SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Diagnostic Products Corporation

5700 West 96th Street
Los Angeles, California 90045
(Address of principal executive offices)

Registrant’s telephone number: (310) 645-8200

No change

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES x NO o

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 o

The number of shares of Common Stock, no par value, outstanding as of August 2, 2004, was 29,109,146.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 – Basis of Presentation

The information for the three and six-month periods ended June 30, 2004 and 2003 has not been audited by independent public accountants, but includes all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for such periods.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in these financial statements are adequate to make the information not misleading.

The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The results of operations for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share include the dilutive effect of stock options.

Certain reclassifications have been made to the 2003 periods to conform to the 2004 presentation.

Note 2 – Inventories

     Inventories by major categories are summarized as follows:

Note 3 – Property, Plant & Equipment

Property, plant and equipment consist of the following:

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Construction in progress primarily relates to the building out of the Company’s new corporate headquarters building and the construction of a new building in Wales.

Note 4 – Goodwill and Other Assets

Goodwill results primarily from the Company’s purchase of certain of its foreign distributors. Other assets at June 30, 2004 consist of purchased technology licenses totaling $7,762,000, which is net of accumulated amortization of $238,000, and accounts receivable for certain equipment purchases with a due date of greater than a year totaling $4,757,000. Of the purchased technology licenses amount, $3.0 million represents licenses purchased during the first quarter of 2004. The remaining licenses totaling approximately $4.8 million were purchased during 2003. Amortization expense for the three and six months ended June 30, 2004 totaled $51,000 and $102,000, respectively. Amortization expense for each of the next five fiscal years is estimated to be $464,000, $524,000, $680,000, $766,000, and $854,000, respectively, and will be amortized in future periods based on the underlying estimated benefit derived.

Note 5 – Comprehensive Income

Comprehensive income is summarized as follows:

The Company does not provide for U.S. income taxes on foreign currency translation adjustments because it does not provide for such taxes on undistributed earnings of foreign subsidiaries as these are considered to be indefinitely invested.

Note 6 – Segment and Product Line Information

The Company considers its manufactured instruments and medical immunodiagnostic test kits as one operating segment, as the kits are required to run the instruments and utilize similar technology and instrument manufacturing processes. The Company manufactures its instruments and kits principally from facilities in the United States and the United Kingdom. Kits and instruments are sold to hospitals, medical centers, clinics, physicians, and other clinical laboratories throughout the world through a network of distributors, including consolidated distributors located in the United Kingdom, Germany, Czech Republic, Poland, Spain, The Netherlands, Belgium, Luxemborg, Finland, Norway, France, Australia, New Zealand, China, Brazil, Uruguay, Bolivia, Venezuela, Honduras, Guatemala, Costa Rica, Panama, Sweden, Latvia, Lithuania, Estonia, and Denmark.

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The Company sells its instruments and immunodiagnostic test kits under several product lines. Product line sales information is as follows:

The Company is organized and managed by geographic area. Transactions between geographic segments are accounted for as normal sales for internal reporting and management purposes with all intercompany amounts eliminated in consolidation. Sales are attributed to geographic areas based on the location from which the instrument or kit is shipped to the customer. Information reviewed by the Company’s chief operating decision maker on significant geographic segments is prepared on the same basis as the consolidated financial statements and is as follows:

*DPC Biermann includes the Company’s operations in Germany, the Czech Republic, Slovenia, Croatia, and Poland. DPC Medlab includes the Company’s operations in Brazil, Uruguay, Venezuela, Honduras, Guatemala, Costa Rica, Panama, El Salvador, and Bolivia.

Note 7 – Pro Forma Stock-Based Compensation

The Company has stock option plans under which options have historically been granted at exercise prices equal to the market price at the date of grant. Options granted vest over periods of three to nine years and expire ten years from the date of grant.

