INVERNESS MEDICAL INNOVATIONS INC - 10-Q Quarterly Report

INVERNESS MEDICAL INNOVATIONS, INC.
(Exact Name Of Registrant As Specified In Its Charter)

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.

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

The number of shares outstanding of the registrant's common stock as of November 7, 2003 was 19,316,707.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. There are a number of important factors that could cause actual results of Inverness Medical Innovations, Inc. and its subsidiaries to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in this quarterly report on Form 10-Q and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission. Readers should carefully review the factors discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Future Results" and "Special Statement Regarding Forward-Looking Statements" beginning on pages 36 and 52, respectively, in this quarterly report on Form 10-Q and should not place undue reliance on our forward-looking statements. These forward-looking statements are based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Unless the context requires otherwise, references in this quarterly report on Form 10-Q to "we," "us," and "our" refer to Inverness Medical Innovations, Inc. and its subsidiaries.

We have registered the following trademarks which appear in this quarterly report on Form 10-Q: Clearblue®, Fact plus®, Persona®, Clearview®, Wampole® and Signify®.

The following are registered trademarks of parties other than us: Abbott TestPack® and e.p.t.®.

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited):
a)	Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002	3
b)	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	4
c)	Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002	5
d)	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	55
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 2.	Changes in Securities and Use of Proceeds	58
Item 6.	Exhibits and Reports on Form 8-K	59
SIGNATURE	60

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

INVERNESS MEDICAL INNOVATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except per share amounts)

The accompanying consolidated financial statements of Inverness Medical Innovations, Inc. and its subsidiaries (the "Company") are unaudited. In the opinion of management, the unaudited consolidated financial statements contain all adjustments considered normal and recurring and necessary for their fair presentation. Interim results are not necessarily indicative of results to be expected for the year. These interim financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a complete presentation of operations, financial position, and cash flows of the Company in conformity with accounting principles generally accepted in the United States. The Company filed audited consolidated financial statements for the year ended December 31, 2002, which included information and footnotes necessary for such presentation and were included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2002.

The Company considers all highly liquid cash investments with maturities of three months or less at the date of acquisition to be cash equivalents. At September 30, 2003, the Company's cash equivalents consisted of money market funds.

Inventories are stated at the lower of cost (first in, first out) or market and are comprised of the following:

	September 30, 2003		December 31, 2002
Raw materials	$	17,236	$	13,447
Work-in-process		14,046		7,076
Finished goods		18,241		16,632

	$	49,523	$	37,155

For the three months ended September 30, 2003, the Company recorded the following noncash items: (a) noncash interest expense of $50 representing the amortization of original issue discount related to certain of the Company's subordinated promissory notes, (b) a noncash charge of $33 to mark to market an interest rate swap agreement, and (c) noncash stock-based compensation of $60. For the nine months ended September 30, 2003, the Company recorded the following noncash items: (a) noncash interest expense of $150 representing the amortization of original issue discount related to certain of the Company's subordinated promissory notes, (b) a noncash gain of $54 to mark to market an interest rate swap agreement, and (c) noncash stock-based compensation of $66.

For the three months ended September 30, 2002, the Company recorded the following noncash items: (a) noncash interest expense of $43 representing the amortization of original issue discount related to a common stock warrant issued in connection with certain debt facilities and (b) a noncash charge of $1,269 to mark to market an interest rate swap agreement. For the nine months ended September 30, 2002, the Company recorded the following noncash items: (a) noncash interest expense of $3,605 representing the amortization of original issue discount related to a common stock warrant issued in connection with certain debt facilities and beneficial conversion feature related to certain of the Company's subordinated promissory notes, (b) a total noncash asset impairment charge of $24,830, of which $12,148 was recorded as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of operations, representing the value of the impaired goodwill and trademarks relating to certain of the Company's nutritional supplement business, (c) noncash stock-based compensation of $10,169, (d) a gain of $9,600 related to the early extinguishment of certain subordinated promissory notes and the related repurchase of the beneficial conversion feature associated with these subordinated promissory notes, which was included as a component of other income (expense), net, in the accompanying consolidated statements of operations, and (e) a noncash charge of $1,269 to mark to market an interest rate swap agreement.

For all periods presented in the accompanying unaudited financial statements, the Company accounted for its employee stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and in accordance with Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44, Accounting for Certain Transactions Involving Stock Compensation. The Company has elected to use the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure.

Had compensation expense for stock option grants to employees been determined based on the fair value method at the grant dates for awards under the stock option plans consistent with the

method prescribed by SFAS No. 123, the Company's net income (loss) would have been decreased (increased) to the pro forma amounts indicated as follows:

The Company has computed the pro forma disclosures for stock options granted to employees after January 1, 1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions used were as follows:

	Three Months Ended September 30,	Nine Months Ended September 30,
	2003	2002	2003	2002
Risk-free interest rate	2.6%-3.5%	2.6-3.5%	2.3%-3.5%	2.6-4.9%
Expected dividend yield	—	—	—	—
Expected lives	5 years	5 years	5 years	5 years
Expected volatility	53%	58%	56%	58%

The weighted average fair value under the Black-Scholes option pricing model of options granted to employees during the three months ended September 30, 2003 and 2002 were $11.22 and $6.94, respectively. The weighted average fair value under the Black-Scholes option pricing model of options granted to employees during the nine months ended September 30, 2003 and 2002 were $10.34 and $9.44, respectively.

The following table sets forth the computation of basic and diluted earnings per share:

For the three months ended September 30, 2003, the computation of diluted income per share did not include convertible promissory notes and Series A Preferred Stock that are convertible into an aggregate of 344 and 646 shares of the Company's common stock, respectively, because the inclusion thereof, together with the add-back of interest and redemption interest, would be antidilutive. The Series A Preferred Stock convertible into an aggregate of 646 shares of the Company's common stock was also excluded from the computation of diluted income per share for the nine months ended September 30, 2003 because the inclusion thereof would be antidilutive.

The Company had the following potential dilutive securities outstanding during the nine months ended September 30, 2002: (a) options and warrants to purchase an aggregate of 3,402 shares of the Company's common stock at a weighted average exercise price of $14.87 per share, (b) Series A Preferred Stock convertible into an aggregate of 646 shares of the Company's common stock, (c) convertible promissory notes convertible into an aggregate of 344 shares of the Company's common stock, (d) 1,358 shares of unvested restricted common stock issued to certain executive officers, and (e) 16 shares of common stock held in escrow. These potential dilutive securities were not included in the computation of diluted loss per share because the inclusion thereof would be antidilutive.

The Company's comprehensive income relates to foreign currency translation adjustments. Comprehensive income for the three months ended September 30, 2003 and 2002 was approximately $597 and $1,014 more than reported net income, respectively, and for the nine months ended September 30, 2003 and 2002 approximately $2,029 and $3,273 more than reported net income (loss), respectively, due to foreign currency translation adjustments.

On September 30, 2003, the Company acquired from Abbott Laboratories ("Abbott") certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and Abbott TestPack, Abbott TestPack plus and Signify lines of professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse (the "Abbott Business"). The acquired assets also include certain transferred and licensed intellectual property related to these products.

The preliminary aggregate purchase price was $93,070, which consisted of $55,000 in cash, $37,500 in the form of 1,551 shares of the Company's common stock and preliminary direct acquisition costs of $570. The Company financed the cash portion of the purchase price by obtaining loans under its amended senior credit facility (Note 9).

The aggregate purchase price is preliminary as the Company will incur additional direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price. The aggregate purchase price was preliminarily allocated to the assets acquired as follows:

Property, plant and equipment	$	4,032
Tradename—Signify		6,400
Tradename—Fact plus		1,600
Goodwill		81,038

	$	93,070

The fair value assigned to property, plant and equipment was based upon management estimates. Final value will be determined based upon an independent appraisal. The values assigned to the tradenames were based upon an independent appraisal. The Company has assigned an indefinite life to the Signify tradename and 5 years to the Fact plus tradename.

The acquisition of Abbott is accounted for as a purchase under SFAS No. 141, Business Combinations. Accordingly, the operating results of the Abbott Business will be included in the Company's consolidated statements of operations after the acquisition date as part of each of the Company's consumer diagnostic products and professional diagnostic products reporting units. The allocation of the operating results between the two reporting units was based on revenues of the

Abbott Business relating to the respective units. The assets acquired are included in the accompanying consolidated balance sheet as of September 30, 2003.

On August 27, 2003, the Company acquired 100% of the outstanding common stock of Applied Biotech, Inc. ("ABI") from Apogent Technologies Inc. ABI is a developer, manufacturer and distributor of rapid diagnostic products in the areas of women's health, infectious disease and drugs of abuse testing. In the transaction, the Company also acquired ABI's wholly-owned subsidiary, Forefront Diagnostics, Inc. ("Forefront"). Forefront develops, manufactures and distributes rapid diagnostic products for drugs of abuse testing.

The preliminary aggregate purchase price of ABI was $28,165, which consisted of $13,400 in cash, 693 shares of the Company's common stock with an aggregate fair value of $14,267 and preliminary direct acquisition costs of $498. The fair value of the Company's common stock was determined based on the average market price of the Company's common stock over the periods just prior to and following the date of the merger agreement, pursuant to Emerging Issues Task Force ("EITF") Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination. The Company financed the cash portion of the purchase price by obtaining a loan under its amended senior credit facility (Note 9).

The aggregate purchase price is preliminary as management is in the process of developing a restructuring plan for the operations of ABI, which could have a material impact to exit costs to be included in the aggregate purchase price. In addition, the Company will incur additional direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of acquisition:

Cash and cash equivalents	$	1
Accounts receivable		6,367
Inventory		7,056
Property, plant and equipment		5,352
Customer relationships		2,000
Manufacturing know how		3,500
Goodwill		9,474
Other assets		2,121
Accounts payable and accrued expenses		(4,616	)
Deferred tax liabilities		(3,090	)

	$	28,165

The values assigned to the intangible assets, customer relationships and manufacturing know how, were based upon the results of an independent appraisal. The Company estimates the useful lives of both intangible assets to be 15 years.

The acquisition of ABI is accounted for as a purchase under SFAS No. 141, Business Combinations. Accordingly, the operating results of ABI are included in the accompanying consolidated financial statements since the acquisition date as part of each of the Company's consumer diagnostic products and professional diagnostic products reporting units. The allocation of the operating results between the two reporting units was based on revenues of ABI relating to the respective units.

On June 30, 2003, the Company acquired 100% of the outstanding common stock of Ostex International, Inc. ("Ostex") through a merger transaction. Ostex develops and commercializes osteoporosis diagnostic products. This acquisition also provides the Company with intellectual property rights in the field of osteoporosis diagnostics.

The preliminary aggregate purchase price of Ostex was $33,240, which consisted of 1,597 shares of the Company's common stock with an aggregate fair value of $23,537, the assumption of fully-vested stock options and warrants to purchase an aggregate of 303 shares of the Company's common stock, which options and warrants have an aggregate fair value of $1,752, estimated exit costs of $3,560, which primarily consists of severance and costs to vacate Ostex's manufacturing and administrative facilities in accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination., direct acquisition costs of $1,516 and $2,875 in assumed debt. The fair value of the Company's common stock issued to acquire all of Ostex's outstanding common stock was determined based on the average market price of the Company's common stock over the periods just prior to and following the date of the merger agreement, as amended, pursuant to EITF Issue No. 99-12. The fair value of the assumed fully-vested stock options and warrants was calculated using the Black-Scholes option pricing model.

As a result of the business combination with Ostex, the Company established a restructuring plan whereby it will exit all operating activities at Ostex's locations and combine such activities with the Company's existing manufacturing and distribution facilities. The total number of employees to be terminated involuntarily will be 41, of which 1 has been terminated as of September 30, 2003. Total severance costs associated with employees to be terminated involuntarily are estimated to be $1,592, of which $1,091 has been paid as of September 30, 2003. The Company estimated costs to vacate the Ostex facilities to be approximately $100, none of which has been paid as of September 30, 2003. Additionally, the remaining costs to exit operations, primarily lease commitments, are estimated at $1,868, of which $32 has been paid as of September 30, 2003. Total unpaid estimated exit cost amounted to $2,437 as of September 30, 2003.

The aggregate purchase price is preliminary as management is in the process of determining the final exit costs of Ostex's operations. The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

Cash and cash equivalents	$	1,270
Accounts receivable		1,203
Inventory		928
Property, plant and equipment		584
Core technology		5,532
Customer relationships		1,096
Goodwill		26,932
Other assets		178
Accounts payable and accrued expenses		(1,964	)
Deferred tax liabilities		(2,519	)

	$	33,240

The values assigned to the intangible assets, core technology and customer relationships, were based upon the results of an independent appraisal. The Company estimates the useful lives of both intangible assets to be 15 years.

The acquisition of Ostex is accounted for as a purchase under SFAS No. 141. Accordingly, the results of Ostex are included in the accompanying consolidated financial statements since the acquisition date as part of the Company's professional diagnostic products reporting unit.

The following table presents selected unaudited financial information of the Company, including Ostex, ABI and the Abbott Business, as if the acquisitions had occurred on January 1, 2002. For the three and nine months ended September 30, 2002, the unaudited pro forma results include the results of IVC Industries, Inc. ("IVC," acquired by the Company on March 19, 2002) and Wampole Laboratories, Inc. ("Wampole," acquired by the Company on September 20, 2002), as if these acquisitions had also occurred on January 1, 2002. The unaudited pro forma results are not necessarily indicative of the results that would have occurred had the acquisitions of IVC, Wampole, Ostex, ABI and the Abbott Business been consummated on January 1, 2002, or of future results.

On August 27, 2003, to finance the cash portion of its acquisition of ABI (Note 8(b)), the Company amended its senior credit agreement with a group of banks, whereby the borrowing capacity under the senior credit facilities was increased to $70,000 from $55,000. On September 30, 2003, to finance the cash portion of its acquisition of the Abbott Business (Note 8(a)), the Company further amended its senior credit agreement, whereby the borrowing capacity under the senior credit facilities was further increased to $135,000. The amended senior credit agreement of September 30, 2003 consists of two U.S. term loans, Term Loan A for $35,075 and Term Loan B for $40,000, a European term loan for $9,925, a U.S. revolving line of credit of up to $25,000, and a European revolving line of credit of up to $25,000. Aggregate borrowings as of September 30, 2003 amounted to $85,000 under the term loans and $39,859 under the revolving lines of credit. The unused portion of the revolving lines of credit totaled $10,141 as of September 30, 2003.

Principal repayments under the U.S. Term Loan A are to be made in sixteen equal quarterly installments of $1,949 commencing on April 30, 2004 through January 31, 2008 with a final installment of $3,897 due on March 31, 2008. Principal repayments under the U.S. Term Loan B are to be made in sixteen equal quarterly installments of $100 commencing on April 30, 2004 through January 31, 2008 with a final installment of $38,400 due on March 31, 2008. Principal repayments under the European term loan are to be made in eleven equal quarterly installments of $25 commencing on October 31, 2003 through April 30, 2006 with a final installment of $9,650 due on May 14, 2006. The Company may choose to prepay all or part of the term loans provided that it prepays at least $1,000 or a multiple thereof. The Company may repay borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. The Company is required to make mandatory prepayments on the loans under the amended senior credit agreement if it meets certain cash flow thresholds, issues equity securities or subordinated debt, or sells assets not in the ordinary course of its business.

