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 March 31, 2005

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)		(Zip Code)

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

May 5, 2005 was 16,894,488.

Part I. Financial Information

ITEM 1. FINANCIAL STATEMENTS.

BIOSITE INCORPORATED

Condensed Consolidated Balance Sheets

(in thousands, except par value)

	March 31, 2005		December 31, 2004
	(Unaudited)		(Note)
Assets
Current assets:
Cash and cash equivalents	$	32,065	$	25,645
Marketable securities	63,789		46,765
Accounts receivable, net	31,052		36,867
Inventories, net	36,402		37,077
Deferred income taxes	7,432		7,432
Other current assets	5,935		7,081
Total current assets	176,675		160,867
Property, equipment and leasehold improvements, net	123,067		111,135
Patents and license rights, net	5,261		5,484
Deferred income taxes	3,668		3,668
Deposits and other assets	2,990		2,361
	$	311,661	$	283,515

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,437	$	18,662
Accrued employee expenses	10,200		11,008
Current portion of equipment financing notes	6,062		5,749
Income taxes payable	6,315		4,401
Other current liabilities	8,855		6,253
Total current liabilities	46,869		46,073

Equipment financing notes	15,518		15,292
Other long-term liabilities	1,995		1,813

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued and outstanding at March 31, 2005 and December 31, 2004	—		—
Common stock, $.01 par value, 40,000 shares authorized; 16,822 and 16,419 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively	168		164
Additional paid-in capital	138,616		125,013
Accumulated other comprehensive income, net of related tax effect of $(90) and $(53) at March 31, 2005 and December 31, 2004, respectively	629		1,086
Retained earnings	107,866		94,074
Total stockholders’ equity	247,279		220,337
	$	311,661	$	283,515

Note: The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by U.S. 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 March 31,
	2005			2004
Revenues:
Product sales	$	70,496		$	56,698
Contract revenues	1,350			979
Total revenues	71,846			57,677

Operating expenses:
Cost of product sales	20,240			19,742
Selling, general and administrative	18,557			15,883
Research and development	10,768			7,488
License and patent disputes	209			—
Total operating expenses	49,774			43,113

Operating income	22,072			14,564

Interest and other income, net	59			194

Income before provision for income taxes	22,131			14,758
Provision for income taxes	(8,339		)	(5,813		)

Net income	$	13,792		$	8,945

Net income per share:
- Basic	$	0.83		$	0.57
- Diluted	$	0.76		$	0.55

Shares used in calculating per share amounts:
- Basic	16,687			15,628
- Diluted	18,226			16,366

See accompanying notes.

BIOSITE INCORPORATED

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2005			2004
OPERATING ACTIVITIES
Net income	$	13,792		$	8,945
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,030			3,079
Changes in operating assets and liabilities:
Net purchases of investments classified as trading	(171		)	(156		)
Accounts receivable	5,815			(1,446		)
Inventory	675			345
Other current assets	1,185			(549		)
Income taxes	7,825			5,533
Accounts payable	(3,225		)	4,765
Other current liabilities	1,794			(490		)
Long-term liabilities	239			377
Foreign currency translation	(401		)	(574		)
Net cash provided by operating activities	31,558			19,829

INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities	9,889			3,750
Purchase of marketable securities	(26,892		)	(3,527		)
Purchase of property, equipment and leasehold improvements	(15,601		)	(10,430		)
Patents, license rights, deposits and other assets	(763		)	(11		)
Net cash used in investing activities	(33,367		)	(10,218		)

FINANCING ACTIVITIES
Proceeds from issuance of financing obligations	2,007			2,546
Principal payments under financing obligations	(1,468		)	(1,184		)
Proceeds from issuance of stock under stock plans, net	7,690			263
Net cash provided by financing activities	8,229			1,625

Increase in cash and cash equivalents	6,420			11,236

Cash and cash equivalents at beginning of period	25,645			19,537
Cash and cash equivalents at end of period	$	32,065		$	30,773

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	253		$	229
Income taxes paid	$	446		$	262
Income tax benefit of disqualifying dispositions of stock	$	5,911		$	54

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 U.S. 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 U.S. 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, as amended, for the year ended December 31, 2004.

The 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.