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Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to account for its employee stock options under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which recognizes expense based on the intrinsic value at the date of grant. As stock options have been issued with exercise prices equal to the respective market prices at grant date, no compensation expense has resulted. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company elected to maintain the intrinsic method of accounting for stock options under APB No. 25. Had compensation cost for all options granted been determined based on the fair value at grant date consistent with SFAS No. 123, the Company’s net income and earnings per share would have been as follows:

Note 8 – New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In December 2003, FIN 46 was replaced by FASB interpretation No 46R “Consolidation of Variable Interest Entities.” FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors 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 subordinate financial support from other parties. FIN 46R requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity’s expected losses, is entitled to receive a majority of the entity’s expected residual returns, or both. FIN 46R was effective for special-purpose entities being evaluated under FIN 46R for consolidation on December 31, 2003 and was effective for all other entities being evaluated on March 31, 2004. The adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

Note 9 – Commitments and Contingent Liabilities

The Company is continuing to cooperate with the SEC and the United States Justice Department in their review of certain improper payments by the Company’s Chinese subsidiary first discovered internally by the Company in the fourth quarter of 2002. The Company voluntarily disclosed this to the SEC and the United States Justice Department in early 2003 and is continuing to evaluate its internal policies and procedures to promote compliance with applicable laws. The Company’s activities in this regard resulted in the termination of the general manager of the Chinese subsidiary in the first quarter of 2004 as a result of his failure to follow payment-related procedures implemented on the advice of outside counsel. An independent committee of the

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Board continues to oversee these issues and is conducting an investigation. Government and other actions related to this matter may have a material adverse effect on future operations in China. For the year ended December 31, 2003, the Chinese subsidiary had sales of $9.8 million. In the second quarter of 2004 the Company’s Chinese subsidiary had sales of $2.2 million. In the fourth quarter of 2002, the Company accrued $1.5 million for actual and estimated costs to resolve this matter. As of June 30, 2004, $1.4 million remains in the accrual, although the actual costs, including fines and penalties, to resolve this matter could significantly exceed the amount accrued. In addition, the Company recorded a charge of $1.4 million to its 2002 fourth quarter tax provision related to the possible non-deductibility of the payments in China. During the third quarter of 2003, the Company recorded an additional charge of $0.9 million to its income tax provision for this and other Chinese tax-related matters. Additional legal expenses of approximately $884,000, $700,000 and $733,000 have been incurred and charged to general and administrative expense during the year ended December 31, 2003, the three months and the six months ended June 30, 2004, respectively. It is anticipated that legal fees for issues related to China will decrease in the remainder of 2004.

In February 2004, the Company was informed by the U.S. Food and Drug Administration (FDA) that based on inspectional findings that included data integrity and procedural issues, the Company was subject to the FDA’s Application Integrity Policy. The FDA suspended its review of all applications submitted by the Company and will defer the review of any future applications until the FDA determines that the Company has resolved these issues. The resolution process consists of developing and implementing a corrective action plan that will be audited by a third party and reviewed by the FDA. The Company has engaged the third party auditor and still believes that 12 months is a reasonable time for such actions to take place. During this time, the Company is not restricted by the FDA with regard to introducing new tests outside of the United States. However, the Company’s inability to introduce new tests in the United States pending resolution of this matter may have a negative impact on its future sales and profits.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Except for the historical information contained herein, this report and the following discussion in particular contain forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” and similar expressions) which are based upon management’s current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties, and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements. These risks and uncertainties include:

•		the Company’s ability to successfully market new and existing products;
•		the Company’s ability to keep abreast of technological innovations and successfully incorporate them into new products;
•		the Company’s dependence on sole suppliers for key chemical components in the IMMULITE assays;
•		the Company’s ability to address and resolve issues relating to the FDA’s Application Integrity Policy;
•		the Company’s ability to have new tests reviewed and approved by the FDA;
•		the risks inherent in the development and release of new products, such as delays, unforeseen costs, technical difficulties, and regulatory approvals;
•		competitive pressures, including technological advances and patents obtained by competitors;
•		environmental risks related to substances regulated by various federal, state, and international laws;
•		currency risks based on the relative strength or weakness of the U.S. dollar;
•		domestic and foreign governmental health care regulation and cost containment measures;
•		political and economic instability in certain foreign markets;
•		changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, or the American Institute of Certified Public Accountants; and
•		the effects of governmental or other actions relating to certain payments by the Company’s Chinese subsidiary.