Borrowings under the term loans and the revolving lines of credit bear interest at either (i) the London Interbank Offered Rate ("LIBOR"), as defined in the agreement, plus applicable margins or, at the Company's option, (ii) a floating Index Rate, as defined in the agreement, plus applicable margins. Applicable margins, depending on the type of loan, can range from 2.75% to 4.50% and are subject to quarterly adjustments based on the Company's consolidated financial performance, commencing with the quarter ending March 31, 2004. At September 30, 2003, the interest rates of the term loans and revolving lines of credit range from 5.16% to 5.66%, with a weighted average of 5.32%.

In obtaining the amendments to the senior credit agreement, the Company incurred $654 and $2,950 in financing costs on August 27, 2003 and September 30, 2003, respectively, which have been capitalized and are being amortized through the final repayment dates of the loans. Interest expense, including amortization of deferred financing costs, under the original and amended senior credit facilities amounted to $984 and $2,576 for the three and nine months ended September 30, 2003, respectively. The Company did not incur any interest expense under these senior credit facilities in 2002 until it entered into the original agreement in November 2002.

Borrowings under the amended senior credit facilities are secured by the stock of the Company's U.S. and European subsidiaries, substantially all of the Company's intellectual property rights and the assets of the Company's businesses in the U.S. and Europe, excluding those assets of IVC, Orgenics Ltd., the Company's Israeli subsidiary, and Unipath Scandinavia AB, the Company's Swedish subsidiary, and the stock of IVC, Orgenics and certain immaterial subsidiaries. Under the amended senior credit agreement, the Company must comply with various financial and non-financial covenants. The primary financial covenants pertain to, among other things, fixed charge coverage ratio, capital expenditure, various leverage ratios, earnings before interest, taxes, depreciation and amortization ("EBITDA") and a minimum cash requirement. Additionally, the amended senior credit agreement

currently prohibits the payment of dividends. As of September 30, 2003, the Company was in compliance with the covenants.

Under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is composed of the chief executive officer and members of senior management. The Company's reportable operating segments are Consumer Products (comprised of consumer diagnostic products and vitamins and nutritional supplements), Professional Diagnostic Products, and Corporate and Other.

The Company evaluates performance based on revenue and earnings before taxes. Segment information for the three and nine months ended September 30, 2003 and 2002, respectively, is as follows:

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs, in particular legal obligations associated with such retirement that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted this statement on January 1, 2003, as required. However, the adoption of this statement did not have a material impact on the Company's financial position, results of operations or cash flows.

the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for classification as an extraordinary item shall not be classified as extraordinary and shall be included in earnings from continuing operations. The Company adopted the provisions of this statement on January 1, 2003. As a result, any gains and losses from early extinguishment of debt in the future, that does not meet the criteria of APB Opinion No. 30 for classification as extraordinary, will be included in earnings from continuing operations and all prior periods presented will be required to be restated. Consequently, the restatement of prior period results upon the adoption of this statement reduced the loss from continuing operations from $29,362 to $20,856, or from $4.74 to $3.76 per basic and diluted share, for the nine months ended September 30, 2002. The adoption of this statement did not have an impact on the Company's results of operations for the three months ended September 30, 2002.

In November 2002, the EITF reached consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue arrangements with multiple deliverables include arrangements which provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the guidance under this consensus did not have an impact on the Company's financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an underlying (as initially defined in SFAS No. 133) to conform it to language used in FIN No. 45, and amends certain other existing pronouncements. SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, subject to certain exceptions. The adoption of this statement did not have an impact on the Company's financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), while many of such instruments were previously classified as equity or "mezzanine" equity. The statement also requires that income statement treatment be consistent with the balance sheet classification. That is, if the instrument is classified as a liability, payments to the holders are interest expense, not dividends, and changes in value are recorded in earnings. The statement relates to three specific categories of instruments: mandatorily redeemable shares, freestanding written put options and forward contracts that obligate an entity to purchase its own shares, and freestanding contracts that obligate an entity to pay with its own shares in amounts that are either unrelated, or inversely related, to the price of the shares. SFAS No. 150 is effective immediately for financial instruments entered into or modified after May 31, 2003 and otherwise is effective in the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on the Company's financial position, results of operations, or cash flows.

On May 7, 2003, the Company entered into an agreement with Unilever Plc ("Unilever") to resolve certain issues that arose out of the acquisition of the Unipath business. Pursuant to the agreement, Unilever paid the Company $2,750 in cash. In addition, the working capital adjustment

under the sale agreement with Unilever was fully resolved at the same time without further payment of any funds by either party. The Company recorded a favorable adjustment of $3,803 due to the resolution of these issues as a component of other income (expense), net, in the accompanying statement of operations for the nine months ended September 30, 2003.

On May 15, 2003, the Company entered into an agreement to settle a patent infringement lawsuit it had previously brought. Pursuant to the agreement, the defendant paid the Company $1,183 in cash to settle past royalties. The Company accounted for the cash settlement as a component of other income (expense), net, in the accompanying statement of operations for the nine months ended September 30, 2003.

On or about June 6, 2003, the Company settled its patent infringement litigation against Pfizer Inc. and one of Pfizer's subsidiaries. In connection with the settlement, a wholly owned subsidiary of the Company entered into a manufacturing, packaging and supply agreement with Pfizer, pursuant to which the Company agreed to supply to Pfizer, and Pfizer agreed to purchase from the Company, its e.p.t. pregnancy tests beginning on June 6, 2004 and continuing until June 6, 2009. Pfizer also agreed to minimum purchase obligations. The settlement provided for Pfizer to make certain royalty payments to the Company prior to the commencement of the supply agreement and the Company began to recognize this revenue in the third quarter of 2003. Under the terms of the settlement, the parties have agreed to the entry of permanent injunctive relief and dismissal of certain claims and counterclaims. The settlement does not include an award for damages.

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

We develop, manufacture and market consumer healthcare products, including self-test diagnostic products for the women's health market and vitamins and nutritional supplements. We also develop, manufacture and distribute a wide variety of diagnostic products for use by medical and laboratory professionals. Our strategy to grow the business has included strategic acquisitions to expand our product offerings and geographic presence and to enhance our intellectual property portfolio, which we believe provides a solid foundation for our existing consumer and professional diagnostics products and the development of new diagnostic products.

For the three and nine months ended September 30, 2003, we recorded net revenue of $72.4 million and $202.9 million, respectively, compared to $53.9 million and $142.9 million for the three and nine months ended September 30, 2002, respectively. Our revenue growth resulted largely from our acquisitions of IVC Industries (now operating as Inverness Medical Nutritionals Group or "IMN") in March 2002 and Wampole Laboratories in September 2002 and, to a lesser extent, our recent acquisitions of Ostex International in June 2003 and Applied Biotech in August 2003. Our acquisition of IMN provides us with manufacturing facilities for the majority of our nutritional supplement products and our acquisition of Wampole provides us with extensive distribution channels for our existing professional diagnostic products, as well as new ones we may market in the future. Our acquisition of Ostex provides us with significant intellectual property rights in the field of osteoporosis testing. Our acquisition of Applied Biotech, as well as our recent acquisition of certain rapid diagnostics product lines from Abbott Laboratories in late September 2003, further expands our presence in the professional diagnostics market. In addition, as evidenced by our research and development spending of $6.4 million and $17.1 million for the three and nine months ended September 30, 2003, respectively, compared to $3.6 million and $10.5 million for the three and nine months ended September 30, 2002, respectively, we are committed to bringing superior and technologically advanced products to the consumer and professional diagnostic markets.

On September 30, 2003, we acquired from Abbott Laboratories ("Abbott") certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and the Abbott TestPack, Abbott TestPack plus and Signify lines of professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse. We refer to these assets as the Abbott rapid diagnostics product lines. The acquired assets also include certain transferred and licensed intellectual property related to the products. The operating results of the Abbott rapid diagnostics product lines will be included in our consolidated statements of operations after the acquisition date as part of each of our consumer diagnostic products and professional diagnostic products reporting units. The allocation of the operating results between the two reporting units was based on revenues relating to the respective units. The assets acquired are included in the accompanying balance sheet as of September 30, 2003.

The preliminary aggregate purchase price was $93.1 million, which consisted of $55.0 million in cash, $37.5 million in the form of 1,550,933 shares of our common stock, and preliminary direct acquisition costs of $0.6 million. The shares of our common stock were issued in a private placement, and we agreed to register the shares for resale. We financed the cash portion of the purchase price by obtaining loans under our senior credit facilities. The aggregate purchase price is preliminary as we will incur certain direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price.

On August 27, 2003, we acquired 100% of the outstanding common stock of Applied Biotech from Apogent Technologies Inc. Applied Biotech is a developer, manufacturer and distributor of rapid diagnostic products in the areas of women's health, infectious disease and drugs of abuse testing. In the transaction, we also acquired Applied Biotech's wholly-owned subsidiary, Forefront Diagnostics, Inc ("Forefront"). Forefront develops, manufactures and distributes rapid diagnostic products for drugs of abuse testing. We expect to reduce costs of the combined company through economies of scale. The operating results of Applied Biotech are included in the accompanying consolidated financial statements since the acquisition date as part of each of our consumer diagnostic products and professional diagnostic products reporting units. The allocation of the operating results between the two reporting units was based on Applied Biotech's revenues relating to the reporting units.

The preliminary aggregate purchase price of Applied Biotech was $28.2 million, which consisted of $13.4 million in cash, 692,506 shares of our common stock with an aggregate fair value of $14.3 million and preliminary direct acquisition costs of $0.5 million. The shares of our common stock were issued in a private placement, and we agreed to register the shares for resale. We financed the cash portion of the purchase price by obtaining loans under our senior credit facilities. The aggregate purchase price is preliminary as management is in the process of developing a restructuring plan for the operations of Applied Biotech, which could be significant. In addition, we will incur additional direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price.

Net Product Sales. Net product sales increased by $17.1 million, or 33%, to $69.3 million for the three months ended September 30, 2003 from $52.2 million for the three months ended September 30, 2002. Net product sales increased by $56.8 million, or 41%, to $195.9 million for the nine months ended September 30, 2003 from $139.1 million for the nine months ended September 30, 2002. In terms of product revenue growth by business segment, net product sales from our consumer products segment, which includes our consumer diagnostic products and our vitamins and nutritional supplements, increased by $1.8 million, or 4%, to $47.6 million for the three months ended September 30, 2003 from $45.8 million for the three months ended September 30, 2002 and by $19.3 million, or 16%, to $141.5 million for the nine months ended September 30, 2003 from $122.2 million for the nine months ended September 30, 2002. Net product sales from our professional diagnostic products segment increased by $15.2 million, or 238%, to $21.6 million for the three months ended September 30, 2003 from $6.4 million for the three months ended September 30, 2002 and by $37.4 million, or 220%, to $54.4 million for the nine months ended September 30, 2003 from $17.0 million for the nine months ended September 30, 2002.

The increase in net product sales from our consumer products segment between the three month periods ended September 30, 2003 and September 30, 2002 resulted from a 16% growth in our consumer diagnostics business, in part attributable to the launch of our new digital pregnancy test, offset by an 11% decline in our vitamins and nutritional supplements business. In addition to the foregoing, the increase in net product sales from our consumer products segment, comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002 resulted significantly from our acquisition of IMN in March 2002 which contributed $11.3 million of such increase.

The increase in net product sales from our professional diagnostic products segment resulted largely from our acquisition of Wampole in September 2002 which contributed $10.3 million and $32.3 million of the increase in the three and nine months ended September 30, 2003, respectively, compared to the same periods in 2002. In addition, our recent acquisitions of Applied Biotech and

Ostex contributed $2.8 million and $1.1 million, respectively, of the increase in net product sales from our professional diagnostic products segment.

License Revenue. License revenue represents license and royalty fees from intellectual property license agreements with third-parties. License revenue increased by $1.3 million, or 72%, to $3.1 million for the three months ended September 30, 2003 from $1.8 million for the three months ended September 30, 2002. License revenue increased by $3.2 million, or 84%, to $7.0 million for the nine months ended September 30, 2003 from $3.8 million for the nine months ended September 30, 2002. These increases largely resulted from royalty fees from Pfizer. Beginning in the third quarter of 2003 and continuing through June 2004, we began to record and collect royalty fees from Pfizer as part of the settlement of our infringement litigation against it. During the three months ended September 30, 2003, we recorded $951,000 in royalties from Pfizer. The acquisition of Wampole also provided us with additional license agreements which generated $120,000 and $501,000 in license revenue for the three and nine months ended September 30, 2003, respectively. The remainder of the increase in license revenue resulted from increased sales and minimum royalty payments by certain of our licensees.

Gross Profit. Total gross profit increased by $7.7 million, or 32%, to $31.5 million for the three months ended September 30, 2003 from $23.8 million for the three months ended September 30, 2002. Total gross profit increased by $26.5 million, or 42%, to $89.7 million for the nine months ended September 30, 2003 from $63.2 million for the nine months ended September 30, 2002. Gross profit from net product sales, which represents total gross profits less gross profits associated with license revenue, increased by $6.5 million, or 29%, to $29.2 million for the three months ended September 30, 2003 from $22.7 million for the three months ended September 30, 2002. Gross profit from net product sales increased by $23.5 million, or 38%, to $85.1 million for the nine months ended September 30, 2003 from $61.6 million for the nine months ended September 30, 2002. Overall gross margin from net product sales was 42% and 43% for the three and nine months ended September 30, 2003, respectively, compared to 44% for both the three and nine months ended September 30, 2002.

Gross profit from our consumer product sales increased by $0.4 million, or 2%, to $20.2 million for the three months ended September 30, 2003 from $19.8 million for the three months ended September 30, 2002 and by $8.8 million, or 16%, to $62.2 million for the nine months ended September 30, 2003 from $53.4 million for the nine months ended September 30, 2002. Gross margin from our consumer product sales was 42% and 44% for the three and nine months ended September 30, 2003, respectively, compared to 43% and 44% for the three and nine months ended September 30, 2002, respectively. The increase in gross profit from our consumer product sales resulted primarily from the increase in sales of our Clearblue products in the United States and gross profit attributable to IMN which we acquired in March 2002. The decrease in gross margin from our consumer products sales in the three months ended September 30, 2003 compared to the same period in 2002 resulted from an under absorption of manufacturing overhead in our nutritional supplements business which we believe is temporary. In addition, the weakening of the US dollar against the Euro and Pound Sterling from 2002 to 2003 also negatively impacted the gross margin for our consumer products manufactured at our European subsidiaries and sold to customers in US dollars. The weakening of the U.S. dollar caused a reduction in our gross margin from product sales of approximately 0.4% and 0.6% points for the three and nine months ended September 30, 2003, respectively.

