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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10Q

Commission File Number: 0-11647

HYCOR BIOMEDICAL INC.

7272 Chapman Avenue, Garden Grove, California 92841

Registrant’s telephone number, including area code (714) 933-3000

No Change

     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  [X]  No  [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as identified in Rule 12b-2 of the Exchange Act). Yes  [  ]  No  [X]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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Biomedical Inc.

Index

Note:   Items 1, 2, 3 and 4 of Part II are omitted because they are not applicable.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(unaudited)

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003

1. Basis of Presentation

In the opinion of Hycor Biomedical Inc. and its subsidiaries (the “Company”), the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly the financial position of the Company as of September 30, 2003 and December 31, 2002, the results of its operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and its cash flows for the nine-month periods ended September 30, 2003 and 2002.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements but reflect all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented.

	These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2002 annual report on Form 10K as filed with the Securities and Exchange Commission. Certain items in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation.

	The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

	Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding options and warrants computed using the treasury stock method.

2. Accounting for Stock-Based Compensation

	The Company accounts for its employee stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, and its related interpretations.

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income (loss) and net income (loss) per share had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without

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	vesting restrictions, which significantly differ from the Company’s stock option awards. If the computed fair values of the 2003 and 2002, stock awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been as follows:

3. Inventories

	Inventories are valued at the lower of cost (first-in, first-out method) or market. Cost includes material, direct labor, and manufacturing overhead. Inventories at September 30, 2003 and December 31, 2002 consist of:

4. Long Term Debt

	The Company has available a $2,000,000 line of credit with a maturity date of July 1, 2004. Advances under the line of credit are collateralized by the Company’s accounts receivable, inventories, and property and equipment and bear interest at the prime rate or at LIBOR plus 2%.

The line of credit contains restrictive covenants, the most significant of which relate to the maintenance of minimum tangible net worth, debt-to-tangible net worth requirements, and liquid assets plus accounts receivable-to-current liabilities requirements. At September 30, 2003, the Company was in compliance with such covenants. During the quarter ended March 31, 2003, the Company paid the outstanding balance of $1,000,000 on this line of credit and as of September 30, 2003, the Company did not have any amounts outstanding under this line of credit.

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5. Other Commitments and Contingencies

The Company has entered into employment contracts with each of the Company’s five officers. These contracts generally provide for severance benefits if the officer is terminated by the Company for convenience or by the officer for substantial cause. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interests in the event of an actual or threatened change in control of the Company, the contracts also generally provide four of the officers with certain protections in the event of such a change in control. Two of the contracts provide certain benefits in the event of a change of control only and two of the contracts provide certain benefits in the event of a change of control and the occurrence of other specified events.

	To the best of management’s knowledge, there are no material pending legal proceedings. However, on occasion there may exist immaterial routine litigation that is incidental to the normal operations of the business to which the Company is a party or to which the Company’s property is subject.

6. New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company expects that the provisions of FIN 46 will not have a material impact on its consolidated financial statements since the Company currently has no variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a significant impact on the Company’s financial statements.

7. Merger Agreement

On July 24, 2003, the Company announced the execution of an Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Stratagene, a Delaware corporation, SHC Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Stratagene, and the Company. Pursuant to the Merger Agreement, Stratagene would acquire all of the outstanding shares of the Company through a merger between SHC Acquisition Sub and the Company, with the Company as the surviving corporation. The Company would become a wholly-owned subsidiary of Stratagene. Pursuant to the Merger Agreement, the Company’s stockholders would receive 0.6158 Stratagene Shares in exchange for each share of the Company, plus cash for any fractional shares.

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	The closing of the transaction is subject to closing conditions, including, but not limited to, the parties obtaining the necessary regulatory and shareholder approvals. The Company currently expects that the proposed transaction will be recognized as a tax-free reorganization.

	On October 2, 2003, Stratagene filed form S-4 with the Securities and Exchange Commission regarding the proposed transaction to merge with Hycor. On October 30, 2003, the Commission responded to this filing and an amended form S-4 will be filed as soon as practically possible. Once the SEC approves the S-4, it will be mailed along with a proxy to the shareholders of Hycor.