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Overview

DPC develops and manufactures automated diagnostic test systems and related reagent test kits that are used by hospital, reference, and physicians’ office laboratories throughout the world. The Company’s principal product line, IMMULITE, is a fully automated, computer-driven modular system that uses specialized proprietary software to provide rapid, accurate test results that reduce the customer’s labor and reagent costs. The Company’s immunoassay tests provide critical information useful to physicians in the diagnosis, monitoring, management, and prevention of various diseases.

DPC manufactures immunodiagnostic test kits (also called “reagents” or “assays”) using several different technologies and assay formats. The IMMULITE instruments are closed systems, meaning that they will not perform other manufacturers’ tests. Accordingly, a major factor in the successful marketing of these systems is the ability to offer a broad menu of assays. In addition to about 100 IMMULITE assays, we sell a broad range of tests based on other technologies that can be performed manually using the customer’s own laboratory equipment, such as radioimmunoassay (RIA) and enzyme immunoassay (EIA) tests.

In addition to breadth of menu, major competitive factors for the IMMULITE instruments include time-to-first result (how quickly the instrument performs the test), ease of use, and overall cost effectiveness. Because of these competitive factors and the rapid technological developments that characterize the industry, the Company devotes approximately 10% of its annual revenues to research and development activities, all of which are expensed as incurred.

The Company’s products are sold throughout the world directly through affiliated and independent distributors. Historically, foreign sales (including U.S. export sales, sales to non-consolidated subsidiaries and independent distributors, and sales of consolidated subsidiaries) have accounted for more than 70% of revenues; although, in recent years, domestic sales growth has outpaced foreign sales growth.

The Company derives revenues from two principal sources: reagent (test kit) sales and IMMULITE instrument placements. The Company recognizes sales of test kits upon shipment and transfer of title to the customer.

IMMULITE instruments are placed with customers under many different types of arrangements that generally fall into the following categories: sale, lease, reagent rental, and soft placement. The Company sells instruments directly to end-users, to third party leasing companies that lease the instruments to end-users, and to independent distributors that then resell the instruments to their customers. Instrument sales, which represent the smallest component of placements, are recognized upon shipment and transfer of title. The Company also sells instruments under sales-type leases, which are recorded as revenue upon shipment in an amount equal to the present value of the future minimum lease payments to be received over the lease term.

Many instruments are placed other than by outright sale or capital lease. The Company enters into various types of operating lease arrangements with customers that generally provide for terms of three to five years and periodic rental payments. Revenue on these types of leases is recognized on a pro rata basis over the term of the lease. When an instrument is placed on a reagent rental basis, the customer agrees to pay a mark-up on reagents, but is not charged for the instrument. The Company also places instruments at no charge to the customer (“soft placement”) subject to the customer’s agreement to purchase a minimum amount of reagents. In reagent rentals and soft placements, the only revenue recognized is based on reagent shipments. Under operating lease, rental, and soft placements, DPC continues to own the instrument that is placed with the customer. These instruments are generally amortized on a straight-line basis over five years and maintenance costs are expensed as incurred. The Company also enters into service contracts with customers and recognizes service revenue over the related contract life (related costs are expensed as incurred).

Two important indicators used by management to evaluate financial performance are instrument shipments and reagent utilization. The number of IMMULITE instruments that the Company reports as being shipped in any period is net of returned instruments, such as returns at the end of a lease or rental or trade-ins on the purchase of a new model. The Company refurbishes and seeks to place returned instruments at reduced prices. Because of the different methods in which instruments are placed, total instrument sales vary from period to period based on the relative mix of placement methods, and such sales do not necessarily have a direct correlation to the number of instruments shipped during the period.

An important measure of the penetration of IMMULITE reagent sales is the average amount of reagent sales per instrument shipped. It takes a number of weeks or months after an instrument is shipped for it to become

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fully functional with regard to reagent utilization. The Company calculates average reagent utilization for a fiscal period by dividing IMMULITE reagent sales for the period by the total number of instruments shipped as of the end of the previous fiscal period.

