**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-K**

**(Mark One)**

**x**                               ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe Fiscal Year Ended January 1, 2006**

**OR**

**o**                                  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from             to             .**

**CommissionFile Number: 0-26126**

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**SEROLOGICALS CORPORATION**

(Exact name of Registrantas specified in its charter)

| Delaware                                                         | **58-****2142225**                       |
|------------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification Number) |
| **5655 Spalding Drive, Norcross, Georgia**                       | **30092**                                |
| (Address of  principal executive offices)                        | (Zip Code)                               |
| Registrant’s  telephone number including area code          | **(678) 728-2000**                  |

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Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, $0.01 par value per shareRights to Purchase Preferred Stock**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes x  No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes o  No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

As of July 3, 2005,the aggregate market value of the shares of our Common Stock held bynon-affiliates (based upon the closing sale price on The Nasdaq Global Market)was approximately $737,016,000. As of February 28, 2006, there were34,133,667 shares of our Common Stock outstanding.

**Documents Incorporated byReference.**

| ** **                                                                                             | **Document** | ** **    | ** ** | ** ** | **Parts Into Which Incorporated** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------------|---------------|------------|------------|-----------------------------------|------------|
| Proxy Statement for the Annual Meeting of  Stockholders to be held May 10, 2006 (Proxy Statement) |         | Part III |

 

 

 

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**TABLE OF CONTENTS**
| **PART I.**   |   |                                                                                             |   |   |
|--------------------|--------|--------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.            |   | Business                                                                                         |   | 4      |
| Item 1A.           |   | Risk Factors                                                                                     |   | 15     |
| Item 1B.           |   | Unresolved Staff  Comments                                                                       |   | 23     |
| Item 2.            |   | Properties                                                                                       |   | 23     |
| Item 3.            |   | Legal  Proceedings                                                                               |   | 24     |
| Item 4.            |   | Submission  of Matters to a Vote of Security Holders                                             |   | 24     |
| **PART II.**  |   |                                                                                             |   |   |
| Item 5.            |   | Market  for the Registrant’s Common Equity and Related Stockholder Matters                  |   | 25     |
| Item 6.            |   | Selected  Financial Data                                                                         |   | 27     |
| Item 7.            |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   | 28     |
| Item 7A.      |   | Quantitative  and Qualitative Disclosures about Market Risk                                      |   | 46     |
| Item 8.            |   | Financial  Statements and Supplementary Data                                                     |   | 46     |
| Item 9.            |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            |   | 47     |
| Item 9A.      |   | Controls  and Procedures                                                                         |   | 47     |
| Item 9B.           |   | Other  Information                                                                               |   | 51     |
| **PART III.** |   |                                                                                             |   |   |
| Item 10.           |   | Directors  and Executive Officers of the Registrant                                              |   | 52     |
| Item 11.           |   | Executive  Compensation                                                                          |   | 55     |
| Item 12.           |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   | 55     |
| Item 13.           |   | Certain  Relationships and Related Transactions                                                  |   | 55     |
| Item 14.           |   | Principal  Accountant Fees and Services                                                          |   | 55     |
| **PART IV.**  |   |                                                                                             |   |   |
| Item 15.           |   | Exhibits,  Financial Statement Schedules                                                         |   | 56     |
| **SIGNATURES**     |   | 61                                                                                               |

 

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**PART I.**

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

This Annual Report on Form 10-K containscertain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 about Serologicals Corporation and itssubsidiaries (collectively, “Serologicals” or the “Company,” “we,” “our” or “us”)that are subject to risks and uncertainties. Statements that are not historicalfacts, including statements about our beliefs and expectations, are forward-lookingstatements. Forward-looking statements may be identified by the use ofwords such as “may,” “will,” “expect,” “anticipate,” “intend,” “estimate,” “plan,”“believe,” or “continue” and other words of similar meaning or future orconditional verbs such as “should,” “would” and “could.” Forward-lookingstatements include discussions of our expected business outlook, futureoperations, financial performance, pending acquisitions, financial strategies,future working capital needs and projected industry trends, as well as our strategiesfor growth, product development, regulatory approvals and compliance, marketposition and expenditures.

Forward-looking statements are only predictionsand are not guarantees of performance. Forward-looking statements arebased on current expectations of future events and are based on our currentviews and assumptions regarding future events and operating performance. Theseassumptions could prove inaccurate, or unknown risks or uncertainties couldmaterialize, which could cause our actual results to differ materially from ourexpectations or predictions. Many of these factors are beyond our ability tocontrol or predict.

All forward-lookingstatements contained in this Annual Report on Form 10-K arequalified in their entirety by reference to the factors discussed throughoutthis Annual Report. The following risk factors identify important factors thatcould cause our actual results to differ materially from those discussed in theforward-looking statements made in this Annual Report. Among the factorsthat could cause our actual results to differ materially are:

·       ourability to implement our growth strategy;

·       ourability to manage our growth;

·       ourability to retain key members of our senior management;

·       ourability to raise capital;

·       ourability to compete effectively within our industry;

·       theavailability and cost of raw materials;

·       ourdependence on a supply of recombinant human insulin from a third party for asignificant portion of the revenues in our Bioprocessing segment;

·       ourability to transfer production of several of our cell culture products from ourfacilities in Toronto to another facility, to close the Toronto facilities forthe costs projected and to successfully convert customers of our Torontoproducts to other comparable products produced or sourced from other locations;

·       ourdependence on the success of the customers of our EX-CYTE® product in developing and marketing new drugsusing the product;

·       ourability to comply with governmental, customer and industry laws, regulationsand guidelines, including those related to environmental compliance andremediation;

·       ourdependence on the success of our research and development efforts;

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·       ourability to identify new licensing opportunities and to develop new products,services and technologies;

·       ourability to protect our intellectual property;

·       theeffect on our results of operations of the loss of any significant customers orreduced orders from significant customers, including reductions or delays inresearch and development budgets and in government funding on which ourcustomers may depend;

·       adoptionof, or changes in, domestic and foreign laws and regulations that could affectour ability to maintain existing regulatory licenses and approvals;

·       therisks associated with our international operations; and

·       theother risks described under the caption “Risk Factors” in this Annual Report onForm 10-K.

You should not place unduereliance on any forward-looking statements because the forward-lookingstatements are based on current expectations. Forward-looking statementsspeak only as of the date they are made, and we undertake no obligation toupdate any of them in light of new information or future events. The factorslisted above (in addition to other possible factors not listed) could affectour actual results and cause these results to differ materially from thoseexpressed in forward-looking statements made by us or on our behalf.

**Item 1.**                        Business.

**Our business**

We are a global leader indeveloping and commercializing consumable biological products, enablingtechnologies and services in support of biological research, drug discovery andthe bioprocessing of life-enhancing products. Our customers include major lifescience companies and leading research institutions involved in keydisciplines, such as neurology, oncology, hematology, immunology, cardiology,proteomics, infectious diseases, cell signaling and stem cell research. Inaddition, we are the world’s leading provider of monoclonal antibodies for theblood typing industry. We were founded in 1971 and incorporated under the lawsof the State of Delaware in 1994. Our principal executive offices are locatedat 5655 Spalding Drive, Norcross, Georgia, and our telephone number atthis address is (678) 728-2000. Our principal operating subsidiariesare Celliance Corporation (“Celliance”), Chemicon International, Inc. (“Chemicon”),which we acquired in 2003, and Upstate Group, L.L.C. (“Upstate”), which weacquired in 2004. Celliance is the company that conducts our bioprocessingbusiness. Chemicon and Upstate conduct our research business.

**Recent events**

In January 2006, we announced two actions relatedto our ongoing plant consolidation and rationalization initiative. First, wemade the decision to close the Celliance facilities in Toronto, Ontario, Canadaand to dispose of the plant assets, machinery and equipment at the facilities.We expect that Toronto site will be closed in late 2006 and subsequentlyprepared for sale. In connection with the plan of disposal, the Company determinedthat the carrying values of some of the underlying assets exceeded their fairvalues. Consequently the Company recorded an impairment loss of $16.0 million,which represents the amounts by which the carrying values of these assetsexceeded their estimated fair values determined by their estimated futurediscounted cash flows. The impairment loss is included in the “Impairment andexiting costs” line item in the consolidated income statement for 2005. We alsomade the decision that we will not open the Celliance facility in Lawrence,Kansas, that we constructed to manufacture our EX-CYTE® cell culture product. We expect to meetcurrent and anticipated demand for EX-CYTE® using the existingKankakee facility. In connection with the plan of disposal, the Companydetermined that the carrying values of the underlying assets exceeded theirfair values. Consequently the Company recorded an 

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impairment loss of $17.1million, which represents the excess of the carrying values of the assets overtheir fair values, less cost to sell. The impairment loss is included in the “Impairmentand exiting costs” line item in the accompanying consolidated income statementfor 2005. See “Note 5—Impairment and Exiting Costs” in Item 8Financial Statements and Supplementary Data for additional disclosure relatedto the impairment and exiting costs related to these facilities.

On January 13, 2006, the Company completed a saleof its diagnostic production facility and distribution warehouse based inMilford, Massachusetts. See “Note 16—Subsequent Event” in Item 8Financial Statements and Supplementary Data for additional disclosure relatedto the disposition of the Milford plant.

On March 9, 2006, Celliance executed an expandedfour-year worldwide exclusive supply agreement with its supplier which extendsits distribution rights of recombinant human insulin for the cell culturemarket. Celliance will continue to market this product to our customers underour IncelligentTM brand.

On March 13, 2006,Serologicals UK Holding Company Limited, our wholly-owned subsidiary, enteredinto a definitive agreement to acquire the entire issued ordinary share capitalof Cytomyx Limited for aggregate cash consideration of $7 million. Theconsideration will be subject to a post-closing working-capital adjustment.Cytomyx Limited, which is based in Cambridge, England, and is a wholly ownedsubsidiary of Cytomyx Holdings Plc, is a leading provider of ion channel celllines and drug discovery services. The acquisition is subject to approval ofthe shareholders of Cytomyx Holdings Plc and to other customary closingconditions. Cytomyx Holdings Plc has obtained irrevocable written undertakingsfrom the holders of approximately 40% of its voting shares to approve the sale.Following completion of the acquisition, which is expected to occur on March 31,2006, Cytomyx Limited will operate as part of our Research segment.

**Our markets**

We compete primarily in the life sciences research andbioprocessing markets. We also compete in a niche segment of the diagnosticsmarket. The principal end users of our products and services in the lifesciences research market are academic and institutional research laboratories,as well as research departments at both biotechnology and pharmaceuticalcompanies. The research laboratories and departments include those operated byuniversities, medical research centers and governmental institutions whereresearchers typically conduct small scale experiments in basic molecular andcellular biology. The other principal laboratories in this market are operatedby biotechnology and pharmaceutical companies where researchers conduct smallscale experiments and large scale operations, such as drug screening and targetvalidation, and typically have a commercial focus.