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:

	Three Months Ended March 31,
	2005	2004
	(in thousands)
Shares used in calculating per share amounts – Basic (Weighted average common shares outstanding)	16,687	15,628
Net effect of dilutive common share equivalents using the treasury stock method	1,539	738
Shares used in calculating per share amounts – Diluted	18,226	16,366

3. STOCK-BASED COMPENSATION

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 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 Statement of Financial Accounting Standards, or FAS, Statement 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 Statement No. 123 and has been determined as if we had accounted for our employee stock-based compensation under the fair value method of that Statement. The weighted average fair value of options granted during the three months ended March 31, 2005 and 2004 were $41.78 and $21.34, respectively. The fair value for these options was estimated at the date of grant using the Black-Scholes method for the three months ended March 31, 2005 and 2004:

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:

	Three Months Ended March 31,
	2005			2004
	(in thousands, except per share data)
Net income, as reported	$	13,792		$	8,945
Pro forma FAS 123 compensation expense (net of tax)	(4,738		)	(5,031		)
Adjusted pro forma net income	$	9,054		$	3,914

Adjusted pro forma basic net income per share	$	0.54		$	0.25
Adjusted pro forma diluted net income per share	$	0.50		$	0.24

The pro forma effects on net income for the three months ended March 31, 2005 and 2004 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:

	March 31, 2005		December 31, 2004
	(in thousands)
Raw materials	$	11,861	$	12,852
Work-in-process	13,749		14,242
Finished goods	10,792		9,983
	$	36,402	$	37,077

5. COMPREHENSIVE INCOME

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

	Three Months Ended March 31,
	2005			2004
	(in thousands)
Net income	$	13,792		$	8,945
Change in unrealized net gain (loss) on marketable securities, net of tax	(56		)	(4		)
Foreign currency translation gain (loss)	(401		)	(574		)
Comprehensive income	$	13,335		$	8,367

6. EFFECT OF NEW ACCOUNTING STANDARDS

Share-based Payments

On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123 (revised 2004), or Statement 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement No 123(R) is similar to the approach described in Statement No 123. However, Statement No 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement No 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement No 123(R) on January 1, 2006. Statement No 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement No 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement No 123 for all awards granted to employees prior to the effective date of Statement No 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement No 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We are currently evaluating the two different methods for the adoption of Statement No 123(R) and have not determined which of the two methods we will adopt.

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 outcome of ongoing litigation between us and Roche Diagnostics Corporation and others; potential contract disputes or patent conflicts; 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; dependence on third-party manufacturers and suppliers; changing market conditions and the other risks and uncertainties described under “Risk Factors” and throughout our Annual Report on Form 10-K, as amended, for the year ended December 31, 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 bio-medical company commercializing proteomics discoveries for the advancement of medical diagnosis. We believe that our novel, rapid medical diagnostic products, largely evolved from an intensive study of protein biomarkers of disease, can contribute to improvements in medical care by aiding physicians in the diagnosis of critical diseases and health conditions. In selecting market opportunities, we primarily target highly prevalent diseases that are poorly diagnosed by existing technologies. Currently, we offer diagnostic products for drug screening, heart attack, congestive heart failure, or CHF, acute coronary syndromes, or ACS, 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. We also use a network of distributors both in the United States and internationally.

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. We have a distribution agreement with Fisher that extends through December 31, 2005. Sales to Fisher represented 84% of our product sales in the first quarter of 2005 and 86% of our product sales for the full year 2004. We primarily 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.

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. In the future, we may transition to direct sales and distribution of our products in additional countries. 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.

Our total revenues for the first quarter of 2005 were $71.8 million, representing a 25% increase over the same period of 2004. This growth resulted largely from increased sales of our Triage BNP Test products, which are primarily used to aid in the diagnosis of CHF. Our meter-based Triage BNP Test, launched domestically in January

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. In December 2003, we received clearance from the United States Food and Drug Administration, or FDA, 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 b-type natriuretic peptide, or BNP, testing using either our rapid, portable Triage MeterPlus system or any of Beckman Coulter Inc.’s automated immunoassay systems.

Today, our Triage BNP Test products are among several FDA-cleared blood products for use as an aid in the diagnosis of CHF. These include products from Bayer Healthcare, Dade Behring, Roche Diagnostics and Abbott Laboratories, which offer products based on large, centralized automated testing platforms. We have experienced, and continue to experience, competition from these companies and anticipate competition from others in the future. 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 products 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, or via our internal research and licensing programs. Biosite Discovery has also attracted the interest of leading clinical collaborators, who provide patient samples and assist in the analysis of clinical data. The discovery of new disease markers and the extension of applications for existing products could enable us to expand our product sales into other healthcare market segments.

