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, 2004

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 October 31, 2004 was 16,198,289.

Part I. Financial Information

Item 1. Financial Statements

BIOSITE INCORPORATED

Condensed Consolidated Balance Sheets

(in thousands, except par value)

	September 30, 2004		December 31, 2003
	(Unaudited)		(Note)
Assets
Current assets:
Cash and cash equivalents	$	41,981	$	19,537
Marketable securities	42,135		34,397
Accounts receivable, net	19,673		23,755
Inventories, net	36,395		27,780
Other current assets	11,954		9,534
Total current assets	152,138		115,003
Property, equipment and leasehold improvements, net	96,289		71,408
Patents and license rights, net	5,817		6,771
Other assets	1,852		1,442
	$	256,096	$	194,624

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,975	$	6,905
Accrued employee expenses	12,000		8,463
Current portion of long-term debt	5,566		4,664
Other current liabilities	5,459		4,096
Total current liabilities	40,000		24,128

Long-term debt	15,716		14,158
Other long-term liabilities	1,908		3,435

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued and outstanding at September 30, 2004 and December 31, 2003	—		—
Common stock, $.01 par value, 40,000 shares authorized; 16,148 and 15,618 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively	161		156
Additional paid-in capital	116,269		99,821
Accumulated other comprehensive income, net of related tax effect of ($29) and $66 at September 30, 2004 and December 31, 2003, respectively	114		300
Retained earnings	81,928		52,626
Total stockholders’ equity	198,472		152,903
	$	256,096	$	194,624

Note: The balance sheet at December 31, 2003 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 Consolidated Statements of Income (Unaudited)

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Revenues:
Product sales	$	60,392		$	41,412		$	175,851		$	124,283
Contract revenue	791			1,358			2,871			3,126
Total revenues	61,183			42,770			178,722			127,409

Operating expenses:
Cost of product sales	18,583			14,493			57,920			41,965
Selling, general and administrative	16,108			12,435			47,664			37,438
Research and development	9,588			6,029			25,412			17,499
Total operating expenses	44,279			32,957			130,996			96,902

Operating income	16,904			9,813			47,726			30,507

Interest and other income, net	119			321			499			1,162

Income before provision for income taxes	17,023			10,134			48,225			31,669
Provision for income taxes	(6,642		)	(3,691		)	(18,923		)	(12,058		)

Net income	$	10,381		$	6,443		$	29,302		$	19,611

Net income per share:
- Basic	$	0.65		$	0.42		$	1.86		$	1.29
- Diluted	$	0.60		$	0.38		$	1.74		$	1.18

Shares used in calculating per share amounts:
- Basic	15,979			15,501			15,769			15,200
- Diluted	17,311			16,964			16,864			16,591

See accompanying notes.

BIOSITE INCORPORATED

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine months ended September 30,
	2004			2003
OPERATING ACTIVITIES
Net income	$	29,302		$	19,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,816			7,081
Deferred income taxes	(1,400		)	—
Changes in operating assets and liabilities:
Net purchases of investments classified as trading	(314		)	—
Accounts receivable	4,082			(1,449		)
Inventory	(8,615		)	(16,052		)
Other current assets	(3,008		)	313
Income taxes	4,476			3,116
Accounts payable	10,070			2,487
Other current and long-term liabilities	4,806			1,809
Net cash provided by operating activities	52,215			16,916

INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities	21,313			39,317
Purchase of marketable securities	(28,980		)	(19,080		)
Purchase of property, equipment and leasehold improvements	(36,214		)	(43,481		)
Patents, license rights, deposits and other assets	(852		)	(341		)
Net cash used in investing activities	(44,733		)	(23,585		)

FINANCING ACTIVITIES
Proceeds from issuance of financing obligations	6,361			11,818
Principal payments under financing obligations	(3,901		)	(2,139		)
Proceeds from issuance of stock under stock plans, net	12,502			11,381
Net cash provided by financing activities	14,962			21,060

Increase in cash and cash equivalents	22,444			14,391

Cash and cash equivalents at beginning of period	19,537			19,113
Cash and cash equivalents at end of period	$	41,981		$	33,504

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	745		$	429
Income taxes paid	$	15,685		$	8,986
Income tax benefit of disqualifying dispositions of stock	$	3,947		$	7,047

See accompanying notes.

BIOSITE INCORPORATED

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated 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 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, 2003.

The condensed consolidated financial statements include our financial statements and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain amounts in the financial statements for the three and nine months ended September 30, 2003 have been reclassified to conform to the presentation of the financial statements for the three and nine months ended September 30, 2004.

2. EARNINGS PER SHARE

Basic earnings per share includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents which 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,
	2004	2003	2004	2003
Weighted average common shares outstanding – Shares used in calculating per share amounts - Basic	15,979	15,501	15,769	15,200
Net effect of dilutive common share equivalents using the treasury stock method	1,332	1,463	1,095	1,391
Shares used in calculating per share amounts – Diluted	17,311	16,964	16,864	16,591

3. STOCK-BASED COMPENSATION

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 remeasured 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 fair values for stock options and purchase rights were estimated at the date of grant using the Black-Scholes option valuation model.