We also provide products and services to customers inthe drug screening and drug target validation segment of the life sciencesresearch market. This segment consists of developers of therapeutic agents thatconduct screening and target validation to determine the efficacy of aparticular agent against a particular biological process. The market for drugscreening and drug target validation products and services has grownsignificantly. We believe the market will continue to experience significantgrowth as researchers discover new potential therapeutic agents and newbiological processes against which to screen them. New drug developmentrequires a significant investment of time and money. As a result, we expect drugresearchers will increase outsourcing of the drug screening and drug validationprocesses.

The bioprocessing market consists of biotechnology andpharmaceutical companies that use cell culture products to grow cells foreither research or production of commercial quantities of proteins. Cellculture products include sera, media and supplements. As the number and usageof biological therapeutic drugs increases, we expect the demand for cellculture products and services to increase.

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We also compete in the bloodtyping segment of the diagnostics market. The ultimate consumer in this marketsegment consists of blood banks and hospital transfusion services that usemonoclonal antibodies to assure blood-type compatibility.

**Our segments and operations**

We report operating results in two business segments, “Research”and “Bioprocessing.” The operations of Celliance represent the Bioprocessingsegment and the operations of Chemicon and Upstate represent the Researchsegment.

Our Research segment sells a broad range of researchproducts, including specialty reagents, kits, antibodies and molecular biologytools to research customers working in the areas of neuroscience, infectiousdisease, oncology, stem cell research and cell signaling. We are also a leadingsupplier of monoclonal antibodies, conjugates, antibody blends and molecularand cell biology-based detection kits for use in diagnostic laboratories. Inaddition, we are one of the leading suppliers of tools for kinase research andone of the leading providers of drug discovery services to pharmaceuticalcompanies targeting kinase biology-based drugs. We market our research productsand services under our Chemicon® andUpstate® brand names.

Our Bioprocessing segment sells a variety of cellculture products, including highly purified proteins and tissue culture mediacomponents. These products are used primarily by biopharmaceutical andbiotechnology companies as nutrient additives in cell culture media. One of ourmost significant products within the Bioprocessing segment is EX-CYTE®, a patented serum-freesolution of cholesterol, lipoproteins and fatty acids. EX-CYTE® isused, in combination with other cell culture supplements, to reduce or replaceanimal serum in cell culture processes. We also provide a range of serum-basedproducts in this segment, including Bovine Serum Albumin (“BSA”), under thebrand name “ProbuminTM”, for which we are the world’s leading supplier. We alsosell recombinant human insulin, under the brand name “IncelligentTM”, for use asa media supplement. This segment also manufactures and sells monoclonalantibodies, under the brand name “MonoSeraTM”, that are used in products such asblood typing reagents and in controls for diagnostic tests for certaininfectious diseases. We believe these products comprise the world’s mostcomprehensive range of commercially available human monoclonal antibodies forblood grouping.

Prior to 2005, we reported operating results in threebusiness segments: Research, Cell Culture and Diagnostics. These segments werebased primarily on the differing production, manufacturing and othervalue-added processes that we performed with respect to our products and, to alesser extent, the differing nature of the ultimate end use of our products. Prior to 2003, we reported a fourth segment,Therapeutic Products, which is accounted for as discontinued operations in allperiods presented in this Annual Report on Form 10-K. Allamounts in this Annual Report on Form 10-K reflect the restatementof the pre-2005 segments so that they are consistent with the currentyear presentation.

See “Note 14—Segmentand Geographic Information” in Item 8 Financial Statements andSupplementary Data for disclosure of revenue and gross profit by segment andlong-lived assets by geographical area for our three most recently completedfiscal years.

**Description of our industry**

We operate in thelife science industry. We serve three principal types of life sciencecustomers:

·       lifescience researchers in academia, government and the biopharmaceutical industry;

·       companiesthat use cell culture to produce biopharmaceuticals and other recombinantproteins; and

·       companiesthat produce diagnostic products.

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The following is adescription of the industry segments in which we operate.

*Life**ScienceResearch.**  *Lifescience researchers require special biochemical research tools capable ofperforming precise functions in a given experimental procedure. Two of theprincipal disciplines within the life science research market are cellularbiology research and molecular biology research.

Cellular biology research involves the study of thegenetic functioning and biochemical composition of cells, as well as theirproliferation, differentiation, growth and death. The understanding gained fromthis study has broad application in the field of developmental biology and isimportant in the study of carcinogenesis, cell signaling, virology, immunology,vaccine design and production and agriculture. To grow the cells required forresearch, researchers use cell or tissue culture media that simulate underlaboratory conditions (“in vitro”) the environment in which cells livenaturally (“in vivo”) and that provide nutrients required for their growth.

Molecular biology research involves the study of thegenetic information systems of living organisms. The genetic material of livingorganisms consists of long, double-stranded molecules of deoxyribonucleicacid (“DNA”). DNA contains the information required for the production ofproteins by means of ribonucleic acid (“RNA”), a single-stranded moleculesimilar in composition to DNA. Proteins have many different functionalproperties and include antibodies, certain hormones and enzymes. Manyresearchers study the various steps of gene expression from DNA to RNA toprotein production and the impact of these proteins on cellular function. Otherresearchers are interested in manipulating the DNA-RNA system in order tomodify its functioning. Through techniques that are commonly termed “geneticengineering” or “gene splicing,” a researcher can modify an organism’snaturally occurring DNA to produce a desired protein not usually produced bythe organism, or to produce a naturally produced protein at an increased rate.

*Cell Culture.**  *There are essentially two broadcategories of molecules that can be used as therapeutic agents. These are smallmolecule drugs and large molecule drugs. Small molecule therapeutics arechemical compounds that are made through an organic or inorganic process.Chemical or pharmaceutical companies manufacture these therapeutics and theiractive ingredients in bulk. Large molecule therapeutics are mostly protein-basedwith amino acids as their building blocks. Large molecules must be grown inliving cells, such as bacteria, yeast or mammalian cells (or other livingorganisms) since they cannot be synthesized chemically. Protein-basedtherapeutics are usually injected because they cannot be absorbed orally due totheir size, composition and sensitivity to the gastrointestinal environment.Another major category of protein therapeutics is monoclonal antibodies.Monoclonal antibodies are antibodies that are highly specific towards abiological target, known to be implicated in the development of disease. Thereis an increasing trend of monoclonal antibody development for therapeutic use.

The process for manufacturing large moleculetherapeutics requires a number of components, including:

·       *Cell Culture:* Mammalian or other celltypes which have been genetically transformed to produce large amounts of atherapeutic protein. As the cells grow and metabolize, they secrete thetherapeutic protein into the medium that is then harvested, purified andfurther processed.

·       *Bioreactors or Fermentation Tanks:* Largetanks of varying capacity within which the cell culture and the nutrients areplaced and are grown through the maintenance of optimal temperature, pressureand other environmental conditions.

·       *Media and Nutrients:* Supplements that thecells depend upon for rapid growth enabling the production of the therapeuticprotein.

Cell culture is an important technology that is alsoused in many other essential biomedical applications such as the production ofproteins that serve as key components of clinical diagnostic assays, 

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vaccine production, thedevelopment of cell and tissue therapies, screening for toxicity during drugdiscovery and numerous research applications involving the study of genes andcell biology.

*Diagnostic Products.**  *Antibodies are used in themanufacture of products that are used to screen patients for exposure to disease-causingagents, to detect proteins of clinical importance, determine blood type, andmany other applications where there is a need to detect a biological targetwith high specificity. These products are called diagnostic products.Diagnostic products may involve the use of either monoclonal or polyclonalantibodies. Monoclonal antibodies are produced using the cell culture processdescribed above. Polyclonal antibodies are produced by a living organism thatis exposed to a specific antigen. Typically, polyclonal antibodies are obtainedfrom mammals that have been exposed to a specific disease and have developedresistance to it. The specificity of antibodies makes them powerful diagnostictools. Antibodies can be used to locate substances that occur in minute amountsand to measure the substances with great accuracy. Monoclonal antibodies may beused to locate environmental pollutants, detect harmful microorganisms in food,distinguish cancer cells from normal cells and diagnose infections in humans,animals and plants. Monoclonal antibodies are also used to determine bloodtype. Antibodies are also used to classify the antigens on red cells and todetect regular antibodies and irregular antibodies in blood specimens.

**Our products and services**

*Overview.**  *In fiscal 2005, we derivedapproximately 49.8% of our revenues from our Bioprocessing segment andapproximately 50.2% from our Research segment. The following table presentsindividual products making up greater than 10% of our consolidated net revenueduring fiscal 2005, 2004 and 2003:

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| EX-CYTE®                                |       |     | 12         | %        |       |     | 15         | % |   |   | 20 | % |   |
| ProbuminTM BSA                           |       |     |       | *        |       |     |       | * |   |   | 11 | % |   |
| IncelligentTM Recombinant  Human Insulin |       |     | 14         | %        |       |     | 15         | % |   |   |   | * |   |

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*                    Less than 10%of consolidated net revenue

EX-CYTE®, ProbuminTM and IncelligentTM are productsof our Bioprocessing segment.

The following sets forth a description of the productsof our business segments, the processes by which such products are manufacturedor obtained and the markets for such products.

*Research.**  *The activities of our Researchsegment primarily consist of the manufacture and sale of a broad range of productsand services to research customers working in the areas of neuroscience,infectious disease, oncology, stem cell research and cell signaling. Productssold as reagents include antibodies, peptides, enzymes and other proteins, aswell as general-use consumable supplies. Products sold as kits include assaysfor the detection of viruses, protein and gene activity and stem celldifferentiation, as well as RNAi gene silencing systems. This segment alsosells in vitro diagnostic products, either 510(k) diagnostic kits or asanalyte specific reagents, for use by certified diagnostic laboratories. Theproducts of our Research segment are a blend of in-house developed andmanufactured products, licensed products manufactured in-house and productsmanufactured by third parties. Our antibody products are generally developedand manufactured through in vitro cell culture and animal immunizationprocesses. Molecular biology products are generally developed and manufacturedusing DNA cloning and recombinant protein expression techniques. Developmentand manufacturing of products in the Research segment are performed by ourChemicon and Upstate subsidiaries at facilities in Temecula, California,Charlottesville, Virginia, Lake Placid, New York, Phillipsburg, New Jersey,Southampton, England, Dundee, Scotland and Melbourne, Australia.

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Our Research segment offers many services to ourcustomers, including the development and production of custom antibodies,peptides, assays and other products. In support of certain of these services,our Research segment operates large and small animal facilities in Ramona,California, along with a similar operation in Australia, for the production ofpolyclonal antibodies. The animal facilities have been certified by the UnitedStates Department of Agriculture (“USDA”). Our Research segment also providesdrug discovery services to pharmaceutical companies targeting kinase andG-protein coupled receptor (GPCR) based drugs. Most of these services areperformed at our Dundee, Scotland facility.