Gross profit from our professional diagnostic product sales increased by $6.1 million, or 210%, to $9.0 million for the three months ended September 30, 2003 from $2.9 million for the three months ended September 30, 2002 and by $14.7 million, or 181%, to $22.8 million for the nine months ended September 30, 2003 from $8.1 million for the nine months ended September 30, 2002. Gross margin on our professional diagnostic product sales was 42% for both the three and nine months ended September 30, 2003, respectively, compared to 46% and 48% for the three and nine months ended September 30, 2002, respectively. The increase in gross profit from our professional diagnostic product

sales resulted predominantly from gross profit attributable to Wampole which we acquired in September 2002 and, to a lesser extent, from gross profit attributable to Ostex and Applied Biotech, which were acquired in June 2003 and in August 2003, respectively. The decrease in gross margin on our professional diagnostic product sales was also the result of the addition of Wampole products which generate lower margins than our other professional diagnostic products.

Research and Development Expense. Research and development expense increased by $2.8 million, or 78%, to $6.4 million for the three months ended September 30, 2003 from $3.6 million for the three months ended September 30, 2002. Research and development expense increased by $6.6 million, or 63%, to $17.1 million for the nine months ended September 30, 2003 from $10.5 million for the nine months ended September 30, 2002. The increase resulted from our continuing commitment to invest extensively in research and development of new products and to improve upon our existing products. We expect to continue to invest heavily in research and development for the foreseeable future.

Sales and Marketing Expense. Sales and marketing expense increased by $3.2 million, or 32% to $13.3 million for the three months ended September 30, 2003 from $10.1 million for the three months ended September 30, 2002. Sales and marketing expense increased by $8.2 million, or 29%, to $36.9 million for the nine months ended September 30, 2003 from $28.7 million for the nine months ended September 30, 2002. The increase in sales and marketing expense resulted primarily from the addition of the Wampole business, which contributed $1.7 million and $5.1 million of the increase in the three and nine months ended September 30, 2003, respectively, as well as from organic growth in product sales and increased media advertising spending, relating primarily to the launch of our new digital pregnancy test. Sales and marketing expense as a percentage of net product sales was 19% for both the three and nine months ended September 30, 2003, compared to 19% and 21% for the three and nine months ended September 30, 2002, respectively. Sales and marketing expense as a percentage of net product sales for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002, decreased due to the additions of Wampole and IMN, which incur lower sales and marketing expense as a percentage of sales compared to our other businesses. We expect our sales and marketing expense to increase for the remainder of this year, as we plan to continue to increase our advertising efforts related primarily to the recent launch of our new digital pregnancy product.

General and Administrative Expense. General and administrative expense increased by $1.5 million, or 25%, to $7.6 million for the three months ended September 30, 2003 from $6.1 million for the three months ended September 30, 2002. General and administrative expense increased by $4.2 million, or 21%, to $24.0 million for the nine months ended September 30, 2003 from $19.8 million for the nine months ended September 30, 2002. The increases partly resulted from the addition of Wampole in September 2002, which recorded $673,000 and $2.0 million in general and administrative expenses for the three and nine months ended September 30, 2003, respectively, compared to only $43,000 for the three and nine months ended September 30, 2002. Also, $816,000 of the general and administrative expense increase for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002, resulted from the addition of IMN. The recent acquisitions of Applied Biotech and Ostex increased general and administrative expenses for the three and nine months ended September 30, 2003 by $149,000 and $450,000, respectively. Further, the third quarter of 2003 included higher insurance premiums, salary expense relating to investments in increased management, and general costs associated with the amendments of our senior credit agreement. Partially offsetting the increases in general and administrative expense for the three and nine months ended September 30, 2003, compared to the same periods in 2002, was the recognition of $554,000 related to the recovery of legal costs previously incurred, for which we submitted a claim to an insurance company in August 2003 and the insurance company agreed to such claim. Such legal costs were incurred in our defense of a lawsuit brought in London by approximately 65 consumers

alleging defects in our Persona contraceptive device leading to unwanted pregnancies. We believe any liability in this matter is fully covered by separate insurance provided by Unilever, from whom we acquired the Unipath business and the Persona product line in December 2001. In addition, another $187,000 of such recovery of legal costs is included in other income (expense), net, as that portion represents recovery of legal costs incurred prior to our acquisition of the Unipath business. For a further discussion of the Persona lawsuit, see "Item 3. Legal Proceedings" of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. General and administrative expense as a percentage of net product sales decreased to 11% and 12% for the three and nine months ended September 30, 2003, respectively, from 12% and 14% for the three and nine months ended September 30, 2002, respectively. The improvement of general and administrative expense as a percentage of net product sales was achieved through sales increase, restructuring activities of the Unipath business during the first half of 2002 and the above mentioned legal costs recovery.

Charge Related to Asset Impairment. In the first quarter of 2002, we recorded a noncash impairment charge of $12.7 million to write-off a portion of the value that was assigned to trademarks and brand names related to certain of our nutritional supplement lines that we acquired in 1997. This charge was recorded in connection with the results of a separate impairment review performed on the carrying value of the goodwill related to such nutritional supplement lines, as discussed below in the caption "Cumulative Effect of a Change in Accounting Principle." No impairment charge was recorded during 2003.

Stock-Based Compensation. During the three and nine months ended September 30, 2003, we recorded noncash stock-based compensation expense of $60,000 and $66,000, respectively, which primarily related to stock option grants to consultants. During the three months ended September 30, 2002, we did not incur any noncash stock-based compensation expense. During the nine months ended September 30, 2002, we recorded noncash stock-based compensation expense of $10.2 million. The majority of the noncash stock-based compensation expense for the nine months ended September 30, 2002 related to a sale of our company's restricted stock made to our chief executive officer in 2001. At the time of the sale in 2001, we recorded noncash deferred compensation expense of $10.6 million because the purchase price of the stock was below its market value on the measurement date of the transaction. This deferred compensation expense was originally set to amortize over the vesting period of the restricted stock, which was a four-year period. However, as a result of an amendment to the terms of the restricted stock agreement in February 2002, we fully recognized the remaining unamortized deferred compensation expense, or $10.1 million, at that time.

Interest Expense. Interest expense increased by $1.0 million, or 71%, to $2.4 million for the three months ended September 30, 2003 from $1.4 million for the three months ended September 30, 2002. Interest expense decreased by $1.4 million, or 17%, to $6.8 million for the nine months ended September 30, 2003 from $8.2 million for the nine months ended September 30, 2002. Interest expense for the three months ended September 30, 2003, compared to the three months ended September 30, 2002, increased due to our higher average debt balance in 2003. Despite our higher average debt balance in 2003, interest expense for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002, decreased because, during the first quarter of 2002, we recorded $3.5 million in amortization of noncash original issue discounts and discounts in the form of a beneficial conversion feature related to an issue of $20.0 million in subordinated promissory notes which were prepaid in March 2002.

Other Income (Expense), Net. Other income (expense), net, includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Interest income decreased by $189,000, or 45%, to $232,000 for the three months ended September 30, 2003 from $421,000 for the three months ended September 30, 2002. Interest income decreased by $324,000, or

29%, to $801,000 for the nine months ended September 30, 2003 from $1.1 million for the nine months ended September 30, 2002. The decrease in interest income resulted from our lower average cash balance during 2003, as we had used a significant portion of our cash to help finance the acquisitions of Wampole in September 2002 and Ostex in June 2003.

A significant portion of other income (expense), net, generally represents foreign currency exchange gains and losses. For the three and nine months ended September 30, 2003, we recognized foreign exchange losses of $126,000 and gains of $372,000, respectively, compared to foreign exchange gains of $110,000 and losses of $1.3 million for the three and nine months ended September 30, 2002, respectively. The significant amounts of foreign exchange losses recorded in 2002 resulted from the weak U.S. Dollar versus the Japanese Yen and Euro as $10.0 million of our bank loans at the time was denominated in Japanese Yen and as certain receivables of our Irish subsidiary are denominated in the U.S. Dollar while its functional currency is the Euro.

Further, included in other income (expense), net, for the nine months ended September 30, 2003 is $1.2 million of past royalties received as part of a patent infringement settlement and a one-time gain of $3.8 million recorded in connection with an agreement with Unilever which resolved certain issues that arose out of our acquisition of the Unipath business. In addition, other income (expense), net, for the three and nine months ended September 30, 2003, included a gain for the recovery of legal costs of $187,000 as noted above in our discussion of general and administrative expense. During the three and nine months ended September 30, 2002, we recorded a noncash charge of $1.3 million in other income (expense), net, to mark to market an interest rate swap agreement at September 30, 2002 because the swap agreement did not qualify as a hedge for accounting purposes. Also included in other income (expense), net, for the nine months ended September 30, 2002, is a one-time noncash gain of $9.6 million which resulted from the repurchase of the beneficial conversion feature associated with the early extinguishment of an issue of $20 million in subordinated promissory notes in March 2002.

Provision for Income Taxes. Provision for income taxes decreased by $279,000, or 42%, to $392,000 for the three months ended September 30, 2003 from $671,000 for the three months ended September 30, 2002. Provision for income taxes increased by $192,000, or 11%, to $2.0 million for the nine months ended September 30, 2003 from $1.8 million for the nine months ended September 30, 2002. The effective tax rate was 18% for the nine months ended September 30, 2003 compared to (10%) for the nine months ended September 30, 2002. The changes in the effective tax rates resulted from tax credits, permanent differences, and the mix of domestic to foreign income.

Income (Loss) before Accounting Change. We generated income before accounting change for the three months ended September 30, 2003 of $1.7 million while for the three months ended September 30, 2002, we generated income before accounting change of $1.1 million. After taking into account charges for dividends, a redemption premium and amortization of a beneficial conversion feature related to our Series A Redeemable Convertible Preferred Stock, we had income before accounting change available to common stockholders of $1.5 million, or $0.09 and $0.08 per basic and diluted common share, respectively, for the three months ended September 30, 2003 and a loss of $6.7 million, or $0.65 per basic and diluted common share, for the three months ended September 30, 2002. We generated income before accounting change for the nine months ended September 30, 2003 of $9.3 million while for the nine months ended September 30, 2002, we generated a loss before accounting change of $20.9 million. After taking into account charges for dividends, a redemption premium and amortization of a beneficial conversion feature related to our series A Redeemable Convertible Preferred Stock, we had income before accounting change available to common stockholders of $8.8 million and $8.9 million, or $0.60 and $0.53 per basic and diluted common share, respectively, for the nine months ended September 30, 2003 and a loss of $32.5 million, or $3.76 per basic and diluted common share, for the nine months ended September 30, 2002. Approximately $1.5 million and $3.8 million of the income before accounting change for the three and nine months ended September 30, 2003, respectively, was generated as a result of the addition of Wampole in

September 2002. The remaining income for the three and nine months ended September 30, 2003 and the significant losses for the three and nine months ended September 30, 2002 resulted predominantly from various noncash, nonrecurring and/or infrequent gains and charges as described above.

Cumulative Effect of a Change in Accounting Principle. On January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires annual impairment tests to be performed on all reporting units, as defined in the statement, with carrying values for goodwill. Based on the results of an independent appraisal obtained on the nutritional supplements business that we acquired in 1997, we recorded an impairment charge of $12.1 million to write-off the carrying value of the goodwill related to that business on January 1, 2002. This impairment charge was recorded as a cumulative effect of a change in accounting principle. There were no charges due to a change in accounting principle during 2003.

Net Income (Loss). We generated net income for the three months ended September 30, 2003 of $1.7 million, while for the three months ended September 30, 2002, we generated net income of $1.1 million. After taking into account charges for dividends, a redemption premium and amortization of a beneficial conversion feature related to our Series A Redeemable Convertible Preferred Stock, we had net income available to common stockholders of $1.5 million, or $0.09 and $0.08 per basic and diluted common share, respectively, for the three months ended September 30, 2003 and a loss of $6.7 million, or $0.65 per basic and diluted common share, for the three months ended September 30, 2002. We generated net income for the nine months ended September 30, 2003 of $9.3 million while for the nine months ended September 30, 2002, we generated a net loss of $33.0 million. After taking into account charges for dividends, a redemption premium and amortization of a beneficial conversion feature related to our Series A Redeemable Convertible Preferred Stock, we had net income available to common stockholders of $8.8 million and $8.9 million, or $0.60 and $0.53 per basic and diluted common share, respectively, for the nine months ended September 30, 2003 and a loss of $44.7 million, or $5.16 per basic and diluted common share, for the nine months ended September 30, 2002. Approximately $1.5 million and $3.8 million of the net income for the three and nine months ended September 30, 2003, respectively, was generated as a result of the addition of Wampole. The remaining income for the three and nine months ended September 30, 2003 and the significant losses for the three and nine months ended September 30, 2002 resulted predominantly from various noncash, nonrecurring and/or infrequent gains and charges as described above. See Note 6 of the accompanying "Notes to Consolidated Financial Statements" for the calculation of earnings per share.

Based upon our working capital position, current operating plans and business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our current outstanding debt and other commitments, as discussed below, for at least the next 12 months. This may be adversely impacted by unforeseen costs associated with integrating the operations of Ostex and Applied Biotech and the product lines acquired from Abbott Laboratories. We also cannot be certain that our underlying assumed levels of revenues and expenses will be realized. In addition, we intend to continue to expand our research and development efforts related to the substantial intellectual property portfolio we now own, including the intellectual property acquired in connection with our acquisitions of Ostex and Applied Biotech and from Abbott Laboratories. We may also choose to further expand our research and development efforts and may pursue the acquisition of new products and technologies through licensing arrangements, business acquisitions, or otherwise. If we decide to pursue such activities, or if our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In such event, adequate funds may not be available when needed, or, may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise

additional funds by issuing equity or convertible securities, dilution to then existing stockholders may result.

As of September 30, 2003, we had cash and cash equivalents of $24.8 million, a $5.8 million decrease, or 19%, from December 31, 2002. We have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities, as well as contributions from our former parent prior to the split-off and merger transaction with Johnson & Johnson in November 2001. During the nine months ended September 30, 2003, we generated cash of $5.9 million from operating activities, which resulted from net income, adjusted for noncash items, of $21.7 million, offset by a net working capital increase, excluding change in the cash balance, of $15.8 million. Our financing activities, primarily borrowings under our senior credit facilities, provided us with cash of $71.0 million during the nine months ended September 30, 2003.

During the nine months ended September 30, 2003, we used cash of $84.5 million for our investing activities. Our primary investing activities consisted of $76.1 million paid for acquisitions of businesses and intellectual property and $8.4 million in capital expenditures. Working capital was $56.8 million as of September 30, 2003, compared to $28.0 million as of December 31, 2002.

On June 30, 2003, we acquired 100% of the outstanding common stock of Ostex through a merger transaction. The preliminary aggregate purchase price of Ostex was $33.2 million, which consisted of 1,596,821 shares of our company's common stock with an aggregate fair value of $23.5 million, the assumption of fully-vested stock options and warrants to purchase an aggregate of 303,000 shares of our company's common stock, which options and warrants have an aggregate fair value of $1.8 million, preliminary exit costs of $3.5 million (which includes severance, facility lease and exit costs, and disposal of assets), preliminary direct acquisition costs of $1.5 million and $2.9 million in assumed debt. The aggregate purchase price is preliminary as management is in the process of determining the final exit costs for Ostex's operations.

On August 27, 2003, we acquired 100% of the outstanding common stock of Applied Biotech from Apogent Technologies Inc. The preliminary aggregate purchase price of Applied Biotech was $28.2 million, which consisted of $13.4 million in cash, 692,506 shares of our common stock with an aggregate fair value of $14.3 million and preliminary direct acquisition costs of $0.5 million. We financed the cash portion of the purchase price by borrowing under our senior credit facilities, as discussed below. The aggregate purchase price is preliminary as management is in the process of determining a restructuring plan for the operations of Applied Biotech, which could be significant. In addition, we will incur certain direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price.