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

Recent Developments

Triage Stroke Panel

In December 2004, we filed a Premarket Approval Application, or PMA, with the FDA for the approval of our Triage Stroke Panel. In April 2005, we received a letter from the FDA indicating that the PMA for our Triage Stroke Panel is on hold pending submission of additional information. The letter further states that the issues raised need to be resolved before the FDA can complete its review, otherwise the PMA in its current form would be considered not approvable.

New Products

During the first quarter of 2005, we launched two new products: the Triage D-Dimer Test and the Triage TOX Drug Screen with Acetaminophen. The Triage D-Dimer Test aids in the assessment and evaluation of patients suspected of having thromboembolic events, including pulmonary embolism and deep vein thrombosis, which are common and potentially lethal conditions. The Triage TOX Drug Screen with Acetaminophen is the first rapid, point-of-care drug screen to test for the qualitative detection of acetaminophen in urine.

Critical Accounting Policies Involving Management Estimates and Assumptions

There were no significant changes in our critical accounting policies or estimation methods from those at December 31, 2004.

Results of Operations

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

Product Family	Three Months Ended March 31,				$$ Increase/ (Decrease)			% Increase/ (Decrease)
Product Family	2005		2004		$$ Increase/ (Decrease)			% Increase/ (Decrease)

Cardiovascular products:
Triage BNP Test products	$	49,771	$	39,152	$	10,619		27	%
Triage Cardiac Panel	5,985		5,490		495			9	%
Triage Cardio ProfilER and Profiler SOB	1,946		460		1,486			323	%
Triage D-Dimer	131		—		131			N/A
Triage MeterPlus products	776		905		(129		)	(14	)%

Other products:
Triage Drugs of Abuse Panel and TOX Drug Screen products	10,283		9,315		968			10	%
Triage Microbiology products	1,604		1,376		228			17	%
Total Product Sales	$	70,496	$	56,698	$	13,798		24	%

Product sales for the three months ended March 31, 2005 were $70.5 million, representing an increase of 24%, compared with $56.7 million for the same period of 2004. The $13.8 million increase in total product sales consisted primarily of $13.7 million of product sales growth resulting from an increase in sales volume. Growth in the sales volume of our Triage BNP Tests represented 82% of the product sales growth resulting from an increase in sales volume.

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 in the future may be below or above targeted stocking levels. We adjust our manufacturing capacity by both adjusting our production activities and the number of production shifts we operate, 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 to our distributors in future periods 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 output and capacity. 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. Higher utilization rates of our Triage BNP Tests may be due to a higher number of emergency department, or ED, visits by patients exhibiting shortness of breath, a symptom of congestive heart failure and the flu. However, higher utilization may also result from greater awareness, education and acceptance 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 Cardio ProfilER™ Panel, Triage Profiler Shortness of Breath™, Triage D-Dimer Test, and Triage MeterPlus, totaled $58.6 million for the three months ended March 31, 2005, as compared with $46.0 million for the same period of 2004. The product sales growth of our cardiovascular products of 27% was primarily due to growth in sales volume of our Triage BNP Tests, partially offset by a decline in the average sales price. 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 and testing platforms 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 continue to decline.

Product sales of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were $11.9 million for the three months ended March 31, 2005, as compared to $10.7 million for the same period of 2004. The increase in sales of these products was primarily due to the $1.2 million growth in sales volume of our Triage TOX Drug Screen, which was partially offset by a decrease in sales volume of the Triage

Drugs of Abuse Panel. We believe that 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 months ended March 31, 2005 were $1,350,000, compared with $979,000 for the same period of 2004. Contract revenues recognized during the first quarters of 2005 and 2004 consisted primarily of research funding. During each of the first quarters of 2005 and 2004, we recognized $750,000 of research funding from an alliance with Medarex Inc., which expires in 2008. 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 generate 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 $2.4 million for the first quarter of 2005, compared with $1.4 million for the same period of 2004. These costs are included in research and development expenses.

Cost of Product Sales and Gross Profit From Product Sales. Gross profit from product sales increased 36% to $50.3 million for the three months ended March 31, 2005 from $37.0 million for the same period of 2004.

