 27, 2007

10.35	Amendment to Warrant between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated August 29, 2007	S-1	333-146354		10.41	September 27, 2007

10.36	Credit Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated July 22, 2005	8-K	000-31617		10.47	July 28, 2005

- 44 -


Exhibit		Incorporated by Reference					Filed
Number	Exhibit Description	Form	File No.	Exhibit		Filing Date	Herewith
10.37	Security Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated dated July 22, 2005	8-K	000-31617		10.48	July 28, 2005

10.38	Form of Exchange Agreement, dated as of November 3, 2006 between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and certain holders of its 4.50% Convertible Senior Notes due September 1, 2008	8-K	000-31617		10.55	November 6, 2006

10.39	Asset Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated August 14, 2006	14a	000-31617			September 12, 2006

10.40	Amendment to Asset Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006	S-1	333-146354		10.47	September 27, 2007

10.41	Stock Purchase Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006	S-1	333-146354		10.48	September 27, 2007

10.42	Transition Services Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006	S-1	333-146354		10.49	September 27, 2007

10.43	Amendment No. 1 to Transition Services Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated May 11, 2007	S-1	333-146354		10.50	September 27, 2007

10.44	Amendment No. 2 to Transition Services Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated June 15, 2007	S-1	333-146354		10.51	September 27, 2007

10.45	Manufacture and Supply Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006	S-1	333-146354		10.52	September 27, 2007

10.46	Amendment No. 1 to Manufacture and Supply Agreement between Vermillion, Inc. and Bio-Rad Laboratories, Inc. dated August 27, 2007	S-1	333-146354		10.53	September 27, 2007

- 45 -

Exhibit

Incorporated by Reference

Filed

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

10.47

Cross License Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006

S-1

333-146354

10.54

September 27, 2007

10.48

Letter Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006

S-1

333-146354

10.55

September 27, 2007

10.49

Sublease Agreement between Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated November 13, 2006

S-1

333-146354

10.56

September 27, 2007

10.50

Securities Purchase Agreement, dated as of August 23, 2007, by and among Vermillion, Inc. and the purchasers party thereto

S-1

333-146354

10.57

September 27, 2007

10.51

Form of Warrant

31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.0

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

)


(1)		Furnished herewith

- 46 -

SIGNATURES

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


		Vermillion, Inc.

Date: November 14, 2007		/s/ Gail S. Page

		Gail S. Page
		Director, President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 14, 2007		/s/ Qun Zhou

		Qun Zhou
		Corporate Controller and Interim Chief Financial Officer
		(Acting Principal Financial and Accounting Officer)

- 47 -

Exhibit 10.6

VERMILLION, INC.

AMENDED AND RESTATED 2000 EMPLOYEE STOCK PURCHASE PLAN

The following constitute the provisions of the Amended and Restated 2000 Employee Stock Purchase Plan of Vermillion, Inc., as amended and restated effective November 1, 2005, pursuant to Board resolutions adopted September 22, 2005.

1. Purpose . The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code.

2. Definitions .

(a) “ Board ” shall mean the Board of Directors of the Company or any committee thereof designated by the Board of Directors of the Company in accordance with Section 14 of the Plan.

(b) “ Code ” shall mean the Internal Revenue Code of 1986, as amended.

(d) “ Company ” shall mean Vermillion, Inc. and any Designated Subsidiary of the Company.

(e) “ Compensation ” shall mean all base straight time gross earnings, bonuses and commissions, but exclusive of payments for overtime, shift premium, and other compensation.

(f) “ Designated Subsidiary ” shall mean any Subsidiary that has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan.

(g) “ Employee ” shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual’s right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave.

(h) “ Enrollment Date ” shall mean the first Trading Day of each Offering Period.

(i) “ Exercise Date ” shall mean the first Trading Day on or after May 1 ^st and November 1 ^st of each year.

(j) “ Fair Market Value ” shall mean, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable;

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or

(iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company’s Common Stock (the “Registration Statement”).