Our products and services within the Research segmentare primarily used as research tools by scientists performing experiments in aneffort to uncover the sequence and function of genes and proteins and tounderstand their roles in biological pathways. These scientists are involved inacademic research at universities and research institutes as well as drugdiscovery research at pharmaceutical and biotechnology companies. Therefore,market growth is driven by the amount of academic and industrial researchconducted throughout the world. Funding for this research in the academicsetting is derived primarily from grants awarded by the National Institutes ofHealth (“NIH”) and, to a lesser extent, other government agencies and privateendowments.

Our Research segment offers approximately 11,000products. We maintain inventories of these products based on our expectationsregarding future sales of the products because our customers expect rapiddelivery of the products they order. As a result, we typically keep asignificant portion of these products in inventory. Most sales of our Researchproducts are for small amounts, the average sale being under $1,000. Thetypical purchaser of our Research products is a researcher who pays for theorder under an established customer account or with a credit card. We sell someof our Research products in bulk to large users. Typical payment terms for ourcustomers are net 30.

*Bioprocessing.**  *Our Bioprocessing segment is aleading provider of cell culture media components and monoclonal antibodiesused as blood typing reagents. Our cell culture products are primarily producedat our protein fractionation facilities in Kankakee, Illinois and Toronto,Ontario, Canada. We also distribute IncelligentTM recombinant human insulin intothe cell culture marketplace under a distribution agreement with our supplier. Theprimary cell culture products produced at our two sites include:

·       EX-CYTE®, a patented growth enhancementmedia supplement,

·       ProbuminTMbovine serum albumin, and

·       Othercell culture and diagnostic supplements, including Aprotinin, Transferrin(human and bovine), Trypsin and Fetuin.

Recent advances in the commercialization of large moleculetherapeutic products have increased demand for cell culture media and cellculture components. Our manufacturing process isolates and purifies specificproteins, including albumin, gamma globulin, transferrin, lipoproteins,aprotinin and clotting factors, contained primarily in animal sera or plasma. Theproteins are isolated and purified through specialized manufacturing processesknown as protein fractionation. The core technologies used in proteinfractionation include organic solvent precipitation, heat shock, molecular andmicroporous filtration, ion-exchange chromatography and salt precipitation.

The primary raw materials used in the manufacture ofour cell culture media components are bovine serum and plasma. Concerns havebeen expressed that the agent that causes bovine spongiform encephalopathycould be present in cell culture supplements that are derived from bovine serumor bovine plasma, including those that we manufacture. Bovine spongiformencephalopathy is a disease that afflicts cattle and is often referred to as “BSE”or “mad-cow disease.” If the agent were present in cell culture supplements,there is a risk that it might be introduced into a therapeutic substancemanufactured by one of our customers. We seek to address this risk in a numberof ways. With respect to EX-CYTE® andseveral other of our cell culture supplements, we developed a purificationprocess that inactivates the 

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agent. During 2004, wewere awarded a patent on this process as it applies to the manufacture ofEX-CYTE®. Asan additional safeguard, we obtain the bovine serum and plasma that we use tomanufacture our products only from beef cattle that are less than30 months of age. We believe our selectivity in this regard substantiallyreduces the risk that the agent that causes BSE will be present in our productsbecause, due to the nature of BSE disease pathology and based on historicaldata, the incidence of BSE in cattle of this type and age is extremely rare.Furthermore, we are able to confirm that the cattle from which we obtain ourbovine serum and plasma have never been fed ruminant protein. Consumption ofruminant feed is considered the primary source of BSE transmission. Finally, wehave completed clearance studies on a number of our products. These studies, whichwe publish, demonstrate that our products do not contain the agent that causesBSE.

We maintain inventories of our cell culture productsbased on our expectations regarding future sales of the products and based onour contractual commitments to supply the products to our customers. Wetypically manufacture our cell culture products in large lots or batches toachieve production efficiencies. A significant amount of the sales of our cellculture products are for large amounts of products to large, industrialcustomers. The payment terms vary from customer to customer; however, thetypical payment term is net 30.

Our Bioprocessing segment also manufactures and sellsmonoclonal and polyclonal antibodies that are sold under the brand name “MonoSeraTM”and are used in diagnostic products, such as blood typing reagents anddiagnostic test kits. Blood typing reagents are used by blood banks andhospital transfusion services worldwide to assure compatibility between arecipient and a donor’s blood type. There are many blood types and highlyaccurate and specific antibodies are required to determine blood type. Morethan 15 billion human blood tests are performed annually worldwide. Theseblood tests are performed mostly in commercial laboratories, hospitals, urgentcare centers or physicians’ offices. Although over 1,000 different tests areperformed on blood, fewer than 50 different tests account for approximately 75%of all blood testing. These tests are important because physicians routinelyuse them to diagnose and monitor the treatment of disease and a significantportion of the top 50 tests prescribed by physicians fall within the clinicalchemistry category. We believe that increased concerns relating to blood safetyand increased demand for more diverse diagnostic tests will increase the demandfor our diagnostic products. Historically, blood typing reagents were madeprimarily from human-sourced, or polyclonal, antibodies. Over the past20 years, monoclonal antibodies have been developed to provide certainhigh quality antibodies on a consistent basis. Many monoclonal antibodies areFDA approved for diagnostic purposes. Monoclonal antibodies have largely, butnot completely, replaced polyclonal antibodies for use in blood typing.

We produce monoclonalantibodies at our FDA-licensed manufacturing facility in Livingston, Scotland.We use cell lines obtained from independent laboratories and cell culturematerials to produce our diagnostic products. We currently store 87 cell lineswith which we provide over 60 different antibodies used in the production ofblood typing reagents. We maintain inventories of our monoclonal products basedon our expectations regarding future sales of the products and based on ourcontractual commitments to supply the products to our customers. We typicallymanufacture our monoclonal products in large lots or batches to achieveproduction efficiencies. Most sales of our monoclonal products are for largequantities of products to large, industrial customers. The payment terms varyfrom customer to customer; however, the typical payment term ranges from net 30to net 60.

**Research and Development**

We believe that acommitment to research and development is an essential component of our futuregrowth opportunities. Accordingly, we expect to continue to increase ourinvestment in research and development over the next several years. We spentapproximately $17.2 million, $10.1 million and $6.2 million onresearch and development activities in fiscal 2005, 2004 and 2003, respectively.Our 

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researchand development activities are focused on developing new products andapplications. Our research and development activities with respect to ourResearch segment primarily relate to the development of polyclonal andmonoclonal antibodies, enzymes and other proteins, cell-based assays andmolecular biology products, including kits using these products andtechnologies and ancillary products to enhance the utility of our products.During fiscal 2005, our Research segment introduced approximately 1,700 newproducts. With respect to our Bioprocessing segment, our research anddevelopment efforts are focused on the development of animal component freesupplements and the development and licensing support of gene expressiontechnologies. In addition, research efforts include the study and developmentof new recombinant supplements. As of January 1, 2006, we hadapproximately 117 employees principally engaged in research and development.

**Sales and Marketing**

The majority of our sales of Research products comefrom orders placed as a result of direct customer contact by salespeople, ourresearch catalogs, direct mail marketing and product information and promotionon our website. Our Research segment issues catalogs every 12 to18 months, with frequent updates and supplements as product lines changeand grow. We sell the majority of our cell culture and diagnostic productsthrough our own direct sales force. We also use distributors to market and sellour products in places where we do not maintain a direct sales force. Wedirectly market our products in over 29 countries; we sell products throughindependent distributors or agents in approximately 73 additional countries.Our independent distributors may also market products of other companies,including some companies that supply products that are competitive with ourproducts. As of January 1, 2006, we employed over 144 people world-wide inour combined sales, customer service, technical support and marketingorganizations.

Revenuesto our top ten customers accounted for approximately 31%, 36% and 45% of totalrevenues in fiscal 2005, 2004 and 2003, respectively. In 2005, 2004 and 2003,sales to customers located in the United States of America representedapproximately 66%, 62% and 64%, respectively, of our net revenues. Thefollowing table presents sales to a customer that represented more than 10% ofconsolidated net revenues:

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Johnson &  Johnson |       |     | 10         | %        |       |     | 15         | % |   |   | 17 | % |   |
|                             |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

We do not currently have a significant backlog ofproduct orders and do not anticipate that we will develop a material backlog inthe future.

**Quality Assurance**

We maintain a global quality assurance system andprogram designed to assure the efficacy and safety of our products andcompliance with the requirements of regulatory authorities, voluntary qualitystandards, industry trade associations and our customers. Using our qualityassurance program and an internally maintained regulatory compliance program,we conduct periodic audits of each of our facilities to ascertain the statusand compliance of the quality system as implemented. The audits are designed toensure adherence to applicable regulations and our procedures and to assess theeffectiveness of our quality system as a whole. The audits are one component ofthe key performance indicators that we collect, review and monitor in order tomaintain our program of continuous improvement and compliance with ourestablished systems and programs.

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Most of our operatingfacilities are registered to ISO 9000:2000 Quality Standards. TheISO 9000:2000 series of standards is a voluntary quality standardrecognized throughout the world. Many of our customers require compliance withthis standard. Additionally, our monoclonal manufacturing facility inLivingston, Scotland, complies with the European Union’s In Vitro DiagnosticDirective (“IVDD”). The monoclonal manufacturing facility of our Bioprocessingsegment and the  manufacturing facilitiesof our Research segment that are used to make diagnostic products are alsoregistered pursuant to ISO 13485, a voluntary quality standard for invitro diagnostic products. Our Research segment is approved to use EuropeanCertification, or CE, marking on some of its in vitro diagnostic productspursuant to European Community Directive 98/79/ EC Annex IV, Article 3.This certification and approval is for the design, manufacturing anddistribution of in vitro diagnostic devices, research and laboratory useproducts.

**Competition**

*Research.**  *The market for the products andservices of our Research segment is highly competitive. We estimate thatapproximately 350 companies serve all or part of the markets served by ourResearch segment. We believe that a company’s competitive position in themarkets served by our Research segment is determined by product consistency andfunction, product quality, speed of delivery, technical support, price, breadthof product line and commitment to product development. Our customers are diverseand place varying degrees of importance on the competitive attributes listedabove. We believe that the following factors give us a competitive advantage inthe markets served by our Research segment:

·       Thebreadth of our product offering. We offer approximately 11,000 products in ourResearch segment.

·       Theuniqueness of our product offering. Chemicon has an extensive portfolio ofunique products for stem cell and neuroscience researchers. Upstate is aleading supplier of tools for cell signaling research and the leading providerof secondary screening services to pharmaceutical companies seeking to developdrugs based on kinase biology.

·       Thequality of our technical support personnel. Our Research segment employsapproximately 15 technical support personnel. The majority of our technicalsupport personnel have advanced degrees in a field relevant to our productoffering.

