BIOSITE INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(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

Commission file number 000-21873

BIOSITE INCORPORATED
(Exact name of Registrant as specified in its charter)

Delaware		33-0288606
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11030 Roselle Street San Diego, California 92121
(Address of principal executive offices)

Registrant’s telephone number, including area code: (858) 455-4808

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

The number of shares of the Registrant’s Common Stock, $0.01 par value, outstanding at
November 3, 2003 was 15,567,008.

BIOSITE INCORPORATED

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Balance Sheets

Condensed Statements of Income (Unaudited)

Condensed Statements of Cash Flows (Unaudited)

Notes to Condensed Financial Statements (Unaudited)

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

Biosite®, Triage® and New Dimensions in Diagnosis® are registered trademarks of Biosite Incorporated. Cardio ProfilER™ and the Company’s logos are trademarks of Biosite Incorporated.

Part I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

BIOSITE INCORPORATED

Condensed Balance Sheets

(in thousands, except par value)

	September 30, 2003		December 31, 2002
	(Unaudited)		(Note)
Assets
Current assets:
Cash and cash equivalents	$	33,504	$	19,113
Marketable securities, available-for-sale	31,138		51,783
Accounts receivable, net	12,445		10,996
Inventories, net	28,347		12,295
Other current assets	6,205		4,574
Total current assets	111,639		98,761
Property, plant and equipment, net	58,462		19,864
Patents and license rights, net	6,951		7,899
Other assets	3,836		4,730
	$	180,888	$	131,254

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,276	$	3,789
Accrued employee expenses	7,266		6,992
Income taxes and other current liabilities	3,586		5,055
Current portion of long-term obligations	4,155		2,224
Total current liabilities	21,283		18,060
Long-term obligations	13,854		5,253

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued and outstanding at September 30, 2003 and December 31, 2002	—		—
Common stock, $.01 par value, 40,000 shares authorized; 15,562 and 14,895 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively	156		149
Additional paid-in capital	97,981		79,544
Unrealized net gain on marketable securities, net of related tax effect	140		385
Retained earnings	47,474		27,863
Total stockholders’ equity	145,751		107,941
	$	180,888	$	131,254

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

BIOSITE INCORPORATED

Condensed Statements of Income (Unaudited)

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Revenues:
Product sales	$	41,412		$	28,103		$	124,283		$	69,014
Contract revenue	1,358			823			3,126			3,515
Total revenues	42,770			28,926			127,409			72,529

Operating expenses:
Cost of product sales	14,493			8,728			41,965			21,482
Selling, general and administrative	12,435			8,975			37,438			22,878
Research and development	6,029			4,588			17,499			11,946
License and patent disputes	—			1,228			—			4,043
Total operating expenses	32,957			23,519			96,902			60,349

Operating income	9,813			5,407			30,507			12,180

Interest and other income, net	321			450			1,162			1,471

Income before provision for income taxes	10,134			5,857			31,669			13,651
Provision for income taxes	(3,691		)	(2,189		)	(12,058		)	(5,225		)

Net income	$	6,443		$	3,668		$	19,611		$	8,426

Net income per share:
• Basic	$	0.42		$	0.25		$	1.29		$	0.57
• Diluted	$	0.38		$	0.24		$	1.18		$	0.55

Shares used in calculating per share amounts:
• Basic	15,501			14,769			15,200			14,713
• Diluted	16,964			15,464			16,591			15,427

See accompanying notes.

BIOSITE INCORPORATED

Condensed Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2003			2002
OPERATING ACTIVITIES
Net income	$	19,611		$	8,426
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,953			3,703
Changes in operating assets and liabilities:
Accounts receivable	(1,449		)	(1,774		)
Inventory	(16,052		)	(2,891		)
Other current assets	313			(195		)
Income taxes	3,116			3,085
Accounts payable	2,487			2,042
Other current liabilities	956			4,894
Net cash provided by operating activities	15,935			17,290

INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities	39,317			17,642
Purchase of marketable securities	(19,080		)	(28,440		)
Purchase of property, equipment and leasehold improvements	(43,481		)	(6,287		)
Patents, license rights, deposits and other assets	(213		)	(999		)
Net cash used in investing activities	(23,457		)	(18,084		)

FINANCING ACTIVITIES
Proceeds from issuance of financing obligations	11,881			2,824
Principal payments under financing obligations	(1,349		)	(1,715		)
Proceeds from issuance of stock under stock plans, net	11,381			1,583
Net cash provided by financing activities	21,913			2,692

Increase in cash and cash equivalents	14,391			1,898

Cash and cash equivalents at beginning of period	19,113			13,011
Cash and cash equivalents at end of period	$	33,504		$	14,909

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	429		$	338
Income taxes paid	$	8,986		$	2,140
Income tax benefit of disqualifying dispositions of stock	$	7,047		$	234

See accompanying notes.

BIOSITE INCORPORATED

Notes to Condensed Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. We have experienced significant quarterly fluctuations in our operating results and we expect that these fluctuations in sales, expenses and operating results may continue.

The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to our audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2002.

Certain amounts in the financial statements for the three and nine months ended September 30, 2002 have been reclassified to conform to the presentation of the financial statements for the three and nine months ended September 30, 2003.

2. EARNINGS PER SHARE

Earnings per share, EPS, is computed in accordance with the Financial Accounting Standards Board’s Statement, or FAS, No. 128, Earnings Per Share. FAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents that may be issuable upon exercise of outstanding common stock options.

Shares used in calculating basic and diluted earnings per share were as follows (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2003	2002	2003	2002
Weighted average common shares outstanding – Shares used in calculating per share amounts - Basic	15,501	14,769	15,200	14,713
Net effect of dilutive common share equivalents using the treasury stock method	1,463	695	1,391	714
Shares used in calculating per share amounts – Diluted	16,964	15,464	16,591	15,427

3. EMPLOYEE STOCK PLANS

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations in accounting for our stock-based compensation. Stock options issued to non-employees are recorded at their fair value as determined in accordance with FAS No. 123, Accounting for Stock-based Compensation, and Emerging Issues Task Force, or EITF, Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling, Goods or Services, and are periodically re-measured as the stock options vest.

Adjusted pro forma information regarding net income is required by FAS No. 123, and has been determined as if we had accounted for our employee stock-based compensation under the fair value method of that Statement. The

weighted average fair value of options granted during the three months ended September 30, 2003 and 2002 were $35.67 and $17.73, respectively. The weighted average fair value of options granted during the nine months ended September 30, 2003 and 2002 were $31.85 and $17.56, respectively. The fair value for these options was estimated at the date of grant using the Black-Scholes method for option pricing with the following weighted-average assumptions for the three and nine months ended September 30, 2003 and 2002:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002
Risk-free interest rate	3.05	%	3.02	%	2.39	%	3.02	%
Volatility	85	%	87	%	86	%	87	%
Dividend yield	0	%	0	%	0	%	0	%
Expected life of options	6.0 years		5.9 years		6.1 years		5.9 years

For purposes of adjusted pro forma disclosures, the estimated fair value of the stock-based compensation is amortized to expense over the options’ vesting period. Our adjusted pro forma information is as follows (in thousands, except per share data):

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002

Net income, as reported	$	6,443		$	3,668		$	19,611		$	8,426
Pro forma FAS 123 compensation expense (net of tax)	(4,857		)	(3,053		)	(11,795		)	(8,469		)
Adjusted pro forma net income (loss)	$	1,586		$	615		$	7,816		$	(43	)
Adjusted pro forma basic net income (loss) per share	$	0.10		$	0.04		$	0.51		$	(0.00	)
Adjusted pro forma diluted net income (loss) per share	$	0.10		$	0.04		$	0.47		$	(0.00	)

The pro forma effects on net income for the three and nine months ended September 30, 2003 and 2002 are not likely to be representative of the effects on reported net income or loss in future quarters or years. In management’s opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Changes in such subjective input assumptions can materially affect the fair value estimate of employee stock options.