(k) “ Offering Periods ” shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 ^st and November 1 ^st of each year and terminating on the first Trading Day on or after the May 1 ^st and November 1 ^st Offering Period commencement date approximately twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company’s Registration Statement effective and ending on the first Trading Day on or after May 1, 2002; provided, however, that except with respect to options outstanding under the Plan as of September 22, 2005, effective as of the first Trading Day on or after November 1, 2005, “Offering Periods” shall mean the periods of approximately six (6) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 ^st and November 1 ^st of each year and terminating on the first Trading Day on or after the November 1 ^st and May 1 ^st Offering Period commencement date approximately six (6) months later. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan.

(l) “ Plan ” shall mean this 2000 Employee Stock Purchase Plan.

(m) “ Purchase Period ” shall mean the approximately six month period commencing on one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date.

-2-
Rev’d 10-25-07

(n) “ Purchase Price ” shall mean 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Board pursuant to Section 20.

(o) “ Reserves ” shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option.

(p) “ Subsidiary ” shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary.

(q) “ Trading Day ” shall mean a day on which national stock exchanges and the Nasdaq System are open for trading.

3. Eligibility .

(a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan.

(b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time.

4. Offering Periods . The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 ^st and November 1 ^st each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company’s Registration Statement effective and ending on the first Trading Day on or after May 1, 2002. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter.

5. Participation .

(a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company’s payroll office prior to the applicable Enrollment Date.

-3-
Rev’d 10-25-07

(b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof.

6. Payroll Deductions .

(a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period; provided, however, that should a pay day occur on an Exercise Date, a participant shall have the payroll deductions made on such day applied to his or her account under the new Offering Period or Purchase Period, as the case may be.

(b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account.

(c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate; provided, however, that effective as of the first Trading Day on or after November 1, 2005, a participant may not increase the rate of his or her payroll deductions during the Offering Period and may decrease the rate of his or her payroll deductions only once during the offering Period. The Company may, in its discretion, limit the nature and/or number of participation rate changes during any Offering Period, and may establish such other conditions or limitations as it deems appropriate for Plan administration. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company’s receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant’s subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof.

(d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant’s payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period; provided, however, that effective as of the first Trading Day on or after November 1, 2005, a participant’s payroll deductions may be decreased only once during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant’s subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof.

(e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company’s Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company’s federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant’s compensation the amount necessary for the Company to meet applicable withholding obligations, including any

-4-
Rev’d 10-25-07

withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee.

7. Grant of Option . On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company’s Common Stock determined by dividing such Employee’s payroll deductions accumulated prior to such Exercise Date and retained in the Participant’s account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 2,500 shares of the Company’s Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company’s Common Stock an Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period.

8. Exercise of Option .

(a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant’s account which are not sufficient to purchase a full share shall be retained in the participant’s account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant’s account after the Exercise Date shall be returned to the participant. During a participant’s lifetime, a participant’s option to purchase shares hereunder is exercisable only by him or her.

(b) If the Board determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Board may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence,

-5-
Rev’d 10-25-07

notwithstanding any authorization of additional shares for issuance under the Plan by the Company’s stockholders subsequent to such Enrollment Date.

9. Delivery . As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option.

10. Withdrawal .

(a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant’s payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant’s option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement.

(b) A participant’s withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws.

11. Termination of Employment .

Upon a participant’s ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant’s account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant’s option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant’s customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice.

12. Interest . No interest shall accrue on the payroll deductions of a participant in the Plan.

13. Stock .

(a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company’s Common Stock which shall be made available for sale under the Plan shall be 500,000 shares, plus an annual increase to be added on the first day of the Company’s fiscal year, beginning in 2001, equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the outstanding shares of Common Stock on the last day of the immediately preceding fiscal year, or (iii) an amount determined by the Board.

-6-
Rev’d 10-25-07

(b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised.

(c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse.

14. Administration . The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties.

15. Designation of Beneficiary .

(a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under the Plan in the event of such participant’s death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under the Plan in the event of such participant’s death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective.

(b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant’s death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

16. Transferability . Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof.

17. Use of Funds . All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

18. Reports . Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any.

-7-
Rev’d 10-25-07

19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale .

(a) Changes in Capitalization . Subject to any required action by the stockholders of the Company, the Reserves (including the number of shares automatically added annually to the Plan pursuant to Section 13(a)(i)), the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.

(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company’s proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant’s option has been changed to the New Exercise Date and that the participant’s option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof.

(c) Merger or Asset Sale . In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”) and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company’s proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant’s option has been changed to the New Exercise Date and that the participant’s option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof.

-8-
Rev’d 10-25-07

20. Amendment or Termination .

(a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required.

(b) Without stockholder consent and without regard to whether any participant rights may be considered to have been “adversely affected,” the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company’s processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant’s Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan.

(c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to:

(i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price;

(ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and

(iii) allocating shares.

Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants.

21. Notices . All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

22. Conditions Upon Issuance of Shares . Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant

-9-
Rev’d 10-25-07

thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law.

23. Term of Plan . The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof.

24. Automatic Transfer to Low Price Offering Period . To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period.

-10-
Rev’d 10-25-07

EXHIBIT A

VERMILLION, INC.

2000 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT


___ Original Application		Enrollment Date:
___ Change in Payroll Deduction Rate
___ Change of Beneficiary(ies)

1.		hereby elects to participate in the Vermillion, Inc. Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”) and subscribes to purchase shares of the Company’s Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan.

2.		I hereby authorize payroll deductions from each paycheck in the amount of ___% of my Compensation on each payday (from 0 to 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.)

3.		I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option.

4.		I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to stockholder approval of the Employee Stock Purchase Plan.

5.		Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only).

6.		I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the

Rev’d 10-3-07

		disposition of the Common Stock . The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain.

7.		I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan.

8.		In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan:


NAME: (Please print)

	(First)	(Middle)	(Last)



		Relationship

				(Address)

-2-
Rev’d 10-3-07


		Employee’s Social
		Security Number:

		Employee’s Address:

I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.

-3-
Rev’d 10-3-07

EXHIBIT B

VERMILLION, INC.

2000 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF WITHDRAWAL

The undersigned participant in the Offering Period of the Vermillion, Inc. Employee Stock Purchase Plan which began on , (the “Enrollment Date”) hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement.


		Name and Address of Participant:







		Signature:



		Date:

Rev’d 10-3-07

Exhibit 10.51


Warrant		# of		Section 1(e)
No.	Record Holder	Shares		excluded
1	David I.J. Wang		285,713
2	Quest Diagnostics Incorporated		1,904,761	ü
3	Falcon Technology Partners LP		1,428,571
4	Phronesis Partners LP		3,895,428	ü
5	Kane & Co.		6,320
6	OFI Institutional Global Opportunities Fund		25,040
7	IFT Co.		20,080
8	IFT Co.		283,283
9	Oppenheimer Global Opportunities Fund		3,474,800
10	Highbridge International LLC		4,380,952
11	Fort Mason Master LP		1,788,762
12	Fort Mason Partners LP		116,000
13	Rockmore Investment Master Fund Ltd.		952,380
14	Iroquois Master Fund Limited		952,380
15	Kee Colen		96,000
16	Oppenheimer & Co.		921,000	ü

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS
EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 5 OF THIS WARRANT


Warrant No. [ ]		Number of Shares: [ ] (subject to adjustment)
Date of Issuance: August 29, 2007

Original Issue Date (as defined in subsection 2(a)): August 29, 2007

Vermillion, Inc.

Common Stock Purchase Warrant

(Void after August 29, 2012)

Vermillion, Inc., a Delaware corporation (the “Company”), for value received, hereby certifies that [ ], or his registered assigns (the “Registered Holder”), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, at any time or from time to time on or after August 29, 2007, and on or before 5:00 p.m. (New York City time) on August 29, 2012 (the “Exercise Period”), [ ] shares of Common Stock, $0.001 par value per share, of the Company (“Common Stock”), at a purchase price of $0.925 per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the “Warrant Shares” and the “Purchase Price,” respectively. This Warrant is one of a series of Warrants issued by the Company in connection with a private placement of Common Stock and of like tenor, except as to the number of shares of Common Stock subject thereto (collectively, the “Company Warrants”).