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

	Three months ended September 30,						Nine months ended September 30,
(Net of tax)	2004			2003			2004			2003

Net income, as reported	$	10,381		$	6,443		$	29,302		$	19,611
Pro forma FAS 123 compensation expense	(4,785		)	(4,857		)	(14,938		)	(11,795		)
Adjusted pro forma net income	$	5,596		$	1,586		$	14,364		$	7,816
Adjusted pro forma basic net income per share	$	0.35		$	0.10		$	0.91		$	0.51
Adjusted pro forma diluted net income per share	$	0.32		$	0.09		$	0.85		$	0.47

The pro forma effects on net income for the three and nine months ended September 30, 2004 and 2003 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, 2004		December 31, 2003
	(in thousands)

Raw materials	$	12,047	$	13,327
Work-in-process	17,695		11,476
Finished goods	6,653		2,977
	$	36,395	$	27,780

5. COMPREHENSIVE INCOME

FAS No. 130, Comprehensive Income, establishes rules for the reporting and display of comprehensive income and its components. As adjusted, our comprehensive income is as follows (in thousands):

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003

Net income	$	10,381	$	6,443		$	29,302		$	19,611
Change in unrealized net gain (loss) on marketable securities, net of tax	10		(113		)	(144		)	(245		)
Foreign currency translation gain (loss)	22		—			(42		)	—
Comprehensive income	$	10,413	$	6,330		$	29,116		$	19,366

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

Forward-looking Statements

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 impact of competition, including products competitive with our Triage® BNP Tests, from companies with greater capital and resources; our ability to effectively promote our products, whether directly or through distributors, including our ability to effectively promote our products in the physician office market; our ability to successfully expand our business through direct sales in certain European countries; the extent to which our products and products under development are successfully developed and gain market acceptance; our ability to obtain regulatory approvals and complete other clinical and pre-market activities needed to launch new products and gain market acceptance of any new products; manufacturing inefficiencies, backlog, delays or capacity constraints; the timing of significant orders or the impact of seasonality; regulatory changes, uncertainties or delays; product recalls; potential contract disputes or patent conflicts; dependence on third-party manufacturers and suppliers; changing market conditions and the other risks and uncertainties described under “Risk Factors” below and throughout our Annual Report on Form 10-K for the year ended December 31, 2003 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Quarterly Report on 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 diagnostic tests that improve a physician’s ability to diagnose critical diseases and health conditions. In selecting market opportunities, we primarily target large categories of disease that lack accurate or timely diagnostic methods. Currently, we offer tests for drug screening, heart attack, congestive heart failure, or CHF, acute coronary syndromes, evaluation of shortness of breath and certain bacterial and parasitic infections.

Our products are principally sold to acute care hospitals, which number approximately 5,400 in the United States. To market our products, we utilize a direct sales team that focuses its efforts primarily on larger centers with more than 200 beds and smaller hospitals that are high volume users of our products. The Fisher HealthCare Division of the Fisher Scientific Company, or Fisher, distributes our products primarily in hospitals in the United States and supports our direct sales force, particularly in smaller hospitals. In July 2003, we signed a two-year distribution agreement with Fisher that extended the existing distribution relationship through December 31, 2005. Sales to Fisher represented 86% of our product sales in the first nine months of 2004 and 90% of our product sales for the full year 2003. We utilize distributor relationships with Physician Sales & Services, or PSS, and Henry Schein, Inc., or Henry Schein, to market our products to physician office laboratories in the United States.

We also employ a field-based network of clinically experienced individuals that support our direct sales force by providing pre- and post- sale education and training. In international markets, we have established direct selling efforts in several countries and utilize a network of country-specific and regional distributors in other areas. During 2003 and 2004, we initiated direct sales and distribution operations in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy. Over the next few years, we may transition to direct sales and distribution of our products in additional countries.

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 us or 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” and in our discussion below under the heading “Liquidity and Capital Resources.”

Our product sales for the first nine months of 2004 were $175.9 million, representing a 42% increase over the same period of 2003. This growth resulted largely from increased sales of our Triage BNP Test products. Our meter-based Triage BNP Test, launched domestically in 2001, was the first blood test available to aid in the

detection of CHF and benefited from a semi-exclusive position in the market, until the entry of direct competition in June 2003. Our Triage BNP Tests are currently two of several FDA-cleared tests used as an aid in the diagnosis of CHF. At various times since November 2002, Bayer Healthcare, Dade Behring, Roche Diagnostics and Abbott Laboratories have launched competitive products that are also designed to aid in the diagnosis of CHF.

We have experienced, and continue to experience, competition from these companies and anticipate competition from others in the future. In the third quarter of 2003, we began to experience significant competition from Bayer, resulting in a loss of customers who preferred to use an automated immunoassay system for BNP testing. In December 2003, we received FDA clearance to market our Triage BNP Test for Beckman Coulter Immunoassay Systems and began selling the product in the United States in January 2004. As a result, a customer can perform BNP testing using either our rapid, portable Triage MeterPlus system or any of Beckman Coulter’s automated immunoassay systems. Our competitors may succeed in developing or marketing products that are more effective or more commercially attractive than the Triage BNP Tests. 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.

With several diagnostic tests commercialized, our focus has expanded to include the search for proprietary disease markers that can potentially be applied to our testing platforms or to platforms marketed by other diagnostic companies with whom we might collaborate. To that end, in 1999 we launched Biosite Discovery. Through Biosite Discovery, we leverage our expertise in phage display antibody development to access protein targets via collaborations with clinical institutions or commercial companies, and also access targets via internal research and licensing programs. We have the capacity to offer antibody development services to pharmaceutical and biotechnology companies seeking high-affinity antibodies for use in their drug research. In return, we seek diagnostic licenses to their targets, as well as potential fees for deliverables, milestones and royalties. Biosite Discovery has also attracted the interest of leading clinical collaborators, who provide patient samples and assist in the analysis of clinical data.