Certain of our competitors offer a broader range ofproducts than we do. We may be at a competitive disadvantage with respect tothese competitors because potential customers may prefer to deal with a singlesupplier for all of their research-product needs.

*Bioprocessing.**  *The market for the products of ourBioprocessing segment is very competitive. We estimate that approximately 12companies serve all or part of the markets in which our Bioprocessing segmentoperates. We believe that a company’s competitive position in the markets forthe products of our Bioprocessing segment is determined by price, productfunction, product quality, speed of delivery and technical support. Of thesefactors, we believe that quality, including conformity to specifications, isthe most important to the majority of our customers. We believe that thefollowing factors give us a competitive advantage in the market for theproducts of our Bioprocessing segment:

·       Wehave strong intellectual property protection for our EX-CYTE® product.

·       Ourcustomers who have incorporated our products into the manufacturing processesfor pharmaceuticals are reluctant to substitute other products for our productsbecause of the requirement for regulatory approvals for the substitution.

We believe that we may be at a competitivedisadvantage in the markets for our cell culture products because many of ourproducts are derived from bovine serum. We believe that concerns about the 

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transmission of BSEthrough cell culture products that are derived from bovine serum could causeprospective customers of our cell culture products to seek syntheticalternatives to our products. We, as well as several other companies, areattempting to develop synthetic alternatives. We also believe that we are at acompetitive disadvantage with respect to some grades of BSA because othercompanies sell the product for less than our price.

The market for ourMonoSeraTM products is very competitive. However, we currently enjoy asignificant share of the market for these products. The primary competition formonoclonal antibodies used in blood typing reagents comes from customers thatare vertically integrated, and thus provide antibodies for their own use, andsmaller, independent manufacturers that offer a more limited range of productsthan we offer. We estimate that there are approximately four companies involvedin the supply of products similar to our monoclonal products. Some fullyintegrated manufacturers also offer OEM and bulk services. As we do not have asignificant presence in the end market and are thus not perceived as being indirect competition with our customers, we believe that we are generally favoredover fully integrated manufacturers that offer OEM and bulk antibodies. Webelieve that the breadth of our MonoSeraTM product line gives us a competitiveadvantage because our customers often desire to buy an entire panel ofdifferent antibodies for blood typing reagents from one manufacturer.

**Government and Industry Regulation**

Many of our activities are subject to regulation bygovernmental authorities, such as the United States Food and DrugAdministration (“FDA”) and similar bodies outside of the United States ofAmerica. The regulatory authorities govern the collection, testing,manufacturing, safety, efficacy, labeling, storage, record keeping,transportation, approval, advertising and promotion of our products, as well asthe training of our employees. We manufacture and distribute a significantnumber of products that are not subject to governmental regulation; however,some of these products are subject to import and export regulations specific tothe country of import. We believe that we are in substantial compliance withall relevant laws and regulations.

The facilities we use in our Bioprocessing segment aresubject to extensive FDA regulation, primarily through the requirements of thePublic Health Service Act and the Food, Drug and Cosmetic Act. New facilities,products and operating procedures at such locations must undergo FDA approvalprocesses. These facilities are also subject to periodic inspection by the FDAto ensure their compliance with applicable laws and regulations. Significantchanges to existing facilities, products or operating procedures must alsoundergo FDA review prior to implementation. Celliance’s monoclonal antibodymanufacturing facility in Livingston, Scotland, and Chemicon’s facility inTemecula, California, are required to adhere to the FDA’s Quality SystemRegulations (“QSR”), which were formerly known as Good Manufacturing Practicesor GMP. Such facilities are periodically inspected by the FDA. Chemicon’sanimal husbandry operations are also licensed by the USDA and are periodicallyinspected by the USDA.

In the United Kingdom, our operations are subject tothe U.K. Health and Safety at Work Act, which regulates the safety precautionsrequired of manufacturers in the United Kingdom, and to various otherregulations covering the use of genetically engineered organisms in laboratoryand manufacturing processes. In certain countries, our customers are subject toregulatory requirements that require additional inspection and approval of ourfacilities prior to the shipment of products to such countries. Changes inexisting federal, state or foreign laws or regulations, or our inability tocomply with such laws and regulations, could have an adverse effect on ourbusiness and financial condition.

Celliance produces certain bovine-derivedproducts at its protein fractionation facilities in Kankakee, Illinois andToronto, Ontario, Canada. The cattle industry, which supplies Celliance withraw materials for its bovine-derived products, is regulated by the USDAto prevent the spread of BSE. The regulations restrict the use of feedcontaining ruminant meat and bone protein, require spot-testing of cattle and 

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require testing of cattlemanifesting symptoms of BSE affliction. Cows afflicted with BSE were discoveredin Canada and the northwestern United States in 2003. These animals were thefirst known cases of mad-cow disease in North America. The discovery of mad-cowdisease in North America caused disruptions in the production and sales of someof our cell culture products during the first quarter of fiscal 2004. As aresult of both discoveries, we were forced to close our Canadian manufacturingfacility for a period of time and to delay shipments of inventory to a numberof international customers due to foreign government regulations. We were alsounable to import raw material sourced in the United States into Canada and viceversa for a period of time following the discovery of BSE in each country.Similar scares or actual outbreaks of disease could have a material adverseeffect on our business and results of operations. We take steps to assure thecontinued availability and highest possible safety of our bovine-derivedproducts. The regulatory agencies may impose additional regulations on thecattle industry or us in response to the discovery of BSE afflicted cattle inNorth America.

Certain of our products are considered “medicaldevices” under the Food, Drug and Cosmetic Act and, accordingly, are subject toits general control provisions that include requirements for registration,listing of devices, QSR, labeling and prohibitions against misbranding andadulteration. These products subject us to FDA inspection and scrutiny.Furthermore, the FDA has indicated in certain guidance documents and in publicmeetings that it intends to more closely regulate cell culture media products,such as our EX-CYTE® product, that are used in the manufacture ofinjectable products. While there has been no indication as to how theseproducts will be classified and therefore with which standards they will needto comply, the FDA has indicated that, at a minimum, manufacturers of cellculture media should adhere to QSR standards. We currently produce EX-CYTE® in a dedicated facility that was constructedto QSR standards. The imposition of additional regulatory requirements for ourprotein fractionation facilities could adversely affect our business andfinancial condition.

We are also subject togovernment regulation under, among other things, the Environmental ProtectionAct, the Clean Air Act, the Clean Water Act, the National Environmental PolicyAct, the Toxic Substances Control Act, the Resource Conservation and RecoveryAct, the Medical Waste Tracking Act, and similar laws and regulations outsidethe United States. We are also subject to workplace safety regulations underthe Occupational Safety and Health Act and similar laws and regulations outsidethe United States.

**TechnologyLicensing, Patents, Proprietary Rights and Trademarks**

We expect to accelerate our research and our newproduct development efforts by targeting research and development spending. Wewill also continue to seek intellectual property protection for new products aswe determine to be appropriate. Furthermore, we will continue to in-license newtechnologies from academic and government institutions, as well asbiotechnology and pharmaceutical companies. We use licensed technologies to createnew products, including high value kits, many of which address bottlenecks inthe research or drug discovery laboratories.

We seek patent protection for our inventions whenappropriate. As of January 2006, we owned approximately 66 patents and hadapproximately 44 patent applications pending, most of which relate to ourResearch segment. Our issued patents expire at various dates through December 2021.Several of our patents are on EX-CYTE, which is one of our most important cellculture products. We have also obtained federal and foreign trademarkregistrations on the name of the product. One patent on the process used tomake EX-CYTE® expires in October 2006 in the UnitedStates and in April 2006 in Europe and Japan. Other patents associatedwith the process for making EX-CYTE® expire in 2012 and beyond. After theexpiration of our process patents on EX-CYTE®, other companies could produce productssimilar to EX-CYTE® using our process. If other companies did so,sales of EX-CYTE® could be materially adversely affected.

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A large percentage of theproducts of our Research segment are sold pursuant to licenses that havevarying terms and conditions. Therefore, our ability to obtain licenses toallow the introduction of new products is very important to allow us to offernew, innovative and technologically superior products. As of January 2006,we had approximately 1,240 licenses from others and we had approximately 160licenses to others. The licenses from others typically cover patents orbiological materials, such as cell lines, that we use to develop new products.Most of them are for fixed terms with options for renewal. No single license ismaterial to our business.

**Employees**

As of February 28,2006, we employed 912 people, 631 in the United States, 51 in Canada, 26 inAustralia and 204 in Europe. We have 43 employees at our manufacturing site inIllinois and 33 employees at our manufacturing site in Toronto who are membersof a collective bargaining unit. We believe that our relationship with ouremployees is generally satisfactory.

**Available Information**

We make available free ofcharge through our website, *www.serologicals.com,*our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q,our Current Reports on Form 8-K and amendments to those reportsfiled pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonablypossible after we file such material with, or furnish it to, the Securities andExchange Commission.

**Item 1A.**                RiskFactors

You should consider thefollowing factors, together with other matters described in this Annual Reporton Form 10-K, in evaluating us and our prospects. Any of thefollowing risks could seriously harm our business and financial results. Insuch case, the trading price of our securities could decline.

*If we are unable toimplement our growth strategy, the price of our securities may be adverselyaffected.*

Our strategy is toincrease our sales and profitability thus increasing our rate of growth. Wehave historically achieved, and intend to continue to achieve, our growthprimarily through the acquisition or internal development of new product lines,the expansion of our customer base and the addition of new businesses. However,we cannot guarantee that we will continue to expand successfully or that growthor expansion will result in continued profitability. Our ability to implementour growth strategy will depend upon a variety of factors that are not entirelywithin our control, including:

·       ourability to develop new products;

·       ourability to make profitable acquisitions;

·       integrationof acquired companies and facilities into existing operations;

·       hiring,training and retention of qualified personnel;

·       establishmentof new relationships or expansion of existing relationships with customers andsuppliers; and

·       availabilityof capital.

Our growth strategyincludes growth by acquisitions. We compete for acquisition opportunities withcompanies that have significantly greater financial resources than we have.Therefore, there is a risk that we may be unable to complete an acquisitionthat we believe could be important to our growth strategy because one of ourcompetitors may be willing to pay more for a potential acquisition candidate ormay be 

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able touse its financial resources to acquire a potential acquisition candidate beforewe are able to obtain financing.

*Loss of keymanagement or key personnel could have a material adverse effect on ourbusiness.*

Our success depends to asignificant extent on the members of our senior management team. Although wehave written employment agreements with all of our senior management team, we maynot be able to retain the services of our senior management team. If we were tolose a member of our senior management team, we would be required to incursignificant costs in identifying, hiring and retaining replacements for thedeparting executive. No member of our senior management team has a significantequity-based performance incentive.  The loss of any of our key managementor employees could have a material adverse effect upon our business.