The $13.3 million increase in gross profit from product sales consisted of $9.0 million attributable to product sales growth, and $4.3 million resulting from changes in the gross margins of our products. For the first quarter of 2005 and 2004, the gross margins for our cardiovascular products were 70% and 65%, respectively, while our gross margins for our Triage Drugs of Abuse Panel, Triage TOX Drug Screen and other products were 78% and 65%, respectively. Sales of our cardiovascular products represented 83% and 81% of our product sales for the three months ended March 31, 2005 and 2004, respectively. Our overall gross margin for the three months ended March 31, 2005 was 71%, as compared to 65% for the same period of 2004. The increase in the overall gross margin was primarily due to greater manufacturing efficiencies generated primarily from higher production volumes and manufacturing output for products sold in the first quarter of 2005 compared with the same period of 2004.

Our cardiovascular products have, and are expected to continue to realize, lower gross margins than our 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 products sold 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. Manufacturing inefficiencies, including inefficiencies experienced as we attempt to increase or decrease our manufacturing capacity, production volumes and manufacturing output will also impact our gross margins. Our manufacturing overhead costs are spread over the changing production volumes manufactured during a quarter on a first in, first out basis.

We also expect that our fixed occupancy costs will significantly increase as we transition our manufacturing operations to our new corporate complex, which has a much larger manufacturing space than our existing facilities. 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, or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities. 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 during the period of time we transfer our operations to the new corporate complex as we will transfer our operations in stages over a three to six month period.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses increased 17% to $18.6 million for the three months ended March 31, 2005 from $15.9 million for the same period of 2004. At March 31, 2005, our headcount for sales, marketing and administrative functions totaled 331 employees, compared with 275 at March 31, 2004. The increase in SG&A expenses was primarily associated with the addition of sales, clinical education and technical service resources, and administrative support. The expansion of our direct sales, marketing and distribution operations in Europe resulted in an increase in SG&A expenses of $1.4 million in first quarter of 2005 compared to the same period of 2004. We began direct sales, marketing and distribution in certain European countries at different dates from July 2003 to June 2004, and we are continuing to scale-up our direct operations in Europe. In the United States, employee-related expenses increased approximately $400,000 and travel and entertainment expenses increased approximately $685,000, compared to the same period of 2004, as a result of growth in sales activities, marketing activities and general administrative resources.

We expect SG&A expenses in 2005 to be higher than in 2004, as we continue to increase our sales, marketing, clinical education, technical service and general administration resources in the United States, as well as continue to build our direct sales, distribution and administrative infrastructure in Europe. We also expect other non-personnel-related costs, including sales and marketing program activities for our new products, to grow as our overall operations grow. The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products. SG&A expenses are also expected to increase due to costs associated with our move from our existing facilities to our new corporate complex and higher occupancy costs primarily due to increased square footage at the new corporate complex and, for a period of time, occupancy costs of both facilities.

Research and Development Expenses. Research and development, or R&D, expenses increased 44% to $10.8 million for the three months ended March 31, 2005 from $7.5 million for the same period of 2004. The increase in R&D expenses consisted primarily of a $1.1 million increase in employee expenses, an increase in consultant, clinical studies and patent-related expenses, including involvement in pending interference and opposition proceedings, totaling approximately $700,000, an increase in license fees of $640,000, and an increase in expenses for supplies used in our R&D activities of $475,000. During the first quarter of 2005, our R&D resources were focused primarily on product development for potential new diagnostic products, including a new ACS panel and other diagnostic products for critical health conditions such as sepsis and abdominal pain. We also focused on the development of potential improvements to our existing products, including our Triage Cardiac Panel, 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 R&D group and were primarily related to Biosite Discovery.

We expect R&D expenses in 2005 to be higher than in 2004 and to relate primarily to:

• product development efforts, including the development of potential diagnostic products for ACS, stroke, sepsis and abdominal pain;

• 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;

• engineering development programs intended to miniaturize the Triage MeterPlus Platform and automate and improve manufacturing processes;

• manufacturing scale-up for potential new products, including the Triage Profiler CP™ and Triage Stroke Panel;

• costs associated with FDA submissions for the Triage Stroke Panel, Triage Profiler CP Panel and other products under development;

• Biosite Discovery activities;

• performance-based compensation; and

• costs associated with our move from our existing facilities to our new corporate complex and higher occupancy costs primarily due to increased square footage at the new corporate complex and occupancy of both facilities for a period of time.