1. Exercise.

(a) Exercise for Cash . The Registered Holder may, at its option, elect to exercise this Warrant, in whole or in part and at any time or from time to time during the Exercise Period, by surrendering the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. A facsimile signature of the Registered Holder on the purchase form shall be sufficient for purposes of exercising this Warrant, provided that the Company receives the Registered Holder’s original signature with three (3) business days thereafter.

(b) Cashless Exercise .

(i) At any time during the Exercise Period when the resale of the Warrant Shares by the Registered Holder is not registered pursuant to an effective registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933,

as amended (the “Securities Act”), the Registered Holder may, at its option, elect to exercise this Warrant, in whole or in part, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Registered Holder shall be determined according to the following formula:


X = Y(A-B) A

Where: X =		the number of Warrant Shares that shall be issued to the Registered Holder;

Y =		the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Registered Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price);

A =		the Fair Market Value (as defined below) of one share of Common Stock, as of the date prior to the Exercise Date; and

B =		the Purchase Price then in effect.

(ii) “Fair Market Value” means, for any security as of any date, the closing sale price for such security on the Nasdaq Capital Market, as reported by Bloomberg, or, if the Nasdaq Capital Market begins to operate on an extended hours basis and does not designate the closing sale price then the last sale price of such security prior to 4:00:00 p.m., New York City time, as reported by Bloomberg, or, if the Nasdaq Capital Market is not the principal securities exchange or trading market for such security, the last sale price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last sale price of such security in an over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last sale price is reported for such security by Bloomberg, the average of the ask prices of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Fair Market Value cannot be calculated for a security on a particular date on any of the foregoing bases, the Fair Market Value of such security on such date shall be the fair market value as mutually determined by the Company and the Registered Holder. If the Company and the Registered Holder are unable to agree upon the Fair Market Value of such security, then such dispute shall be resolved pursuant to Section 13 hereof. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

(c) Exercise Date . Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the applicable

purchase form shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the “Exercise Date”). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates.

(d) Issuance of Certificates . As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within three (3) trading days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct:

(i) a certificate or certificates for the number of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; provided that in the event the Company’s transfer agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of the Registered Holder in connection with the Registered Holder’s sale of such Warrant Shares pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, the Company shall credit such aggregate number of shares of Common Stock to which the Registered Holder is entitled pursuant to such exercise to the Registered Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system; and

(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Registered Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price).

If the Company shall fail to deliver or cause to be delivered for any reason or no reason the shares of Common Stock as provided for above (the “Delivery Deadline”), then, in addition to all other remedies available to the Registered Holder, if on or after the trading day immediately following the Delivery Deadline the Registered Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Registered Holder of shares of Common Stock that were to be represented by the shares of Common Stock to be issued as provided for above (a “Buy-In”), then, provided as of such purchase date the Registered Holder had not received such shares of Common Stock, the Company shall, within three (3) business days after written request by the Registered Holder and in the Registered Holder’s discretion, either (i) pay cash to the Registered Holder in an amount equal to the purchase price (including brokerage commissions, if any) paid by the Registered Holder for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to issue such shares of Common Stock shall terminate, or (ii) promptly honor its obligation to deliver to the Registered Holder a certificate or certificates representing

such shares of Common Stock and pay cash to the Registered Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Fair Market Value on the Delivery Deadline.

(e) Beneficial Ownership . The Company shall not effect the exercise of this Warrant, and the Registered Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, the Registered Holder (together with the Registered Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such exercise. For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by the Registered Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by the Registered Holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the Registered Holder and its affiliates (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Registered Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written or oral request of the Registered Holder, the Company shall within one business day confirm orally and in writing to the Registered Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Company Warrants, by the Registered Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. By written notice to the Company, the Registered Holder may from time to time increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase will not be effective until the sixty-first (61 ^st ) day after such notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the Registered Holder and not to any other holder of Company Warrants.

2. Adjustments.

(a) Adjustment for Stock Splits and Combinations . If the Company shall at any time or from time to time after the date on which this Warrant was first issued (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (the “Original Issue Date”) effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or

from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective.