4. BALANCE SHEET INFORMATION

Net inventories consist of the following:

	September 30, 2003		December 31, 2002
	(in thousands)

Raw materials	$	10,012	$	4,474
Work-in-process	12,775		6,027
Finished goods	5,560		1,794
	$	28,347	$	12,295

5. NEW CORPORATE COMPLEX

In June 2003, we completed the purchase of 17.7 usable acres of land, which will serve as the location for our new corporate complex designed to consolidate our administrative, manufacturing, marketing and research and development functions. The purchase price of $19.1 million is included in Property, Plant and Equipment on the Balance Sheet at September 30, 2003. In October 2003, we completed the second phase of the land purchase, closing escrow on an additional 8.4 usable acres of adjacent land for $9.1 million.

6. COMPREHENSIVE INCOME

FAS No. 130, Comprehensive Income, establishes rules for the reporting and display of comprehensive income and its components. FAS No. 130 requires the change in net unrealized gains or losses on marketable securities to be included in comprehensive income. As adjusted, our comprehensive income is as follows (in thousands):

	Three months ended September 30,					Nine months ended September 30,
	2003			2002		2003			2002

Net income	$	6,443		$	3,668	$	19,611		$	8,426
Change in unrealized net gain (loss) on marketable securities, net of tax	(113		)	130		(245		)	47
Comprehensive income	$	6,330		$	3,798	$	19,366		$	8,473

7. RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. We are required to adopt this provision for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s results of operations and financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources to the entity to support its activities. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our results of operations or financial condition.

In April 2003, FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued. FAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. FAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No. 149 is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain pre-existing contracts. The adoption of FAS No. 149 did not have a material impact on our results of operations or financial condition.

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

The matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements that involve risks and uncertainties, including the extent to which our products and products under development are successfully developed and gain market acceptance; the impact of competition, including products competitive with our Triage® BNP Test, from diagnostic companies with greater capital and resources; costs, risks and uncertainties in transitioning from using distributors for the sale and distribution of our products in certain international countries to a direct sales and distribution model; effectiveness in marketing our products in the physician office market; implementation of automated and semi-automated manufacturing methods; manufacturing inefficiencies, capacity constraints, backlog or delays; regulatory changes, uncertainties or delays; changing market conditions and the other risks and uncertainties described in “Risk Factors” below and throughout our Annual Report on Form 10-K for the year ended December 31, 2002. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Form 10-Q. We disclaim any intent or obligation to update these forward-looking statements.

Overview

Founded in 1988, Biosite Incorporated is a leading provider of novel, rapid medical diagnostics that improve a physician’s ability to diagnose critical diseases and conditions. We believe that improvements in diagnosis of high-acuity diseases and conditions can positively impact medical decisions, improve the quality of patient care and contribute to cost-effective medical treatment. We focus on large, poorly met medical needs for clinical tests that diagnose acute symptoms associated with serious health problems.

Our products are principally sold to hospitals, which number approximately 5,000 in the United States. To market our products we utilize a clinically astute direct sales team that focuses its efforts on larger centers with more than 200 beds. The Fisher HealthCare Division of the Fisher Scientific Company, or Fisher, distributes all of our products in U.S. hospitals and supports our direct sales force, particularly in smaller hospitals. In July 2003, we signed a two-year distribution agreement with Fisher that extends the existing distribution relationship through December 31, 2005. Sales to Fisher represented 90% of our product sales in the first nine months of 2003 and 87% of our product sales for the full year 2002. In May 2003, we entered into a distributor relationship with PSS World Medical, Inc. to market our products to physician office practices. PSS World Medical’s physician business, Physician Sales & Services, or PSS, distributes our products to physician office practices in the United States. A direct field-based network of clinically experienced individuals supports the sales effort by providing pre- and post- sale education and training. In international markets, we primarily utilize a network of country-specific and regional distributors, as well as utilize a direct sales force in certain countries. During 2003, we initiated a direct sales and distribution effort in France and Germany and, over the next few years, we expect to transition the distribution of our products in some additional European countries to a direct sales and distribution basis.

Product sales for the first nine months of 2003 grew 80% over the same period of 2002. This growth resulted largely from sales of our Triage BNP Test, which aids in the diagnosis of congestive heart failure, or CHF. Sales of our Triage BNP Test represented 60% of our product sales in the first nine months of 2003, compared to 32% for the same period of 2002. The test, which was launched domestically in 2001, was the first blood test available to aid in the detection of CHF and has benefited from a semi-exclusive position in the market. We believe that the combination of innovation, medical relevance and semi-exclusivity has contributed to the commercial success of the Triage BNP Test and we seek to replicate this model for future products that we hope to commercialize.

The Triage BNP Test is currently one of three FDA-approved tests used as an aid in the diagnosis of congestive heart failure. Bayer Diagnostics, or Bayer, received FDA clearance to market its competitive product in June 2003 and Roche Diagnostics received FDA clearance in November 2002. Shionogi & Co., Ltd. sells a BNP radioimmunoassay product for research purposes only in the United States. Abbott Laboratories has certain diagnostic rights to the BNP protein and we anticipate competition from this company and others in the future. During the third quarter of 2003, we experienced significant competition, primarily from Bayer, resulting in a loss of customers desiring to utilize an automated immunoassay system to perform BNP testing. Bayer and other competitors may succeed in developing or marketing products that are more effective or commercially attractive

than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully with these and other competitors in the future. Scios, Inc., the licensor of the BNP technology and patents, was acquired by Johnson & Johnson in April 2003.

In 1999, we launched Biosite Discovery, a program dedicated to the validation of targets with novel therapeutic and/or diagnostic applications. Through Biosite Discovery, we leverage our expertise in phage display antibody development to access protein targets via internal research, licensing or collaborations with clinical institutions or commercial companies. Once promising targets are selected, we develop immunoassays for these targets and then conduct high throughput screening using patient samples procured from clinical collaborators, often leading medical institutions. This process, which we refer to as marker mining, enables us to determine diagnostic utility and explore interrelations among multiple markers. If the diagnostic utility of a marker or panel of markers is established, the marker or panel is then assessed for commercialization potential, with high-value markers or panels added to our product development pipeline.

We have reported consecutive quarterly operating profits since the third quarter of 1999, after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts. We may not be able to maintain profitability in the future. Some of the risks and uncertainties associated with our business and future operating results are discussed in the section entitled “Risk Factors” below.

Recent Developments

Beckman Coulter BNP Test

In June 2003, we entered into an agreement with Beckman Coulter, Inc., or Beckman, under which Beckman would manufacture and we would sell a b-type natriuretic peptide, or BNP, test for use on Beckman’s immunoassay systems. In October 2003, we filed a 510(k) submission with the United States Food and Drug Administration, or FDA, seeking clearance to market the Triage BNP Test for use on Beckman immunoassay systems. Subject to obtaining necessary regulatory approvals, we anticipate that the product will be available in the first quarter of 2004. The BNP test would be sold worldwide through a combination of Biosite’s direct and distributor sales forces.

New Corporate Complex

In June 2003, we completed the purchase of 17.7 usable acres of land, which will serve as the location for our new corporate complex designed to consolidate our administrative, manufacturing, marketing and research and development functions. The purchase price was $19.1 million. In October 2003, we completed the second phase of the land purchase, closing escrow on an additional 8.4 usable acres of adjacent land for $9.1 million. Construction of the complex commenced in October 2003. We currently plan to finance the construction of the complex using a combination of debt financing and available cash balances.