Recent Developments

510(k) Premarket Notifications - Triage Profiler CP Panel and Triage D-dimer Test

In October 2004, we filed two 510(k) Premarket Notifications with the United States Food and Drug Administration seeking clearances for two products, the Triage Profiler CP Panel and the Triage D-dimer Test:

• The Triage Profiler CP Panel is designed as an aid in the early diagnosis of acute coronary syndromes, including heart attack and the assessment of severity of heart failure. We expect to launch the test in the first half of 2005. The panel measures four biomarkers - CK-MB, myoglobin, troponin I and troponin I complexes and b-type natriuretic peptide - and incorporates a unique panel index feature, which analyzes information from all four markers and presents a single representative value, the panel index. Our clinical study data collected from more than 2,000 acute coronary syndromes and non-cardiac chest pain patients demonstrated that the Triage Profiler CP Panel index significantly improved the overall diagnostic accuracy for the early diagnosis of acute coronary syndromes and heart attack. The National Hospital Ambulatory Medical Care Survey: 2002 Emergency Department Summary reports that chest pain was the second leading reason cited for emergency department visits.

• The Triage D-dimer Test is designed to aid in the assessment and evaluation of patients with suspected disseminated intravascular coagulation, including pulmonary embolism. We expect to launch the test in the first half of 2005. Pulmonary embolism, a blockage of one or more of the pulmonary arteries by blood clot, is a common and highly lethal condition that is a leading cause of death in all age groups.

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, including to Fisher and our other distributors, 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 SEC’s Staff Accounting Bulletin, or SAB, No. 104, 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. 104.

Warranty Reserve. Our warranty allowance primarily relates to warranty coverage extended with the placement of the Triage MeterPlus. The allowance is established at an amount net of any warranty costs that would be covered by LRE Technology Partner GmbH, or LRE, our manufacturer of the Triage MeterPlus. We also have established a warranty reserve related to the potential replacement of our test devices due primarily to unexpected performance issues with the product. Historical experience and trends detailing returns and replacement activity of both our Triage MeterPlus and our test devices and those that have been covered by LRE’s manufacturer’s warranty of the Triage MeterPlus are used in estimating our warranty reserves.

Allowance for Doubtful Accounts. We also maintain an allowance for doubtful accounts for potential uncollectible accounts receivable arising from our customers’ inability to make required payments. Our estimate is determined by analyzing historical bad debts, customer payment history and patterns, customer creditworthiness, and economic, political or regulatory factors affecting the customer’s ability to make the required payments.

Inventories and Related Allowances. 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, obsolete and potential scrap inventories. The estimated allowance for excess and obsolete inventories is based on inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of scrap or obsolescence. During our manufacturing processes, some work-in-process inventories require additional testing or re-work. These inventories are separately tracked and reviewed on a monthly basis to determine their status and an estimated reserve for potential scrap is calculated. 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.

Intangible and Other Long-Lived Assets. At September 30, 2004, we had approximately $104.0 million of long-lived assets, including $29.6 million of land, $31.1 million of building construction-in-progress, $4.1 million of leasehold improvements, $31.4 million of equipment and $7.7 million of capitalized license rights and other assets. Leasehold improvements, equipment, intangible assets and certain other long-lived assets are amortized or

depreciated over the lesser of their useful lives or the remaining lease term. We lease 10 buildings in the United States with leases that expire between March and December 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 10 years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or 10 years from the inception of the license. The estimated revenues used as the base by which we amortize the license rights include only estimated sales for products we are currently selling and do 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	2004		2003		2004		2003

Cardiovascular products:
Triage BNP Test products	$	38,936	$	24,331	$	118,518	$	74,314
Triage Cardiac Panel and Profiler products	8,232		5,060		19,589		15,445
Triage MeterPlus products	564		858		2,229		2,657
Total Cardio Product Sales	$	47,732	$	30,249	$	140,336	$	92,416

Other products:
Triage Drugs of Abuse and TOX Drug Screen products	11,223		9,971		31,260		28,188
Triage Microbiology products	1,437		1,192		4,255		3,679
Total Other Products Sales	$	12,660	$	11,163	$	35,515	$	31,867
Total Product Sales	$	60,392	$	41,412	$	175,851	$	124,283

Product Sales. Product sales for the three and nine months ended September 30, 2004 were $60.4 million and $175.9 million, respectively, representing increases of 46% and 42%, respectively, compared to $41.4 million and $124.3 million, respectively, for the same periods of 2003. The increases in total product sales, as compared to the same periods in 2003, were primarily attributable to the growth in sales of our Triage BNP Tests, including the Triage BNP Test for Beckman Coulter Immunoassay Systems. Growth in sales of our Triage BNP Tests was $14.6 million and $44.2 million for the three and nine months ended September 30, 2004, respectively.

As a result of significant fluctuations in customer demand, manufacturing inefficiencies, product improvement efforts and new product scale-up activities, inventory levels of our products have been and may be above or below targeted stocking levels in future periods. We adjust our manufacturing capacity by both adjusting the number of production shifts we operate and production activities, as well as through the implementation of additional manufacturing equipment. This allows us to modify our production volumes and manufacturing throughput to meet expected customer demand and targeted stocking levels. Product sales in future periods to our distributors will be impacted as we and our distributors attempt to adjust distributors’ inventories to targeted stocking levels and as we seek to improve our effectiveness and efficiency in adjusting our manufacturing capacity and output. Our product sales are also impacted by the buying patterns of our distributors and other customers. Additionally, we believe that our products are subject to some seasonality in their use. During the flu season (October through March), some of our customers increased their use of our Triage BNP Tests compared with their usage during the summer months. Higher utilization rates of our Triage BNP Tests may be due to a higher number of visitors to the emergency departments of hospitals exhibiting shortness of breath, which is one of the symptoms of congestive heart failure and the flu. However, higher utilization may also result from greater comfort with, and awareness and education of the uses of, our Triage BNP test products, as well as additional users within the hospitals.