(b) Adjustment for Certain Dividends and Distributions . In the event the Company at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however , that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefore, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further that in no event shall the Purchase Price be reduced pursuant to this Section 2(b)(2) below the Fair Market Value of the Common Stock on the Original Issue Date.

(c) Adjustments for Other Dividends and Distributions . In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Registered Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Registered Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Registered Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Registered Holder.

(d) Adjustment for Reorganization .

(i) If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (collectively, a “ Reorganization ”), then, following such Reorganization, the Registered Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Registered Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization.

(ii) Notwithstanding the foregoing, in the event of a Reorganization that is (1) a transaction where the consideration paid to the holders of the Common Stock consists solely of cash, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (3) a Reorganization involving a person or entity not traded on a national securities exchange, the NASDAQ Global Select Market, the NASDAQ Global Market or the NASDAQ Capital Market (any of the events described in clauses (1), (2) or (3) above, each a “ Cash Reorganization ”), at the request of the Holder delivered before the 90 ^th day after such Reorganization, the Company (or the successor entity to the Company) at the Holder’s request shall purchase this Warrant from the Holder by paying to the Holder, within five (5) Business Days after such request (or, if later, on the effective date of the Reorganization), cash in an amount equal to the value of the remaining unexercised portion of this Warrant on the date of such Reorganization, which value shall be determined by use of the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg using (i) a price per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately preceding the date of consummation of the applicable Reorganization, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of such as of the date of consummation of the applicable Reorganization and (iii) an expected volatility equal to the greater of (A) 40% and (B) the 100 day volatility obtained from the HVT function on Bloomberg determined as of the Trading Day immediately following the announcement of the Reorganization, not to exceed 85%.

(iii) Notwithstanding the foregoing, in the event of a Reorganization, other than a Cash Reorganization, that is (x) a transaction in which the Common Stock is converted into or exchanged for anything other than solely equity securities, and (y) the common stock of the acquiring or surviving company is publicly traded, then, as part of such Reorganization, (i) the Registered Holder shall have the right thereafter to receive upon the exercise hereof such number of shares of common stock of the acquiring or surviving company as is determined by multiplying (A) the number of shares of Common Stock subject to this Warrant immediately prior to such Reorganization by (B) a fraction, the numerator of which is the Fair Market Value (as defined in subsection 1(b)(ii) above) per share of Common Stock as of the effective date of such Reorganization, and the denominator of which is the fair market value per share of common stock of the acquiring or surviving company as of the effective date of such transaction, as determined in good faith by the Board, and (ii) the exercise price per share of common stock of the acquiring or surviving company shall be the Purchase Price divided by the fraction referred to in clause (B) above.

(iv) The provisions of this paragraph (d) shall similarly apply to subsequent transactions analogous to a Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant.

(e) Adjustment for Certain Subsequent Offerings .

(i) In the event the Company, at any time after the Original Issue Date, shall issue shares of Additional Stock (as defined below) for consideration per share less than the Purchase Price in effect immediately prior to such issuance, then the Purchase Price in effect immediately prior to such issuance shall be adjusted in accordance with the following formula, provided, however , that in no event shall the Purchase Price be reduced pursuant to this Section 2(e) below the Fair Market Value of the Common Stock on the Original Issue Date:


		C

AP = P x	O +	P

	A

where:

AP = the adjusted Purchase Price.

P = the then current Purchase Price.

O = the number of shares outstanding (on a fully-diluted basis, assuming the full conversion, exercise or exchange of all convertible securities then outstanding) immediately prior to the issuance of such additional shares.

C = the aggregate consideration received for the issuance of such additional shares.

A = the number of shares outstanding (on a fully-diluted basis, assuming the full conversion, exercise or exchange of all convertible securities then outstanding) immediately after the issuance of such additional shares.