Fisher Distribution Agreement

In July 2003, we extended our distribution relationship with Fisher, signing a distribution agreement that maintains our distribution relationship with Fisher through the end of 2005. The agreement provides Fisher with the right to continue distribution of our products into the U.S. hospital market. Additionally, Fisher will distribute our BNP test for use on Beckman’s immunoassay systems, subject to our obtaining necessary regulatory approvals.

2002 Nonqualified Stock Incentive Plan

In October 2003, our Board of Directors reserved an additional 500,000 shares of Common Stock for issuance under the Biosite Incorporated 2002 Nonqualified Stock Incentive Plan solely for use as inducement awards in connection with the recruitment of non-officer employees.

Critical Accounting Policies Involving Management Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements,

management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Our senior management has discussed the development and selection of the critical accounting estimates, and related disclosures, with the Audit Committee of our Board of Directors.

Revenue Recognition. We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment. Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which we have produced antibodies for as long as the targets remain in development by our collaborators, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration. Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless we have no further continuing performance obligations related to the fees. Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance. Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement. Contract revenues that are based on the performance of and collection by our collaborators or their partners are deferred until such performance is complete and collection is probable. We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

The Securities and Exchange Commission’s Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Inventories and Related Allowance for Obsolete and Excess Inventory. Net inventories are valued at the lower of the first-in, first-out, or FIFO, cost or market value and have been reduced by an allowance for excess and obsolete inventories. We utilize a standard cost system to track our inventories on a part-by-part, full absorption cost basis. Adjustments are made to the standard labor and standard overhead costs to approximate actual labor and actual overhead costs on a FIFO cost basis. The estimated allowance for excess and obsolete inventories is based on management’s review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

Intangible and Other Long-Lived Assets. At September 30, 2003, we had approximately $69.2 million of long-lived assets, including $19.1 million of land, $8.3 million of leasehold improvements, $22.5 million of equipment and $7.0 million of capitalized license rights. Leasehold improvements, equipment, intangible assets and certain other long-lived assets are amortized over the lesser of their useful lives or the remaining lease term. We lease nine buildings with leases that expire between December 2004 and August 2005. Useful lives are based on management’s estimates of the period that the assets will generate revenue directly or indirectly. License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license. The estimated revenues used as the base by which we amortize the license rights only includes estimated sales for products we are currently selling and does not include any estimated product sales expected to be realized during the license amortization term from products still in development today. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Results of Operations

Product Sales. Product sales by product family were as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
Product Family	2003		2002		2003		2002

Cardiovascular products:
Triage BNP Test products	$	24,331	$	9,787	$	74,314	$	22,053
Triage Cardiac Panel and Cardio ProfilER products	5,060		5,923		15,445		13,543
Triage MeterPlus products	858		1,174		2,657		2,638

Other products:
Triage Drugs of Abuse and TOX Drug Screen products	9,971		10,061		28,188		27,356
Triage Microbiology products	1,192		1,158		3,679		3,424
Total Product Sales	$	41,412	$	28,103	$	124,283	$	69,014

Product Sales. Product sales for the three and nine months ended September 30, 2003 were $41.4 million and $124.3 million, respectively, representing increases of 47% and 80%, respectively, compared to $28.1 million and $69.0 million for the same periods of 2002. The increases in total product sales, as compared to the same periods in 2002, were primarily attributable to the growth in sales of our Triage BNP Test, one of our cardiovascular diagnostic products, of $14.5 million and $52.3 million, for the three and nine months ended September 30, 2003, respectively.

Product sales of our cardiovascular products, consisting of our Triage Cardiac Panel, Triage BNP Test, Triage Cardio ProfilER and Triage MeterPlus, totaled $30.2 million and $92.4 million, respectively, for the three and nine months ended September 30, 2003. This represented increases of 79% and 142%, respectively, as compared to $16.9 million and $38.2 million, respectively, for the same periods of 2002. The cardiovascular product sales growth was primarily due to growth in sales volume of our Triage BNP Test.

Product sales of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, and Triage Microbiology products (i.e., Triage C. difficile Panel and Triage Parasite Panel) were $11.2 million and $31.9 million, respectively, for the three and nine months ended September 30, 2003, as compared to $11.2 million and $30.8 million for the same periods of 2002. The increase in sales of these products for the nine months ended September 30, 2003 as compared to the same period in 2002 was primarily due to an increase in sales volume of our Triage Drugs of Abuse Panel and Triage TOX Drug Screen. We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market. The Triage TOX Drug Screen was launched in the United States in February 2002.

Contract Revenues. Contract revenues consist of revenues associated with our research and development and licensing arrangements, including license fees, milestone revenues, royalties, research funding and antibody fees. Contract revenues for the three and nine months ended September 30, 2003 were $1.4 million and $3.1 million, respectively, as compared to $823,000 and $3.5 million, respectively, for the same periods of 2002. Contract revenues recognized during the three and nine months ended September 30, 2003 and 2002 consisted primarily of research funding. We recognized $750,000 of research funding from our alliance with Medarex during each of the first three quarters of both 2003 and 2002. Other contract revenues recognized during those periods of 2003 and 2002 included antibody fees, milestone payments and license fees. The increase in contract revenues for the three months ended September 30, 2003 compared to the same period of 2002 was due primarily to the receipt of a $400,000 milestone payment related to a research and development contract during the third quarter of 2003. The decrease in contract revenues for the nine months ended September 30, 2003 compared to the same period of 2002 was due primarily to the grant of a non-exclusive license to a company for certain proprietary technology during the second quarter of 2002. Biosite Discovery activities are performed and its costs are incurred by certain of our research and development teams. These Biosite Discovery research and development resources concurrently focus on programs for our partners, which generated our contract revenue, and on internal research and development

programs. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.4 million and $4.2 million for the three and nine months ended September 30, 2003, respectively, compared to $1.3 million and $3.9 million, respectively, for the same periods of 2002. These costs are included in research and development expenses.

Cost of Sales and Gross Profit From Product Sales. Gross profit from product sales for the three and nine months ended September 30, 2003 were $26.9 million and $82.3 million, respectively, representing increases of 39% and 73%, respectively, compared to $19.4 million and $47.5 million for the same periods of 2002. Gross profits increased primarily due to an overall increase in product sales. The overall gross margins for the three and nine months ended September 30, 2003 were 65% and 66%, respectively, compared to 69% for the same periods of 2002. During 2003, in response to the rapid product sales growth trend for the Triage BNP Test, we made significant investments to expand our production capacity through the addition of production shifts, facility improvements, and implementation of automated and semi-automated equipment, in order to ensure our ability to satisfy anticipated customer demands and maintain customer satisfaction. As a result of changes in sales expectations for the third and fourth quarters of 2003, we scaled back our production during the third quarter. Consequently, our increased manufacturing costs were being spread over a smaller than anticipated sales volume, resulting in lower gross margins than the same period of 2002. We do not expect to operate at full production capacity until mid-2004. Additionally, the decreases in the overall gross margin resulted from the changing mix of our sales of products, which have different gross margins and from inefficiencies experienced as we increased our manufacturing capacity. Our cardiovascular products have lower gross margins than our Triage Drugs of Abuse Panel. Sales of our cardiovascular products represented 73% and 74%, respectively, of our product sales for the three and nine months ended September 30, 2003, compared to 60% and 55% for the same periods in 2002.