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

General

     This section and this entire report contains forward-looking statements and include assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties, and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in this Section and in this entire Report. The Company intends that all forward-looking statements be subject to the “safe-harbor” provisions contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

     Such factors include, but are not limited to, product demand and market acceptance risks; the effect of economic conditions; the impact of competitive products and pricing; product development; commercialization and technological difficulties; capacity and supply constraints or difficulties; difficulties competing against larger companies which have substantially greater financial resources; failure to receive and maintain regulatory approvals for our products; rapid technological change and new products developed by others which are more effective or less costly than our current or future products or which render our technologies and products obsolete or non-competitive; availability of capital resources; general business and economic conditions, including currency risks based on the relative strength or weakness of the U.S. dollar, euro conversions, and changes in government laws and regulations, including taxes; and the other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission. The historical results achieved by the Company are not necessarily indicative of its future prospects. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Execution of Agreement

     On July 24, 2003, the Company announced the execution of an Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Stratagene, a Delaware corporation, SHC Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Stratagene, and the Company. Pursuant to the Merger Agreement, Stratagene would acquire all of the outstanding shares of the Company through a merger between SHC Acquisition Sub and the Company, with the Company as the surviving corporation. The Company would become a wholly-owned subsidiary of Stratagene. Pursuant to the Merger Agreement, the Company’s stockholders would receive 0.6158 Stratagene shares in exchange for each share of the Company, plus cash for any fractional shares. The closing of the transaction is subject to closing conditions, including, but not limited to, the parties obtaining the necessary regulatory and shareholder approvals. The Company expects that the proposed transaction will be recognized as a tax-free reorganization.

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     If the proposed transaction is completed, the combined company would offer diagnostic products and life sciences research tool product lines to the global academic, pharmaceutical, and clinical and government laboratory markets. The combined company is expected to be impacted by merger-related costs of approximately $6 million, consisting of severance payments, investment banking fees, professional fees and other miscellaneous expenses, of which Hycor Biomedical Inc. has incurred $505,000 as of September 30, 2003 and the balance is expected to be recognized in the fourth quarter of 2003.

     On October 2, 2003, Stratagene filed form S-4 with the Securities and Exchange Commission regarding the proposed transaction to merge with Hycor. On October 30, 2003, the Commission responded to this filing and an amended form S-4 will be filed as soon as practically possible. Once the SEC approves the S-4, it will be mailed along with a proxy to the shareholders of Hycor.

Significant Accounting Policies

     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and management is required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

     Revenues from product sales are recognized at the time of shipment and passage of title. Revenues from customers under distributorship agreements are also recognized at the time of shipment and passage of title. The Company offers customers the right to return products only if the products are shipped in error, are damaged or in the event of product failure. While such returns have historically not been significant, the Company cannot guarantee that it will continue to experience the same return rates that it has in the past. Any significant increase in product failure rates and the resulting credit returns could have a material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.

Accounts Receivable

     The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness. The Company continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. The Company’s credit losses have historically been within expectations and the provisions established. However, the inability of any one of the Company’s significant customers to pay amounts owed could have a material adverse impact on the Company’s operating results.

Inventories

     Inventories are valued at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory on specifically identified items based primarily on an estimated forecast of product demand and production requirements. The Company’s losses from disposal of excessive and obsolete inventories have historically been within expectations and the provisions established. However, the Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the

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provision required for excess and obsolete inventory. In addition, rapid technological change or new product development could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if the Company’s inventory is determined to be overvalued, it would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if the Company’s inventory is determined to be undervalued, it may have over-reported its costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale.

     Additionally, the Company’s manufacturing costs and inventory carrying costs are dependent on management’s accurate estimates of customer demand for the Company’s products. A significant increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand and increase the expense of storing and maintaining the inventory until it is sold. Therefore, although management makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the Company’s inventory and its reported operating results.

Deferred Taxes

     The Company’s deferred taxes relate primarily to prior operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. Deferred taxes are also recognized for differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company evaluates a variety of factors in determining the amount of deferred income tax assets to be recognized pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. As of September 30, 2003, the Company had recorded a 100% valuation allowance on its net deferred assets. To the extent that it becomes more likely than not that the deferred assets would be realized, the Company would be required to reverse all or a portion of the valuation allowance. Reducing the amount of valuation allowance would have the affect of reducing the Company’s effective tax rate and have a positive impact on net income in the period of change.