*If we implement our growth strategy but are unable tomanage our growth, our sales and profitability might be adversely affected.*

The implementation of ourgrowth strategy may place additional demands on our administrative, operationaland financial resources and increase the demands on our financial systems andcontrols. Our ability to manage our growth successfully may require us tocontinue to improve and expand these resources, systems and controls. If ourmanagement is unable to manage growth effectively, our operating results couldbe adversely affected. If we are unable to manage our growth, our financialcondition and results of operations may be adversely affected.

*We may not be ableto raise the additional capital necessary to implement our growth strategy.*

Our growth strategyrequires that we make expenditures in connection with new products and theacquisition of other companies. Although we believe we have sufficient resourcesto finance these expenditures, we may be required to seek additional sources offinancing, which may include issuing additional debt or equity securities tofinance potential acquisitions. We cannot predict the amount of ourexpenditures in connection with our growth strategy because opportunities forimplementing our growth strategy arise unexpectedly. This is particularly thecase for acquisition opportunities. In the past, when an acquisitionopportunity arose, we were required to obtain financing simultaneously with ournegotiation of the terms of the acquisition. Our dependence on additionalfinancing may place us at a disadvantage in competing for acquisitions. When afuture acquisition opportunity arises, we will be required to evaluate the sourcesof financing, which may be limited on short notice, and the terms of thefinancing available at the time. If we cannot find financing on acceptableterms, we may be unable to make the acquisition.

*Our competitors may increase the sales of their productsin a way that results in decreased sales of our products and our loss of marketshare.*

The markets formany of our products, particularly our research products, are highlycompetitive. We believe that the following companies are our most significantcompetitors:

·       GEHealthcare, Inc.

·       ApogentTechnologies, Inc.

·       BeckmanCoulter, Inc.

·       Bio-RadLaboratories, Inc.

·       CambrexCorporation

·       CSLLimited

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·       FisherScientific International, Inc.

·       InvitrogenCorporation

·       MerckKgaA

·       MilliporeCorporation

·       Proliant, Inc.

·       QiagenN.V.

·       Sigma-AldrichCorp

·       TechneCorporation

Some of our competitorshave significant financial, operational, sales and marketing resources, andsignificant experience in research and development. Our competitors may developnew technologies that compete with our products or render our productsobsolete. If a competitor develops superior technology or cost-effectivealternatives to our products, our business, operating results and financialcondition could be negatively impacted. In addition, demand for our productsmay weaken due to reduction in research and development budgets, loss ofdistributors and other factors identified in this Annual Report on Form 10-K,which could have an adverse effect on our financial condition. We believe thatcustomers in our markets display a significant amount of loyalty to theirinitial supplier of a particular product. Therefore, it may be difficult togenerate sales to potential customers who have purchased products fromcompetitors. To the extent we are unable to be the first to develop and supplynew products, our competitive position may suffer. We intend to compete in ourindustry by leveraging and expanding upon our business and operationalstructure. Among other things, we intend to leverage our expanded sales andmarketing structure, to expand our investment in research and development andto continue to evaluate acquisitions of businesses and technologies that willfurther accelerate our growth in both revenue and profitability. However, we cannotassure you that our plans will be successful or that we will be able tomaintain or increase our market share.

*If our supply of bovine serum or recombinant humaninsulin were interrupted or if the price of such materials increases and we areunable to pass the increases to our customers, our Bioprocessing segment wouldbe materially adversely affected.*

Our Bioprocessing segment relies on the continuedavailability of bovine serum, which is the raw material from which our EX-CYTE® product is derived and which is a componentused in the manufacture of other cell culture products and of recombinant humaninsulin, which we distribute to our cell-culture-product customers. Theavailability and price of bovine serum has been affected by scares or outbreaksof disease or similar health concerns or perceptions about the safety of bovineserum, government regulation and trade restrictions. Cows afflicted with BSE,or “mad-cow disease”, were discovered in Canada and the northwestern UnitedStates in 2003. These animals were the first known cases of mad-cow disease inNorth America. The discovery of mad-cow disease in North America causeddisruptions in the production and sales of some of our cell culture products.As a result of both discoveries, we were forced to close our Canadianmanufacturing facility for a period of time and to delay shipments of inventoryto a number of international customers due to foreign government regulationsduring the first quarter of fiscal 2004. We were also unable to import raw materialsourced in the United States into Canada and vice versa for a period of timefollowing the discovery of BSE in each country. Similar scares or actualoutbreaks of disease could have a material adverse effect on our business,results of operations and financial condition.

We now obtain most of the bovine serum we use tomanufacture our cell culture products from a single privately held supplier whosources materials from two abattoirs in the Midwestern United States. 

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We also obtain relativelysmall quantities of bovine serum from a supplier in Australia, a country thatis believed to be free of BSE. If we are unable to obtain bovine serum from oursuppliers for any reason, including because of a future outbreak of BSE, wewill contact other suppliers and attempt to find a source of supply. If wecannot find another source, our Bioprocessing segment could be materiallyadversely affected.

We obtain the recombinanthuman insulin that we distribute to our cell-culture-supplement customers froma single supplier based in Europe. We recently entered into a four-yearcontract with this supplier. We do not have an alternate source of supplyfor recombinant human insulin that could provide the same volumes of theproduct that we purchase from our current supplier on terms competitive withthose offered by our current supplier. We do not believe that we could readilyobtain on competitive terms another source of the quantities of recombinanthuman insulin that we require, if our supply from this supplier were interrupted.If our supply were interrupted, our Bioprocessing segment and our results ofoperations could be materially adversely affected.

*Our EX-CYTE*® product sales are driven by market demand fortherapeutic drugs that we do not manufacture or sell. If such drugs are notcommercially successful, the companies that manufacture them will not purchaseEX-CYTE®, and ourresults of operations may be materially adversely affected.

EX-CYTE® is one of our most significant cell cultureproducts. The majority of our sales of EX-CYTE® areto companies with approved, marketed drugs, or with drugs in advanced phases ofclinical trials. Reduced demand or acceptance, or delays or denial of approvalof the underlying pharmaceutical product could adversely impact the demand forEX-CYTE® and adversely affect our results ofoperations.

*Concern about the transmission of BSE could reduce thedemand for our cell culture products that are derived from bovine serum.*

The demand for several ofour cell culture products, including EX-CYTE® andProbuminÔ bovine serum albumin, could be adverselyaffected by concerns about some of their components being derived from bovineserum. The demand for IncelligentÔ, our recombinanthuman insulin product, could be adversely affected by concerns about the use ofbovine material in the process by which it is manufactured. The concern arisesfrom the risk that the agent causing BSE might be present in the raw materialsused in the production process and that the agent might be introduced into atherapeutic substance manufactured by one of our customers. The regulatoryauthorities of certain countries, including Japan, have refused to approvepharmaceuticals that are manufactured using a product that was derived frombovine serum or that was manufactured by a process that uses bovine material. Theregulatory authorities of other countries could adopt similar restrictions.

*We may incur costsin excess of amounts projected to close our manufacturing facilities inToronto.*

We decided to close ourmanufacturing facilities in Toronto, Ontario, Canada, and to transferproduction of the cell culture products manufactured there elsewhere. Werecorded substantial one-time, non-cash charges in the fourth quarter of fiscal2005 in connection with the closure. We expect to incur additional charges inthe future. Our estimates regarding the closure costs may not be accuratebecause, among other things, they are based on our knowledge of environmentalconditions at the facilities. If the environmental conditions are not asexpected, the closure costs could exceed our estimates. Additional closurecosts could have a material adverse effect on our results of operations infiscal 2006.

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*We may lose sales as a result of our decision to closeour manufacturing facilities in Toronto and not to open our manufacturingfacility in Lawrence, Kansas. We may loose sales as a result of our decision totransfer certain manufacturing operations of our Research segment from LakePlacid, New York, to Temecula, California.*

If we are unable to induce customers of our Torontocell culture products to purchase such products manufactured elsewhere, therevenues of our Bioprocessing segment may be materially adversely affected. Wemay have to provide financial or other incentives to the customers of ourToronto cell culture products to induce them to purchase such productsmanufactured elsewhere. Incentives may be required because our customers mayincur costs associated with the conversion of their manufacturing processes toour other products.

We decided not to open our EX-CYTE® manufacturing facility in Lawrence, Kansas,because we believe that we can satisfy the demand for the product with theproduction of our Kankakee, Illinois, facility, which we have recentlyincreased beyond our previous expectations. If we have underestimated thefuture demand for the product or if we have overestimated our ability toproduce larger quantities of it in Kankakee, we may be unable to satisfy thedemand for the product. Furthermore, if production at our Kankakee plant isinterrupted, we will be unable to manufacture the product, and othersignificant cell culture products, at any other location.

We are in the process oftransferring certain manufacturing operations of our Research segment from LakePlacid, New York, to Temecula, California. If we are unable to transfer theoperations on schedule, we may loose sales of the effected products.Furthermore, we could incur expenses in excess of amounts budgeted, which couldadversely affect our results of operations.

*The outsourcing trend in the pre-clinical andnon-clinical stages of drug discovery and development may decrease, which couldslow our growth.*

Our Research segmentderives a portion of its revenues from the provision of drug discovery servicesto its customers. This business has grown significantly over the past severalyears as a result of the increase in pharmaceutical and biotechnology companiesoutsourcing their pre-clinical and non-clinical research support activities. Asubstantial decline in pre-clinical and non-clinical outsourcing activity couldresult in a diminished growth rate in the revenues of our Research segment.

*Violation of government regulations or voluntaryquality programs could result in loss of sales and customers and additionalexpense to attain compliance.*

Several of our facilities are subject to extensiveregulation by the FDA, primarily through the requirements of the Public HealthService Act and the Food, Drug and Cosmetic Act, and similar governmentalbodies in other countries. The facilities are also subject to periodicinspection by the FDA and other similar governmental bodies to ensure theircompliance with applicable laws and regulations. New facilities, products andoperating procedures also must be approved by the FDA and/or similargovernmental bodies in other countries. Failure to comply with these laws and regulationscould lead to sanctions by the governmental bodies, such as writtenobservations of deficiencies made following inspections, warning letters,product recalls, fines, product seizures and consent decrees, which would bemade available to the public. Such actions and publicity could affect ourability to sell our products and to provide our services. In the past, we havereceived notifications and warning letters from the FDA relating todeficiencies in our compliance with FDA requirements. We were required to takemeasures to respond to the deficiencies. There can be no assurance that the FDAwill not request that we take additional steps to correct these deficiencies orother deficiencies in compliance raised by the FDA in the future. Correction ofany such deficiencies could have a material adverse affect on our business.