Product sales of our cardiovascular products, consisting of our Triage BNP Tests, Triage Cardiac Panel, Triage Profiler Panels and Triage MeterPlus, totaled $47.7 million and $140.3 million, respectively, for the three and nine months ended September 30, 2004. This represented increases of 58% and 52%, respectively, as compared to $30.2 million and $92.4 million, respectively, for same periods of 2003. The product sales growth of our cardiovascular products for the third quarter and first nine months of 2004 was primarily due to growth in sales volume of our Triage BNP Tests. Our product sales growth rate for our Triage BNP Tests in future periods may be lower than in the past periods because of increased competition from alternative tests that aid in the diagnosis of CHF. In addition, as the market for BNP testing matures and more competitive products become available, our average sales price for our Triage BNP Tests may decline.

Product sales of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were $12.7 million and $35.5 million, respectively, for the three and nine months ended September 30, 2004. This represented increases of 13% and 11%, respectively, as compared to $11.2 million and $31.9 million, respectively, for the same periods of 2003. The increase in sales of these products was primarily due to an increase in sales volume of our 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.

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, 2004 were $791,000 and $2.9 million, respectively, as compared to $1.4 million and $3.1 million, respectively, for the same periods of 2003. Contract revenues recognized during the three and nine months ended September 30, 2004 and 2003 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 2004 and 2003. Other contract revenues recognized during those periods of 2004 and 2003 included antibody fees, milestone payments and license fees. The decrease in contract revenues for both the three and nine months ended September 30, 2004 compared to the same periods of 2003 was due primarily to lower contract revenues related to the development and delivery of antibodies and milestones. 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 $1.8 million and $4.8 million for the three and nine months ended September 30, 2004, respectively, compared to $1.4 million and $4.2 million, respectively, for the same periods of 2003. 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, 2004 was $41.8 million and $117.9 million, respectively, representing increases of 55% and 43%, respectively, compared to $26.9 million and $82.3 million for the same periods of 2003.

Gross profits increased primarily due to an overall increase in product sales. The overall gross margin for the three and nine months ended September 30, 2004 was 69% and 67%, respectively, compared to 65% and 66%, respectively, for the same periods of 2003. The increase in the overall gross margin was primarily due to higher manufacturing efficiencies. The higher efficiencies resulted primarily from higher production volumes and manufacturing output during the manufacture of product sold in the third quarter and first nine months of 2004 compared with the same periods of 2003. Additionally, the changing mix of our sales of products that have different gross margins impacted our overall gross margin. Our overall gross margin will fluctuate as a result of the changing mix of our sales of products that have different gross margins and from manufacturing inefficiencies, including inefficiencies experienced as we attempt to increase or decrease our manufacturing capacity, production volumes and manufacturing output. Our manufacturing overhead costs are spread over the changing production volumes manufactured during a quarter on a first in, first out basis.

Our cardiovascular products have lower gross margins than our Triage Drugs of Abuse Panel. Sales of our cardiovascular products represented 79% and 80%, respectively, of our product sales for the three and nine months ended September 30, 2004, compared to 73% and 74%, respectively, for the same periods in 2003. Our cardiovascular products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel. Although our gross profits may continue to grow, we expect our overall gross margin to fluctuate as a result of the changing mix of sales of products with different gross margins, changes in our manufacturing processes or

costs and competitive pricing pressures. Any new products that we successfully develop, acquire and sell may change our future gross margins.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses for the three and nine months ended September 30, 2004 were $16.1 million and $47.7 million, respectively, representing increases of 30% and 27%, respectively, compared to $12.4 million and $37.4 million, respectively, for the same periods of 2003. The increase in SG&A expenses was primarily associated with the formation of our direct sales and distribution operations in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy, as well as with the addition of sales, clinical education and technical service resources in the United States, expanded sales activities related to our broader product lines and scale-up in additional markets such as physician laboratories, marketing activities relating to new products, increased administrative costs to support our expanded operations and higher performance-based compensation, such as sales commissions and bonuses based on our financial performance.

We expect SG&A expenses in 2004 and 2005 to continue to be higher than in 2003, as we continue to increase our sales, marketing, administration, clinical education and technical service resources, and continue to build our direct sales and distribution infrastructure in Europe. 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, 2004 were $9.6 million and $25.4 million, respectively, representing increases of 59% and 45%, respectively, compared to $6.0 million and $17.5 million for the same periods of 2003. The increases in R&D expenses for the three and nine months ended September 30, 2004 compared to the same periods of 2003 were primarily associated with increased employee expenses, clinical studies and supplies used in our R&D activities. During the first three and nine months of 2004 and 2003, our research and development resources were focused primarily on product development for potential new diagnostic tests including the Triage Profiler CP Panel, Triage Profiler Shortness of Breath Panel and other diagnostic tests for critical health conditions such as stroke, the development of potential improvements to our existing products, including our Triage Cardiac Panel, 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 and were primarily related to Biosite Discovery.

We expect R&D expenses in 2004 and 2005 to continue to be higher than in 2003. The increased expenditures will relate primarily to:

• product development efforts, including the development of potential diagnostic products for stroke, acute coronary syndromes 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 Tests;

• scale-up for potential new products;

• Biosite Discovery activities; and

• performance-based compensation.

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.