Results of Operations

SUMMARY FINANCIAL DATA

Sales

The 15% sales increase in the second quarter of 2004 reflected continued demand for the IMMULITE product line. Sales of all IMMULITE products, instruments, service, and reagents in the second quarter of 2004 were $100.8 million, an 18% increase over 2003. In the second quarter of 2004, IMMULITE products represented 91% of sales versus 89% in 2003. In the first six months of 2004, sales of IMMULITE products increased 23% to $197.1 million from $160.8 million in the fist six months of 2003. In the first six months of 2004, IMMULITE products represented 91% of sales versus 88% in 2003. Various categories of IMMULITE product line sales in the second quarter and six months ended June 30 2004 and 2003 are shown in the following chart:

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IMMULITE Product Line Sales

The Company shipped a total of 246 IMMULITE systems during the second quarter of 2004, including 185 IMMULITE 2000 and 2500 systems and 61 IMMULITE 1000 systems. The total base of IMMULITE systems shipped grew to 9,488, including 3,287 IMMULITE 2000 and 2500 systems. In the second quarter of 2003 the Company shipped a total of 201 IMMULITE systems, including 123 IMMULITE 2000 systems.

The reduction in the number of IMMULITE 1000’s shipped is a result of the time that the IMMULITE 1000 and its predecessor system, the IMMULITE, have been available in the market, which is over ten years. The Company also ships IMMULITE systems that have been returned by customers and refurbished by the Company. In the fourth quarter of 2003 the Company reduced the price of the IMMULITE 2000 in anticipation of the release of the IMMULITE 2500 which occurred in June of 2004. The IMMULITE 2000/2500 has a longer sales process than the IMMULITE 1000 due to its higher sales price, and the IMMULITE 2000/2500 experiences a longer time delay between instrument placement and the ramp-up of reagent sales. The 2500, which reduces the time it takes to get a result for certain tests, most importantly tests for the emergency room to aid in the diagnosis of cardiac conditions, sells at a higher price than the IMMULITE 2000, and sales of the 2500 may erode sales of the 2000. The Company has 78 tests available in the United States on the IMMULITE 2000 and 71 tests available for introduction in the United States on the IMMULITE 2500. The Company’s ability to add FDA approved tests to the IMMULITE 2500 menu will depend on the resolution of the FDA inquiry discussed below. The Company is, however, able to market new tests abroad without FDA approval and expects to introduce new tests for the IMMULITE 2500, such as Pro-BNP and an ANA screen, in the fourth quarter of 2004.

The increase in IMMULITE and IMMULITE 2000 instrument and service revenue in the second quarter is primarily due to an increase in revenue from service and parts. Included in IMMULITE 2000 equipment sales is revenue relating to the Company’s sample management system (SMS), a sample-handling device that can be attached to the IMMULITE 2000. In the first six months of 2004 the increase in IMMULITE 2000 instruments and service included a significant increase in instrument revenue as a result of an increase in the number of instruments which were sold.

For the second quarter of 2004, IMMULITE 2000 reagent utilization per instrument was $19,255 and IMMULITE reagent utilization per instrument was $4,460 as compared to the second quarter of 2003, when they were $18,220 and $4,562, respectively. Increases in utilization on the IMMULITE 2000 are in part a result of a larger test menu including Hepatitis B tests and the strength of the euro relative to the dollar. The decrease in average utilization per instrument on the IMMULITE is expected to continue as high volume IMMULITE installations are replaced with IMMULITE 2000’s and incremental IMMULITE placements go into lower volume environments.

Sales of the Company’s mature RIA product line declined approximately 12% in the second quarter of 2004, representing 6% of sales, compared to 7% of sales in the second quarter of 2003. This trend is expected to continue. Sales of other DPC products declined to $1.7 million in the second quarter of 2004 from $2.5 million in the second quarter of 2003. The primary reason for this was a decline in sales of the Company’s micro-plate

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allergy product line. The Company ceased manufacturing this product line at the end of 2003 because of the availability of allergy testing on the IMMULITE 2000. These sales will continue to decline as inventories are depleted. Sales of non-DPC products, primarily through its consolidated international affiliates, increased 39% in the second quarter of 2004 to $1.9 million and increased to 2% of sales from 1% in the second quarter of 2003.