On September 30, 2003, the Company acquired from Abbott Laboratories certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and the Abbott TestPack, Abbott TestPack plus and Signify lines of professional rapid diagnostics for various testing needs, including strep throat, pregnancy and drugs of abuse. The assets also included certain transferred and licensed intellectual property related to the products. The preliminary aggregate purchase price was $93.1 million, which consisted of $55.0 million in cash, $37.5 million in the form of 1,550,933 shares of our common stock, and preliminary direct acquisition costs of $0.6 million. We financed the cash portion of the purchase price by borrowings under our senior credit facilities, as discussed below. The aggregate purchase price is preliminary as we will incur certain direct acquisition costs subsequent to September 30, 2003, which will increase the total amount of direct acquisition costs included in the aggregate purchase price.

On November 14, 2002, our company and certain of our subsidiaries entered into a senior credit agreement with a group of banks for credit facilities in the aggregate amount of up to $55.0 million. On August 27, 2003, to finance the cash portion of our acquisition of Applied Biotech, we amended the senior credit agreement, whereby we increased our borrowing capacity under the senior credit facilities to $70.0 million. On September 30, 2003, to finance the cash portion of our acquisition of the rapid diagnostics product lines from Abbott Laboratories, we further amended the senior credit agreement, whereby the aggregate amount available under the senior credit facilities was further increased to $135.0 million. The amended senior credit agreement dated September 30, 2003 consists of two U.S. term loans, Term Loan A for $35.1 million and Term Loan B for $40.0 million, a European term loan for $9.9 million, a U.S. revolving line of credit of up to $25.0 million, and a European revolving line of credit of up to $25.0 million. Aggregate borrowings as of September 30, 2003 amounted to $85.0 million under the term loans and $39.9 million under the revolving lines of credit. The unused portion of the revolving lines of credit totaled $10.1 million as of September 30, 2003.

Principal repayments under U.S. Term Loan A are to be made in sixteen equal quarterly installments of $1.95 million commencing on April 30, 2004 through January 31, 2008 with a final installment of $3.9 million due on March 31, 2008. Principal repayments under U.S. Term Loan B are to be made in sixteen equal quarterly installments of $100,000 commencing on April 30, 2004 through January 31, 2008 with a final installment of $38.4 million due on March 31, 2008. Principal repayments under the European term loan are to be made in eleven equal quarterly installments of $25,000 commencing on October 31, 2003 through April 30, 2006 with a final installment of $9.65 million due on May 14, 2006. We may choose to prepay all or part of the term loans provided that we prepay at least $1.0 million or a multiple thereof. We may repay borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. We are required to make mandatory prepayments of our senior credit facilities if we meet certain cash flow thresholds, issue equity securities or subordinated debt, or sell assets not in the ordinary course of our business.

Borrowings under the term loans and the revolving lines of credit bear interest at either (i) the London Interbank Offered Rate ("LIBOR"), as defined in the agreement, plus applicable margins or, at our option, (ii) a floating Index Rate, as defined in the agreement, plus applicable margins. Applicable margins, depending on the type of loan, can range from 2.75% to 4.50% and are subject to quarterly adjustments based on our consolidated financial performance, commencing with the quarter ending March 31, 2004. As of September 30, 2003, the interest rates under term loans and the revolving lines of credit range from 5.16% to 5.66%, with a weighted average rate of 5.32%.

Borrowings under our senior credit facilities are secured by the stock of our U.S. and European subsidiaries, substantially all of our intellectual property rights and the assets of our businesses in the U.S. and Europe, excluding those assets of IVC, Orgenics Ltd., our Israeli subsidiary, and Unipath Scandinavia AB, our Swedish subsidiary, and the stock of IVC, Orgenics and certain smaller subsidiaries. Under the amended senior credit agreement, we must comply with various financial and non-financial covenants. The primary financial covenants pertain to, among other things, fixed charge coverage ratio, capital expenditure, various leverage ratios, earnings before interest, taxes, depreciation and amortization ("EBITDA") and a minimum cash requirement. Additionally, the amended senior credit agreement currently prohibits us from paying dividends. As of September 30, 2003, we were in compliance with the covenants.

The syndication agents under the amended senior credit agreement have the right, in their sole discretion, to syndicate the loans under the facilities to other banks. Should they opt to syndicate those facilities, the syndication agents have the right to change the structure, terms or pricing of our senior credit facilities if they, in their reasonable judgment, determine that such changes are necessary or advisable in order to successfully syndicate the facilities and achieve certain post-syndication hold levels.

On September 20, 2002, we sold units having an aggregate purchase price of $20.0 million to private investors to help finance our acquisition of Wampole. Each unit was issued for $50,000 and consisted of (i) a 10% subordinated promissory note in the principal amount of $50,000 and (ii) a warrant to acquire 400 shares of our common stock at an exercise price of $13.54 per share. In the aggregate, we issued fully vested warrants to purchase 160,000 shares of our common stock, which may be exercised at any time on or prior to September 20, 2012. In addition, the placement agent for the offering of the units received a warrant to purchase 37,700 shares of our common stock, the terms of which are identical to the warrants sold as a part of the units. The 10% subordinated notes accrue interest on the outstanding principal amount at 10% per annum, which is payable quarterly in arrears on the first day of each calendar quarter starting October 1, 2002. The 10% subordinated notes mature on September 20, 2008, subject to acceleration in certain circumstances, and we may prepay the 10% subordinated notes at any time, subject to certain prepayment penalties. Subject to the consent of our senior lenders, we may repay the 10% subordinated notes and pay any prepayment penalty, in cash or in shares of our common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. The 10% subordinated notes are expressly subordinated to up to $150.0 million of indebtedness for borrowed money incurred or guaranteed by our company plus any other indebtedness that we incur to finance or refinance an acquisition. Among the purchasers of the units were three of our directors and officers and an entity controlled by our chief executive officer, who collectively purchased an aggregate of 37 units consisting of 10% subordinated notes in the aggregate principal amount of $1.85 million and warrants to purchase an aggregate of 14,800 shares of our common stock.

On September 20, 2002, also in connection with the financing of the Wampole acquisition, we sold 9% subordinated promissory notes in an aggregate principal amount of $9.0 million and 3% subordinated convertible promissory notes in an aggregate principal amount of $6.0 million to private investors for an aggregate purchase price of $15.0 million. The 9% subordinated notes and 3% convertible notes accrue interest on the outstanding principal amount at 9% and 3% per annum, respectively, which is payable quarterly in arrears on the first day of each calendar quarter starting October 1, 2002. Both the 9% subordinated notes and the 3% convertible notes mature on September 20, 2008, subject to acceleration in certain circumstances, and we may prepay the 9% subordinated notes at any time, subject to certain prepayment penalties and the consent of our senior lenders. If we repay the 9% subordinated notes and the 3% convertible notes, we may do so in cash or in shares of our common stock valued at 95% of the average closing price of such stock over the ten consecutive trading days immediately preceding the payment date. At any time prior to the maturity date, the holders of the 3% convertible notes have the option to convert all of their outstanding principal amounts and unpaid interest into shares of our common stock at a conversion price equal to $17.45. Additionally, the outstanding principal amount and unpaid interest on the 3% convertible notes will automatically convert into common stock at a conversion price equal to $17.45 if, at any time after September 20, 2004, the average closing price of our common stock in any consecutive thirty day period is greater than $22.67. An entity controlled by our chief executive officer purchased 3% convertible notes in the aggregate principal amount of $3.0 million.

As of September 30, 2003, our subsidiary IMN had a total outstanding debt balance of $17.0 million, of which $12.7 million represented borrowings under a credit agreement with Congress Financial Corporation, a subsidiary of Wachovia Corporation, and $4.3 million related to various notes payable and capital leases. Under the credit agreement with Congress, as amended, IMN can borrow up to $15.0 million under a revolving credit commitment and $4.2 million under a term loan commitment, subject to specified borrowing base limitations. Borrowings under the revolving credit commitment and the term loan bear interest at either 1.50% above the bank's prime rate or, at IMN's option, at 3.75% above the Adjusted Eurodollar Rate used by the bank. As of September 30, 2003, the interest rates on the loans with Congress ranged from 4.25% to 5.75%. The notes are collateralized by substantially all of IMN's assets. The credit agreement with Congress requires IMN to maintain

minimum tangible net worth and contains various restrictions customary in such financial arrangements, including limitations on the payment of cash dividends. As of September 30, 2003, IMN was in compliance with such requirements and restrictions. The loans with Congress were originally set to mature on October 16, 2003, but have been extended to mature on October 15, 2004. IMN's other notes payable and capital leases mature on various dates through July 2008.

As of September 30, 2003, our subsidiary Orgenics had bank debt balances totaling $437,000. Orgenics' bank debt is collateralized by certain of Orgenics' assets. Orgenics' notes bear interest at rates ranging from 2.625% to 3.25% and are payable on various dates through 2004.

As of September 30, 2003, our newly acquired subsidiary Ostex had $42,000 in capital lease obligations outstanding.

As of September 30, 2003, there were 323,060 shares of our Series A Redeemable Convertible Preferred Stock outstanding. Each share of Series A Preferred Stock accrues dividends on a quarterly basis at $2.10 per annum, but only on those days when the closing price of our common stock is below $15. For the nine months ended September 30, 2003, we accrued $33,000 in dividends. Dividends accrued are payable only if declared by the board of directors. Until December 31, 2003, accrued dividends, if any, must be paid in our common stock. The number of shares of common stock to be issued in payment of any accrued dividends is equal to such number as is determined by dividing the aggregate amount of the accrued dividend then payable by the greater of (i) $15 or (ii) the average market price during the thirty trading day period immediately preceding the date such dividend is declared. Thereafter, we have the option to pay dividends in cash or common stock. In addition, our senior credit agreement currently prohibits us from paying dividends. The number of shares of common stock to be issued upon any voluntary conversion of one share of Series A Preferred Stock is equal to such number as is determined by dividing $30 by the conversion price in effect at the time of conversion. As of September 30, 2003, the conversion price was $15, subject to adjustment. Accordingly, each share of Series A Preferred Stock is currently convertible into two shares of common stock. On or after December 20, 2003, we may convert the Series A Preferred Stock into common stock in the event that the average closing price of our common stock exceeds $20 for any consecutive thirty trading day period ending not more than 10 days prior to the date of our mandatory conversion notice. The Series A Preferred Stock may be redeemed upon a vote by the holders of at least two-thirds of the outstanding Series A Preferred Stock on or after June 30, 2011. The redemption price per share of Series A Preferred Stock will be equal to $30 plus a premium calculated at 5% per annum from the date of issuance.

As of December 31, 2002, we had approximately $21.1 million and $19.1 million of domestic and foreign net operating loss carryforwards, respectively, which either expire on various dates through 2022 or can be carried forward indefinitely. As part of the acquisition of Ostex, we also acquired Ostex's net operating loss carryforwards of approximately $45.1 million. These losses are available to reduce federal and foreign taxable income, if any, in future years. These losses are also subject to review and possible adjustments by the applicable tax authorities and may be limited in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. We have recorded a valuation allowance against the portion of the deferred tax assets related to our net operating losses and certain of our other deferred tax assets to reflect uncertainties that might affect the realization of such deferred tax assets, as these assets can only be realized via profitable operations.

The following table summarizes our principal contractual obligations as of September 30, 2003 and the effects such obligations are expected to have on our liquidity and cash flow in future periods:

The consolidated financial statements included in this Quarterly Report on Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The accounting policies discussed below are considered by our management to be critical to an understanding of our financial statements because their application depends on management's judgment, with financial reporting results relying on estimations and assumptions about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast and the best estimates routinely require adjustment. In addition, the "Notes to Consolidated Financial Statements" included in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission include a comprehensive summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.

We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101 and its related amendments (collectively, "SAB No. 101"). SAB No. 101 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collection is reasonably assured.

The majority of our revenues are derived from product sales. We recognize revenue upon title transfer of the products to third-party customers, less a reserve for estimated product returns and allowances. Determination of the reserve for estimated product returns and allowances is based on our management's analyses and judgments regarding certain conditions, as discussed below in the critical accounting policy "Use of Estimates for Sales Returns and Other Allowances and Allowance for Doubtful Accounts." Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be adversely affected.

We also receive license and royalty revenue from agreements with third-party licensees. Revenue from fixed fee license and royalty agreements are recognized on a straight-line basis over the obligation period of the related license agreements. License and royalty fees that are calculated based on the licensees' sales are generally recognized upon receipt of the license or royalty payments because we would not be able to determine such fees until such time. License and royalty fees that are determinable prior to the receipt thereof are recognized in the period they are earned.

Use of Estimates for Sales Returns and Other Allowances and Allowance for Doubtful Accounts

Sales arrangements with customers for our consumer products generally require us to accept product returns. From time to time, we also enter into sales incentive arrangements with our customers, which generally reduce the sale prices of our products. Against product revenue recognized in any reporting period, we must establish allowances for potential future product returns and claims resulting from our sales incentive arrangements. Calculation of these allowances requires significant judgments and estimates. When evaluating the adequacy of the sales returns and other allowances, our management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of our products. Material differences in the amount and timing of our product revenue for any reporting period may result if changes in conditions arise that would require management to make different judgments or utilize different estimates. Our provision for sales returns and other allowances related to sales incentive arrangements amounted to approximately $11.0 million and $32.2 million for the three and nine months ended September 30, 2003, respectively, and $11.0 million and $31.0 million for the three and nine months ended September 30, 2002, respectively.

Similarly, our management must make estimates regarding uncollectible accounts receivable balances. When evaluating the adequacy of the allowance for doubtful accounts, management analyzes specific accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms and patterns. Our accounts receivable balance was $47.8 million and $37.3 million, net of allowances for doubtful accounts of $764,000 and $871,000, as of September 30, 2003 and December 31, 2002, respectively.

We state our inventories at the lower of the actual cost to purchase or manufacture the inventory or the estimated current market value of the inventory. In addition, we periodically review the inventory quantities on hand and record a provision for excess and obsolete inventory. This provision reduces the carrying value of our inventory and is calculated based primarily upon factors such as forecasts of our customers' demands, shelf lives of our products in inventory, loss of customers and manufacturing lead times. Evaluating these factors, particularly forecasting our customers' demands, requires management to make assumptions and estimates. Actual product sales may prove our forecasts to be inaccurate, in which case we may have underestimated or overestimated the provision required for excess and obsolete inventory. If, in future periods, our inventory is determined to be overvalued, we would be required to recognize the excess value as a charge to our cost of sales at the time of such determination. Likewise, if, in future periods, our inventory is determined to be undervalued, we would have over-reported our cost of sales, or understated our earnings, at the time we recorded the excess and obsolete provision. Our inventory balance was $49.5 million and $37.2 million, net of a provision for excess and obsolete inventory of $1.5 million and $1.3 million, as of September 30, 2003 and December 31, 2002, respectively.