Although our gross profits may continue to grow, we expect that our overall gross margins may continue to decrease as a result of competition from diagnostic companies with greater financial capital and resources, competitive pricing pressures and the changing mix of sales of products with different gross margins. Our cardiovascular products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel due to the differences in the net sales prices of the products and as production efficiency issues are addressed.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses for the three and nine months ended September 30, 2003 were $12.4 million and $37.4 million, respectively, representing increases of 39% and 64%, respectively, compared to $9.0 million and $22.9 million for the same periods of 2002. The increases in SG&A expenses were primarily associated with the addition of sales, marketing, clinical education and technical service resources, expanded sales activities related to our broader product lines, additional marketing activities relating to new products, increased administrative resources and costs to support our expanded operations and higher performance-based compensation, such as sales commissions and bonuses based on financial performance.

We expect SG&A expenses in 2003 to continue to be higher than in 2002, as we have increased our worldwide sales, marketing, clinical education and technical service resources. A significant portion of the 2002 increase in sales and field support resources occurred during the latter half of the year and is expected to contribute to the growth in 2003. We also expect to expand our overall operations, including sales and marketing program activities for our new products and administrative support functions and infrastructure. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products.

Research and Development Expenses. Research and development, or R&D, expenses for the three and nine months ended September 30, 2003 were $6.0 million and $17.5 million, respectively, representing increases of 31% and 47%, respectively, compared to $4.6 million and $11.9 million for the same periods of 2002. The increases in R&D expenses for the three and nine months ended September 30, 2003 compared to the same periods of 2002 were primarily associated with increased employee expenses and supplies used in our R&D activities. During the three and nine months ended September 30, 2003 and 2002, our research and development resources were focused primarily on product development for potential new diagnostics for critical health conditions such as stroke, dyspnea, acute coronary syndrome and sepsis, the development of a BNP test for use on the Beckman immunoassay systems, the development of potential improvements to our existing products and manufacturing processes, and research activities associated with Biosite Discovery. Expenses related to the performance of our obligations associated with earning our contract revenues were incurred by our research and development group, primarily Biosite Discovery.

We expect R&D expenses in 2003 to continue to be higher than in 2002. The increased expenditures will relate primarily to:

• product development efforts, including the development of a BNP test for use on Beckman immunoassay systems, and the development of potential diagnostic products for stroke, dyspnea, acute coronary syndrome and sepsis;

• clinical studies, including studies associated with potential diagnostic products for stroke and ones related to the exploration and validation of other potential uses for our Triage BNP Test;

• scale-up for potential new products;

• Biosite Discovery activities; and

• performance-based compensation resulting from the Company’s and employees’ performance versus its beginning of the year goals.

The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as the timing and progress of our R&D efforts.

License and Patent Disputes. Expenses associated with license and patent disputes incurred during the three and nine months ended September 30, 2002 totaled $1.2 million and $4.0 million, respectively. The expenses consisted primarily of legal costs related to our litigation with XOMA. In September 2002, we announced that we resolved all outstanding disputes regarding patent and licensing issues with XOMA so as to permit each the freedom to operate its business.

Interest and Other Income, net. Interest and other income, net was $321,000 and $1.2 million, respectively, for the three and nine months ended September 30, 2003, compared to $450,000 and $1.5 million for the same periods of 2002. The decreases for the three and nine months ended September 30, 2003, compared to the same periods of 2002, were primarily due to lower interest income from our cash equivalents and marketable securities resulting from an overall decline in interest rates. We may experience lower interest income in future periods due to lower average cash equivalents and marketable securities balances and lower overall interest rates than prior periods.

Provision for Income Taxes. As a result of the estimated pre-tax income and the estimated tax credits to be generated in 2003, we recorded a provision for income taxes of $12.1 million for the first nine months of 2003. For the same period in 2002, we recorded a provision for income taxes of $5.2 million. We will continue to assess the likelihood of realization of our tax credits and other net deferred tax assets. If future events occur that do not make the realization of such assets more likely than not, a valuation allowance will be established against all or a portion of the net deferred tax assets.

Liquidity and Capital Resources

We have financed our operations through cash from operations, private and public placements of equity securities, debt and capital lease financing, cash received under collaborative agreements and interest income. As of September 30, 2003, we had cash, cash equivalents and marketable securities of $64.6 million compared to $70.9 million as of December 31, 2002.

The decrease in cash, cash equivalents and marketable securities during the first nine months of 2003 was largely attributable to the use of $18.4 million of cash for the first of a two part escrow closing to purchase land to be used for our new corporate complex, designed to consolidate administrative, manufacturing, marketing and research and development functions. A previously paid escrow deposit of $678,000 was applied to the purchase price. Other significant uses of cash include expenditures for leasehold improvements and capital equipment of $25.1 million, primarily for the expansion of our production capacity. Sources of cash during the first nine months of 2003 included cash generated from operating activities of $15.9 million, proceeds from the issuance of common stock under our stock plans of $11.4 million and proceeds from equipment financing of $11.9 million. The primary contributor to cash generated from operating activities was our net income for the nine months ended September 30, 2003 of $19.6 million. Cash generated from operating activities also included increases in current liabilities totaling approximately $3.4 million and non-cash expenses such as depreciation and amortization of $6.9 million, offset by increases in accounts receivable of $1.4 million and inventory of $16.1 million.

The increase in cash, cash equivalents and marketable securities during the first nine months of 2002 was largely attributable to cash generated from operating activities of $17.3 million. The cash generated from operating

activities included increases in income taxes payable, account payable and accrued liabilities totaling approximately $10.0 million and non-cash expenses such as depreciation and amortization of $3.7 million offset by increases in accounts receivable of $1.8 million and inventory of $2.9 million. Other sources of cash included the receipt of $2.8 million in proceeds from equipment financing and proceeds from the issuance of stock under our stock plans of $1.6 million. Significant uses of cash during the first nine months of 2002 included expenditures for leasehold improvements and capital equipment of $6.3 million and principal payments under equipment financing debt arrangements of $1.7 million.

Our primary short-term needs for capital, which are subject to change, are for the payment related to the second closing of escrow to purchase land to construct our new corporate facility, continued expenditures related to the construction of our new corporate facility, support of our commercialization efforts related to our products, including expansion of our direct sales force and field support resources, establishing direct sales forces and infrastructure in certain international countries, improvements in our manufacturing capacity and efficiency, facility expansion, new product development, clinical trials, purchase of finished inventory, components and supplies, and the continued advancement of research and development efforts. We executed agreements to license technologies patented by others that call for milestone payments and future royalties based on product sales utilizing the licensed technologies. We may enter into additional licensing agreements that may include up-front and annual cash payments, milestone payments and future royalties based on product sales utilizing the licensed technologies. We utilized and may continue to utilize credit arrangements with financial institutions to finance the purchase of capital equipment. Additionally, we may utilize cash generated from operating activities, if any, to meet our capital requirements.

We are also addressing our future facilities expansion needs. In June 2003, we completed the first of a two-part escrow closing to purchase land for the construction and relocation of our new corporate complex. In the first escrow closing, we purchased 17.7 usable acres for approximately $19.1 million. In October 2003, we completed the final part of the two-part escrow closing, purchasing an additional 8.4 usable acres of adjacent land for $9.1 million. We are pursuing financing for a portion of the land purchase price and the subsequent building construction costs. We may not be able to obtain financing on commercially reasonable terms or at all. The new facility will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase of construction commenced in October 2003 and will provide us with approximately 350,000 square feet of space. The total land and construction cost of the first phase is estimated to be approximately $95 million. We expect the first phase of construction to be completed in the first quarter of 2005 and do not anticipate expanding our operations to the new facility prior to then. We currently plan to finance the construction of the complex using a combination of debt financing and available cash balances.. Expanding into a new facility has, and will continue to, result in both cash expenditures, for the purchase of the land and construction costs, that would be partially reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs. We believe that the occupancy and financing costs of the new facility should impact our net income and earnings per share more favorably than other facilities expansion options such as renewing existing leases and leasing additional space adjacent to our current corporate headquarters.