Interest and Other Income, Net. Interest and other income, net was $119,000 and $499,000, respectively, for the three and nine months ended September 30, 2004, compared to $321,000 and $1.2 million for the same periods of 2003. We realized lower interest income during the three and nine months ended September 30, 2004 compared to the same periods of 2003 primarily because we had a higher percentage of our cash and marketable securities in more liquid cash and cash equivalents, which yielded lower interest income than our marketable securities. During the third quarter and first nine months of 2004, we maintained a larger portion of our marketable securities in cash and cash equivalents for liquidity purposes in anticipation of cash needs, including new corporate complex construction costs, as well as rising interest rates. The decrease during the nine months ended September 30, 2004 compared to the same period of 2003 was also impacted from the capitalization of interest expense we incurred beginning July 2003 related to the development of our new corporate complex.

Provision for Income Taxes. As a result of the pre-tax income and the estimated tax credits to be generated in 2004, we recorded a provision for income taxes of $18.9 million for the first nine months of 2004. For the same period in 2003, we recorded a provision for income taxes of $12.1 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, including proceeds from the issuance of stock under our employee stock plans, equipment financing, cash received under collaborative agreements and interest income. As of September 30, 2004, we had cash, cash equivalents and marketable securities of approximately $84.1 million compared to $53.9 million as of December 31, 2003.

The increase in cash, cash equivalents and marketable securities during the first nine months of 2004 as compared to the same period of 2003 was largely attributable to cash generated from operating activities of $52.2 million during the first nine months of 2004, compared to $16.9 million for the same period in 2003. The primary contributor to cash generated from operating activities for the nine months ended September 30, 2004 was our net income of $29.3 million. Cash generated from operating activities also included a decrease in accounts receivable of $4.1 million, increases in income taxes payable of $4.5 million, accounts payable of $10.1 million and non-cash expenses such as depreciation and amortization of $12.8 million. Other significant sources of cash included the receipt of $6.4 million in proceeds from equipment financing and $12.5 million in proceeds from the issuance of stock under our stock plans. Significant uses of cash during the first nine months of 2004 included expenditures for the construction of our new corporate complex of $24.8 million, leasehold improvements and capital equipment of approximately $11.4 million, an increase in inventory of $8.6 million and principal payments under equipment financing debt arrangements of $3.9 million.

Our primary short-term needs for capital, which are subject to change, are for:

• the construction of our new corporate complex;

• support of commercialization efforts related to our products, including expansion of our direct sales force and field support resources;

• improvements in our manufacturing capacity and efficiency;

• transitioning and operating a direct sales and distribution model in certain international countries;

• new product development, clinical studies, and the continued advancement of research and development efforts; and

• working capital needs.

We have executed agreements to license technologies patented by others that call for milestone payments and 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. As of September 30, 2004, we had two equipment financing lines of credit with financial institutions totaling $12.0 million, of which an aggregate of $11.5 million was available for future borrowings. The lines of credit expire on December 31, 2004 and September 30, 2005. Additionally, we may utilize cash generated from operating activities, if any, to meet our capital requirements.

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 construction cost of our new corporate complex. We have used available cash balances to purchase the land for our new corporate complex and pay for the design and construction costs to date. For the remainder of the construction costs, we plan to utilize a combination of available cash and debt financing, if necessary. 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, if at all. Furthermore, any additional equity financing may be

Risk Factors

This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See “Forward-looking Statements” above. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004. 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 occurs, our business could be harmed substantially.

Our quarterly and annual revenues and operating results may fluctuate. We may not maintain profitability.

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 from products competitive with our Triage BNP Tests and from companies with greater financial capital and resources;

• our ability to market and sell products in the markets in which we compete, including the hospital market, the physician office market and international markets;

• changes in the mix of products sold;

• seasonal or unanticipated changes in customer demand or the timing of significant orders;

• manufacturing problems, inefficiencies, capacity constraints, backlog or delays;

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

• competitive pressures on average selling prices of our products;

• regulatory changes, uncertainties or delays;

• changes in reimbursement policies;

• regulatory approvals, market acceptance and sales execution of current or new products;

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

• whether and when we successfully develop and introduce new products;

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

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

• our ability to execute, maintain and achieve performance milestones under license and collaborative agreements;

• product recalls;

• costs and timing associated with business development activities, including potential licensing of technologies or intellectual property rights; and

• temporary and permanent costs and timing associated with the relocation of our personnel, assets and activities to our new corporate facilities.

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 at the same or higher rate 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 us or 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 and sales of our newer products, such as the Triage BNP Tests, Triage Cardiac Panel, Triage Cardio Profiler, Triage Profiler Shortness of Breath Panel and products currently under development, such as our stroke diagnostic panel. Our revenues will also depend on 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. We are also making significant investments in developing and penetrating new markets in the United States such as the physician office segment. 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;

• effective marketing to users, especially to those in markets where we have limited experience or significant competition;

• an effective distribution system for our products; or

• appropriate strategies or tactics to address our competitors,

sales of our products may not meet expectations and our profitability may suffer.

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

We are making significant investments in research and development of potential new products, including the development of diagnostic tests for stroke, ACS and sepsis, and in expanded uses of our existing products. The successful development of some of our 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 new products and revenue growth, as well as constructing 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. Products that appear promising during product development and preclinical studies, including our stroke diagnostic panel, may not demonstrate acceptable clinical study 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. We will be harmed if we are unable, for technological or other reasons, to:

• complete new product development, processes, or capital projects 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 effectively or efficiently scale-up manufacturing for new products; or

• obtain regulatory approval or clearance for marketing a new product for an intended use or an existing product for an alternative use.