Our long-lived assets include (i) property, plant and equipment, (ii) goodwill and (iii) other intangible assets. As of September 30, 2003, the balances of property, plant and equipment, goodwill and other intangible assets, net of accumulated depreciation and amortization, were $58.3 million,

$227.6 million and $99.4 million, respectively. Where we believe that property, plant and equipment and intangible assets have finite lives, we depreciate and amortize those assets over their estimated useful lives. For purposes of determining whether there are any impairment losses, as discussed below, our management has historically examined the carrying value of our identifiable long-lived tangible and intangible assets and goodwill, including their useful lives, when indicators of impairment are present. In addition, SFAS No. 142 requires that impairment reviews be performed on the carrying values of all goodwill on at least an annual basis. For all long-lived tangible and intangible assets and goodwill, if an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period we identify the impairment. Furthermore, if our review of the carrying values of the long-lived tangible and intangible assets indicates impairment of such assets, we may determine that shorter estimated useful lives are more appropriate. In that event, we will be required to record additional depreciation and amortization in future periods, which will reduce our earnings.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals and lives assigned to long-lived and intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered through future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within our tax provision.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $28.2 million as of December 31, 2002 due to uncertainties related to the future benefits, if any, from our deferred tax assets related primarily to our U.S. businesses and certain foreign net operating losses and tax credits. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our tax provision.

Because of the nature of our business, we may from time to time be subject to consumer product claims or various other lawsuits arising in the ordinary course of our business, and we expect this will continue to be the case in the future. These lawsuits generally seek damages, sometimes in substantial amounts, for personal injuries or other commercial claims. In addition, we aggressively defend our patent and other intellectual property rights. This often involves bringing infringement or other commercial claims against third parties, which can be expensive and can result in counterclaims against us. We are currently involved in certain legal proceedings, as discussed in "Item 3. Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission and "Part II. Item 1. Legal Proceedings" in this Quarterly Report. We do not accrue for potential losses on legal proceedings where our company is the defendant when we are not able to quantify our potential liability, if any, due to uncertainty as to the nature, extent and validity of the claims against us, uncertainty as to the nature and extent of the damages or other relief sought by the plaintiff and the complexity of the issues involved. Our potential liability, if any, in a particular case may become quantifiable as the case progresses, in which case we will begin accruing for the expected loss.

In addition, in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2002, we have reported on certain legal proceedings as to which we do not believe a final ruling against us could have a material adverse impact on our financial position and operations. To the extent that unanticipated facts or circumstances arise that cause us to change this assessment with respect to any matter, our future results of operations and financial position could be materially affected.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs, in particular legal obligations associated with such retirement that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. We adopted this statement on January 1, 2003, as required. However, the adoption of this statement did not have a material impact on our financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections, which addresses the reporting of gains and losses resulting from the extinguishment of debt, accounting for sale-leaseback transactions and rescinds or amends other existing authoritative pronouncements. SFAS No. 145 requires that any gain or loss on the extinguishment of debt that does not meet the criteria of Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for classification as an extraordinary item shall not be classified as extraordinary and shall be included

in earnings from continuing operations. We adopted the provisions of this statement on January 1, 2003. As a result, any gains and losses from early extinguishment of debt in the future, that does not meet the criteria of APB Opinion No. 30 for classification of extraordinary, will be included in earnings from continuing operations and all prior periods presented will be required to be restated. Consequently, the restatement of prior period results upon the adoption of this statement reduced the loss from continuing operations from $29.4 million to $20.9 million, or from $4.74 to $3.76 per basic and diluted share, for the nine months ended September 30, 2002. The adoption of this statement did not have an impact on our results of operations for the three months ended September 30, 2002.

In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue arrangements with multiple deliverables include arrangements which provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the guidance under this consensus did not have an impact on our financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an underlying (as initially defined in SFAS No. 133) to conform it to language used in FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing pronouncements. SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, subject to certain exceptions. The adoption of this statement did not have an impact on our financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), while many of such instruments were previously classified as equity or "mezzanine" equity. The statement also requires that income statement treatment be consistent with the balance sheet classification. That is, if the instrument is classified as a liability, payments to the holders are interest expense, not dividends, and changes in value are recorded in earnings. The statement relates to three specific categories of instruments: mandatorily redeemable shares, freestanding written put options and forward contracts that obligate an entity to purchase its own shares, and freestanding contracts that obligate an entity to pay with its own shares in amounts that are either unrelated, or inversely related, to the price of the shares. SFAS No. 150 is effective immediately for financial instruments entered into or modified after May 31, 2003 and otherwise is effective in the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on our financial position, results of operations, or cash flows.

There are various risks, including those described below, which may materially impact your investment in our company or may in the future, and, in some cases already do, materially affect us and our business, financial condition and results of operations. You should consider carefully these factors, as well as the risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission, in connection with your investment in our securities. This section includes

or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements on pages 2 and 52 of this report.

Our business has substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations.

As of September 30, 2003, we had approximately $177.9 million of gross indebtedness outstanding under our credit facilities and other debt-related instruments. Our substantial indebtedness could have important consequences to you. For example, it could:

We expect to obtain the money to pay our expenses and to pay the principal and interest on our senior credit facility and our other debt from cash flow from our operations. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets in which we operate and pressure from competitors. We cannot be certain that our cash flow from operations will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If our cash flow and capital resources prove inadequate, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, seek additional equity capital or borrow more money. We cannot guarantee that we will be able to do so on terms acceptable to us. In addition, the terms of existing or future debt agreements, including our senior credit facility, may restrict us from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve such alternatives could significantly adversely affect our ability to pay principal and interest on our debt and meet our other obligations.

The agreements governing our indebtedness subject us to various restrictions that may limit our ability to pursue business opportunities.

The agreements governing our indebtedness subject us to various restrictions on our ability to engage in certain activities, including, among other things, our ability to:

These restrictions may limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests. In addition, the syndication agents under our senior credit facilities may opt to syndicate those facilities and, should the syndication agents decide to do so, they have the right to change the terms of our senior credit facilities if they, in their reasonable judgment, determine that such changes are necessary or advisable to successfully syndicate the facilities and achieve certain post-syndication hold levels. In the event of such a syndication the restrictive covenants or other obligations under our senior credit facilities could become more onerous or restrictive than they are presently.

Our credit facilities contain certain financial covenants that we may not satisfy which, if not satisfied, could result in the acceleration of the amounts due under our credit facilities and the limitation of our ability to borrow additional funds in the future.

As of September 30, 2003, we had approximately $138.0 million of gross indebtedness outstanding under our various credit facilities, substantially all of which was owed to General Electric Capital Corporation, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., UBS AG, Cayman Islands Branch and Congress Financial Corporation. The agreements governing these various credit facilities subject us to various financial and other covenants with which we must comply on an ongoing or periodic basis. These include covenants pertaining to fixed charge coverage, capital expenditures, various leverage ratios, minimum EBITDA, total net worth and minimum cash requirements. If we violate any of these covenants, there may be a material adverse effect on us. Most notably, our outstanding debt under one or more of our credit facilities could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness and our ability to borrow additional funds in the future may be limited. In addition, because the syndication agents under our senior credit facilities currently have the right to change the terms of those facilities under certain circumstances, the financial convenants applicable to those facilities could become more onerous or restrictive than they are presently.

Our acquisitions of the Unipath business, IVC Industries, Inc., the Wampole Laboratories Division of MedPointe Inc., Ostex International, Inc., Applied Biotech and the Abbott rapid diagnostics product lines may not be profitable, and the integration of these businesses or product lines may be difficult and may lead to adverse effects.

Since we commenced activities in November 2001, we have acquired and attempted to integrate into our operations the Unipath business, IVC Industries, Inc. (now doing business as Inverness Medical Nutritionals Group or IMN), the Wampole Laboratories Division of MedPointe Inc. and Ostex International, Inc. On August 27, 2003, we acquired Applied Biotech and on September 30, 2003 we acquired the Abbott rapid diagnostics product lines. The ultimate success of all of these acquisitions depends, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses or product lines into our existing businesses. However, the successful integration of independent companies or product lines is a complex, costly and time-consuming process. The difficulties of integrating companies and acquired assets include among others:

We may not accomplish the integration of our acquisitions smoothly or successfully. The diversion of the attention of our management from our current operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from these acquisitions and adversely affect our other businesses. Ultimately, the value of any company, product line or assets that we have acquired may not be greater than or equal to their purchase prices.

If we choose to acquire or invest in new and complementary businesses, products or technologies instead of developing them ourselves, such acquisitions or investments could disrupt our business and, depending on how we finance these acquisitions or investments, could result in the use of significant amounts of cash.

Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. Accordingly, from time to time we may seek to acquire or invest in businesses, products or technologies instead of developing them ourselves. Acquisitions and investments involve numerous risks, including:

Any of these factors could materially harm our business or our operating results.

If goodwill that we have recorded in connection with our acquisitions of other businesses becomes impaired, we could have to take significant charges against earnings.

In connection with the accounting for our acquisitions of the Unipath business, Wampole, Ostex, Applied Biotech and the Abbott rapid diagnostics product lines, we have recorded a significant amount of goodwill and other intangible assets. Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings which could materially adversely affect our results of operations in future periods.

We could experience significant manufacturing delays, disruptions to our ongoing research and development and increased production costs if Unilever is unable to successfully assign or sublease to us the lease for the multi-purpose facility that we currently use in Bedford, England.

One of our primary operating facilities is located in Bedford, England. The Bedford facility is a multi-purpose facility that is registered with the U.S. Food and Drug Administration, or FDA, contains state-of-the-art research laboratories and is equipped with specialized manufacturing equipment. This facility currently provides the manufacturing for our Clearblue and Clearview products, serves as our research and development center and serves as the administrative center for our European operations, and we anticipate using this facility to manufacture the e.p.t. pregnancy test for Pfizer Inc. in connection with our five year supply arrangement with Pfizer (see "Part II, Item. 1 Legal Proceedings"). We are currently using the Bedford facility pursuant to our acquisition agreement with Unilever relating to our acquisition of the Unipath business in late 2001. Unilever currently leases this facility from a third-party landlord. Pursuant to the terms of Unilever's lease, Unilever cannot assign the lease or sublet the Bedford facility to us without first obtaining the landlord's consent. The landlord has not yet, and may not in the future, consent to an assignment of the lease or a sublease to us. The terms of our acquisition agreement obligate Unilever to provide to us the benefit of its lease of the Bedford facility. If Unilever is unable to successfully acquire such consent or otherwise enable us to realize the benefit of Unilever's lease of the Bedford facility, or if its lease is terminated, we may be forced to renegotiate a lease of the Bedford facility on substantially less favorable terms or seek alternative means of producing our products, conducting our research and housing our European administrative staff. In either case, we may experience increased production costs or manufacturing delays, which could prevent us from meeting contractual supply obligations or jeopardize important customer relationships. We may also suffer disruptions to our ongoing research and development while we are resolving these issues. We cannot assure you that we will be able to renegotiate a lease for the Bedford facility on terms that are acceptable to us or find an acceptable replacement for this facility. Any one or more of these events may have a material adverse effect on us.

We produce most of our consumer products in our manufacturing facilities located in New Jersey, San Diego, Bedford, England and Galway, Ireland and some of our professional diagnostic tests in our manufacturing facilities located in Bedford, England, San Diego, Seattle and Yavne, Israel. Our production processes are complex and require specialized and expensive equipment. Replacement parts for our specialized equipment can be expensive and, in some cases, can require lead times of up to a year to acquire. In addition, our private label consumer products business, and our private label and bulk nutritional supplements business in particular, rely on operational efficiency to mass produce

products at low margins per unit. We also rely on third parties to supply production materials and in some cases there may not be alternative sources immediately available.

In addition, we rely on third parties to manufacture most of our professional diagnostic products and certain components of our consumer diagnostic products, including products in development. For example, certain of the Abbott rapid diagnostics product lines are currently manufactured for us by Abbott Laboratories in Chicago under the terms of a transition services agreement. Any event impacting our manufacturing facilities, our manufacturing systems or equipment, or our contract manufacturers or suppliers, including, without limitation, wars, terrorist activities, natural disasters and outbreaks of infectious disease (such as SARS), could delay or suspend shipments of products or the release of new products or could result in the delivery of inferior products. Our revenues from the affected products would decline or we could incur losses until such time as we were able to restore our production processes or put in place alternative contract manufacturers or suppliers. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies.

We may not be successful in manufacturing, shipping and selling our new digital pregnancy test.

In the second quarter of 2003 we shipped the first orders for our new digital pregnancy test, Clearblue Easy Digital, which is the first consumer pregnancy test on the market to display test results in words. Instead of interpreting colored lines for a result, the digital display will spell out "Pregnant" or "Not Pregnant." However, manufacturing or distribution problems, or other factors beyond our control, could negatively impact the effectiveness of our ongoing new product launch and prevent us from meeting customer demand or our own sales forecasts. In addition, we cannot assure you that the market will accept this new product or that any such acceptance will not dilute market acceptance of our other consumer pregnancy test products or the e.p.t. pregnancy test, which we will manufacture for Pfizer for a period of five years beginning in June 2004. Accordingly, there is no assurance that this new product will increase our overall revenues or profitability.

If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.

Our facilities and manufacturing techniques generally must conform to standards that are established by government agencies, including those of European and other foreign governments, as well as the FDA, and, to a lesser extent, the U.S. Drug Enforcement Administration, or the DEA, and local health agencies. These regulatory agencies may conduct periodic audits of our facilities to monitor our compliance with applicable regulatory standards and our facilities in Bedford, England and Galway, Ireland have both recently undergone successful FDA audits. If a regulatory agency finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or if such a regulatory agency determines that our non-compliance is severe, it may close our facilities. Any adverse action by an applicable regulatory agency could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. These regulatory agencies may also impose new or enhanced standards that would increase our costs as well as the risks associated with non-compliance. For example, we anticipate that the FDA may soon finalize and implement "good manufacturing practice," or GMP, regulations for nutritional supplements. GMP regulations would require supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. While our manufacturing facilities for nutritional supplements have been subjected to, and passed, third party inspections against anticipated GMP standards, the ongoing compliance required in the event that GMP regulations are adopted would involve additional costs and would present new risks associated with any failure to comply with the regulations in the future.

If we deliver products with defects, our credibility may be harmed, market acceptance of our products may decrease and we may be exposed to liability in excess of our product liability insurance coverage.

The manufacturing and marketing of consumer and professional diagnostic products involve an inherent risk of product liability claims. In addition, our product development and production are extremely complex and could expose our products to defects. Any defects could harm our credibility and decrease market acceptance of our products. In addition, our marketing of vitamins and nutritional supplements may cause us to be subjected to various product liability claims, including, among others, claims that the vitamins and nutritional supplements have inadequate warnings concerning side effects and interactions with other substances. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. In the event that we are held liable for a claim for which we are not indemnified, or for damages exceeding the limits of our insurance coverage, that claim could materially damage our business and our financial condition.

Sales of our branded nutritional supplements have been trending downward since 1998 due to the maturity of the market segments they serve and the age of that product line and we may experience further declines in sales of those products.