Warranties

     All products are guaranteed to perform pursuant to Company policy for each product type when stored and used as directed. Warranty is limited to replacement of defective product returned at no cost to the customer. While the Company’s warranty costs have historically not been significant, the Company cannot guarantee that it will continue to experience the same warranty return rates that it has in the past. A significant increase in product return rates could have a material adverse impact on operating results for the period or periods in which such returns materialize.

New Accounting Pronouncements

     Information regarding recent accounting pronouncements is contained in Note 6 to the Consolidated Financial Statements for the period ended September 30, 2003, which note is incorporated herein by this reference and is included as part of “Item 1. Financial Statements,” to this Form 10-Q.

Financial Condition and Liquidity

     As of September 30, 2003, the Company’s working capital decreased approximately $10,000 compared to December 31, 2002. This decrease was the result of the payment of the outstanding balance of $1,000,000 on the Company’s line of credit in January 2003 offset by an increase from profitable operations.

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     During the three-month periods ended September 30, 2003 and 2002, total capital expenditures were approximately $210,000 and $219,000, respectively. Capital spending during the three-month periods ended September 30, 2003 and 2002 included approximately $113,000 and $75,000 for reagent rental equipment, respectively, and $34,000 and $10,000 for tooling and test equipment utilized in the Company’s manufacturing and research and development areas, respectively. During the nine-month periods ended September 30, 2003 and 2002, total capital expenditures were approximately $408,000 and $454,000, respectively. Capital spending during the nine-month periods ended September 30, 2003 and 2002 included approximately $156,000 and $218,000 for reagent rental equipment and $141,000 and $69,000 for tooling and test equipment utilized in the Company’s manufacturing and research and development areas, respectively. For fiscal 2003, the Company currently anticipates capital spending on property and equipment to be in the range of $500,000 to $600,000.

     The Company’s principal capital commitments are for lease payments under non-cancelable operating leases. Additionally, the HY-TEC business requires the purchase of instruments, which in many cases are placed in use in laboratories of the Company’s direct customers and paid for over an agreed contract period through the purchase of test reagents. This “reagent rental” sales program, common to the diagnostic market, creates negative cash flows in the initial years. The Company has entered into a long-term product manufacturing and sales agreement (the “Supply Agreement”) with an equipment manufacturer located in Europe. The Supply Agreement provides for the European manufacturer to supply and the Company to purchase certain minimum levels of HY-TEC instruments.

     The Company has a line of credit that provides for borrowings of up to $2,000,000 and expires on July 1, 2004. The loan is collateralized by the Company’s accounts receivable, inventories, and property and equipment. At September 30, 2003, the Company had no outstanding advances under the line of credit. Advances under the line of credit bear interest at the prime rate or at LIBOR plus 2%, payable monthly, with the principal due at maturity. During the nine-month period ended September 30, 2003, the applicable interest rate was 3.87%. The line of credit contains restrictive covenants, the most significant of which relate to the maintenance of minimum tangible net worth, debt-to-tangible net worth requirements and liquid assets plus accounts receivable-to-current liabilities requirements. At September 30, 2003, the Company was in compliance with such covenants.

     In addition, in the normal course of operations, the Company enters into purchase obligations with various vendors and suppliers of various key raw materials and other goods and services through purchase orders or other documentation. Such obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services. The purchase commitments covered by these various key raw materials and other goods and services aggregate approximately $570,000 for 2003.

     The following table summarizes the approximate future minimum payments under the above contractual obligations for the twelve-month periods as from September 30, 2003:

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     Current working capital, funds expected to be generated by future operations, and the available line of credit are expected to be sufficient to satisfy the Company’s capital commitments, as the Company currently operates, for the foreseeable future.

     In October 2002, the Board of Directors authorized the repurchase of up to an aggregate of 1,000,000 shares of the Company’s outstanding common stock. As of September 30, 2003, 11,500 shares of the Company’s common stock had been purchased at an average cost of $1.77 per share for a total of $20,404.

Other Commitments and Contingencies

     The Company has entered into employment contracts with each of the Company’s five officers. These contracts generally provide for severance benefits if the officer is terminated by the Company for convenience or by the officer for substantial cause. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interests in the event of an actual or threatened change in control of the Company, the contracts also generally provide four of the officers with certain protections in the event of such a change in control. Two of the contracts provide certain benefits in the event of a change of control only and two of the contracts provide certain benefits in the event of a change of control and the occurrence of other specified contingencies. Such obligations are not included in the table of contractual obligations set forth above. In the event the proposed transaction with Stratagene Holding Corporation is completed, the Company will incur severance obligations which are included in the expected merger related costs of approximately $6 million disclosed above under the heading “Execution of Agreement”.