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We are also indirectly held accountable for complyingwith some of the regulations to which our customers are subject, even though weare not the regulated entity. For example, some of our customers use ourproducts in the manufacturing process for their drug and medical deviceproducts. Such products are regulated by the FDA under the FDA’s QSR. Althoughthe customer is ultimately responsible for QSR compliance for their products,the customers expect that the materials we sell to them will meet QSR requirements.We could lose sales and customers, and incur products liability claims, if ourproducts do not meet QSR requirements, to the extent applicable.

We are subject to USDAregulations and various foreign regulations for the sourcing, manufacturing anddistribution of animal based proteins. Our failure to comply with theserequirements could negatively impact our business and potentially cause theloss of customers and sales. ISO 9000:2000 quality standards are aninternationally recognized set of voluntary quality standards that requirecompliance with a variety of quality requirements somewhat similar to the QSRrequirements. The operations of our cell culture manufacturing facilities, aswell as our manufacturing facility in Scotland and our research productsfacilities in California, Australia and the United Kingdom, are registeredunder the ISO standards. Failure to comply with this voluntary standard canlead to observations of non-compliance or even suspension of ISO certificationby the certifying unit. Loss of ISO certification could cause some customers topurchase products from other suppliers.

*Our research anddevelopment efforts for new products may be unsuccessful.*

We incur research anddevelopment expenses to develop new products and technologies. There can be noassurance that any of these products or technologies will be successfullydeveloped or that, if developed, will be commercially successful. If we areunable to develop and commercialize products from our research and developmentefforts or we are unable or unwilling to allocate amounts beyond our currentlyanticipated research and development investment, we could lose our entireinvestment in these new products and technologies.

*If we are not able to identify new licensingopportunities or to enter into licenses for new products on acceptable terms,we may be unable to offer new products, which would adversely affect ourresults of operations.*

A component of our business strategy is to increasethe number of products we offer by licensing products developed by otherbiotechnology companies or academic research laboratories. We attempt to marketsuch products to our customers. Often, we attempt to improve the licensedproducts using our technologies. Therefore, we depend on the success of ourlicensing efforts for a portion of our new products. There can be no assurancethat our licensing efforts will be successful.

We license technology thatenables us to access proprietary biological materials that we use tomanufacture our products. Some of the licenses do not provide guarantees thatwe will have all legal rights to sell products that are derived from thelicensed technology. Therefore, we may be prevented from selling productsproduced with the licensed biological materials because of competingtechnologies owned by others, including patented technologies. If our productsare found by a court to infringe intellectual property rights of a third party,we may be prevented from practicing that technology. Moreover, if found by acourt to infringe the patent of the third party, we may be liable forcompensatory damages, treble damages and attorney’s fees and subject to aroyalty obligation or enjoined from practicing the technology altogether,notwithstanding the license from the licensor. Although we attempt to obtainindemnification from our licensors, we do not always receive indemnificationagainst third party claims of patent infringement. In the ordinary course ofbusiness, we receive notices alleging that one or more of our approximately11,000 research products violates a patent or other intellectual propertyright. Although we have not in the past incurred material liabilities as aresult of infringement claims with respect to our research products, we have noassurance that we will not incur material liability as a result of aninfringement claim in the future, which could materially adversely affect ourresults of operations.

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*If we fail to introduce new products, or our newproducts are not accepted by potential customers, we may lose market share.*

Our Research segment ishighly dependent on frequent new product introductions. Our future success willdepend in part on continuous, timely development and introduction of newproducts that address evolving market requirements. To the extent we fail tointroduce new and innovative products, we may lose market share to ourcompetitors, which could be difficult to regain. Any inability to develop andintroduce new products successfully could reduce our growth rate or damage ourbusiness.

*If we do notprotect our intellectual property, our business could be materially adverselyaffected.*

Many of our current products are not protected bypatents that we own or license. We attempt to protect these products bymaintaining our intellectual property related to them as trade secrets. Ourproducts that are not patented may be susceptible to reverse engineering orparallel development efforts and sales by our competitors. We attempt toprotect our trade secrets by entering into confidentiality agreements withthird parties, our employees and consultants. In that regard, our policy is torequire all of our current employees to sign confidentiality and non-disclosureagreements; however, it is possible that some employees have failed to do so orthat these agreements are not enforceable. The agreements restrict the abilityof our employees to disclose proprietary company data without our priorpermission. We enforce these agreements when appropriate. However, if one ofour current or former employees discloses proprietary company data in violationof these agreements, our business could be materially adversely affected.Furthermore, confidentiality agreements with third parties may be breached bythe third party. If so, we may not have an adequate remedy against the thirdparty. If our trade secrets become known, we may lose our competitive position.To prevent competitors from using technologies and trademarks in which we holdintellectual property rights, it may be necessary for us to litigate againstthose competitors. Any litigation could result in substantial expense, maydistract our management and may not adequately protect the proprietarytechnologies and trademarks. Furthermore, litigation may result in a finding ofinvalidity and unenforceability of our intellectual property rights. In anycase in which we are unable to protect our proprietary technologies andtrademarks, we may be subject to increased competition, resulting in lost salesand reduced profits, and even discontinuance of or non-entry into a productline.

We own or have rights through licenses to manytechnologies used to manufacture and sell our products that have limited lifespans due to patent or license term expiration. When patents expire or licensesare not renewed, we may lose our proprietary advantage over our competitors. Wemay not be able to obtain new licenses or to renew existing licenses onfavorable terms or if at all due to expiration of the license term, failure inselling certain minimum quantities of products, or changes in the licensor’slicensing strategy. If we lose our licensed rights, we may be forced to stopmaking and selling the products that depend on the license. Furthermore, ourcompetitors could license the rights, which could erode or eliminate our marketshare for such products and could adversely affect our results of operationsand financial condition. Our ability to gain access to new products and newtechnologies required to perform services and manufacture new products ispartly dependent on our ability to convince inventors, and the institutionsthat support them, that we will be successful in the commercialization of theirinventions. We have no assurance that we will be able to continue to negotiateaccess for such new products or technologies on acceptable terms or if at all.

We attempt to obtain patent protection for ourinventions in appropriate cases. We have no assurance that patents will begranted pursuant to any of our pending patent applications. Furthermore, wehave no assurance that the scope of our issued patents will be sufficientlybroad to offer meaningful protection from our competitors. Accordingly, thepossibility exists that our competitors or other third parties could make andsell products thought to be covered by our patents or patents pending. Further,our owned or exclusively licensed patents could be challenged, invalidated orrendered inapplicable so that such patent rights would not bar our competitorsfrom selling competing products.

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In the ordinary course ofbusiness we receive notices alleging that one or more of our products mayviolate the intellectual property rights of others. Although we have not in thepast incurred material liabilities as a result of such infringement claims, wehave no assurance that we will not incur material liability as a result of aninfringement claim in the future, which could materially adversely affect ourbusiness.

*Reduction or delays in research and developmentbudgets and in government funding may negatively impact sales in our Researchsegment.*

Our customers includepharmaceutical and biotechnology companies, academic institutions andgovernment and private laboratories. A significant portion of the revenues ofour Research segment is attributable to sales to researchers, universities,government laboratories and private foundations whose funding is dependent upongrants from government agencies such as the NIH and similar domestic andinternational agencies. Fluctuations in the research and development budgets ofthese researchers and their organizations could affect the demand for ourresearch products. Research and development budgets fluctuate due to numerousfactors that are outside our control and are difficult to predict, includingchanges in available resources, spending priorities and institutional budgetarypolicies. Furthermore, funding for controversial areas of research, such asstem cell research, could be affected by political factors and could have anadverse impact on revenues.

*We rely oninternational sales, which are subject to additional risks.*

International salesaccounted for approximately 34% of our revenues in fiscal 2005, 38% of ourrevenues in fiscal 2004 and 36% of our revenues in fiscal 2003. Internationalsales can be subject to many inherent risks that are difficult or impossiblefor us to predict or control, including:

·       unexpectedchanges in regulatory requirements and tariffs;

·       difficultiesand costs associated with staffing and managing foreign operations, includingforeign distributor relationships;

·       longeraccounts receivable collection cycles in certain foreign countries;

·       adverseeconomic or political changes;

·       unexpectedchanges in regulatory requirements;

·       morelimited protection for intellectual property in some countries;

·       changesin our international distribution network and direct sales force;

·       changesin currency exchange rates;

·       potentialtrade restrictions, exchange controls and import and export licensingrequirements; and

·       potentiallyadverse tax consequences of overlapping tax structures.

Each of these risks mightimpact our cash flow or impair our ability to borrow funds, which ultimatelycould affect our business, financial condition or operating results. We havenot attempted to mitigate the risk of fluctuations in currency exchange rates byentering into hedging financial arrangements. We have not entered into foreignexchange hedging financial arrangements because the foreign sales of ourResearch segment, which are frequently denominated in foreign currencies, havehistorically offset the U.S. sales of our MonoSeraTM products, which arefrequently denominated in U.S. dollars. Therefore, we currently believe thatthe risk to our results of operations posed by fluctuations in foreign exchangerates does not currently warrant a hedging arrangement.

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*Litigation may harm our business or otherwise distractour management.*

Substantial, complex orextended litigation could cause us to incur large expenditures and distract ourmanagement. For example, lawsuits by employees, stockholders, collaborators,distributors, competitors, customers, or end-users of our products or services,including liability claims and patent infringement claims based on our productsand services, could be very costly and substantially disrupt our business.Disputes from time to time with such companies or individuals are not uncommon,and we cannot provide assurance that we will always be able to resolve suchdisputes out of court or on terms favorable to us. If we are sued for patentinfringement, and a court agrees that we are infringing a third party’s patent,we may be forced to remove a product from the market or enter into a licenseagreement, which may not be available on reasonable terms, if at all. Further,in such a circumstance, we could be exposed to significant attorneys’ fees andcosts.

*Compliance with environmental laws and regulationscould adversely affect our results of operations.*

We are subject toenvironmental laws and regulations governing the use of materials and chemicalsused in our business. We use many chemicals that are classified as hazardoussubstances in our manufacturing operations, including organic solvents. Webelieve that our safety and environmental policies for handling and disposingof such materials comply with standards prescribed by state and federalagencies. There is a risk, however, that we might accidentally release ahazardous substance into the environment. In addition, we cannot give assurancethat laws, rules and regulations or enforcement policies that are morerestrictive than those with which we now comply will not be adopted in thefuture. If so, we would be required to change our compliance programs, whichcould make compliance more expensive or otherwise adversely affect our resultsof operations.

*Inboth domestic and foreign markets, sales to our customers may depend, in part,on the availability of reimbursement from third-party payors.*

Third-party payors, suchas NIH, government health administration authorities and other similarorganizations, are continually challenging the price and cost-effectiveness ofmedical products and services, including the medical products that ourcustomers manufacture using our products. There can be no assurance thatpricing pressures that may be experienced by our customers will not adversely affectour financial condition and results of operations because of a determinationthat a customer’s products are not cost effective or because of inadequatethird-party reimbursements levels to our customers.