Sales of our branded nutritional products have declined each year since 1998 until the year 2002 when they increased slightly as compared to 2001. We believe that these products have under-performed because they are, for the most part, aging brands with limited brand recognition that face increasing private label competition. The age of this product line means that we are subject to future distribution loss for under-performing brands, while our opportunities for new distribution on the existing product lines are limited. Though we did experience a slight increase in sales seen during 2002, the overall trend of declining sales for these products appears to be continuing. We do not expect significant sales growth of our existing branded nutritional products and we may experience further declines in sales of those products in the future.

The vitamin and nutritional supplements market is subject to significant fluctuations based upon media attention and new developments.

Most growth in the vitamin and nutritional supplement industry is attributed to new products that tend to generate greater attention in the marketplace than do older products. Positive media attention resulting from new scientific studies or announcements can spur rapid growth in individual segments of the market, and also impact individual brands. Conversely, news that challenges individual segments or products can have a negative impact on the industry overall as well as on sales of the challenged segments or products. Most of our vitamin and nutritional supplements products serve well-established market segments and, absent unforeseen new developments or trends, are not expected to benefit from rapid growth. A few of our vitamin and nutritional products are newer products that are more likely to be the subject of new scientific studies or announcements, which could be either positive or negative. News or other developments that challenge the safety or effectiveness of these products could negatively impact the profitability of our vitamin and nutritional supplements business.

We market our Orgenics professional diagnostic products to small and medium sized customers in more than 90 countries at considerable cost that reduces the operating margins for those products.

Because small and medium sized laboratories are the principal customers of our Orgenics professional diagnostic products, we sell these products worldwide in order to maintain sufficient sales volume. Our Orgenics professional diagnostic products are marketed in more than 90 countries, including many third world and developing nations where smaller laboratories are the norm, more expensive technologies are not affordable and infectious diseases are often more prevalent. This worldwide sales strategy is expensive and results in lower margins than would be possible if we could generate sufficient sales volume by operating in fewer markets.

We could suffer monetary damages, incur substantial costs or be prevented from using technologies important to our products as a result of a number of pending legal proceedings.

We are involved in various legal proceedings arising out of our consumer diagnostics, nutritional supplements and professional diagnostics business. Our current material legal proceedings are:

Because the above claims each seek damages and reimbursement for costs and expenses without specific amounts, we are unable to assess the probable outcome of or potential liability arising from the lawsuits.

In connection with our split-off from Inverness Medical Technology, Inc., or IMT, we agreed to assume, to the extent permitted by law, and indemnify IMT for, all liabilities arising out of the women's health, nutritional supplements and professional diagnostics businesses before or after the split-off to the extent such liabilities are not otherwise retained by IMT. Through our acquisitions of the Unipath business, IMN, Wampole, Ostex, and ABI, we also assumed or acquired substantially all of the liabilities of those businesses. We are unable to assess the materiality or costs associated with these lawsuits at this time. We cannot assure you that these lawsuits or any future lawsuits relating to our businesses will not have a material adverse effect on us.

We recently met with the Securities and Exchange Commission, or the SEC, regarding an informal inquiry concerning the resignation of our former independent accountants, Ernst & Young LLP, and certain accounting and financial matters that we discussed with the SEC earlier this year. We cannot predict what the outcome of this informal inquiry will be.

In October 2003, in connection with an informal inquiry, we met with two representatives of the Boston office of the SEC's Division of Enforcement to respond to questions regarding Ernst & Young LLP's resignation and certain of the accounting and financial matters that we discussed with the SEC earlier this year after filing our Current Report on Form 8-K, event date April 11, 2003, to disclose Ernst & Young's resignation. We have responded fully to the staff's request for information. We cannot predict whether the SEC will seek additional information or what the outcome of this informal inquiry will be.

The profitability of our consumer products businesses may suffer if we are unable to establish and maintain close working relationships with our customers.

Our consumer products businesses rely to a great extent on close working relationships with our customers rather than long-term exclusive contractual arrangements. Customer concentration in these businesses is high, especially in our private label nutritional supplements business. In addition, customers of our branded and private label consumer products businesses purchase products through purchase orders only and are not obligated to make future purchases. We therefore rely on our ability to deliver quality products on time in order to retain and generate customers. If we fail to meet our customers' needs or expectations, whether due to manufacturing issues that effect quality or capacity issues that result in late shipments, we will harm our reputation and likely lose customers. The loss of a major customer and the failure to generate new accounts could significantly reduce our revenues or prevent us from achieving projected growth.

The profitability of our consumer products businesses may suffer if Pfizer Inc. is unable to continue to successfully market and sell its e.p.t. pregnancy test.

Under the terms of a recent manufacturing, packaging and supply agreement that we entered into with Pfizer Inc., through one of its wholly owned subsidiaries, Pfizer will purchase its e.p.t. pregnancy tests from us beginning on June 6, 2004 and continuing until June 6, 2009. Provided Pfizer meets its minimum purchase requirements under the contract, we stand to profit. However, if Pfizer's sales of its e.p.t. pregnancy test fail to grow as forecast we may not generate as much revenue or profit under this arrangement as we currently project.

Our private label nutritional supplements business is a low margin business susceptible to changes in costs and pricing pressures.

Our private label nutritional supplements business operates on low profit margins, and we rely on our ability to efficiently mass produce nutritional supplements in order to make meaningful profits from this business. Changes in raw material or other manufacturing costs can drastically cut into or eliminate the profits generated from the sale of a particular product. For the most part, we do not have long-term supply contracts for our required raw materials and, as a result, our costs can increase with little notice. The private label nutritional supplements business is also highly competitive such that our ability to raise prices as a result of increased costs is limited. Customers generally purchase private label products via purchase order, not through long-term contracts, and they often purchase these products from the lowest bidder on a product by product basis. The internet has enhanced price competition among private label manufacturers through the advent of on-line auctions, where mass merchandisers will auction off the right to manufacture a particular product to the lowest, often anonymous bidder.

Retailer consolidation poses a threat to existing retailer relationships and can result in lost revenue.

Recent years have witnessed rapid consolidation within the mass retail industry. Drug store chains, grocery stores and mass merchandisers, the primary purchasers of our consumer diagnostic products and vitamins and nutritional supplements, have all been subject to this trend. Because these customers purchase through purchase orders, consolidation can interfere with existing retailer relationships, especially private label relationships, and result in the loss of major customers and significant revenue streams.

Our financial condition or results of operations may be adversely affected by international business risks.

Approximately 29% of our net revenues were generated from outside the United States in the nine months ended September 30, 2003. A significant number of our employees, including manufacturing, sales, support and research and development personnel, are located in foreign countries, including England, Ireland and Israel. Conducting business outside of the United States subjects us to numerous risks, including:

Because our business relies heavily on foreign operations and revenues, changes in foreign currency exchange rates and our ability to convert currencies may negatively affect our financial condition and results of operations.

Our business relies heavily on our foreign operations. Three of our manufacturing facilities are outside the United States, in Bedford, England, Galway, Ireland and Yavne, Israel. Approximately 29% of our net revenues were generated from outside the United States in the nine months ended September 30, 2003. Our Clearblue products, pregnancy tests in particular, have historically been much stronger brands outside the United States, with 68% of our net product sales of Clearblue products coming from outside the United States during 2002. In addition, the Abbott rapid diagnostics product lines generate a majority of their profits from sales outside the United States. Furthermore, Persona is sold exclusively outside of the United States and our Orgenics professional diagnostic products have always been sold exclusively outside of the United States. Because of our foreign operations and foreign sales, we face exposure to movements in foreign currency exchange rates. Our primary exposures are related to the operations of our European subsidiaries. These exposures may change over time as business practices evolve and could result in increased costs or reduced revenue and could impact our actual cash flow.

Our Orgenics subsidiary is located in Israel, and its operations could be negatively affected due to military or political tensions in the Middle East.

Our wholly owned subsidiary, Orgenics, which develops, manufactures and sells certain of our professional diagnostic products, is incorporated under the laws of the State of Israel. The administrative offices and development and manufacturing operations of our Orgenics business are located in Yavne, Israel. Although most of Orgenics's sales currently are to customers outside of Israel, political, economic and military conditions in Israel could nevertheless directly affect its operations.

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite its history of avoiding adverse effects, our Orgenics business could be adversely affected by any major hostilities involving Israel.

Intense competition could reduce our market share or limit our ability to increase market share, which could impair the sales of our products and harm our financial performance.

The medical products industry is rapidly evolving and developments are expected to continue at a rapid pace. Competition in this industry, which includes both our consumer diagnostics and professional diagnostics businesses, is intense and expected to increase as new products and technologies become available and new competitors enter the market. Our competitors in the United States and abroad are numerous and include, among others, diagnostic testing and medical products companies, universities and other research institutions. Our future success depends upon maintaining a competitive position in the development of products and technologies in our areas of focus. Our competitors may:

Also, the possibility of patent disputes with competitors holding foreign patent rights may limit or delay expansion possibilities for our consumer diagnostics business in certain foreign jurisdictions. In addition, many of our existing or potential competitors have or may have substantially greater research and development capabilities, clinical, manufacturing, regulatory and marketing experience and financial and managerial resources.

The market for the sale of vitamins and nutritional supplements is also highly competitive. This competition is based principally upon price, quality of products, customer service and marketing support. There are numerous companies in the vitamins and nutritional supplements industry selling products to retailers such as mass merchandisers, drug store chains, independent drug stores, supermarkets and health food stores. As most of these companies are privately held, we are unable to obtain the information necessary to assess precisely the size and success of these competitors. However, we believe that a number of our competitors, particularly manufacturers of nationally advertised brand name products, are substantially larger than we are and have greater financial resources.

The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology and would reduce our ability to compete in the market.

Our success will depend in part on our ability to develop or acquire commercially valuable patent rights and to protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. The degree of present and future protection for our proprietary rights is uncertain.

The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

In addition to patents, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying our products. If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection or prosecute potential infringements of our patents. We also realize that our trade secrets may become known through other means not currently foreseen by us. Despite our efforts to protect our intellectual property, our competitors or customers may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our intellectual property rights or design around our proprietary technologies.

Claims by other companies that our products infringe on their proprietary rights could adversely affect our ability to sell our products and increase our costs.

Substantial litigation over intellectual property rights exists in both the consumer and professional diagnostic industries. We expect that our products and products in these industries may increasingly be subject to third party infringement claims as the number of competitors grows and the functionality of products and technology in different industry segments overlaps. Third parties may currently have, or may eventually be issued, patents on which our products or technology may infringe. Any of these third parties might make a claim of infringement against us. Any litigation could result in the expenditure of significant financial resources and the diversion of management's time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, have an impact on prospective customers, cause product shipment delays or require us to develop non-infringing technology, make substantial payments to third parties, or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement was made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenue may decrease and we could be exposed to legal actions by our customers.

We have initiated, and may need to further initiate, lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:

Currently, we have initiated a number of lawsuits against competitors who we believe to be selling products that infringe our proprietary rights. These current lawsuits and any other lawsuits that we initiate could be expensive, take significant time and divert management's attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us.

Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We may not prevail in any of these suits and the damages or other remedies awarded, if any, may not be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, our stock price could decline.

Non-competition obligations and other restrictions will limit our ability to take full advantage of our management team, the technology we own or license and our research and development capabilities.

Members of our management team have had significant experience in the diabetes field. In addition, technology we own or license may have potential applications to this field and our research and development capabilities could be applied to this field. However, in conjunction with our split-off from IMT, we agreed not to compete with IMT and Johnson & Johnson in the field of diabetes. In addition, Mr. Ron Zwanziger, our Chairman, Chief Executive Officer and President, and two of our senior scientists, Dr. David Scott and Dr. Jerry McAleer, have entered into consulting agreements with IMT that impose similar restrictions. Further, our license agreement with IMT prevents us from using any of the licensed technology in the field of diabetes. As a result of these restrictions, we cannot pursue opportunities in the field of diabetes.

We are obligated to indemnify IMT and others for liabilities and could be required to pay IMT and others amounts that we may not have.

The restructuring agreement, post-closing covenants agreement and related agreements entered into in connection with the split-off and merger transaction with Johnson & Johnson provide that we will indemnify IMT and other related persons for specified liabilities related to our businesses, statements in the proxy statement/prospectus issued in connection with the split-off and merger about our businesses and breaches of our obligations under the restructuring agreement, post-closing covenants agreement and related agreements.

In addition, under our tax allocation agreement with IMT and Johnson & Johnson, we will indemnify Johnson & Johnson and IMT for any unpaid tax liabilities attributable to the pre-split-off operation of our consumer diagnostics, vitamins and nutritional supplements and professional diagnostics businesses.

While no claims for indemnification have yet been made, and may never be made, we are unable to predict the amount, if any, that may be required for us to satisfy our indemnification obligations under these agreements. However, if claims are made for indemnification and we are liable for such claims, the amount could be substantial. In such an event, we may not have sufficient funds available to satisfy our potential indemnification obligations. In addition, we may be unable to obtain the funds on terms satisfactory to us, if at all. If we are unable to obtain the necessary funds, we will need to consider other alternatives, including sales of assets, to raise necessary funds.

You are unlikely to be able to exercise effective remedies against Arthur Andersen LLP, our former independent public accountants.

Although we have dismissed Arthur Andersen LLP as our independent public accountants and have now engaged BDO Seidman, LLP, our consolidated financial statements as of December 31, 2001 and for the two years in the period ended December 31, 2001 included in our Annual Report on Form 10-K for the year ended December 31, 2002 were audited by Arthur Andersen.

On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen guilty of these federal obstruction of justice charges. In light of the jury verdict and the underlying events, Arthur Andersen subsequently substantially discontinued operations and dismissed essentially its entire workforce. You are therefore unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen. In addition, Arthur Andersen has not consented to the inclusion of its report in our Annual Report on Form 10-K for the year ended December 31, 2002, and the requirement to file its consent has been dispensed with in reliance on Rule 2-02(e) of Regulation S-X. Because Arthur Andersen has not consented to the inclusion of its report in our Annual Report on Form 10-K for the year ended December 31, 2002, you will not be able to recover against Arthur Andersen under Section 11 of the Securities Act for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated in those financial statements.

Our operating results may fluctuate due to various factors and as a result period-to-period comparisons of our results of operations will not necessarily be meaningful.

Factors relating to our business make our future operating results uncertain and may cause them to fluctuate from period to period. Such factors include:

Our stock price may fluctuate significantly and stockholders who buy or sell our common stock may lose all or part of the value of their investment, depending on the price of our common stock from time to time.

Our common stock has only been listed on the American Stock Exchange since November 23, 2001 and we have a limited market capitalization. As a result, we are currently followed by only a few market analysts and a portion of the investment community. Limited trading of our common stock may therefore make it more difficult for you to sell your shares.

In addition, our share price may be volatile due to our operating results, as well as factors beyond our control. It is possible that in some future periods the results of our operations will be below the expectations of the public market. In any such event, the market price of our common stock could

decline. Furthermore, the stock market may experience significant price and volume fluctuations, which may affect the market price of our common stock for reasons unrelated to our operating performance. The market price of our common stock may be highly volatile and may be affected by factors such as:

The holders of our Series A Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.