Results of Operations

     During the three and nine-month periods ended September 30, 2003, sales increased approximately $461,000 or 10.2% and $1,053,000 or 7.7%, respectively, compared to the comparable periods in 2002. Sales in the Urinalysis product line increased by $171,000 for the three-month period ended September 30, 2003, and remained basically unchanged for the nine-month period ended September 30, 2003, respectively, versus the corresponding periods last year. This increase was due to increased sales levels to a major distributor after the completion of inventory and distribution center consolidations during the second quarter of 2003. Sales returned to normal levels during the third quarter of 2003. Sales in the clinical immunology product line increased during the three and nine-month periods ended September 30, 2003, approximately $282,000 and $1,061,000, respectively, versus the corresponding periods last year. This increase was primarily the result of increased sales in the Allergy product line due to increased volumes with pre-existing accounts of approximately $35,000 and $456,000 and increasing activity from new accounts of approximately $86,000 and $213,000 for the three and nine-month periods ended September 30, 2003, respectively, when compared to the comparable periods in 2002.
     Sales during the three and nine-month periods ended September 30, 2003 were also affected by the weakening dollar resulting in a positive foreign currency translation impact to foreign sales of approximately $129,000 or 2.6% and $523,000 or 3.5%, respectively, when compared to the comparable periods in 2002. Additionally, continued pressures in the health care industry for cost controls continue to impact the Company’s revenue and the Company anticipates that these pricing pressures will continue in the future.

     Gross profit as a percentage of product sales increased for the three and nine-month periods ended September 30, 2003 from approximately 53.8% to 55.2% and 53.2% to 54.3%, respectively, when compared to the comparable periods last year. This increase was due primarily to changes in the product sales mix.

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     Selling, general and administrative expenses increased for the three-month period ended September 30, 2003, approximately $467,000 or 26.8% (44.5% of net sales in 2003 versus 38.7% of net sales in 2002) and increased for the nine-month period ended September 30, 2003, approximately $1,020,000 or 20.6% (40.2% of net sales in 2003 versus 35.9% of net sales in 2002), when compared to the comparable periods last year. This increase was due primarily to higher legal and consulting expenses related to the merger negotiations of approximately $505,000 and to increases in sales support costs related to field sales activities in the US market of approximately $149,000. In addition, during the three and nine-month periods ended September 30, 2003, an unfavorable foreign exchange impact caused an increase in reported expenses of approximately $42,000 and $178,000, respectively.

     Research and development costs increased for the three and nine-month periods ended September 30, 2003, approximately $170,000 or 45.1% (11.0% of net sales in 2003 versus 8.4% of net sales in 2002) and $257,000 or 18.4% (11.2% of net sales in 2003 versus 10.1% of net sales in 2002), respectively, when compared to the comparable periods in 2002. This increase was primarily due to increased expenses in 2003 for ongoing development projects with the Company’s allergy product line, expenses associated with the Company’s agreement with Bayer Diagnostics and recruitment expenses. In addition, included in the nine-month period ended September 30, 2002 were non-recurring severance costs related to the termination of a senior member of management of approximately $189,000.

     Interest income decreased for the three-month period ended September 30, 2003, approximately $9,000 or 18.3% when compared to the comparable period last year. This decrease was the result of the sale and transfer of approximately $1,778,000 in long-term bonds to money market accounts with lower interest rates. Interest income increased for the nine-month period ended September 30, 2003, approximately $20,000 or 17.1% when compared to the comparable period in 2002. This increase was the result of increased average monthly balances in cash and investments during 2003. Interest expense decreased for the three and nine-month periods ended September 30, 2003, $10,000 or 100.0% and $28,000 or 87.5%, respectively, when compared to the comparable periods in 2002. This decrease was due to the payment of the long-term debt balances early in the first quarter of 2003.

     During the three-month period ended September 30, 2003, the Company sold investments with an aggregate book value of $1,777,448 for total cash proceeds of $1,844,247, resulting in a net realized gain of $66,799.