*Thesourcing, processing, manufacturing and sale of our products involve a risk ofproduct and professional liability claims.*

There is a risk that wemight be subject to product or professional liability in excess of ourinsurance coverage. We believe that we have obtained sufficient levels ofproduct and professional liability insurance to insure against the risk ofcatastrophic claims. There can be no assurance that the coverage limits of ourinsurance policies will be sufficient to cover potential claims. A successfulclaim against us in excess of our insurance coverage could have a materialadverse effect on our financial position and results of operations.

**Item 1B.     UnresolvedStaff Comments.**

Not applicable.

**Item 2.**                        Properties.

Our principal executiveoffice is located in approximately 50,000 square feet of office space inNorcross, Georgia. We lease this space under an agreement that expires in 2011.We share this space with Celliance, which also has its headquarters there.Celliance’s 40,000 square foot monoclonal antibody manufacturing facility islocated in Livingston, Scotland. The facility consists of two buildings, one ofwhich 

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isleased for a term that expires in 2021 and the other is a 20,000 square footmanufacturing building owned by Celliance. Celliance manufactures its cellculture supplement products in a 63,000 square foot facility in Kankakee,Illinois and in facilities totaling 50,000 square feet located in Toronto,Ontario, Canada. Celliance leases a 19,500 square foot distribution facility inKankakee, Illinois. Celliance also leases 16,000 square feet of laboratoryspace in Morgan Hill, California for its research and development operations.Celliance has announced that it intends to discontinue production at itsfacility in Toronto, Ontario, Canada. Such facility will be sold afterproduction is discontinued, which is expected to occur in the second half of2006. Celliance owns these facilities. Celliance also owns a new 44,650 squarefoot manufacturing facility in Lawrence, Kansas, which as a result of thedecision to not commence operations will be prepared for sale in 2006.

The executive and manufacturing offices of ourResearch segment are located in an 85,000 square foot, formerly leased,facility in Temecula, California. In January 2006, Chemicon purchased thisfacility. Also in January 2006, Chemicon purchased a 27,000 square footfacility adjacent to the Temecula executive offices. This space is expected tohouse research and development operations during 2006. It also operates twofacilities in Ramona, California, totaling 120,000 square feet; a 36,000 squarefoot manufacturing facility in Australia; a 21,000 square foot distributionfacility in Southampton, England, and a 7,200 square foot manufacturingfacility in Philipsburg, New Jersey. The facilities in Australia and Southamptonare leased. The leases expire between 2009 and 2011.

Upstate occupies a 30,000square foot facility in Charlottesville, Virginia, which houses administrativepersonnel and research and development operations. It operates a 60,000 squarefoot manufacturing and distribution facility in Lake Placid, New York, and twomanufacturing facilities in Dundee, Scotland, totaling approximately 26,000square feet. All of Upstate’s facilities are leased except for its facility inLake Placid, New York, which it owns. The terms of Upstate’s leases expirebetween 2007 and 2018. In fall 2005, we announced our intention to discontinueproduction at the facility in Lake Placid, New York in spring 2006 and thisfacility will be sold after production is discontinued.

**Item 3.**                        LegalProceedings

We are involved in alawsuit that arose out of the acquisition of Chemicon in 2003. In the lawsuit,former employees of Chemicon sued Chemicon, us and certain others, includingthe founders of Chemicon, for amounts allegedly owed them pursuant to bonusagreements they entered into with Chemicon. They alleged in the lawsuit thatour acquisition of Chemicon gave rise to their right to receive bonuses. Theyalso alleged that Chemicon breached the bonus agreements and that we and thefounders of Chemicon tortuously interfered with Chemicon’s obligations pursuantto the bonus agreements. The case proceeded to trial before the judge sittingwithout a jury in November 2005. During the third week of trial, theplaintiffs agreed to dismiss their claims against us in exchange for ouragreement not to seek to recover our attorneys’ fees from the plaintiffs. Trialcontinued against Chemicon and the other defendants. On January 10, 2006,the trial judge published a Statement of Tentative Decision finding that Chemiconbreached the bonus agreements. On March 10, 2006, the trial judgeconducted a hearing at which the parties submitted to him their respectivecalculations of the bonus amounts, interest and attorneys’ fees based on thetentative decision. The founders of Chemicon have already paid $4.2 millionof the bonus payment. The amount remaining to be paid will likely be betweenapproximately $1.9 million and $3.6 million, depending on the trial judge’sfinal decision. Chemicon is indemnified by the founders of Chemicon and certainothers against liability for the amount of this verdict. At the time of theacquisition of Chemicon, we paid $19.0 million of the purchase price directlyinto an escrow account to secure the obligations of the indemnifying parties. Webelieve that the amount on deposit in the escrow account will be sufficient todischarge the remaining obligation to the plaintiffs.

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We are also involved incertain litigation that arose in the ordinary course of business. We do notbelieve that the ultimate resolution of these matters will have a materialadverse effect on our financial position or results of operations.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

We did not submit any matter to a vote of our securityholders in the fourth quarter of fiscal 2005.

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**PART II.**

**Item 5.**                        Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

**Market Information**

OurCommon Stock is listed on the Nasdaq Global Market (“NASDAQ”) under the symbol “SERO.”As of February 28, 2006, there were 76 holders of record of our CommonStock. The following table shows, for the periods indicated, the high and lowsale prices per share for our Common Stock on NASDAQ.

| ** **                                  | ** ** | **High**   | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|------------|------------|---------|------------|
| **Fiscal Year Ended  January 2, 2005** | ** ** | ** ** |       |    |       |
| First Quarter                               |       | $          | 21.17      |    | $          | 14.34 |   |
| Second Quarter                              |       | 22.35      |       | 17.10   |       |
| Third Quarter                               |       | 23.85      |       | 18.60   |       |
| Fourth Quarter                              |       | 24.95      |       | 21.49   |       |
| **Fiscal  Year Ended January 1, 2006** | ** ** | ** ** |       |    |       |
| First Quarter                               |       | $          | 25.67      |    | $          | 20.47 |   |
| Second Quarter                              |       | 25.05      |       | 19.41   |       |
| Third Quarter                               |       | 25.16      |       | 21.06   |       |
| Fourth Quarter                              |       | 23.53      |       | 18.68   |       |

 

We have never paid cashdividends on our Common Stock. We do not expect to declare cash dividends onour Common Stock in the future. We intend to retain all earnings for businessdevelopment. Any possible future cash dividends will depend on our earnings,capital requirements and financial condition and will be made at the discretionof our Board of Directors. In addition, our ability to pay dividends isprohibited by the terms of our credit facility. Any declaration and payment ofcash dividends on our Common Stock will result in an adjustment of theconversion rate for our 4.75% Convertible Senior Subordinated Debentures due2033 (the “Debentures”).

**InformationRegarding Shares Reserved for Issuance**

The section captioned “EquityCompensation Plan Information” within the proxy statement for our 2006 AnnualMeeting of Stockholders, which will be held on May 10, 2006 (the “2006Proxy Statement”), is incorporated herein by reference.

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**Repurchases of Equity Securities**

On June 10,2005, our Board of Directors approved our repurchase of up to 2,000,000 sharesof our Common Stock (the “Repurchase Program”). The Repurchase Program expireson June 30, 2008. The following table provides information about ourpurchases of our Common Stock during the quarter ended January 1, 2006pursuant to the Repurchase Program.

| **Period**                                                     | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased(1)** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of  Shares  Purchased as  Part of Publicly  Announced  Program** | ** ** | **Maximum  Number of  Shares  that May Yet  Be  Purchased  Under  the Program** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| October 2,  2005 through November 1, 2005       |       |       | 232,000    |                                            |       |                                         | $          | 19.58                                                                                                |       |                                                                                                |       | 357,120 |   |   |   | 1,642,880 |   |   |
| November 2,  2005 through December 1, 2005      |       |       | 385,387    |                                            |       |                                         | 20.11      |                                                                                                 |       |                                                                                                | 742,507    |   |   |   | 1,257,493 |   |   |
| December 2, 2005  through January 1, 2006  |       |       | 432,457    |                                            |       |                                         | 19.23      |                                                                                                 |       |                                                                                                | 1,174,964  |   |   |   | 825,036 |   |   |

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(1)          We have repurchased atotal of 1,174,964 shares of our Common Stock pursuant to the RepurchaseProgram. In addition to repurchases pursuant to the Repurchase Program,pursuant to the Serologicals Corporation 2005 Incentive Plan and thepredecessor plans (collectively, the “Plan”), participants may exercise stockoptions by surrendering shares of our Common Stock that the participantsalready own as payment of the exercise price. Plan participants may alsosurrender shares of our Common Stock as payment of applicable tax withholdingon the vesting or exercise of awards. Shares so surrendered by participants inthe Plan are repurchased pursuant to the terms of the Plan and applicable awardagreement and not pursuant to publicly announced share repurchase programs. Noshares of our Common Stock were surrendered by participants in the Plan duringthe quarter ended January 1, 2006.

 

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**Item 6. Selected Financial Data**

Thefollowing selected financial data as of and for the years ended January 1,2006, January 2, 2005, December 28, 2003, December 29, 2002 and December 30,2001 have been derived from our audited Consolidated Financial Statements. Thisdata should be read in conjunction with “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and our ConsolidatedFinancial Statements and the notes thereto included elsewhere in this AnnualReport on Form 10-K. All amounts in the following table are inthousands, except per share data.