As of September 30, 2003, there were 323,060 shares of our Series A Preferred Stock outstanding. Pursuant to the terms of the certificate of designation creating our Series A Preferred Stock, upon a liquidation or a deemed liquidation of our company, the holders of the shares of our Series A Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is $30 per share of our Series A Preferred Stock (or $40.50 per share in certain circumstances), plus the amount of any dividends that have accrued on those shares, subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting our Series A Preferred Stock. Dividends accrue on the shares of our Series A Preferred Stock at the rate of up to $2.10 per share per annum based on the percentage of trading days on which the closing market price of our common stock is less than $15.00. As a result of these terms, the holders of our common stock may be disproportionately affected by any reduction in the value of our assets or fluctuations in the market price of our common stock.

The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in your best interests.

There are provisions in our certificate of incorporation and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock. Finally, the board of directors may in the future adopt other protective measures, such as a stockholder rights plan, which could delay, deter or prevent a change of control.

Because we do not intend to pay dividends on our common stock, you will benefit from an investment in our common stock only if it appreciates in value.

We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our common stock in the foreseeable future. In addition, our senior credit facility currently prohibits the payment of dividends. As a result, the success of your investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which you purchased your shares.

Our historical financial information relating to periods beginning prior to our split-off from Inverness Medical Technology, Inc. on November 21, 2001 may not be representative of our results as a separate company.

On November 21, 2001, we were split-off from IMT and became an independent, publicly owned company as part of a transaction by which IMT was acquired by Johnson & Johnson. Prior to that time, we had been a majority owned subsidiary of IMT, and the businesses that we acquired in connection with the restructuring that preceded the split-off represented approximately 20% of IMT's net product sales during the calendar quarter concluded immediately prior to the split-off. The historical financial information relating to any periods beginning prior to November 21, 2001 included in our reports filed with the Securities and Exchange Commission report on time periods prior to the split-off reflects the operating history of our businesses when we were a part of IMT. As a result, the financial information may not reflect what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone company during those periods. This financial information also may not reflect what our results of operations, financial position and cash flows will be in the future. This is not only related to the various risks associated with the fact that we have not been a stand-alone company for a long period of time, but also because:

The adjustments and allocations we made in preparing the financial information for any periods beginning prior to November 21, 2001 may not appropriately reflect our operations during those periods as if we had operated as a stand-alone company.

Period-to-period comparisons of our operating results may not be meaningful due to frequent acquisitions.

We have engaged in a number of significant acquisitions in recent years which make it difficult to analyze our results and to compare them from period to period, including the acquisitions of the Unipath business in December 2001, IVC Industries, Inc. in March 2002, Wampole in September 2002, Ostex in June 2003, Applied Biotech in August 2003 and the Abbott rapid diagnostics product lines in September 2003. Period-to-period comparisons of our results of operations may not be meaningful due to these acquisitions and are not indications of our future performance. Any future acquisitions will also make our results difficult to compare from period to period in the future.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as "may," "could," "should," "would," "intend," "will," "expect," "anticipate," "believe," "estimate," "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. There may be events in the future that we are not able to predict accurately or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. We caution investors that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those we discuss in this Quarterly Report on Form 10-Q. These differences may be the result of various factors, including those factors described in the "Certain Factors Affecting Future Results" section in this Quarterly Report and other risk factors identified from time to time in our periodic filings with the Securities and Exchange Commission. Some important additional factors that could cause our actual results to differ materially from those projected in any such forward-looking statements are as follows:

The foregoing list sets forth many, but not all, of the factors that could impact upon our ability to achieve results described in any forward-looking statements. Readers should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described above and elsewhere in this Quarterly Report on Form 10-Q could harm our business, prospects, operating results and financial condition. We do not undertake any obligation to update any forward-looking statements as a result of future events or developments.

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

We are exposed to market risk from changes in interest rates primarily through our investing and financing activities. In addition, our ability to finance future acquisition transactions or fund working capital requirements may be impacted if we are not able to obtain appropriate financing at acceptable rates.

Our investing strategy, to manage interest rate exposure, is to invest in short-term, highly liquid investments. Our investment policy also requires investment in approved instruments with an initial maximum allowable maturity of eighteen months and an average maturity of our portfolio that should not exceed six months, with at least $500,000 cash available at all times. Currently, our short-term investments are in money market funds with original maturities of 90 days or less. At September 30, 2003, our short-term investments approximated market value.

At September 30, 2003, we had two U.S. term loans totaling $75.1 million and a European term loan of $9.9 million outstanding and $16.9 million outstanding borrowings on a U.S. revolving line of credit and $23.0 million outstanding borrowings on a European revolving line of credit under our amended credit agreement dated September 30, 2003. Principal repayments under U.S. Term Loan A are to be made in sixteen equal quarterly installments of $1.95 million commencing on April 30, 2004 through January 31, 2008 with a final installment of $3.9 million due on March 31, 2008. Principal repayments under U.S. Term Loan B are to be made in sixteen equal quarterly installments of $0.1 million commencing on April 30, 2004 through January 31, 2008 with a final installment of $38.4 million due on March 31, 2008. Principal repayments under the European term loan are to be made in eleven equal quarterly installments of $25,000 commencing on October 31, 2003 through April 30, 2006 with a final installment of $9.65 million due on May 14, 2006. We may choose to prepay all or part of the term loans provided that we prepay at least $1.0 million or a multiple thereof. We may repay borrowings under the revolving lines of credit at any time but in no event later than March 31, 2008. Borrowings under the term loans and the revolving lines of credit bear interest at either (i) the London Interbank Offered Rate ("LIBOR"), as defined in the agreement, plus applicable margins or, at our option, (ii) a floating Index Rate, as defined in the agreement, plus applicable margins. Applicable margins, depending on the type of loan, can range from 2.75% to 4.50% and are subject to quarterly adjustments based on our consolidated financial performance, commencing with the quarter ending March 31, 2004. As of September 30, 2003, the interest rates under the term loans and the revolving lines of credit range from 5.16% to 5.66%, with a weighted average rate of 5.32%.

We have an interest rate swap agreement with a bank in place, which will provide us with limited protection from fluctuations in the LIBOR rate. Under the interest rate swap agreement, the LIBOR rate is at a minimum of 3.36% and a maximum of 5% and applies to $34.8 million to $37.7 million of our loans, depending upon the interest period, for the remaining term of the agreement. This interest rate swap agreement is effective through December 30, 2004. Currently, the LIBOR and Index rates applicable under the amended senior credit agreement were 1.16% and 4.00%, respectively. Assuming no changes in our leverage ratio which would have affected the margin of the interest rates, the effect of interest rate fluctuations on the loans under the amended senior credit agreement over the next twelve months is quantified and summarized as follows:

	Interest Expense Increase
If compared to the rate at September 30, 2003,
LIBOR increases by 1% point	$	873,000
LIBOR increases by 2% point		1,746,000
Index Rate increases by 1% point	$	1,236,000
Index Rate increases by 2% point		2,472,000

Our subsidiary IMN has a credit agreement with its bank, under which it can borrow up to $15.0 million under a revolving credit commitment and $4.2 million under a term loan commitment, subject to specified borrowing base limitations. These IMN loans were originally set to mature on October 16, 2003, but have been extended to mature on October 15, 2004. As of September 30, 2003, total borrowings outstanding under the credit agreement with the bank were $12.7 million. Borrowings under the revolving credit commitment and the term loan bear interest at either 1.5% above the bank's prime rate or, at IMN's option, at 3.75% above the Adjusted Eurodollar Rate used by the bank. As of September 30, 2003, the interest rates on $3.3 million of the outstanding borrowings were at the Adjusted Eurodollar Rates ranging from 0.52% to 0.81% plus the spread of 3.75% and the interest rate on the remaining $9.4 million of the outstanding borrowings was at the prime rate of 4.00% plus the

spread of 1.5%. The effect of interest rate fluctuations on the loans under IMN's credit agreement over the next twelve months is quantified and summarized as follows:

	Interest Expense Increase
If compared to the rate at September 30, 2003,
Interest rate increases by 1% point	$	118,000
Interest rate increases by 2% point		235,000

We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than our, or its, functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. For the three and nine months ended September 30, 2003, the net impact of foreign currency changes on transactions was a (loss)/gain of $(126,000) and $372,000, respectively. Generally, we do not use derivative financial instruments or other financial instruments to hedge such economic exposures. However, if our foreign currency exchange exposure in these transactions continues to be significant, we may decide to use such instruments in the future.

In addition, because a substantial portion of our earnings is generated by our foreign subsidiaries, whose functional currencies are other than the U.S. Dollar (in which we report our consolidated financial results), our earnings could be materially impacted by movements in foreign currency exchange rates upon the translation of the earnings of such subsidiaries into the U.S. Dollar. If the U.S. Dollar had been stronger by 1%, 5% or 10%, compared to the actual average exchange rates used to translate the financial results of our foreign subsidiaries, our net revenue and net income would have been lower by approximately the following amounts:

	Approximate Decrease in
	Net Revenue		Net Income
If for the three months ended September 30, 2003, the U.S. Dollar was stronger by:
1%	$	203,000	$	36,000
5%		1,013,000		180,000
10%		2,026,000		358,000
If for the nine months ended September 30, 2003, the U.S. Dollar was stronger by:
1%	$	580,000	$	91,000
5%		2,898,000		454,000
10%		5,797,000		907,000

Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at that time. We and our management understand nonetheless that controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and our management necessarily was

required to apply its judgment in evaluating and implementing possible controls and procedures. In reaching their conclusions stated above regarding the effectiveness of our disclosure controls and procedures, our CEO and CFO concluded that such disclosure controls and procedures were effective as of such date at the "reasonable assurance" level.

There was no change in our internal control over financial reporting that occurred during the quarter covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As part of our ongoing efforts to enhance our controls and procedures, however, we have taken certain actions during the third quarter which may directly or indirectly affect our internal control over financial reporting. In July 2003, we engaged Protiviti, Inc., an independent risk consulting firm, to assist us in assessing, documenting and testing our internal controls starting in 2003 to ensure that we can comply with the rules and regulations promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 when they take effect for us for the fiscal year ended December 31, 2004. We are also continually striving to improve our management and operational efficiency, manage our growth and integrate acquired businesses and we expect that our efforts in these regards may from time to time directly or indirectly affect our internal controls. For example, during the third quarter of 2003 we continued to expand our financial staff, including the hiring of Christopher J. Lindop as our Chief Financial Officer. We are also continuing our efforts to integrate the financial accounting systems used by certain of our businesses and to upgrade the information technology capabilities of certain of our subsidiaries.

In April 1998, Abbott Laboratories ("Abbott") commenced a lawsuit against Inverness Medical Technology, Inc. ("IMT"), our former parent, formerly known as Selfcare, Inc., and Princeton BioMeditech Corporation ("PBM"), which manufactured certain products for IMT, in an action filed in the United States District Court for the District of Massachusetts ("District Court"), asserting patent infringement arising from IMT's and PBM's manufacture, use and sale of products that Abbott claims are covered by one or more of the claims of U.S. Patent Nos. 5,073,484, 5,654,162 and 6,020,147 (the "Pregnancy Test Patents"), to which Abbott asserts that it is the exclusive licensee. Abbott claimed that certain of IMT's products relating to pregnancy detection and ovulation prediction (now our products to the extent they are still sold) infringe the Pregnancy Test Patents. On March 31, 1999, the District Court granted a motion by IMT, PBM and PBM-Selfcare LLC (the "LLC"), a joint venture between PBM and IMT, filed to amend IMT's counterclaim against Abbott, asserting that Abbott is infringing U.S. Patent Nos. 5,559,041 (the "041 patent") and 5,728,587 (the "587 patent"), which are owned by the LLC, and seeking a declaration that Abbott infringes the patents and that IMT is entitled to permanent injunctive relief, money damages and attorneys' fees. On November 5, 1998, Abbott filed suit in the United States District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement, unenforceability and invalidity of the 041 patent and the 587 patent. The Illinois court granted IMT's motion to transfer the aforementioned Illinois action to Massachusetts. In connection with our split-off from IMT in November 2001, we assumed all obligations and liabilities of IMT arising out of this matter. On September 30, 2003, we entered into a settlement agreement with Abbott pursuant to which Abbott agreed to release us from all claims of infringement of the Pregnancy Test Patents and we agreed to release Abbott from all claims asserted by us in the litigation and any claims for royalties due under an existing license agreement. The release does not affect claims asserted by the LLC or PBM against Abbott for infringement of certain patents owned by the LLC. We also agreed under the settlement that our subsidiary, Inverness Medical Switzerland GmbH, will pay royalties on the sale of its products which infringe the Pregnancy Test Patents. We and Abbott have executed binding stipulations of dismissal with prejudice.

We had several lawsuits pending against Pfizer, Inc. ("Pfizer") and certain other parties, including PBM, in the United States District Court for the District of New Jersey alleging, among other things, that Pfizer's e.p.t. brand pregnancy tests infringe patents owned by us. In early June 2003, we settled our litigation against Pfizer. In connection with the settlement, we entered into an agreement with Pfizer, through one of its wholly owned subsidiaries, pursuant to which we agreed to supply to Pfizer, and Pfizer agreed to purchase from us, its e.p.t. pregnancy tests beginning on June 6, 2004 and continuing until June 6, 2009. Pfizer also agreed to minimum purchase obligations. The agreement provides for Pfizer to make certain royalty payments to us prior to the commencement of the supply arrangement. Under the terms of the settlement, the parties have agreed to the entry of permanent injunctive relief and dismissal of certain claims and counterclaims. The settlement does not provide for any damage award.

Our claims against PBM, a co-defendant in one of the infringement suits against Pfizer and the subject of two other related infringement suits initiated by us, remain active. PBM has brought several counterclaims against us. The counterclaims allege, among other things, that we have breached various obligations to PBM arising out of a joint venture with us. We believe that we have strong defenses to all of the counterclaims and we are defending them vigorously. However, a final ruling against us could have a material adverse impact on our sales, operations or financial performance.

Because of the nature of our business, we may be subject at any particular time to consumer product claims or various other lawsuits arising in the ordinary course of our business, including employment matters, and expect that this will continue to be the case in the future. Such lawsuits generally seek damages, sometimes in substantial amounts, for personal injuries or other commercial or employment claims. An adverse ruling in such a lawsuit could have a material adverse effect on our sales, operations or financial performance. In addition, we aggressively defend our patent and other intellectual property rights. This often involves bringing infringement or other commercial claims against third parties. We have filed at least twenty law suits around the world against competitors whom we believe to be selling products that infringe our propriety rights, including suits against Acon Laboratories and Qualis. These suits can be expensive and results in counterclaims challenging the validity of our patents and other rights.

In October 2003, in connection with an informal inquiry received from the SEC's Division of Enforcement, we met with two representatives of the SEC's Boston office to respond to questions regarding Ernst & Young LLP's resignation and certain of the accounting and financial matters that we discussed with the SEC earlier this year after filing our Current Report on Form 8-K, event date April 11, 2003, to disclose Ernst & Young's resignation. We have responded fully to the staff's request for information. However, we cannot predict whether the SEC will seek additional information or what the outcome of the informal inquiry will be.

On August 27, 2003, we issued 692,506 shares of unregistered common stock to Erie Scientific Company, a wholly owned subsidiary of Apogent Technologies Inc., in connection with our acquisition of Applied Biotech. No underwriters or underwriting discounts or commissions were involved. There was no public offering in connection with our sale to Erie Scientific and we believe that the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, based on the private nature of the transaction, because we understand Erie Scientific to be an accredited investor and because it acquired the securities for investment purposes and not with a view to the distribution thereof. Under our agreement with Erie Scientific, we paid Erie Scientific 692,506 shares of our common stock and $13,400,000 in cash in exchange for all of the stock of Applied Biotech. We also agreed to subsequently register the resale of the shares of stock issued to Erie Scientific on a registration statement on Form S-3.