     During the three and nine-month periods ended September 30, 2003, gains from foreign currency transactions decreased approximately $78,000 or 125.6% and $31,000 or 36.7%, respectively, when compared to the comparable periods in 2002. The decreases were primarily due to foreign currency transactions at the Company’s German subsidiary that resulted in a negative foreign currency transaction impact.

     The tax provision for the three and nine-month periods ended September 30, 2003 and 2002 reflects the provision for estimated federal, state, and foreign liabilities. The Company’s effective tax rate differs from the statutory rate primarily due to a foreign tax rate differential and a reduction in the valuation allowance due to the utilization of net operating loss carryforwards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The Company’s financial instruments include cash and cash equivalents and investments. At September 30, 2003, the carrying values of our financial instruments approximated their fair values based on current market prices and rates.

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     The Company is exposed to a number of market risks in the ordinary course of business. These risks, which include foreign currency exchange risk and interest rate risk, arise in the normal course of business rather than from trading. Aside from the operations of our subsidiaries in Germany and Scotland, we do not transact business in foreign currencies. At the present time, we do not have any hedging programs in place and we are not trading in any financial or derivative instruments.

Foreign Currency

     The Company’s international sales expose it to foreign currency risk in the ordinary course of its business. For the three-month periods ended September 30, 2003 and 2002, the percentage of the Company’s net sales generated by the Company’s foreign subsidiaries (“Foreign Subs”) were approximately 26.7% and 23.6%, respectively. For the nine-month periods ended September 30, 2003 and 2002, the percentage of the Company’s net sales generated by the Company’s Foreign Subs were approximately 25.4% and 24.3%, respectively. The financial position and results of operations of the Foreign Subs are measured using the local currency as the functional currency. The Foreign Subs sell product in various European currencies that are collected at future dates and purchase raw materials and finished goods in both U.S. Dollars and other European currencies. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. Realized gains and losses from foreign currency transactions are included in operations as incurred.

     For financial reporting purposes, the Foreign Subs’ statements of operations are translated from the local currency into U.S. Dollars at the exchange rates in effect during the reporting period. When the local currency strengthens compared to the U.S. Dollar, there is a positive effect on the Foreign Subs’ sales and a negative effect on operating expenses as reported in the Company’s Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens, there is a negative effect on sales and a positive effect on operating expenses. For the three and nine-month periods ended September 30, 2003, the net impact to the Company’s reported sales from the effect of exchange rate fluctuations was an increase of approximately $129,000 or 2.6% and $523,000 or 3.5% respectively, when compared to the comparable periods in 2002. The net impact to the Company’s reported operating expenses from the effect of exchange rate fluctuations was an increase of approximately $44,000 or 1.6 % and $197,000 or 2.6 % respectively, when compared to the comparable periods in 2002.

     Assets and liabilities of the subsidiaries are translated at the exchange rate in effect at each period-end. Translation adjustments arising from differences in exchange rates from period to period are included in the accumulated other comprehensive loss account in stockholders’ equity. At September 30, 2003 the accumulated other comprehensive loss was approximately $572,000, which included the cumulative effect of foreign currency translation adjustments of approximately $588,000.

Interest Rates

     Advances under the Company’s line of credit bear interest at the prime rate or at LIBOR plus 2%. During the nine-month period ended September 30, 2003, the applicable interest rate was 3.87%. At September 30, 2003, the Company had no outstanding advances under the line of credit.

     The Company’s cash and equivalents are generally invested in money market accounts and short-term debt instruments of highly rated credit issuers. The Company limits the amount of credit exposure to any one issuer and seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. Based on the Company’s short-term investment portfolio at

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September 30, 2003, the Company believes that a 10% rise or fall in interest rates would have no material impact.

     The Company’s interest income on longer-term investments is dependent on the interest rate attributable primarily to the debt securities purchased by the Company. Since the Company generally holds these securities to maturity, changes in interest rates are not expected to have a material impact on the value of the Company’s portfolio.

Item 4. Controls and Procedures

     Based on the evaluation of the effectiveness 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), the Company’s principal executive officer and principal financial officer have concluded that such controls and procedures were effective as of the end of the period covered by this report. In connection with such evaluation, no change in the Company’s internal control over financial reporting occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

*      Pursuant to Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURE

     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.

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Exhibit Index

*      Pursuant to Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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