Our Triage BNP Tests have 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 Tests represented 63% of our product sales in the first nine months of 2004 and 60% in the same period of 2003. Our Triage BNP Tests are currently two of several FDA-cleared tests used as an aid in the diagnosis of CHF. Bayer, Dade Behring, Roche Diagnostics and Abbott Laboratories have launched competitive tests at various times since November 2002. Shionogi & Co., Ltd. sells a BNP radioimmunoassay product for research purposes only in the United States. Scios, Inc., the licensor of the BNP technology and patents, was acquired by Johnson & Johnson in April 2003.

We have, and continue to, experience competition from these companies and anticipate competition from others in the future. Beginning in the third quarter of 2003, we experienced significant competition, primarily from Bayer, resulting in a loss of customers who wanted to utilize an automated immunoassay system for BNP testing. After initiating sales outside of the United States in November 2003, Abbott Laboratories began selling a test in the United States during the first quarter of 2004. Dade Behring began selling a NT-pro BNP diagnostic product in September 2004. These and other competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Tests. This risk of competition may increase as other potential competitors gain access to competing technologies, such as NT-pro BNP, which Roche Diagnostics is offering for license. 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. In addition, as the market for BNP testing matures and more competitive products become available, our average sales price for our Triage BNP Tests may decline.

Competition and technological change in the diagnostic testing market may make our products less attractive or obsolete.

In addition to the specific competitive risks that we face in the market for our Triage BNP Tests, we face intense competition for our other products and in the general market for diagnostic testing. 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 healthcare providers are performed by independent clinical reference laboratories and hospital-based laboratories using automated testing systems. Therefore, with the exception of our Triage BNP Test for Beckman Coulter Immunoassay Systems, in order to achieve market acceptance for our products we will be required to demonstrate that our products provide clinical, cost-effective and time saving alternatives to automated tests traditionally performed by clinical reference laboratories or hospital-based laboratories. This may prove to be even more difficult in the future as CHF testing becomes more widely available on automated testing systems.

Our competitors have developed or are developing diagnostic products and/or testing systems that do or will compete with our products. Many of our 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. The success of our competitors, many of whom 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 in either the United States or in international markets.

We are subject to manufacturing risks, including our limited manufacturing experience with newer products and processes, which may lead to our inability to scale-up manufacturing. Additionally, unanticipated acceleration or deceleration of customer demand may lead to manufacturing inefficiencies. These manufacturing risks and inefficiencies may adversely affect our ability to produce products and could reduce our gross margins and could 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 and changes in our manufacturing processes and organization 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 successfully or efficiently completed.

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. It may not be possible for us, or any other party, to manufacture these products 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 other 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 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 has and may harm our gross margins and overall financial results. Such inefficiencies or constraints may also result in delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.

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 and may rely upon Fisher or other distributors to distribute new products or our existing products in other markets. Fisher accounted for 86% of our product sales in first nine months of 2004 and 90% for the full year 2003. In July 2003, we signed a two-year distribution agreement with Fisher that extends our distribution relationship through December 31, 2005. We distribute products in the United States physician office market primarily through PSS. In August 2004, Henry Schein began distributing our products in the physician office market. 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.

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 our future 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, both domestically and 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.

We may be unable to accurately predict future sales through our distributors, which could harm our ability to efficiently manage our internal resources to match market demand.

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 seasonal aspects and fluctuations in the buying patterns of end-user customers, Fisher and our other distributors, and by the changes in inventory levels of our products held by these distributors. We are unable to verify the inventory levels of our international distributors and only have limited visibility over the inventory levels of our products at Fisher or our other domestic distributors. While we attempt to assist Fisher in maintaining targeted stocking level of our products, we may not consistently be accurate or successful. Attempting to assist Fisher in maintaining targeted stocking levels of our products 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, which may harm our financial results due to unexpected buying patterns of our distributors or our inability to efficiently manage or invest in internal resources, such as manufacturing capacity, to meet the actual demand for our products.

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

Sole-source vendors provide some key components and raw materials used in the manufacture of our products. 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 products under development 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 on acceptable terms, or at all, or the implementation of alternative processes for the manufacture of our future products, if any, could increase our manufacturing costs or limit our production capacity for one or more of our products, which would have a material adverse effect on us.

For example, we rely upon LRE for production of the fluorometer that is used with our Triage MeterPlus platform products, which include the Triage BNP Test, Triage Cardiac Panel, Triage Cardio Profiler, Triage Profiler Shortness of Breath Panel and Triage TOX Drug Screen and other products currently under development. In addition, we rely on Beckman Coulter to manufacture the Triage BNP Test for Beckman Coulter Immunoassay Systems for us. If LRE is unable or unwilling to manufacture sufficient quantities of quality Triage MeterPlus units, or if Beckman Coulter is unable or unwilling to manufacture sufficient quantities of the Triage BNP Test for Beckman Coulter Immunoassay Systems that meets our quality standards, this may materially and 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.

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 and Germany in 2003 and in Belgium, Luxembourg, the United Kingdom and Italy in 2004. 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 United States 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.

Our international sales and operations may be harmed by political, social or economic changes, or other factors.

Export sales to international customers amounted to $18.4 million for the first nine months of 2004 and $14.5 million for the full year 2003. During the last half of 2003 and the first nine months of 2004, we have significantly expanded our direct sales and distribution operations outside of the United States in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy, and we may expand into additional countries in the future. Sales and costs resulting from our direct sales and distribution operations, in Europe are denominated primarily in local currencies, including the Euro, and are subject to fluctuations in currency exchange rates. Further, we purchase our Triage MeterPlus inventory from LRE and incur other operating expenses, including clinical trials, which are denominated in Euros and other local currencies. Significant fluctuations in the currency exchange rates may negatively impact our consolidated sales and earnings.