(ii) As used in this Section 2(e), “Additional Stock” shall mean any shares of Common Stock issued by the Company or deemed to be issued pursuant to this Section 2(e) after the Original Issue Date, except shares of Common Stock issued (A) by reason of a stock split, combination, dividend, or other distribution or issuance of shares of Common Stock that is covered by Sections 2(a), 2(b), 2(c) or 2(d); (B) to employees or directors of, or consultants or advisors to, the Company or any of its subsidiaries pursuant to a plan, agreement

or arrangement approved by the Board of Directors of the Company; (C) upon exercise of the Company Warrants or any other warrants or convertible securities issued by the Company and outstanding as of the Original Issue Date; (D) to banks, equipment lessors or other financial institutions in connection with loans or other extensions of credit made to the Company; (E) to suppliers or third party service providers in connection with the provision of goods or services (the primary purpose of which is not to raise equity capital); or (F) in connection with sponsored research, collaborations, technology license, development, marketing or other similar agreements or mergers, acquisitions or strategic partnerships (the primary purpose of which is not to raise equity capital).

(iii) For the purpose of the adjustment required under this Section 2(e), if the Company issues or sells (i) stock or other securities convertible into, shares of Additional Stock (such convertible stock or securities being herein referred to as “Convertible Securities”) or (ii) rights or options for the purchase of shares of Additional Stock or Convertible Securities and if the Effective Price of such shares of Additional Stock is less than the Purchase Price in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of shares of Additional Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Purchase Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of shares of Additional Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Purchase Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Purchase Price which would have been in effect had an adjustment been made on the basis that the only shares of Additional Stock so issued were the shares of Additional Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such shares of Additional Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if

any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities, whether or not converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. As used herein, the “Effective Price” of the shares of Additional Stock shall mean the quotient determined by dividing the total number of shares of Additional Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 2(e), into the aggregate consideration received, or deemed to have been received by the Company for such issue under this Section 2(e), for such shares of Additional Stock.

(f) Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Registered Holder (but in any event not later than 10 days thereafter), furnish or cause to be furnished to the Registered Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant.

3. Fractional Shares . The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay the value thereof to the Registered Holder in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above.

4. Transfers, etc.

(a) Notwithstanding anything to the contrary contained herein, this Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the “Act”), or (ii) such sale or transfer shall be exempt from the registration requirements of the Act and the Company shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is an entity to a wholly owned subsidiary or affiliate of such entity, a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership or to the estate of any such partner or retired partner, or a transfer by a Registered Holder which is a limited liability company to a member of such limited liability company or a retired member or to the estate of any such member or retired member, provided that the transferee in each case agrees in writing to be subject to the terms of this Section 4, or (ii) a transfer made in accordance with Rule 144 under the Act.

(b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form:

“The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or any state securities laws and neither the securities nor any interest therein may be offered, sold, transferred, pledged or otherwise disposed of except pursuant to an effective registration under such act or an exemption from registration, which, in the opinion of counsel reasonably satisfactory to counsel for this corporation, is available.”

The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act or at such time as the Warrant Shares are sold or transferred in accordance with the requirements of a registration statement of the Company on Form S-1, or such other form as may then be in effect.

(c) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its address as shown on the warrant register by written notice to the Company requesting such change.

(d) Subject to the provisions of this Section 4, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency).

5. No Impairment . The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder against impairment.

6. Notices of Record Date, etc. In the event:

(a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or

(b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation, or any transfer of all or substantially all of the assets of the Company; or

(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Registered Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer,

dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least five (5) days prior to the record date or effective date for the event specified in such notice.

7. Reservation of Stock . The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant.

8. Exchange or Replacement of Warrants.

(a) Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Registered Holder, at the Company’s expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant.

(b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor.

9. Notices . All notices and other communications from the Company to the Registered Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Registered Holder. All notices and other communications from the Registered Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered one business day after being sent via a reputable international overnight courier service guaranteeing next business day delivery.

10. No Rights as Stockholder . Until the exercise of this Warrant, the Registered Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company. Notwithstanding the foregoing, in the event (i) the Company effects a split of the Common Stock

by means of a stock dividend and the Purchase Price of and the number of Warrant Shares are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), and (ii) the Registered Holder exercises this Warrant between the record date and the distribution date for such stock dividend, the Registered Holder shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

11. Amendment or Waiver . Any term of this Warrant may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and the holders of Company Warrants representing at least two-thirds of the number of shares of Common Stock then subject to outstanding Company Warrants. Notwithstanding the foregoing, (a) this Warrant may be amended and the observance of any term hereunder may be waived without the written consent of the Registered Holder only in a manner which applies to all Company Warrants in the same fashion and (b) the number of Warrant Shares subject to this Warrant and the Purchase Price of this Warrant may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the Registered Holder (it being agreed that an amendment to or waiver under any of the provisions of Section 2 of this Warrant shall not be considered an amendment of the number of Warrant Shares or the Purchase Price). The Company shall give prompt written notice to the Registered Holder of any amendment hereof or waiver hereunder that was effected without the Registered Holder’s written consent. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.