We believe that our available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy our funding needs for at least the next 24 months, except for the potential funding requirement of a portion of the cost of our facility expansion plan.

RISK FACTORS

This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2002 and in our other filings with the SEC. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occur, our business could be harmed substantially.

We have only a limited history of profitability and we may not maintain profitability. In addition, our quarterly and annual results may fluctuate.

We have reported consecutive quarterly operating profits since the third quarter of 1999 after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future. We may not be able to maintain profitability in the future. We believe that our future operating results may be subject to quarterly and annual fluctuations due to a variety of factors, including:

• competition, including products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources;

• regulatory approvals, market acceptance and sales execution of current or new products, including a BNP test for use on the Beckman immunoassay systems;

• our ability to market and sell products within the physician office market;

• changes in the mix of products sold;

• seasonal or unanticipated changes in customer demand;

• the timing and variability of significant orders;

• effectiveness in transitioning and operating a direct sales distribution model in certain international countries and expenses associated with these transitions;

• manufacturing inefficiencies, capacity constraints, backlog or delays;

• implementation of automated and semi-automated manufacturing methods;

• competitive pressures on average selling prices of our products;

• regulatory changes, uncertainties or delays;

• changes in reimbursement policies;

• costs, timing and effectiveness of further expansion of our sales force and field support resources

• whether and when new products are successfully developed and introduced by us;

• research and development efforts, including clinical trials and new product scale-up activities;

• ability to execute, enforce, maintain and attain milestones under license and collaborative agreements necessary to earn contract revenues;

• product recalls;

• shipment problems;

• enforcement, defense and resolution of license, patent or other contract disputes; and

• costs and timing associated with business development activities, including potential licensing of technologies.

Our operating results would also be adversely affected by a downturn in the market for our products or a slower than anticipated sales growth trend for our products. Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our product development efforts are unsuccessful or subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not achieve revenue growth or sustain profitability on a quarterly or annual basis and our growth or operating results may not be consistent with predictions made by securities analysts.

We are dependent on the market acceptance of our existing products and products under development for revenue growth and profitability.

We believe that our revenue growth and profitability will substantially depend upon our ability to continue to achieve a growing level of market acceptance of our newer products, such as the Triage Cardiac Panel, Triage Cardio ProfilER and the Triage BNP Test, and products currently under development, our effectiveness in transitioning and operating a direct sales and distribution model in certain international countries, as well as our ability to appropriately manage our operating expenses and our capital expenditures to optimize our profitability. We have made and continue to make significant additions in headcount, manufacturing equipment, facilities and infrastructure to address our current and planned future revenue growth. These investments and commitments are predicated on assumptions of market acceptance of our products and revenue growth.

If we fail to plan, establish and maintain:

• reliable, cost-efficient, high volume manufacturing capacity;

• a cost-effective sales force, implementation and customer support resources and administrative infrastructure;

• an effective product distribution system for our products; or

• appropriate strategies or tactics to address competitors of our products,

market acceptance of our products may not meet our expectations and our profitability may suffer. Unanticipated acceleration and deceleration of customer demand for our products has and may continue to result in inefficiencies or constraints related to our manufacturing, sales force, implementation resources and administrative infrastructure, which may harm our gross margins and overall financial results. Such inefficiencies or constraints also may adversely affect us as a result of delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.

If we do not successfully develop new products as currently planned, we may not recover our significant investments in those projects.

In June 2003, we entered into an agreement with Beckman under which Beckman would make and we would sell a BNP test for use on Beckman’s immunoassay systems. In October 2003, we filed a 510(k) submission with the FDA seeking clearance to market the Triage BNP Test for use on Beckman immunoassay systems. We may experience difficulties that could delay or prevent the successful development, FDA approval, introduction or market acceptance of this product. Additionally, we may not be effective in marketing and selling this new product to users of Beckman’s systems.

Additionally, we are making significant investments in research and development of other potential new products, including the development of diagnostic products for stroke, dyspnea, acute coronary syndrome and sepsis, and expanded uses of our existing products. The successful development of some of these new products will depend on the development of new technologies. We are also making significant investments in processes, leasehold improvements and equipment to improve our manufacturing efficiency and capacity in anticipation of these new products. In addition, we are making significant investments in our new corporate complex. Our revenue growth and profitability are impacted by all of these investments. We are required to undertake time-consuming and costly development activities and seek regulatory approval for potential new products and for the potential new uses of existing products. Often, products that appear promising during product development and preclinical studies may not demonstrate acceptable clinical trial results, or other parties have or may have patent or other proprietary rights to our potential new products, and may not allow us to sell them on reasonable terms, or at all. We may experience difficulties that could delay or prevent the successful development, introduction or market acceptance of any such new products. Additionally, we may not be effective in marketing and selling new products to users, especially those in markets where we have limited experience. We will be harmed if we are unable, for technological or other reasons, to:

• complete development of new products, processes, leasehold improvements or equipment in a timely manner or at all;

• complete appropriate clinical studies to validate the use of potential new products or expanded use of existing products;

• implement or scale-up manufacturing effectively or efficiently;

• receive approval or clearance for marketing a new product for an intended use or an existing product for an alternative use; or

• gain a significant level of market acceptance for a new product or expanded uses of existing products.

The Triage BNP Test encountered, and may continue to encounter, significant competition from products developed and commercialized by companies with greater financial capital and resources.

Product sales of our Triage BNP Test represented 60% of our product sales in the first nine months of 2003 and 38% of our product sales during the full year 2002. The Triage BNP Test is currently one of three United States Food & Drug Administration, or FDA, cleared tests for use as an aid in the diagnosis of congestive heart failure. Bayer received FDA clearance to market its competitive product in June 2003 and Roche Diagnostics received FDA clearance in November 2002. Shionogi & Co., Ltd. sells a BNP radioimmunoassay product for research purposes only in the United States. Abbott Laboratories has certain diagnostic rights to the BNP protein and we anticipate competition from this company and others in the future. During the third quarter of 2003, we experienced significant competition, primarily from Bayer, resulting in a loss of accounts desiring to utilize an automated immunoassay system to perform BNP testing. Bayer and other competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future. Scios, Inc., the licensor of the BNP technology and patents, was acquired by Johnson & Johnson in April 2003.

Competition and technological change may make our products less attractive or obsolete.

The market in which we compete is intensely competitive. Our competitors include:

• companies making laboratory-based tests and analyzers;

• clinical reference laboratories; and

• other rapid diagnostic test manufacturers.

Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories using automated testing systems. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. To date, we have not sold any product for an automated testing system. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to automated tests traditionally performed by clinical reference laboratories or hospital-based laboratories. This will require many physicians to change their established means of having such tests performed. Our products may not be able to compete with the testing services provided by traditional laboratory services.

In addition, companies with a significant presence in the diagnostic market, such as:

• Abbott Laboratories;

• Bayer Diagnostics;

• Dade Behring;

• Ortho Clinical Diagnostics; and

• Roche Diagnostics,

have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than us, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with our products. We utilize long-term contracts with some of our customers as a method of defending against competition. Such contracts are of varying terms and expiration dates. Expiring contracts may not be renewed and long-term contracts may not be acceptable to new customers, which could harm our competitive strategy.

Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. The success of our competitors, many of which have made substantial investments in competing technologies, or our failure to compete successfully, may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

Our limited manufacturing experience and our potential inability to scale-up manufacturing may adversely affect our ability to produce products and increase our research and development expenses.

We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining acceptable product quality and manufacturing costs. Significant additional resources, implementation of additional automated and semi-automated manufacturing equipment or changes in our manufacturing processes have been, and may continue to be, required for the scaling-up of each new product prior to commercialization or in order to meet increasing customer demand once commercialization begins, and this work may not be completed successfully or efficiently.

In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise. These products may not be able to be manufactured by us or any other party at a cost or in quantities to make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, our ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on us.

Manufacturing and quality problems have arisen and may continue to arise as we attempt to scale-up our manufacturing capacity and implement automated and semi-automated manufacturing methods. For instance, we have experienced problems with third-party contractors that work with us in connection with our development of automated and semi-automated manufacturing equipment and we continue to rely on third parties for the manufacture of much of our automated and semi-automated manufacturing equipment. Consequently, scale-up and implementation of automated and semi-automated manufacturing methods may not be achieved in a timely manner or at a commercially reasonable cost, or at all. In addition, we continue to make significant investments to improve our manufacturing processes and to purchase manufacturing equipment that may not yield the improvements that we expect. Unanticipated acceleration or deceleration in customer demand for our products has and may continue to result in production inefficiencies or manufacturing constraints. Our manufacturing facilities and those of our contract manufacturers are, or will be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and these facilities are also subject to Quality System Regulations requirements of the FDA. We, or our contractors, may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on us.

We are dependent on key distributors and have limited direct distribution experience. If any of our distribution relationships are terminated, or our distributors fail to adequately perform, our product sales will suffer.

We primarily rely upon Fisher for distribution of our products in the U.S. hospital market segment and may rely upon Fisher or other distributors to distribute products under development or our products in other market segments. Fisher accounted for 90% of our product sales in the first nine months of 2003 and 87% of product sales in the full year 2002. We distribute products in the U.S. physician office practice market through PSS. Internationally, we distribute products through country-specific and regional distributors, as well as by our direct sales force in selected countries. The loss or termination of one or more of our distributors could have a material adverse effect on our sales. In July 2003, we signed a two-year distribution agreement with Fisher that extends our distribution relationship through December 31, 2005.

If any of our distribution or marketing agreements are terminated and we are unable to enter into alternative agreements or if we elect to distribute our products directly, we will have to invest in additional sales and marketing resources, including additional field account executives and field support resources, which would significantly increase future SG&A expenses. Changes in the distribution of our products may also result in contract termination fees, transition related expenses, disruption of our business, increased competition and lower product sales and operating profits. We have limited experience in direct sales, marketing and distribution of our products, either domestically or internationally. Our direct sales, marketing and distribution efforts may not be successful. Further, we may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all. A failure to enter into acceptable distribution agreements or our failure to successfully market our products would have a material adverse effect on us.

A significant portion of our product sales is made to Fisher domestically and other distributors internationally. As a result, our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of end-user customers, Fisher and our other distributors, and by the changes in inventory levels of our product held by these distributors. We are unable to verify the inventory levels of our international distributors. We only have limited visibility over the inventory levels of our products at Fisher. While we attempt to assist Fisher in maintaining targeted stocking level of our products, we may not consistently be accurate or successful. This process involves the exercise of judgment and use of assumptions as to future uncertainties including end-user customer demand and, as a result, actual results could differ from our estimates. Inventory levels of our products held by distributors may exceed or fall below the levels we consider desirable on a going-forward basis.

We may not be successful in transitioning from the use of distributors in international markets to directly selling our products in those markets, which may result in lower product sales and higher expenses.

Until recently, we sold all of our products internationally through independent distributors. Over the next few years, we anticipate transitioning the distribution of our products in some international countries to a direct sales and distribution model. We transitioned to a direct sales and distribution model in France in July 2003 and we are making a similar transition in Germany in November 2003. In any country in which we transition to a direct sales and distribution model, we will need to make investments in facilities, resources and personnel. In addition, we will be assuming additional administrative expenses to manage our operations in those countries. We may also incur expenses associated with the termination of our existing distribution arrangements in those countries. We have limited experience in managing operations outside of the U.S. and in direct sales, marketing and distribution of our products in international markets. If we are not successful in implementing direct sales and distribution in countries where we elect to do so, we may not achieve our projected sales objectives, and we may also incur additional expenses, or our operating profits may be lower than anticipated.

We are dependent on sole-source suppliers for our products. A supply interruption would harm us.

Some key components and raw materials used in the manufacture of our products are provided by single-source vendors. Any supply interruption in a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified or alternative manufacturing processes are implemented and, as a result, would have a material adverse effect on us. In addition, an uncorrected impurity or supplier’s variation in a raw material, either unknown to us or incompatible with our manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products. We have under development products that, if developed, may require us to enter into additional supplier arrangements or implement alternative manufacturing processes. We may not be able to enter into additional supplier arrangements on commercially reasonable terms, or at all. We also may not be able to implement alternative manufacturing processes that are effective and cost efficient, or at all. Failure to obtain a supplier or the implementation of alternative processes for the manufacture of our future products, if any, would have a material adverse effect on us.

For example, we rely upon LRE Technology Partners GmbH, or LRE, for production of the fluorometer that is used with our Triage MeterPlus platform products, which includes the Triage Cardiac Panel, Triage Cardio ProfilER, Triage BNP Test and Triage TOX Drug Screen and other products currently under development. If LRE is unable or unwilling to manufacture sufficient quantities of quality Triage MeterPlus units, this may adversely affect:

• our sales and profit margins;

• our ability to adequately service our existing customers and market our products to potential new customers;

• our ability to develop and manufacture products on a timely and competitive basis; or

• the timing of market introductions and subsequent sales of products in use with the Triage MeterPlus.

Health care reform and restrictions on reimbursement may adversely affect our results.

In the United States, health care providers that purchase our products and other diagnostic products generally rely on third-party payors to reimburse all or part of the cost of the procedure. Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services. In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement. Further, some health care providers utilize a managed care system in which providers contract to

provide comprehensive health care for a fixed cost per patient. We are unable to predict what changes will be made in the reimbursement methods utilized by third-party payors. We could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which our products are used.

Third-party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our products on a profitable basis. Failure by physicians and other users to obtain reimbursement from third-party payors, or changes in government and private third-party payors’ policies toward reimbursement of tests utilizing our products could have a material adverse effect on us. Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for our existing products or products under development.

In addition, market acceptance of our products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance.

We believe that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by us. Third-party reimbursement and coverage may not be available or adequate in either U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our products or our ability to sell our products on a profitable basis.

Changes in laboratory regulations for our customers may adversely affect us.

The use of our products is affected by the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and related federal and state regulations that provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections.

Under CLIA quality control rules in effect from 1992 through 2002, laboratories using “unitized” test systems were in compliance with CLIA if they followed the manufacturers’ instructions for daily quality control, or QC, by relying on the internal controls built into unitized test systems, including our Triage products.

On April 24, 2003, a new CLIA rule regarding quality assessment and quality control requirements for clinical laboratories was implemented by the Centers for Medicare and Medicaid Services, or CMS. In an April 25, 2003 notification of Department of Health & Human Service Regional Offices, CMS CLIA program management directed CLIA surveyors to not enforce the new, general quality control provisions of the rule that increase regulatory burden until final Interpretive Guidelines are published. In the interim, CLIA surveyors are to inspect laboratories using the quality control guidelines in force from 1992 through 2002.