International sales and operations are also subject to a variety of other risks, including:

• difficulty in staffing, monitoring and managing foreign operations;

• understanding of, and compliance with local employment laws, including reduced flexibility and increased cost of staffing adjustments;

• longer collection cycles;

• greater risk of uncollectible accounts;

• unknown or changes in regulatory practices, including import or export license requirements, trade barriers, tariffs, employment and tax laws;

• adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries;

• restrictions on repatriation of locally-derived revenue;

• competition from locally-produced products with cost advantages or national appeal;

• local business practices that could expose our direct sales and marketing organization to Foreign Corrupt Practices Act risks;

• political, social or economic conditions and changes in these foreign markets; and

• government spending patterns.

As a result, our operating results will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results.

Healthcare reform and restrictions on reimbursement may adversely affect our results.

In the United States, healthcare providers that purchase our products and other diagnostic tests generally rely on third-party payors to reimburse all or part of the cost of the procedure. In international markets, reimbursement and healthcare payment systems vary significantly by country, and include both government sponsored healthcare and private insurance. 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. Third-party payors are increasingly scrutinizing and challenging the prices charged for both existing and new medical products and services. Lower than expected or 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 to the physicians at prices we target. 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, or CLIA, and related federal and state regulations, which 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 January 24, 2003, the Centers for Medicare and Medicaid Services, or CMS, publicly issued a final QC rule under CLIA, which went into effect April 24, 2003. On January 12, 2004, CMS published updated Interpretive Guidelines for CLIA-regulated laboratories. We are working with CMS, FDA and our customers to evaluate the new Interpretive Guidelines and assist our customers in complying with any provisions, including QC requirements that may be new. CMS has stated that the first two-year survey cycle of clinical laboratories will be an “educational” one, especially with respect to new requirements of the new Interpretive Guidelines.

While we believe the weight of scientific data and professional acceptance support the appropriateness of our internal quality controls, there can be no assurance that the application of these new Interpretive Guidelines will be favorable to our products. Moreover, future amendments 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. Any of these circumstances could prevent us from selling any or all of our products. 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 may 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.

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. 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. There can be no assurance that we do not or will not infringe these patents, or other patents or proprietary rights of third parties. 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 collaborators to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that our collaborators or we 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, 2004, we had approximately $104.0 million of long-lived assets, including $29.6 million of land, $31.1 million of building construction-in-progress, $4.1 million of leasehold improvements, $31.4 million of equipment and $7.7 million of capitalized license rights and other assets. Leasehold improvements, equipment, intangible assets and certain other long-lived assets are amortized or depreciated over the lesser of their useful lives or the remaining lease term. In San Diego, we lease 10 buildings with leases that expire between March and December 2005. 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 changes might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other matters. Additionally, we may determine that certain equipment, furniture and fixtures will not be used at the new corporate complex. 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, 2004, we had approximately $4.1 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 unlikely 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 costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources, expansion of our manufacturing capacity and our facilities expansion needs, including the construction of our new corporate complex;

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

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

• seasonal or unanticipated changes in customer demand;

• regulatory changes, uncertainties or delays;

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

• changes in third-party reimbursement policies;

• 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; and

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

If we require additional capital, and if we are not able to raise capital on acceptable terms when needed, we would 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.

Changing facilities costs and other risks relating to our move to our new corporate complex may negatively impact our operating results.

In October 2003, we completed a two-part escrow closing to purchase land for the construction of our new corporate complex. We purchased a total of 26.1 usable acres for approximately $28.2 million. We expect the new complex will provide us with up to 800,000 square feet of space 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 $105 million, of which we have paid approximately $60.7 million through September 30, 2004. We have funded and currently plan to continue to finance the construction of the complex using a combination of available cash balances and debt financing, if necessary. 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 second 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. We may also incur unexpected costs and expenses in connection with our move from our existing facilities to our new corporate complex, or we may experience unanticipated decreases in productivity and other losses due to inefficiencies relating to this transition. For instance, the scale-up of manufacturing at our new corporate complex could result in lower than expected manufacturing output and higher than expected product costs. In addition, we expect to incur some duplicate facilities expenses, such as rent, during the period of time we transfer our operations to the new corporate complex as we will transfer our operations in stages.

Many of our existing office and laboratory leases will expire during 2005. In the event of any delays in the construction or completion of our new corporate complex, we may not be able to extend our existing property leases

on acceptable terms or at all and we may not be able to find acceptable alternative facilities. This and other consequences of any delay in the construction or completion of our new corporate complex may significantly disrupt our business, increase our operating expenses and reduce our productivity, which could harm our financial results.

Additionally, in order to meet the increase in customer demand for our products, we have made, and continue to make, 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, which may harm our financial results.

Delays in the conduct or completion of our clinical studies or the analysis of the data from our clinical studies 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, including those related to our Triage Stroke Panel, that will cause us or regulatory authorities to delay or suspend our ongoing or 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 studies;

• delays in enrolling patients;

• lower than anticipated retention rate of patients in a clinical study;

• unexpected results or adverse events of clinical studies;

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

• difficulties in coordinating clinical study activities with third party clinical study 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 worldwide, principally the Food and Drug Administration (FDA) in the United States. and corresponding state and foreign regulatory agencies. Our future performance depends on, among other matters, our estimates as to when and at what cost we will receive regulatory approval for new products. Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and cost of obtaining approvals difficult to predict.