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

License and Patent Disputes. Expenses associated with license and patent disputes incurred for the three months ended March 31, 2005 totaled $209,000. We did not incur any such expenses during the same period in 2004. The expenses consisted of legal costs related to two lawsuits involving Roche Diagnostics Corporation and several of its affiliates. In November 2004, Roche Diagnostics Corporation and certain of its affiliates filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 and U.S. Patent 4,816,224, owned by Roche and/or its affiliates. We believe these allegations of infringement are without merit and we intend to vigorously contest these claims. Also, in November 2004, we filed a complaint in the United States District Court, Southern District of California alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite. The patents relate to methods for the measurement of cardiac troponin forms. We believe that our claims have merit and we intend to vigorously pursue their prosecution. We expect expenses for license and patent disputes to be significantly higher in 2005 than in 2004 due to the ongoing costs associated with both lawsuits.

Interest and Other Income, Net. Interest and other income, net was $59,000 and $194,000 for the three months ended March 31, 2005 and 2004, respectively. The decrease resulted primarily from net losses on receivables and payables denominated in foreign currencies of $147,000 during the three months ended March 31, 2005 compared with net gains of $12,000 in the same period of 2004.

Provision for Income Taxes. As a result of the pre-tax income and the estimated tax credits and other permanent differences between our reported and tax results in 2005, we recorded a provision for income taxes of $8.3 million for the first three months of 2005, or an effective tax rate of 37.7%. For the same period in 2004, we recorded a provision for income taxes of $5.8 million, or an effective tax rate of 39.4%. 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

Historically, our sources of cash have included:

• cash generated from operations, primarily from the collection of accounts receivable resulting from product sales;

• private and public placements of equity securities, including cash generated from the exercise of stock options and participation in our employee stock purchase plan;

• proceeds from equipment financing;

• cash received under collaborative development agreements; and

• interest income.

Our historical cash outflows have primarily been associated with:

• cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and R&D activities and other working capital needs; and

• expenditures related to equipment and leaseholds used to increase our manufacturing capacity, improve our manufacturing efficiency and expand our research and development activities.

Other factors that impact our cash inflow and outflow include:

• We have experienced gross margins of greater than 65% in each of the last three years. As our product sales have increased significantly since 2001, our gross profits have increased significantly as well, providing us with an increasing source of cash to finance our expansion of our operations; and

• Fisher, which represented 86% of our product sales in 2004, has historically been a timely and predictable payor of its outstanding accounts receivable. Our current distribution agreement with Fisher will expire December 31, 2005.

As of March 31, 2005, we had cash, cash equivalents and marketable securities of $95.9 million compared with $72.4 million as of December 31, 2004. The increase in cash, cash equivalents and marketable securities during the first quarter of 2005 was largely attributable to cash generated from operating activities, for which the sales volume growth of our Triage BNP Tests was the primary driver. Additionally, we generated $7.7 million in cash from proceeds from the issuance of shares under our stock plans as well as tax deductions related to disqualifying dispositions of shares by employees during the first quarter of 2005. We believe the increased activity related to the exercise of stock options and participation in our employee stock purchase plan by employees was driven by increases in the market price of our common stock. Future proceeds from exercise of stock options and our employee stock purchase plan will depend primarily upon the behavior, expectations and needs of the stock option holders and our stock price. The primary cash outflow during the three months ended March 31, 2005 was cash used for the construction of our new corporate complex.

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. Through March 31, 2005, we have expended an additional $57.9 million for the design and construction of the new corporate complex. We expect the new complex to provide us with up to 800,000 square feet of space, to 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 the construction of the first phase is estimated to be approximately $107 million. We plan to finance the construction of the complex using available cash balances and utilize debt financing, if necessary. We may not be able to obtain financing on commercially reasonable terms or at all. We expect the buildings in the first phase of construction to be completed during the second and third quarters of 2005 and do not anticipate expanding our operations to the new facility prior to that time. 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, or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities. 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 in which we transfer our operations to the new corporate complex as we will transfer our operations in stages.

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

• the remaining construction costs in the first phase of the new corporate complex, which we estimate to be approximately $21 million payable in the second and third quarters of 2005;

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

• expenditures for equipment and other fixed assets for use in our new corporate complex, and for manufacturing and research and development purposes;

• the prosecution, defense and resolution of ongoing license and patent disputes;

• improvements in our manufacturing capacity and efficiency, new discovery and product development; and

• clinical studies, and the continued advancement of research and development efforts.