Future amendment of CLIA, the promulgation of additional regulations or guidelines impacting laboratory testing, and uncertainties relating to the enforcement of CLIA may have a material adverse effect on our ability to market our products, our business and financial condition, our results of operations and our customers’ access to our products.

Our patents and proprietary technology may not provide us with any benefit and the patents of others may prevent us from commercializing our products.

Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Our patent applications may not result in the issuance of any patents. Additionally, our patent applications may not have priority over others’ applications, or, if issued, our patents may not offer protection against competitors with similar technology. Any patents issued to us may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage. Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the

priority of inventions, from time to time, we participate in interference proceedings declared by the United States Patent and Trademark Office, or USPTO, that could result in substantial cost to us. We may also participate in similar proceedings in foreign jurisdictions. No assurance can be given that any patent application of others will not have priority over patent applications filed by us, which could prevent us from selling any or all of our products.

Our products and activities may be covered by technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses, and we may negotiate to obtain other licenses, for technologies patented by others. Some of our current licenses are subject to rights of termination and may be terminated. Our licensors may not abide by their contractual obligations and, as a result, may limit the benefits we currently derive from their licenses. We may not be able to renegotiate or obtain licenses for technology patented by others on commercially reasonable terms, or at all. We may not be able to develop alternative approaches if we are unable to obtain licenses and our current and future licenses may not be adequate for the operation of our business. The failure to obtain, maintain or enforce necessary licenses or to identify and implement alternative approaches would prevent us from operating some or all of our business and would have a material adverse effect on us.

We rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology. We may not be able to meaningfully protect our trade secrets, or be capable of protecting our rights to our trade secrets.

Legal proceedings to obtain patents and litigation of third-party claims of intellectual property infringement or relating to existing licenses could require us to spend substantial amounts of money and could impair our operations.

Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us, to determine the enforceability, scope and validity of the proprietary rights of others, or to enforce our rights under license and other intellectual property-related agreements. Litigation related to intellectual property matters has in the past, and may in the future, result in material expenses to us and be a significant diversion of effort by our technical and management personnel, regardless of the outcome. Litigation, if initiated, could seek to recover damages as a result of any sales of the products subject to the litigation and to enjoin further sales of such products. The outcome of litigation is inherently uncertain. An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling any or all of our products, which could have a material adverse effect on our business, financial condition and results of operations.

Our commercial success also depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. There can be no assurance that we do not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that we or our collaborators would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights.

Long-lived and intangible assets may become impaired and result in an impairment charge.

At September 30, 2003, we had approximately $69.2 million of long-lived assets, including $19.1 million of land, $8.3 million of leasehold improvements, $22.5 million of equipment and $7.0 million of capitalized license rights. In October 2003, we purchased an additional 8.4 usable acres of land at a purchase price of $9.1 million. The carrying amounts of long-lived and intangible assets are affected whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other matters. Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from long-lived and intangible assets. In the event impairment exists, an

impairment charge would be determined by comparing the carrying amount of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. An impairment charge may result in a material adverse effect on our operating results. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.

As of September 30, 2003, we had approximately $3.9 million of deferred tax assets, consisting primarily of temporary differences between book and tax treatment of certain items such as depreciation. No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized. We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets. Examples of future events that may occur which would make the realization of such assets not likely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

We may need additional capital. If additional capital is not available, we may have to curtail or cease operations.

If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. Our future liquidity and capital funding requirements will depend on numerous factors, including:

• the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive;

• the timing and variability of significant orders;

• seasonal or unanticipated changes in customer demand;

• regulatory changes, uncertainties or delays;

• the costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources, expansion of our manufacturing capacity and Biosite Discovery activities and our facilities expansion needs, including the construction of our new corporate complex;

• competition, including products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources;

• the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues;

• the enforcement, defense and resolution of license and patent disputes;

• the timing and results of research and development efforts, including clinical studies and regulatory actions regarding our potential products;

• changes in third-party reimbursement policies; and

• the costs and timing associated with business development activities, including potential licensing of technologies patented by others.

The failure by us to raise capital on acceptable terms when needed would cause us to have to scale back our operations, reduce our work force and license or sell to others products we would otherwise seek to develop or commercialize ourselves. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Changing facilities costs may negatively impact our operating results.

In June 2003, we completed the first of a two-part escrow closing to purchase land for the construction of our new corporate complex. In the first of a two-part escrow closing, we purchased 17.7 usable acres for approximately $19.1 million. In October 2003, we purchased the remaining 8.4 usable acres of adjacent land for $9.1 million. We expect the new complex will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 350,000 square feet of space. The total cost of the land and construction costs of the first phase is estimated to be approximately $95 million. We currently plan to finance the construction of the complex using a combination of debt financing and available cash balances. We may not be able to obtain financing on commercially reasonable terms or at all. We expect the first phase of construction to be

completed in the first quarter of 2005 and do not anticipate expanding our operations to the new facility prior to then. We expect our occupancy costs to increase primarily due to increased square footage. Should there be a downturn in our business or the markets in which we compete, we may not have a need to expand our facilities as we have planned. As a result, we may then seek an alternative use for all or a portion of the property, or seek to sell the property, which may have a negative impact on our operating results.

Additionally, in order to meet the increasing customer demand for our products, short-term investments in additional facility space and related leasehold improvements have been, and continue to be, made in order to increase our manufacturing capacity prior to our relocation to the new corporate complex. Because of their short-term nature, these investments in additional facility space and related leasehold improvements may not be done as efficiently or cost effectively as longer-term investments or improvements.

Delays in the conduct or completion of our clinical trials or the analysis of the data from our clinical trials may result in delays in our planned filings for regulatory approvals, and may adversely affect our ability to commercialize our products.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical studies that will cause us or regulatory authorities to delay or suspend our ongoing clinical studies, delay or suspend planned clinical studies, or delay the analysis of data from our completed or ongoing clinical studies.

Any of the following could delay the completion of our ongoing and planned clinical studies:

• ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

• delays in enrolling volunteers;

• lower than anticipated retention rate of volunteers in a clinical trial;

• unexpected results of clinical studies;

• insufficient supply or deficient quality of materials necessary for the performance of clinical trials; or

• difficulties in coordinating clinical trial activities with third party clinical trial sites.

If the results of our ongoing or planned clinical studies for our potential products are not available when we expect or if we encounter any delay in the analysis of data from our clinical studies, we may not be able to commence marketing or commercial sales of products when we expect.

The regulatory approval and compliance process is expensive, time consuming and uncertain. As a result, we may not obtain required approvals or previously acquired approvals for the commercialization of our products may be rescinded.

The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act, or the FD&C Act, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. We are not able to commence marketing or commercial sales in the United States of new products under development until we receive clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Clearance or approval to commercially distribute new medical devices would generally be received in one of two ways. We must obtain the FDA’s authorization through either clearance of a 510(k) notification or approval of a pre-market approval, or PMA, application.

The 510(k) clearance process requires us to demonstrate that our new product is substantially equivalent to a medical device first marketed prior to May 1976. We must submit data that supports our claim of substantial equivalence. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring submission of clinical data and other performance data. It generally takes from four to twelve months from submission to obtain 510(k) pre-market clearance but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a device first marketed prior to May 1976 or that additional information is needed before a substantial equivalence determination can be made. A “not substantially equivalent” determination, or a request for additional information, could prevent or delay the market

introduction of new products that fall into this category. The FDA may determine we must adhere to the more costly, lengthy and uncertain PMA application process.