In the United States, clearance or approval to commercially distribute new medical devices is received from the FDA through clearance of a 510(k) Premarket Notification, or 510(k), or approval of a Premarket Approval Application, or PMA. 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. It generally takes from three to nine months from submission to obtain 510(k) clearance but may take longer or may not be obtained at all. The FDA may determine that a new 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. In October 2004, we filed two 510(k)s with the United States Food and Drug Administration seeking clearances for two products, the Triage Profiler CP Panel and the Triage D-dimer Test, each of which we expect to launch in the first half of 2005. However, we may not receive 510(k) clearance on a timely basis, or at all, for either of these products.

For any devices that are cleared through the 510(k) Premarket Notification 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)s describing the modifications and have received FDA 510(k) clearance. We made other modifications to some of our products that we believe do not require the submission of new 510(k)s. 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) for any of these modifications made to our products. If the FDA requires us to submit a new 510(k) for any device modification, we may be prohibited from marketing the modified products until the 510(k) 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. We currently intend to submit a PMA application of our planned Triage Stroke Panel. 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. It generally takes from six to eighteen months from submission to obtain PMA approval, but it may take longer or may not be approved at all.

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. Our manufacturing facilities and those of our contract manufacturers are, or can be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies. Noncompliance with applicable laws and requirements 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 also subject to routine inspection by the FDA and certain state agencies for compliance with Quality System Requirement, or QSR, and Medical Device Reporting requirements in the United States and other applicable regulations worldwide. 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.

Regulatory agencies have made, and continue to make, changes in their approval and compliance requirements and processes. We cannot predict what, how or when these changes will occur 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 may not be able to obtain necessary worldwide 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 business strategy includes entering into agreements with clinical and commercial collaborators and other third parties for the development, clinical evaluation and marketing of existing products and products under development. Many of the agreements are subject to rights of termination and may be terminated without our consent. These parties also may not abide by their contractual obligations to us and may discontinue or sell their current lines of business. Research performed under a collaboration for which we receive or provide funding may

not lead to the development of products in the timeframe expected, or at all. If these agreements are terminated earlier than expected, or if third parties do not perform their obligations to us properly and on a timely basis, we may not be able to successfully develop new products as planned, 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 internal control, 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 components that are 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 clinical and product liability exposure.

The testing, manufacturing and marketing of medical diagnostic tests entails an inherent risk of clinical and product liability claims. Our launch of new products to assist in the diagnosis of other indications, such as stroke, may further increase our risk of these claims. Potential clinical and product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. In the future, 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.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the United States that, if implemented, would require us to record charges to earnings for employee stock option grants. Adopting this proposed requirement would negatively impact our earnings.

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 Securities and Exchange Commission, or 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.

Investor confidence and share value may be adversely impacted if our independent auditors are unable to provide us with the attestation of the adequacy of our internal controls over financial reporting as of December 31, 2004, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on our internal controls over financial reporting in our annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for the fiscal year ending December 31, 2004. How companies should be implementing these new requirements including internal control reforms, if any, to comply with Section 404’s requirements, and how independent auditors will apply these new requirements and test companies’ internal controls, are subject to uncertainty. Although we are diligently and vigorously reviewing our internal controls over financial reporting in order to ensure compliance with the new Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. If our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our shares.

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.

Beginning with the last half of 2003, we have significantly expanded our direct sales and distribution operations in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy, and we may expand into additional countries in the future. Sales and costs resulting from our direct sales and distribution operations in Europe are denominated primarily in local currencies and are subject to fluctuations in currency exchange rates. Further, we purchase our Triage MeterPlus inventory from LRE and incur other operating expenses, including clinical trials, which are denominated in Euros and other local currencies. As a result, our costs will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results. In prior years, we have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes. As of September 30, 2004, we had no outstanding forward exchange contracts. Cash totaling $3.9 million, accounts receivable totaling $484,000 and accounts payable totaling $2,000 were denominated in foreign currencies as of September 30, 2004. Significant fluctuations in currency exchange rates may negatively impact our consolidated sales and earnings.

International sales and operations are also subject to a variety of other risks, including:

• difficulty in staffing, monitoring and managing foreign operations;

• reduced flexibility and increased cost of staffing adjustments;

• longer collection cycles;

• greater risk of uncollectible accounts;

• unknown or changes in regulatory practices, including import or export license requirements, trade barriers, tariffs and tax laws;

• adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries;

• political, social or economic conditions and changes in these foreign markets; and

• government spending patterns.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (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 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 that occurred during the period covered by this report that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year beginning in 2004, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports beginning with our Annual Report on Form 10-K for the fiscal year ending on December 31, 2004. Section 404 also requires our independent auditors to attest to and report on, management’s assessment of our internal controls over financial reporting.

In 2004, we initiated a company-wide review of our internal controls over financial reporting as part of the process of preparing for compliance with Section 404 and as a complement to our existing overall program of internal controls over financial reporting. As a result of this on-going review, we have made numerous improvements to the design and effectiveness of our internal controls over financial reporting through the period ended September 30, 2004. We anticipate that improvements will continue to be made. Such improvements included enhancing segregation of duties, expanding and formalizing the documentation and maintenance of our control systems and processes throughout the Company.

Part II. Other Information

Item 6. 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.
	10.1(4)	Amended and Restated 1996 Stock Incentive Plan of Biosite Incorporated.
	10.2(5)	Biosite Incorporated Amended and Restated Employee Stock Purchase Plan.
	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.
	(4)	Incorporated by reference to Exhibit A to Biosite’s Definitive Proxy Statement filed on April 27, 2004.
	(5)	Incorporated by reference to Exhibit B to Biosite’s Definitive Proxy Statement filed on April 27, 2004.

Dated: November 5, 2004		BIOSITE INCORPORATED


	By:	/s/ CHRISTOPHER J. TWOMEY

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

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Notes to Condensed Consolidated 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
Signatures