In the second quarter of 2004, sales to domestic customers grew by 17%, and remained at 29% of total sales. The increase in domestic sales was due to increased penetration into most customer segments. Foreign sales (including U.S. export sales, sales to non-consolidated foreign subsidiaries, and sales of consolidated foreign subsidiaries) as a percentage of total sales were approximately 71% in the second quarter of 2004 and 2003. Europe, the Company’s principal foreign market, represented 44% of sales in the second quarter of 2004 and 45% of sales in 2003. Sales in the Company’s German subsidiary, which includes the Czech Republic and Poland, increased 10% primarily as a result of the strength of the euro. Sales in the Brazil region, which includes certain other Central and South American countries, accounted for approximately 9% of total sales in the second quarter of 2004, an increase of 25% over the second quarter of 2003. Although the Brazilian real relative to the U.S. dollar weakened slightly in the second quarter and strengthened slightly in the first six months of 2004, in the past few years the real has been very volatile relative to the dollar.

In the first six months of 2004 sales to domestic customers grew by 19% and remained at 28% of sales. Europe, the Company’s principal foreign market represented 47% of sales versus 46% in the first six months of 2003. Sales in the Company’s German subsidiary, which includes the Czech Republic and Poland, increased 12% primarily as a result of the strength of the euro. Sales in the Brazil region accounted for approximately 8% of sales, an increase of 26%.

Due to the significance of foreign sales, the Company is subject to currency risks based on the relative strength or weakness of the U.S. dollar. In periods when the U.S. dollar is strengthening, the effect of translation of financial statements of consolidated affiliates is that of lower sales and net income. In periods where the dollar is weakening, the impact is the reverse. Based on comparative exchange rates in the second quarter of 2004 and 2003, the dollar weakened relative to the euro and strengthened to the Brazilian real. In the first six months of 2004 the dollar weakened relative to both the euro and the real. The effect of the changes of exchange rates on sales was a positive 3% in the second quarter and 6% in the first six months of 2004. Due to intense competition, the Company’s foreign distributors are generally unable to increase prices to offset this negative effect when the U.S. dollar is strong.

The Company is continuing to cooperate with the SEC and the United States Justice Department in their review of certain improper payments by the Company’s Chinese subsidiary first discovered internally by the Company in the fourth quarter of 2002. The Company voluntarily disclosed this to the SEC and the United States Justice Department in early 2003 and is continuing to evaluate its internal policies and procedures to promote compliance with applicable laws. The Company’s activities in this regard resulted in the termination of the general manager of the Chinese subsidiary in the first quarter of 2004 as a result of his failure to follow payment-related procedures implemented on the advice of outside counsel. An independent committee of the Board continues to oversee these issues and is conducting an investigation. Government and other actions related to this matter may have a material adverse effect on future operations in China. For the year ended December 31, 2003, the Chinese subsidiary had sales of $9.8 million. In the second quarter of 2004 the Company’s Chinese subsidiary had sales of $2.2 million. In the fourth quarter of 2002, the Company accrued $1.5 million for actual and estimated costs to resolve this matter. As of June 30, 2004, $1.4 million remains in the accrual, although the actual costs, including fines and penalties, to resolve this matter could significantly exceed the amount accrued. In addition, the Company recorded a charge of $1.4 million to its 2002 fourth quarter tax provision related to the possible non-deductibility of the payments in China. During the third quarter of 2003, the Company recorded an additional charge of $0.9 million to its income tax provision for this and other Chinese tax-related matters. Additional legal expenses of approximately $884,000, $700,000 and $733,000 have been incurred and charged to general and administrative expense during the year ended December 31, 2003, the three months and the six months ended June 30, 2004, respectively. It is anticipated that legal fees for issues related to China will decrease in the remainder of 2004.

In February 2004, the Company was informed by the U.S. Food and Drug Administration (FDA) that based on inspectional findings that included data integrity and procedural issues, the Company was subject to the FDA’s Application Integrity Policy. The FDA suspended its review of all applications submitted by the Company and

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will defer the review of any future applications until the FDA determines that the Company has resolved these issues. The resolution process consists of developing and implementing a corrective action plan that will be audited by a third party and reviewed by the FDA. The Company has engaged the third party auditor and still believes that 12 months is a reasonable time for such actions to take place. During this time, the Company is not restricted by the FDA with regard to introducing new tests outside of the United States. However, the Company’s inability to introduce new tests in the United States pending resolution of this matter may have a negative impact on its future sales and profits.