For 2005, we plan to spend approximately $38.4 million in cash for capital expenditures primarily for manufacturing and R&D equipment, furniture, fixtures and computer equipment. We intend to use our currently available cash and cash expected to be generated from operating activities to address our capital requirements. We expect that the performance of our product sales and the resulting gross profits will significantly impact our cash management decisions. If our product sales and gross margins exceed our expectations, we may choose to invest the additional cash in the above projects and other activities we believe appropriate. We have utilized, and may continue to utilize, credit arrangements with financial institutions to finance the purchase of capital equipment. Factors such as interest rates and available cash will impact our decision to continue to utilize credit arrangements as a source of cash. As of March 31, 2005, we had an equipment financing line of credit with a financial institution for $10.0 million, of which $7.6 million was available for future borrowings. The line of credit expires on September 30, 2005.

We believe that our available cash, cash from operations, proceeds from the issuance of stock under our stock plans and funds from existing credit arrangements will be sufficient to satisfy our funding needs for at least the next 24 months, except in the event that we determine to accelerate the development and/or construction of the remaining phases of our 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 use our available cash and utilize 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 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;

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

• regulatory changes, uncertainties or delays;

• the impact of the prosecution, defense and resolution of ongoing and potential future license and patent disputes;

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

• seasonal or unanticipated changes in customer demand;

• 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; and

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

Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.

Risk Factors

This Quarterly Report on Form 10-Q 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, as amended, for the year ended December 31, 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 occur, 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;

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

• regulatory changes, uncertainties or delays;

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

• 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;

• changes in reimbursement policies;

• 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;

• 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 Panel, Triage Profiler Shortness of Breath Panel, Triage D-Dimer Test and subject to obtaining appropriate regulatory approvals, our products currently under development, such as our Triage Stroke Panel and our Triage Cardiac CP Panel. Our revenues will also depend on our effectiveness in transitioning to 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, customer education and product 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 products for stroke, ACS, sepsis and abdominal pain, 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 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 Triage Stroke Panel, may not demonstrate clinical study results needed to support regulatory approval, 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 71% of our product sales in the first quarter of 2005 and 69% in the same period in 2004. Our Triage BNP Tests are currently two of several FDA-cleared tests used to 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., from which we licensed the technology and patents related to our Triage BNP Tests in 1996, 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 BNP 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 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, which may adversely impact our product sales, gross margins and our overall financial results.

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 product manufacturers.

Currently, the majority of diagnostic products 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 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 resulted, and may continue to result, in inefficiencies or constraints related to our manufacturing, which has harmed and may in the future 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 operating expenses will increase and our product sales will decrease.

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 84% of our product sales in the first quarter of 2005 and 86% for the full year 2004. We have a distribution agreement with Fisher that expires on December 31, 2005, and automatically renews for an additional one year term unless a notice of non-renewal is delivered by either party. We distribute products in the United States physician office market primarily through PSS and Henry Schein. Internationally, we distribute products through country-specific and regional distributors, as well as through our direct sales force in selected countries. The loss or termination of one or more of our distributors could have a material adverse effect on our sales in that market.

If any of our distribution or marketing agreements are terminated or expire, 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, marketing and administrative resources, including additional field account executives and customer support resources, which would significantly increase our future expenses. For instance, if we distribute our products directly to customers, we will need additional headcount and incur additional expenses relating to customer order processing and servicing, warehousing, shipping, billing and collections that our distributors currently bear. We may also need to invest in additional capital equipment, third-party services and facilities in order to administer the logistics of direct distribution. 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. In addition, following the expiration or termination of any distribution agreement, a former distributor may attempt to compete

directly with us by offering our end-user customers other competitive products. 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 and we may not be able to successfully transition from a distributor model to a direct sales model. 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 or implement the logistics associated with direct product distribution to our customers 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 also believe that our products may be subject to some seasonality in their use and fluctuations in the buying patterns of end-user customers. Higher utilization rates of our Triage BNP Tests may be due to a higher number of ED visits by patients exhibiting shortness of breath, a symptom of congestive heart failure and the flu. However, higher utilization may also result from greater awareness, education and acceptance of the uses of our Triage BNP Tests, as well as additional users within the hospitals.

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 future 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. In addition, if we assume direct distribution in any territory following the expiration or termination of a distribution agreement for that territory, it is likely that our product sales in that territory will decrease as our prior distributor sells its remaining inventory of our products.

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

The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities worldwide, principally the FDA in the United States and corresponding 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 Premarket Notification, or 510(k), or through approval of a PMA. The 510(k) clearance process requires us to demonstrate that our new product is substantially equivalent to a medical device first marketed in interstate commerce prior to May 1976, the enactment date of the Medical Device Amendments. It generally takes from three to six months from submission to obtain 510(k) clearance, but it may take longer or 501(k) clearance may not be obtained at all. The FDA may determine that a new proposed device is not substantially equivalent to a device first marketed in interstate commerce prior to May 1976 or that additional information is needed before a substantial equivalence determination can be made. A “not substantially equivalent” determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. The 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 PMA approval may not be obtained at all.