For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. We have made modifications to our products since receipt of initial 510(k) clearance. With respect to several of these modifications, we filed new 510(k) notices describing the modifications and have received FDA clearance of those 510(k) notices. We made other modifications to some of our products that we believe do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of our determinations not to submit, or would not require us to submit, a new 510(k) notice for any of these modifications made to our products. If the FDA requires us to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified products until the 510(k) notice is cleared by the FDA.

A PMA application must be filed if a proposed device is not substantially equivalent to a medical device first marketed prior to May 1976, or if otherwise required by the FDA. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of human clinical investigations, bench tests, laboratory and animal studies. The PMA application must also contain a complete description of the device and its components and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and any training materials. The PMA approval process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval of a PMA application has been sought by other companies have never been approved for marketing.

We are also subject to the regulatory approval and compliance requirements for each foreign country to which we export our products. In the European Union, a single regulatory approval process has been created, and approval is represented by the CE Mark.

Both before and after a product is commercialized, we have ongoing responsibilities under the regulations of the FDA and other agencies. Noncompliance with applicable laws and the requirements of the FDA and other agencies can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by us. The FDA also administers certain controls over the export of medical devices from the United States.

We are subject to routine inspection by the FDA and certain state agencies for compliance with Quality System Requirement, or QSR, and Medical Device Reporting requirements and other applicable regulations. Changes in existing requirements or adoption of new laws or requirements could have a material adverse effect on our business, financial condition and results of operation. We may incur significant costs to comply with laws and regulations.

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with laws and regulations or such laws or regulations in the future may have a material adverse effect upon our business, financial condition and results of operations.

The Food and Drug Administration Modernization Act of 1997 makes changes to the device provisions of the FD&C Act and other provisions in the FD&C Act affecting the regulation of devices. Among other things, the changes will affect the Investigational Device Exemption, 510(k) and PMA processes, and also will affect device standards and data requirements, procedures relating to humanitarian and breakthrough devices, tracking and post-market surveillance, accredited third-party review, and the dissemination of off-label information. We cannot predict how or when these changes will be implemented or what effect the changes will have on the regulation of our products. Any new legislation may impose additional costs or lengthen review times of our products.

We are uncertain of the regulatory approval path that the FDA will ultimately apply to our products currently in development. We may not be able to obtain necessary regulatory approvals or clearances for our products on a timely basis, if at all. Delays in receipt of or failure to receive such approvals or clearances, the loss of previously

received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

We are dependent on others for the development of products. The failure of our collaborations to successfully develop products would harm our business.

Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with third parties. We are or will be dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected and no revenue may be derived from these arrangements.

We entered into agreements with clinical and commercial collaborators for the development, clinical evaluation and marketing of products. The agreements are subject to rights of termination and may be terminated. Our collaborators may not abide by their contractual obligations and may discontinue or sell their current lines of business. The research for which we receive or provide funding may not lead to the development of products. We intend to enter into additional development and marketing agreements. We may not be able to enter into agreements on acceptable terms, or at all.

We may not be able to manage our growth.

We have experienced growth and anticipate continued growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations if market acceptance of our products increases and potential new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. Our ability to manage growth effectively will require us to continue to implement and improve our operational, financial and management information systems and to train, motivate and manage our employees. We may not be able to manage our expansion, and a failure to do so could have a material adverse effect on us.

Unanticipated acceleration and deceleration of customer demand for our products has and may continue to result in constraints or inefficiencies related to our manufacturing, sales force, implementation resources and administrative infrastructure. Such constraints or inefficiencies may adversely affect us as a result of delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction. Similarly, over-expansion or investments in anticipation of growth that does not materialize could harm our financial results and result in overcapacity. For instance, we have made non-cancelable purchase commitments for certain inventory and product components. Any such inventory or component that is not used when planned is subject to loss because of spoilage or obsolescence.

If we lose our key personnel or are unable to attract and retain additional personnel, we may not be able to pursue collaborations or develop our own products.

Our future success depends in part on the continued service of our key technical, sales, marketing and executive personnel, and our ability to identify, hire and retain qualified personnel. Competition for such personnel is intense and involves factors such as compensation, equity incentives, work culture, organization and direction. We may not be able to retain existing personnel or identify or hire additional personnel. If we are unable to retain existing personnel or identify or hire additional personnel, we may not be able to research, develop, commercialize or market our products, and as a result, our business may be harmed.

We may have significant product liability exposure.

The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability claims. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage, our liabilities could exceed our total assets.

Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rates, primarily from our investments in available-for-sale marketable securities. Under our current policies, we do not use interest rate derivatives instruments to manage this exposure to interest rate changes. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

Additionally, our purchases of Triage MeterPlus from LRE are denominated in Euros and sales of some products to some international customers are denominated in the local currency of customers. Fluctuations in the exchange rates associated with the applicable currencies could increase our manufacturing costs, decrease our expected revenues, or decrease our operating margins. We have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes. As of September 30, 2003, we had no outstanding forward exchange contracts. Total receivables denominated in foreign currencies as of September 30, 2003 were approximately $1.0 million. Total payables denominated in foreign currencies as of September 30, 2003 were approximately $2.6 million. We also have certain purchase commitments for inventory and product components through 2004 that are denominated in foreign currencies, primarily Euros.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, an evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based upon that evaluation, the CEO and CFO concluded that, as of the end of such period, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required to be disclosed in our periodic SEC filings. There was no change in our internal controls over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.(i)(1) Restated Certificate of Incorporation.

3.(i)(1) Certificate of Amendment to the Restated Certificate of Incorporation.

3.(i)(1) Certificate of Designation of Rights and Preferences of Series A Participating Preferred Stock.

3.(ii) (2) Certificate of Amendment to the Restated Certificate of Incorporation.

3.(iii)(3) Amended and Restated Bylaws.

4.1(2) Form of Common Stock Certificate with rights legend.

10.40 Eighth Amendment to Purchase Agreement and Escrow Instructions between Biosite and H.G. Fenton Company dated September 15, 2003.

10.41 Ninth Amendment to Purchase Agreement and Escrow Instructions between Biosite and H.G. Fenton Company dated October 9, 2003.

10.42(A) Biosite Incorporated Nonqualified Deferred Compensation Plan effective June 1, 2002.

10.43* Distribution Agreement between Biosite and Fisher Scientific Company L.L.C. effective January 1, 2004.

31.1 Section 302 Certification of Kim D. Blickenstaff, Chief Executive Officer

31.2 Section 302 Certification of Christopher J. Twomey, Chief Financial Officer

32.1 Section 906 Certification of Kim D. Blickenstaff, Chief Executive Officer

32.2 Section 906 Certification of Christopher J. Twomey, Chief Financial Officer

(1) Incorporated by reference to the exhibit of the same number to Biosite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(2) Incorporated by reference to the exhibit of the same number to Biosite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

(3) Incorporated by reference to exhibit 3.(ii) to Biosite’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

(A) Indicates management contract or compensatory plan or arrangement.

* Confidential treatment has been requested for certain portions of this exhibit.

(b) Reports on Form 8-K

On July 24, 2003, we filed a current report on Form 8-K, furnishing under Item 12. “Results of Operations and Financial Condition,” information relating to our financial results for the second quarter ended June 30, 2003.

On September 24, 2003, we filed a current report on Form 8-K, furnishing under Item 9. “Regulation FD Disclosure,” information relating to the revision of financial guidance for the third quarter and 2003 fiscal year.

SIGNATURES

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

Dated: November 6, 2003	BIOSITE INCORPORATED


	By:	/s/ CHRISTOPHER J. TWOMEY

		Christopher J. Twomey
		Vice President, Finance and Chief Financial Officer
		(Principal Financial and Accounting Officer)