Cost of Sales

Gross margin increased to 59.4% in the second quarter of 2004 from 58.3% in the second quarter of 2003. This increase was due in part to a shift in the mix of revenues toward reagents, particularly IMMULITE 2000 reagents, an increase in domestic end user sales and the strength of the euro relative to the dollar. Gross margin for the first six months of 2004 was 58.1% compared to 58.1% in the same period of 2003. All products manufactured in the United States are dollar-based. However, a large percentage of these products are sold to company-owned international distributors, which sell the products in their local currencies. In periods of a weakening dollar, sales as measured in dollars increase, resulting in higher gross margins. A strengthening dollar generally results in lower gross margins at international distributors.

Operating Expenses and Other

Selling expense in the second quarter of 2004 increased to 17.5% of sales from 16.3% in the second quarter of 2003 in part due to an increase in sales compensation related to the increase in sales and the increase in the value of the euro relative to the dollar.

General and administrative expense increased to 10.0% of sales in the second quarter of 2004 from 8.7% in the second quarter of 2003. Included in general and administrative expense for the second quarter of 2004 is $700,000 in legal fees related to the Company’s internal investigation of its Chinese subsidiary. The review of this matter is on going, but the related legal expenses are expected to decrease in the remainder of 2004. See Note 9 of Notes to the Consolidated Financial Statements. General and administrative expense in the second half of 2004 will be negatively impacted by legal costs incurred to respond to the subpoena referred to in Item 5 of this report, legal and other costs related to the SEC and FDA matters, and expenses relating to the independent auditors review of the Company’s internal controls in connection with their year end attestation.

Equity in income of affiliates represents the Company’s share of earnings in non-consolidated affiliates, principally the 45%-owned Italian distributor. The amount increased to $2.7 million in the second quarter 2004 from $1.5 million in 2003. Included in the quarter was a one-time benefit from a tax revaluation in Italy of $260,000.

In the first six months ended June 30, 2004 operating expenses increased in absolute-terms in part due to the increase in sales and the increase in the value of the euro relative to the dollar. Operating expenses for the first six months ended June 30, 2004 decreased slightly as a percentage of sales to 35.3% from 35.6% in 2003.

Interest/other (expense) income-net includes interest income, interest expense, and foreign exchange transaction losses and gains. The net amount was expense of $184,000 in the second quarter of 2004 versus income of $124,000 in 2003. This difference was driven in part by a $957,000 swing from a $611,000 foreign currency translation gain in 2003 to a net loss of $346,000 in 2004, net of a reduction in interest expense and other expense of $649,000, which was in part due to the capitalization of interest related to the Company’s construction projects and a reduction of other taxes in Brazil. For the first six months of 2004 interest/other expense was an expense of $553,000 versus income of $153,000 in 2003. This difference was due in part to a $1.7 million swing from a $1.1 million foreign currency gain in 2003 to a $552,000 foreign currency loss in 2004. This was partially offset by a $948,000 increase in net interest income, primarily the result of the capitalization of interest related to the Company’s construction projects, which are essentially complete.

Income Taxes and Minority Interest

The Company’s effective tax rate includes federal, state, and foreign taxes. The Company’s tax rate increased to 30.0% in the second quarter and first six months of 2004 from 29.0% in the first quarter and first six months of 2003.

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Contractual Obligations and Commitments

The Company’s contractual obligations and commitments have not changed significantly from those discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions include, but are not limited to, allowance for bad debts, allowance for slow moving and obsolete inventories, useful lives selected for depreciating property, plant, and equipment, valuation allowances for deferred income taxes, estimates used in the recoverability of long-lived assets, and contingency reserves established with respect to the Company’s Chinese subsidiary. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Management does not believe that any of its estimates involve assumptions about matters that are highly uncertain or that different reasonable estimates, or changes in accounting estimates that are reasonably likely to occur, would have a material impact on the financial statements. To the extent there are material differences between management’s estimates and actual results, future results of operations will be affected. However, management’s experience has been that the differences between estimates and actual results have been immaterial, and appropriate adjustments to the consolidated financial statements are made as soon as the differences become known.