On September 30, 2003, we issued 1,550,933 shares of unregistered common stock to Abbott Laboratories in connection with our acquisition of the Abbott rapid diagnostics product lines. No underwriters or underwriting discounts or commissions were involved. There was no public offering in connection with our sale to Abbott Laboratories and we believe that the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, based on the private nature of the transaction, because we understand Abbott Laboratories to be an accredited investor and because it acquired the securities for investment purposes and not with a view to the distribution thereof. Under our agreement with Abbott Laboratories, we paid Abbott $55,000,000 in cash and issued 1,550,933 shares of our common stock in exchange for certain assets related to Abbott's Fact plus line of consumer diagnostic pregnancy tests and the Abbott TestPack, Abbott TestPack plus and Signify lines of professional rapid diagnostic products. We also agreed to subsequently register the resale of the shares of stock issued to Abbott Laboratories on a registration statement on Form S-3.

Exhibit No.		Description
*10.1—		Second Amended and Restated Credit Agreement dated as of September 30, 2003 by and among Inverness Medical Innovations, Inc., Wampole Laboratories, Inc., Inverness Medical (UK) Holdings Limited, the other Credit Parties Signatory thereto, the Lenders signatory thereto from time to time, General Electric Capital Corporation, as administrative agent for Lenders, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as co-syndication agent, UBS AG, Stamford Branch, as co-syndication agent, and GECC Capital Markets Group, Inc. and ML Capital, as co-lead arrangers
*31.1—		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2—		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1—		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

On July 9, 2003, we filed a Current Report on Form 8-K dated June 30, 2003 (Items 2 and 7) regarding the completion of our acquisition of Ostex International, Inc.

On August 1, 2003, we filed a Current Report on Form 8-K dated July 30, 2003 (Item 5) regarding our announcement to acquire Applied Biotech, Inc.

On August 1, 2003, we filed a Current Report on Form 8-K dated July 31, 2003 (Item 12) in order to furnish our press release dated July 31, 2003, entitled "Inverness Medical Innovations Announces Second Quarter Results."

On August 6, 2003, we filed Amendment No. 1 to the Current Report on Form 8-K dated July 31, 2003 (Item 12) in order to furnish a transcript of a conference call held on July 31, 2003 to discuss our second quarter results and to furnish a reconciliation of certain non-GAAP financial measures disclosed during the conference call.

On September 10, 2003, we filed a Current Report on Form 8-K dated August 27, 2003 (Items 2 and 7) regarding the completion of our acquisition of Applied Biotech, Inc.

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.

(Mark One)
ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003
OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

DELAWARE (State or other jurisdiction of incorporation or organization)		04-3565120 (I.R.S. Employer Identification No.)
51 SAWYER ROAD, SUITE 200 WALTHAM, MASSACHUSETTS 02453 (Address of principal executive offices)
(781) 647-3900 (Registrant's Telephone Number, Including Area Code)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2003			2002			2003			2002
Net product sales			$	69,278		$	52,162		$	195,887		$	139,141
License revenue				3,115			1,785			7,030			3,766

	Net revenue			72,393			53,947			202,917			142,907
Cost of sales				40,902			30,155			113,217			79,686

	Gross profit			31,491			23,792			89,700			63,221

Operating expenses:
	Research and development			6,413			3,597			17,055			10,539
	Sales and marketing			13,251			10,121			36,949			28,683
	General and administrative			7,637			6,103			24,013			19,760
	Charge related to asset impairment			—			—			—			12,682
	Stock-based compensation(1) (Note 5)			60			—			66			10,169

		Total operating expenses		27,361			19,821			78,083			81,833

	Operating income (loss)			4,130			3,971			11,617			(18,612	)
Interest expense, including amortization of discounts				(2,410	)		(1,449	)		(6,776	)		(8,230	)
Other income (expense), net				334			(710	)		6,440			7,813

	Income (loss) before income taxes and accounting change			2,054			1,812			11,281			(19,029	)
Provision for income taxes				392			671			2,019			1,827

	Income (loss) before accounting change			1,662			1,141			9,262			(20,856	)
Cumulative effect of a change in accounting principle				—			—			—			(12,148	)

	Net income (loss)		$	1,662		$	1,141		$	9,262		$	(33,004	)

Income (loss) available to common stockholders—basic (Note 6):
	Income (loss) before accounting change		$	1,519		$	(6,725	)	$	8,804		$	(32,524	)

	Net income (loss)		$	1,519		$	(6,725	)	$	8,804		$	(44,672	)

Income (loss) available to common stockholders—diluted (Note 6):
	Income (loss) before accounting change		$	1,519		$	(6,725	)	$	8,938		$	(32,524	)

	Net income (loss)		$	1,519		$	(6,725	)	$	8,938		$	(44,672	)

Income (loss) per common share—basic (Note 6):
	Income (loss) before accounting change		$	0.09		$	(0.65	)	$	0.60		$	(3.76	)

	Net income (loss)		$	0.09		$	(0.65	)	$	0.60		$	(5.16	)

Income (loss) per common share—diluted (Note 6):
	Income (loss) before accounting change		$	0.08		$	(0.65	)	$	0.53		$	(3.76	)

	Net income (loss)		$	0.08		$	(0.65	)	$	0.53		$	(5.16	)

Weighted average shares—basic				16,301			10,356			14,719			8,653

Weighted average shares—diluted				18,176			10,356			16,788			8,653

			September 30, 2003			December 31, 2002
ASSETS
Current assets:
	Cash and cash equivalents		$	24,837		$	30,668
	Accounts receivable, net of allowances of $7,253 at September 30, 2003 and $7,047 at December 31, 2002			47,762			37,283
	Inventory			49,523			37,155
	Deferred tax assets			2,137			2,137
	Prepaid expenses and other current assets			8,837			6,456

		Total current assets		133,096			113,699
Property, plant and equipment, net				58,277			46,029
Goodwill				227,574			108,915
Trademarks and trade name with indefinite lives				38,119			31,719
Core technology and patents, net				29,644			25,805
Other intangible assets, net				31,664			22,374
Deferred financing costs, net, and other assets				7,602			4,908
Deferred tax assets				5,943			4,297

		Total assets	$	531,919		$	357,746

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	6,048		$	17,200
	Current portion of capital lease obligations			462			642
	Accounts payable			29,781			27,495
	Accrued expenses and other current liabilities			40,014			40,382

		Total current liabilities		76,305			85,719

Long-term liabilities:
	Long-term debt			167,908			84,533
	Capital lease obligations			1,944			2,238
	Deferred tax liabilities			15,026			9,365
	Other liabilities			3,883			3,936

		Total long-term liabilities		188,761			100,072

Commitments and contingencies
Series A redeemable convertible preferred stock, $0.001 par value:
	Authorized—2,667 shares Issued—2,527 shares at September 30, 2003 and December 31, 2002 Outstanding—323 shares at September 30, 2003 and December 31, 2002			9,509			9,051

Stockholders' equity:
	Preferred stock, $0.001 par value:
		Authorized—2,333 shares, none issued		—			—
	Common stock, $0.001 par value:
		Authorized—50,000 shares Issued and outstanding—19,235 shares at September 30, 2003 and 14,907 shares at December 31, 2002		19			15
	Additional paid-in capital			335,012			251,457
	Notes receivable from stockholders			(14,691	)		(14,691	)
	Deferred compensation			—			(48	)
	Accumulated deficit			(68,916	)		(77,720	)
	Accumulated other comprehensive income			5,920			3,891

		Total stockholders' equity		257,344			162,904

		Total liabilities and stockholders' equity	$	531,919		$	357,746

			Nine Months Ended September 30,
			2003			2002
Cash Flows from Operating Activities:
Net income (loss)			$	9,262		$	(33,004	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Interest expense related to amortization of noncash original issue discount, noncash beneficial conversion feature and deferred financing costs			1,133			3,927
	Noncash (gain) loss related to interest rate swap agreement			(54	)		1,269
	Noncash stock-based compensation expense			66			10,169
	Noncash gain related to early extinguishment of debt			—			(9,600	)
	Noncash charge related to asset impairment and cumulative effect of a change in accounting principle			—			24,830
	Depreciation and amortization			10,930			7,110
	Deferred income taxes			371			—
	Other noncash items			(4	)		297
	Changes in assets and liabilities, net of acquisitions:
		Accounts receivable, net		(2,672	)		(4,641	)
		Inventory		(3,556	)		(1,779	)
		Prepaid expenses and other current assets		(2,937	)		2,271
		Accounts payable		353			6,667
		Accrued expenses and other current liabilities		(7,013	)		(5,253	)

	Net cash provided by operating activities			5,879			2,263

Cash Flows from Investing Activities:
Purchases of property, plant and equipment				(8,427	)		(3,683	)
Proceeds from sale of property, plant and equipment				151			267
Cash paid for purchase of certain assets from Abbott Laboratories				(55,570	)		—
Cash paid for purchase of Applied Biotech, Inc., net of cash acquired				(13,896	)		—
Cash paid for purchase of Ostex International, Inc., net of cash acquired				(3,806	)		—
Cash paid for purchase of the Wampole Division of MedPointe Inc.				(1,442	)		(71,500	)
Cash paid for purchase of IVC Industries, Inc., net of cash acquired				(424	)		(6,953	)
Cash paid for purchase of Unipath business				(418	)		(5,537	)
Cash paid for purchase of intellectual property license				(585	)		—
Increase in other assets				(44	)		(284	)

	Net cash used in investing activities			(84,461	)		(87,690	)

Cash Flows from Financing Activities:
Cash paid for financing costs			(3,772	)		(2,052	)
Proceeds from issuance of common stock, net of issuance costs			3,985			35,547
Proceeds from issuance of preferred stock, net of issuance costs			—			20,569
Net proceeds from revolving line of credit			18,524			2,040
Proceeds from borrowings under notes payable			58,643			35,000
Repayments of notes payable			(5,875	)		(43,045	)
Principal payments of capital lease obligations			(521	)		(329	)

	Net cash provided by financing activities		70,984			47,730

Foreign exchange effect on cash and cash equivalents			1,767			2,506

	Net decrease in cash and cash equivalents		(5,831	)		(35,191	)
	Cash and cash equivalents, beginning of period		30,668			52,024

	Cash and cash equivalents, end of period	$	24,837		$	16,833

				Nine Months Ended September 30,
				2003			2002
Supplemental Disclosure of Cash Flow Information:
	Interest paid			$	5,677		$	3,768

	Taxes paid			$	1,061		$	1,622

Supplemental Disclosure of Noncash Activities:
	On September 30, 2003, the Company acquired certain assets from Abbott Laboratories —
		Property, plant and equipment		$	4,032		$	—
		Intangible assets			89,038			—
		Cash paid for purchase of certain assets from Abbott Laboratories			(55,570	)		—

		Fair value of common stock issued		$	37,500		$	—

	On August 27, 2003, the Company acquired Applied Biotech, Inc. —
		Accounts receivable		$	6,367		$	—
		Inventory			7,056			—
		Property, plant and equipment			5,352			—
		Intangible assets			14,974			—
		Other assets			2,121			—
		Accounts payable and accrued expenses			(4,616	)		—
		Deferred tax liabilities			(3,090	)		—
		Cash paid for purchase of Applied Biotech, Inc., net of cash acquired			(13,896	)		—

		Fair value of common stock issued		$	14,268		$	—

	On June 30, 2003, the Company acquired Ostex International, Inc. —
		Accounts receivable		$	1,203		$	—
		Inventory			928			—
		Property, plant and equipment			584			—
		Intangible assets			33,560			—
		Other assets			178			—
		Accounts payable and accrued expenses			(1,964	)		—
		Deferred tax liabilities			(2,519	)		—
		Long-term debt			(2,875	)		—
		Cash paid for purchase of Ostex International, Inc., net of cash acquired			(3,806	)		—

				$	25,289		$	—

		Fair value of common stock issued		$	23,537		$	—
		Fair value of assumed and issued fully-vested stock options and warrants			1,752			—

			Total fair value of equity instruments issued	$	25,289		$	—

	On September 20, 2002, the Company acquired the Wampole Division from MedPointe Inc. —
		Accounts receivable		$	—		$	8,737
		Inventory			—			4,924
		Property, plant and equipment			—			2,061
		Intangible assets			—			57,070
		Other assets			—			967
		Accounts payable and accrued expenses			1,442			(2,259	)
		Cash paid for purchase of the Wampole Division			(1,442	)		(71,500	)

				$	—		$	—

	On March 19, 2002, the Company acquired IVC Industries, Inc. —
		Accounts receivable		$	—		$	5,205
		Inventory			—			9,832
		Property, plant and equipment			—			23,016
		Other assets			—			1,755
		Accounts payable and accrued expenses			—			(13,076	)
		Other accrued acquisition costs			424			(1,121	)
		Long-term debt			—			(17,359	)
		Cash paid for purchase of IVC Industries, Inc., net of cash acquired			(424	)		(6,953	)

			Fair value of assumed and issued fully-vested stock options	$	—		$	1,299

Dividends, interest and amortization of beneficial conversion feature related to preferred stock				$	458		$	1,668

Conversion of preferred stock to common stock				$	—		$	67,882

	Consumer Products			Professional Diagnostic Products		Corporate and Other			Total
*Three Months Ended September 30, 2003*
Net revenue from external customers	$	50,222		$	22,171	$	—		$	72,393
Income (loss) before income taxes and accounting change		3,218			2,337		(3,501	)		2,054
*Three Months Ended September 30, 2002*
Net revenue from external customers		47,444			6,503		—			53,947
Income (loss) before income taxes and accounting change		4,070			345		(2,603	)		1,812
*Nine Months Ended September 30, 2003*
Net revenue from external customers		147,086			55,831		—			202,917
Income (loss) before income taxes and accounting change		13,054			5,542		(7,315	)		11,281
*Nine Months Ended September 30, 2002*
Net revenue from external customers		125,645			17,262		—			142,907
Income (loss) before income taxes and accounting change		(9,407	)		775		(10,397	)		(19,029	)
Assets at September 30, 2003		291,001			228,792		12,126			531,919
Assets at December 31, 2002		241,977			107,698		8,071			357,746

	Payments Due by Period
Contractual Obligations	Fourth Quarter of 2003		2004-2005		2006-2007		2008		Thereafter		Total
	(in thousands)
Long-term debt obligations(1)	$	881	$	50,876	$	26,848	$	96,245	$	—	$	174,850
Capital lease obligations		175		1,196		1,170		341		—		2,882
Operating lease obligations		1,543		9,511		7,174		3,200		33,458		54,886
Purchase obligations(2)		349		2,611		—		—		—		2,960

Total	$	2,948	$	64,194	$	35,192	$	99,786	$	33,458	$	235,578

		INVERNESS MEDICAL INNOVATIONS, INC.
Date: November 13, 2003		/s/ CHRISTOPHER J. LINDOP Christopher J. Lindop Chief Financial Officer and an authorized officer