In October 2004, we filed a 510(k) with the U.S. FDA seeking clearances for the Triage Profiler CP Panel. The Triage Profiler CP Panel incorporates a proprietary MultiMarker Index^™ algorithm which analyzes information from all four markers on the panel and presents a single composite index result. Given the proprietary MultiMarker Index algorithm used in the calculation of the composite result, the FDA determined that the device is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976 and therefore classified the device by statute into Class III (Premarket Approval). We believe that the FDA’s decision to request that we file a PMA in no way reflects on the quality of the data we previously submitted, or on the perceived diagnostic utility of the MultiMarker Index algorithm. Rather, we believe that the FDA’s decision was based on the fact that the Triage Profiler CP Panel has new technological characteristics that may not be generally used in medical practice today. We are working with the FDA to build on the clinical data we previously submitted and to conclude the appropriate regulatory pathway for this potential product.

For 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 submissions. We have made modifications to some of 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) or PMA 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 new submission is cleared by the FDA.

We submitted a PMA application for our Triage Stroke Panel in December 2004. In April 2005, we received a letter from the FDA indicating that the PMA submitted in 2004 for our Triage Stroke Panel is on hold pending submission of additional information. The letter further states that the issues raised need to be resolved before the FDA can complete its review, otherwise the PMA in its current form would be considered not approvable.

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 quality system and regulatory approval process has been created, and approval is represented as ISO certification and CE marking, respectively.

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, state and other 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 clearance or 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 that is deemed to be unsafe. 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 and Medical Device Reporting requirements in the United States and other applicable regulations worldwide, including but not limited to ISO regulations. Changes in existing requirements or adoption of new laws or requirements could have a material adverse effect on our business, financial condition and results of operation. We may incur significant costs to comply with laws and regulations.

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

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 regulations 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 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 and subject to obtaining appropriate regulatory approvals, 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 rapid Triage BNP Test, Triage Cardiac Panel, Triage Cardio ProfilER Panel, Triage Profiler Shortness of Breath Panel, 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 these or any other sole-source suppliers are unable or unwilling to manufacture sufficient quantities of the relevant items that meet our quality standards, we would be required to identify and qualify alternative suppliers. Although we generally maintain safety stock inventory levels of these items, which would allow us some time to identify and qualify alternative suppliers, a delay or inability to identify and qualify alternative suppliers 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.

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 participate in interference proceedings declared by the United States Patent and Trademark Office, or USPTO, and similar proceedings in foreign jurisdictions. These proceedings could result in a substantial cost to us.

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, both pending and potentially in the future, is inherently uncertain. An adverse outcome in any 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.

In November 2004, Roche Diagnostics Corporation, together with several of its affiliates, filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division, alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 and U.S. Patent 4,816,224, owned by Roche and/or its affiliates. We believe these allegations of infringement are without merit and we intend to vigorously contest these claims. Also, in November 2004, we filed a complaint in the United States District Court, Southern District of California, alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite. These patents relate to methods for the measurement of cardiac troponin forms. We believe that our claims have merit and we intend to vigorously pursue their prosecution.

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. 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. Over the next few years, we may transition the distribution of our products in some additional international countries to a direct sales and distribution model. 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 assume 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 $9.3 million for the first quarter of 2005 and $26.0 million for the full year 2004. Since 2003, 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 these operations 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 products 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 laboratory 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 of 1988, 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 on April 24, 2003. On January 12, 2004, CMS published updated Interpretive Guidelines for CLIA-regulated laboratories. We are working with CMS 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.

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 to provide us with up to 800,000 square feet of space, to 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 the construction of the first phase is estimated to be approximately $107 million, of which we have incurred approximately $86 million through March 31, 2005. We have funded and currently plan to continue to finance the construction of the complex using available cash balances, and may utilize debt financing, if necessary. We may not be able to obtain financing on commercially reasonable terms or at all. We expect the buildings in the first phase of construction to be completed in the second and third quarters of 2005 and do not anticipate expanding our operations to the new facility prior to that time. 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 all or a portion of 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 or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities. 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 in which we transfer our operations to the new corporate complex as we will transfer our operations in stages.