Liquidity and Capital Resources

The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing capital requirements. At June 30, 2004 and December 31, 2003, the Company had cash and cash equivalents of $65.2 million and $69.8 million, respectively. Net cash flow from operating activities was $27.5 million in the first six months of 2004 and $15.2 million in the first six months of 2003. The increase was primarily a result of an increase in net income, depreciation and amortization, accounts payable, accrued liabilities and income taxes payable net of increases in accounts receivable, and inventories. Additions to property, plant, and equipment in the first six months of 2004 were $28.3 million, compared to $27.9 million in the first six months of 2003. The increases in plant, property, and equipment related to the purchase of a new corporate headquarters building. In 2004 the increase in plant, property, and equipment was in great part related to the fitting out of the Company’s new corporate headquarters building and the construction of a new building in Wales. The Company’s new headquarters will be occupied in the third quarter of 2004. The Company’s new 30,000 square foot building in Wales was completed in the second quarter of 2004 at a total cost of approximately $9 million. The Company decreased borrowings by $4.0 million in the first six months of 2004 and increased borrowings by $1.3 million in the first six months of 2003. The Company’s foreign operations are subject to risks, such as currency devaluations, associated with political and economic instability. See discussion above under “Results of Operations.” The Company placed $14.2 million in instruments in the first six months of 2004, including operating and sales-type leases, as compared to $11.1 million in the first six months of 2003.

The Company has a $20 million domestic unsecured line of credit under which there were no borrowings outstanding at June 30, 2004 or December 31, 2003. The Company had other notes payable (consisting of bank borrowings by the Company’s foreign consolidated subsidiaries payable in their local currency, some of which are guaranteed by the Company) of $14.8 million at June 30, 2004 compared to $19.4 million at December 31, 2003. The Company received $3.4 million from the exercise of stock options in the first six months of 2004 versus $1.7 million in the first six months of 2003. The Company has paid a quarterly cash dividend of $.06 per share, on a split-adjusted basis, since 1995.

New Accounting Pronouncements

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In January 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In December 2003, FIN 46 was replaced by FIN 46R “Consolidation of Variable Interest Entities.” FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors 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 subordinate financial support from other parties. FIN 46R requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity’s expected losses, is entitled to receive a majority of the entity’s expected residual returns, or both. FIN 46R was effective for special-purpose entities being evaluated under FIN 46R for consolidation on December 31, 2003 and was effective for all other entities being evaluated on March 31, 2004. The adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change during the quarter ended June 30, 2004 from the disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation of the Company’s disclosure controls and procedures as of June 30, 2004, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that such disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. There has been no change in the Company’s internal control over financial reporting identified in connection with such evaluation that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The following persons were elected Directors at the Annual Meeting of Shareholders held May 4, 2004.

The Bylaws of the Company were amended to increase the number of directors.

ITEM 5. OTHER INFORMATION

     In late July 2004, the Company was served with a subpoena requiring it to produce to the Federal grand jury for the Central District of California documents relating to trading in the Company’s securities and the exercise of options by officers, directors and employees of the Company between December 30, 2003 and April 1, 2004. The subpoena also seeks all documents relating to the FDA’s review of the Company’s diagnostic test to detect Chagas and any audits or reviews by the FDA between 2000 and the present relating to the Company’s

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products. Finally, the subpoena seeks the personnel file of a former Company employee. The Company is cooperating with the SEC and the U.S. Attorney’s Office regarding these matters. An independent committee of the Board of Directors has conducted an investigation of the trading issues and expects to present its findings and conclusions to the SEC in the near future.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)

Exhibits

3.1		Amended and Restated Bylaws
31.1		Certificate of Chief Executive Officer
31.2		Certificate of Chief Financial Officer
32.1		Section 906 Officers’ Certification

(b)

Reports on Form 8-K. –None

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.

EXHIBIT INDEX

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