12. Dispute Resolution . In the case of a dispute as to the determination of the Purchase Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two business days of receipt of the Purchase Form giving rise to such dispute, as the case may be, to the Registered Holder. If the Holder and the Company are unable to agree upon such determination or calculation of the Purchase Price or the Warrant Shares within three business days of such disputed determination or arithmetic calculation being submitted to the Registered Holder, then the Company shall, within two business days submit via facsimile (a) the disputed determination of the Purchase Price to an independent, reputable investment bank selected by the Company and approved by the Registered Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall use reasonable best efforts to cause at its expense the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Registered Holder of the results no later than ten business days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

13. Section Headings . The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties.

14. Governing Law . This Warrant will be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of law provisions thereof).

15. Facsimile Signatures . This Warrant may be executed by facsimile signature or electronic document in PDF format.

* * * * * * *

EXECUTED as of the Date of Issuance indicated above.


	VERMILLION, INC.

	By:

		Name:
		Title:
ATTEST:

EXHIBIT I

PURCHASE FORM


To: Vermillion, Inc.						Dated:

The undersigned, pursuant to the provisions set forth in the attached Warrant (No. [ ]), hereby elects to purchase (check applicable box) :

o ___shares of the Common Stock of Vermillion, Inc. covered by such Warrant; or

o ___the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b).

The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes) :

	o		$___in lawful money of the United States; and/or

	o		o the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b).

Notwithstanding anything to the contrary contained herein, this Purchase Form shall constitute a representation by the holder of the Warrant submitting this Purchase Form that, after giving effect to the exercise provided for in this Purchase Form, such holder (together with its affiliates) will not have beneficial ownership (together with the beneficial ownership of such Person’s affiliates) of a number of shares of Common Stock which exceeds the Maximum Percentage of the total outstanding shares of Common Stock as determined pursuant to the provisions of Section 1(e) of this Warrant.



		Signature:


		Address:

EXHIBIT II

ASSIGNMENT FORM

FOR VALUE RECEIVED, [ ] hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. [ ]) with respect to the number of shares of Common Stock of Vermillion, Inc. covered thereby set forth below, unto:


Name of Assignee		Address		No. of Shares

Dated:

Signature:

Signature Guaranteed:

By:

The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended.

Exhibit 31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of
The Sarbanes-Oxley Act Of 2002

I, Gail S. Page, certify that:

I have reviewed this quarterly report on Form 10-Q of Vermillion, Inc.;

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;

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;

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

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

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

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

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

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

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

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


Date: November 14, 2007		/s/ Gail S. Page

		Gail S. Page
		Director, President and Chief Executive Officer

EXHIBIT 31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of
The Sarbanes-Oxley Act Of 2002

I, Qun Zhou, certify that:

I have reviewed this quarterly report on Form 10-Q of Vermillion, Inc.;

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

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

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

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

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

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


Date: November 14, 2007		/s/ Qun Zhou

		Qun Zhou
		Corporate Controller and Interim Chief Financial Officer

Exhibit 32.0

Certification of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
with Respect to the Quarterly Report on Form 10-Q
for the Period Ended September 30, 2007

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Vermillion, Inc., a Delaware corporation (the “Company”), does hereby certify, to the best of such officer’s knowledge, that:

The Company’s quarterly report on Form 10-Q for the period ended September 30, 2007, (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and

Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 14, 2007		/s/ Gail S. Page

		Gail S. Page
		Director, President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 14, 2007		/s/ Qun Zhou

		Qun Zhou
		Corporate Controller and Interim Chief Financial Officer
		(Acting Principal Financial and Accounting Officer)

The certification set forth above is being furnished as an Exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document of the Company or the certifying officers.