Recently, the San Diego Airport Authority issued a draft of proposed changes to land uses, such as restrictions on maximum building heights, personnel densities and hazardous materials storage, in areas surrounding airports throughout San Diego County. Several of these changes, if approved, could potentially negatively impact our ability to construct our corporate complex as we currently plan. In that case, we may need to alter our development plans for the remainder of our corporate complex. However, any such regulatory changes are still in the early stages and it is not possible for us to predict whether any changes will be adopted or implemented, and whether such changes could adversely impact our corporate complex.

All of our existing office and laboratory leases in the United States 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 these existing 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 that would 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.

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

At March 31, 2005, we had approximately $135.0 million of long-lived assets, including $30.5 million of land, $55.7 million of building construction-in-progress, $1.5 million of leasehold improvements, $35.5 million of equipment, furniture and fixtures, $3.7 million of deferred taxes and $8.3 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 June 2005 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 our 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 March 31, 2005, we had approximately $11.1 million of short-term and long-term 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 shares 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;

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

• regulatory changes, uncertainties or delays;

• the impact of the prosecution, defense and resolution of ongoing and potential future license and patent disputes;

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

• seasonal or unanticipated changes in customer demand;

• 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; 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.

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, and we may experience constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand.

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 manage our business, 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 products entails an inherent risk of clinical and product liability claims. Our launch of new products, subject to obtaining appropriate regulatory approvals, to assist in the diagnosis of other indications, such as stroke, sepsis and abdominal pain, 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, changes have been approved by the Financial Accounting Standards Board, or FASB, that require that, beginning January 1, 2006, we record compensation expense in our statements of income for equity compensation instruments, including employee stock options, using the fair value method. Although there will be no change in our total cash flows, our reported financial results beginning in the first quarter of 2006 will be negatively and materially impacted by this accounting change. Other potential changes in existing taxation rules related to stock options and other forms of equity compensation could also have a significant negative effect on our reported results.

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

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.

Since 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 in local currencies and are subject to fluctuations in currency exchange rates. Further, we purchase our Triage MeterPlus inventory from LRE in Euros, and we incur employee and other operating costs in foreign 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 March 31, 2005, we had no outstanding forward exchange contracts. We recognized a net currency exchange loss on foreign currency denominated transactions of $147,000 for the three months ended March 31, 2005 compared to a net gain of $12,000 for the same period of 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), we conducted an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based upon that evaluation, the CEO and CFO concluded that, as of the end of such period, our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. 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 materially affect, our internal controls over financial reporting.

Part II. Other Information

ITEM 1. LEGAL PROCEEDINGS

In November 2004, Roche Diagnostics Corporation, together with certain of its affiliates, filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 (the “‘609 Patent”) and U.S. Patent 4,816,224 (the “‘224 Patent”), owned by Roche and/or its affiliates (the “Indiana Case”). Biosite filed an answer and counterclaims to Roche’s complaint in February 2005. In March 2005, at the mutual request of Biosite and Roche, the Indiana Case was, for purposes of claim construction of the ‘609 Patent only, consolidated-in-part with two other cases filed by Roche against several unrelated parties and pending in the same trial court. The hearing on this subject of claim construction, which is commonly referred to as a Markman hearing, with respect to the ‘609 Patent is currently scheduled for August 2, 2005. A Markman hearing with respect to the ‘224 Patent has not been scheduled. The parties have commenced preliminary discovery with respect to the Indiana Case. Roche is seeking unspecified monetary damages and injunctive relief, among other remedies. We believe Roche’s allegations of infringement of the ‘609 Patent and ‘224 Patent are without merit and we intend to vigorously contest these claims.

Also, in November 2004, we filed a complaint in the United States District Court, Southern District of California alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite. The patents relate to methods for the measurement of cardiac troponin forms. Roche filed an answer and counterclaims to our complaint in March 2005. Biosite is seeking unspecified monetary damages and injunctive relief, among other remedies. We believe our claims have merit and we intend to vigorously pursue their prosecution.

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.

10.47 (A) Biosite Incorporated 409A Nonqualified Deferred Compensation 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.

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

Dated: May 9, 2005	BIOSITE INCORPORATED


	By:	/s/ CHRISTOPHER J. TWOMEY

		Christopher J. Twomey
		Senior Vice President, Finance, Chief Financial Officer and Secretary
		(Principal Financial Officer 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 1.	LEGAL PROCEEDINGS
ITEM 6.	EXHIBITS
SIGNATURES

ITEM 4. CONTROLS AND PROCEDURES.

Part II. Other Information

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS

SIGNATURES