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| INCOME STATEMENT DATA:                              |       |     |       |     |       |     |       |     |       |     |       |
| Net revenues                                        |       | $        | 274,945    |     | $          | 195,923  |       | $        | 146,915    |     | $          | 99,289 |   | $ | 53,564 |   |
| Cost of revenues                                    |       | 122,798  |       | 87,482   |       | 64,741   |       | 47,076   |       | 22,878   |       |
| GROSS PROFIT                                        |       | 152,147  |       | 108,441  |       | 82,174   |       | 52,213   |       | 30,686   |       |
| Selling, general and  administrative expenses  |       | 85,141   |       | 59,293   |       | 44,602   |       | 33,811   |       | 18,601   |       |
| Research and development                            |       | 17,199   |       | 10,144   |       | 6,214    |       | 5,628    |       | 1,665    |       |
| Amortization of intangibles                         |       | 7,206    |       | 3,771    |       | 2,175    |       | 895      |       | 1,013    |       |
| Purchased in process  research and development      |       | —   |       | 3,263    |       | —   |       | —   |       | —   |       |
| Impairment, exiting  costs and other                |       | 38,025   |       | —   |       | 2,778    |       | 1,909    |       | 872      |       |
| OPERATING INCOME                                    |       | 4,576    |       | 31,970   |       | 26,405   |       | 9,970    |       | 8,535    |       |
| Other expense (income),  net                        |       | 597      |       | (54      | )          | 180      |       | 31       |       | 72       |       |
| Write-off of deferred  financing costs              |       | —   |       | 965      |       | 4,492    |       | —   |       | —   |       |
| Interest expense                                    |       | 7,361    |       | 6,052    |       | 4,384    |       | 239      |       | 512      |       |
| Interest income                                     |       | (1,782   | )          | (587     | )          | (255     | )          | (637     | )          | (1,651   | )          |
| INCOME (LOSS) BEFORE  INCOME TAXES                  |       | (1,600   | )          | 25,594   |       | 17,604   |       | 10,337   |       | 9,602    |       |
| Provision (benefit) for  income taxes               |       | (2,416   | )          | 7,933    |       | 5,537    |       | 3,617    |       | 3,380    |       |
| NET INCOME FROM  CONTINUING OPERATIONS              |       | 816      |       | 17,661   |       | 12,067   |       | 6,720    |       | 6,222    |       |
| Income (loss) from  discontinued operations    |       | 1,883    |       | —   |       | (10,561  | )          | 7,229    |       | 10,870   |       |
| NET INCOME                                          |       | $        | 2,699      |     | $          | 17,661   |       | $        | 1,506      |     | $          | 13,949 |   | $ | 17,092 |   |
| BASIC EARNINGS (LOSS) PER SHARE:                    |       |     |       |     |       |     |       |     |       |     |       |
| Continuing operations                               |       | $        | 0.02       |     | $          | 0.68     |       | $        | 0.49       |     | $          | 0.28 |   | $ | 0.26 |   |
| Discontinued operations                             |       | 0.06     |       | —   |       | (0.43    | )          | 0.29     |       | 0.46     |       |
| Net income                                          |       | $        | 0.08       |     | $          | 0.68     |       | $        | 0.06       |     | $          | 0.57 |   | $ | 0.72 |   |
| DILUTED EARNINGS (LOSS) PER SHARE:                  |       |     |       |     |       |     |       |     |       |     |       |
| Continuing operations                               |       | $        | 0.02       |     | $          | 0.59     |       | $        | 0.47       |     | $          | 0.27 |   | $ | 0.26 |   |
| Discontinued operations                             |       | 0.06     |       | —   |       | (0.37    | )          | 0.29     |       | 0.44     |       |
| Net income                                          |       | $        | 0.08       |     | $          | 0.59     |       | $        | 0.10       |     | $          | 0.56 |   | $ | 0.70 |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                |       |     |       |     |       |     |       |     |       |     |       |
| Basic                                               |       | 34,729   |       | 26,148   |       | 24,549   |       | 24,357   |       | 23,749   |       |
| Diluted                                             |       | 35,195   |       | 35,524   |       | 28,134   |       | 24,837   |       | 24,439   |       |
| BALANCE SHEET DATA:                                 |       |     |       |     |       |     |       |     |       |     |       |
| Working capital                                     |       | $        | 117,625    |     | $          | 122,443  |       | $        | 104,760    |     | $          | 65,468 |   | $ | 55,156 |   |
| Total assets                                        |       | 623,619  |       | 639,807  |       | 358,178  |       | 191,165  |       | 175,338  |       |
| Long-term debt, less  current maturities            |       | 130,381  |       | 132,814  |       | 130,916  |       | 39       |       | 1,451    |       |
| Stockholders’ equity                           |       | 406,377  |       | 416,531  |       | 181,506  |       | 170,988  |       | 152,736  |       |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

We are a global leader in developing andcommercializing consumable biological products, enabling technologies andservices in support of biological research, drug discovery and thebioprocessing of life-enhancing products. Our customers include major lifescience companies and leading research institutions involved in keydisciplines, such as neurology, oncology, hematology, immunology, cardiology,proteomics, infectious diseases, cell signaling and stem cell research. Inaddition, we are the world’s leading provider of monoclonal antibodies for theblood typing industry.

We report operating results in two business segments, “Research”and “Bioprocessing.” The operations of Celliance represent the Bioprocessingsegment and the operations of Chemicon and Upstate represent the Researchsegment. 

Prior to 2005, we reported operating results in threebusiness segments: Research, Cell Culture and Diagnostics. These segments werebased primarily on the differing production, manufacturing and othervalue-added processes that we performed with respect to our products and, to alesser extent, the differing nature of the ultimate end use of our products. Prior to 2003, we reported a fourth segment,Therapeutic Products, which is accounted for as discontinued operations in allperiods presented as discussed in “Note 4—Discontinued Operations” in Item8—Financial Statements and Supplementary Data. All amounts in this AnnualReport on Form 10-K reflect the restatement of the pre-2005 segments sothat they are consistent with the current year presentation.

Our Research segment sells a broad range of researchproducts, including specialty reagents, kits, antibodies and molecular biologytools to research customers working in the areas of neuroscience, infectiousdisease, oncology, stem cell research and cell signaling. We are also a leadingsupplier of monoclonal antibodies, conjugates, antibody blends and molecularand cell biology-based detection kits for use in diagnostic laboratories. Inaddition, we are one of the leading suppliers of tools for kinase research andone of the leading providers of drug discovery services to pharmaceuticalcompanies targeting kinase biology-based drugs. We market our research productsand services under our Chemicon® andUpstate® brand names.

Our Bioprocessing segment sells a variety of cellculture products, including highly purified proteins and tissue culture mediacomponents. These products are used primarily by biopharmaceutical andbiotechnology companies as nutrient additives in cell culture media. One of ourmost significant products within the Bioprocessing segment is EX-CYTE® , a patented serum-free solution ofcholesterol, lipoproteins and fatty acids. EX-CYTE® isused, in combination with other cell culture supplements, to reduce or replaceanimal serum in cell culture processes. We also provide a range of serum-basedproducts in this segment, including BSA, under the brand name “ProbuminTM”, forwhich we are the world’s leading supplier. We also sell recombinant humaninsulin, under the brand name “IncelligentTM”, for use as a media supplement.This segment also manufactures and sells monoclonal antibodies, under the brandname “MonoSeraTM”, that are used in products such as blood typing reagents andin controls for diagnostic tests for certain infectious diseases. We believethese products comprise the world’s most comprehensive range of commerciallyavailable human monoclonal antibodies for blood grouping. 

See “Note 14—Segmentand Geographic Information” in Item 8—FinancialStatements and Supplementary Data for disclosure of revenue and gross profit bysegment and long-lived assets by geographical area for our three most recentlycompleted fiscal years.

**Discontinued Operations**

On July 10, 2003, the Company announced itsintention to exit the therapeutic plasma business, which consisted of a networkof ten plasma collection centers and a central testing laboratory. Thedivestiture was 

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completed with the sale ofthese operations on January 15, 2004, effective December 28, 2003, toLife Therapeutics, a company based in Sydney, Australia (the “Buyer”). Underthe provisions of Statement of Financial Accounting Standards No. 144, “Impairmentof Long-Lived Assets and Discontinued Operations” (“SFAS 144”) thisbusiness was classified as a discontinued operation. The results of operationsfor this business have been classified as discontinued operations in allperiods presented.

In October 2005, the Company received $3.1million as settlement of a contractual claim with a customer of the Company’sformer therapeutic plasma business. The payment, net of income taxes andcollection expenses totaling approximately $1.2 million, is included in Incomefrom Discontinued Operations in our consolidated income statement for the yearended January 1, 2006. During 2004 the Company did not incur any income orexpenses as a result of discontinued operations.

During 2003, the Company recorded an impairment lossof $12.6 million, based on the total consideration received for thistransaction, which is included as a component of “Loss from discontinuedoperations.” No additional gain or loss was recorded in 2004 at the timeof closing.

Part of the sale proceeds consisted of securedpromissory notes, which were recorded at their estimated net realizable valueof $7.9 million. In December 2004, the Company renegotiated the termsof the promissory notes, combining them into one secured promissory note (“newnote”) with a stated face value of $7.8 million. The new note receivablewas payable in variable quarterly installments through December 2007. TheCompany recorded an imputed interest charge on this new note in December 2004because the stated interest rate on the new note was considered below market.

In September 2005, the Buyer prepaid the entireremaining outstanding principal balance on the note. Under the terms of thetransaction, the remaining debt balance of $6.8 million was settled for $6.0million in cash and a royalty-bearing, non-exclusive commercial license to apurification technology. The amount of the discount, less unamortized imputedinterest income, was reported as a $0.5 million charge and is included as “Otherexpense, net” in the accompanying consolidated income statement for the yearended January 1, 2006.

See “Note 4—DiscontinuedOperations” in Item 8—FinancialStatements and Supplementary Data for further discussion of discontinuedoperations.

**Critical Accounting Policies**

Our consolidated financialstatements are presented on the basis of accounting principles that aregenerally accepted in the United States of America. Such accounting principlesrequire management to make estimates that affect the amount of revenues,expenses, assets and liabilities reported. There are five critical accountingpolicies that are both very important to the portrayal of our financialcondition and results of operations and that required our most difficult,subjective or complex judgments. The accounting for these matters was based oncurrent facts and circumstances which, in our judgment, hold potential forchange which could affect our future estimates. Therefore, future financialresults could differ materially from current financial results based on ourcurrent estimates. We use a combination of historical results, anticipatedfuture events and detailed assessment of relevant facts and circumstances toestimate and make assumptions relating to our critical accounting policies.Actual results could differ from these estimates. The five critical accountingpolicies are as follows:

*Accounts receivable*

We perform ongoing creditevaluations of our customers and adjust credit limits based upon paymenthistory and the customer’s current creditworthiness, as determined by review ofcurrent credit information. We monitor collections and payments from ourcustomers and maintain a provision for estimated credit losses based uponhistorical experience and any specific customer collection issues that havebeen 

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identified.Our allowance for bad debts was $1.4 million and $1.0 million at January 1,2006 and January 2, 2005, respectively. We wrote off $0.4 million and$0.6 million of bad debts in fiscal 2005 and 2004, respectively. Ourallowance for bad debts may prove to be inaccurate, in which case we may haveoverstated or understated our accounts receivable, net and selling, general andadministrative expense, accordingly.

*Inventory*

We carry our inventories at the lower of cost ormarket. Cost includes materials, labor and overhead. Market, with respect toall inventories, is replacement cost or net realizable value. We frequentlyreview inventory to determine the necessity of adjustments for excess, obsoleteor unsaleable inventory. The reviews require us to assess customer and marketdemand. We analyze several different factors to evaluate the net realizablevalue of inventory, including the age of inventory, excess supply based onanticipated demand, specific identification and lower of cost or market. We arenot aware of any instances where our previous estimates or assumptions, whichwere used to determine the net realizable value of inventory at January 1,2006 and January 2, 2005, materially varied from actual results. We do notexpect our estimates or assumptions to change in the future.

Gross inventories at January 1, 2006 and January 2,2005, were $69.0 million and $57.5 million, respectively. Inventories arepresented on the balance sheet net of adjustments for excess, obsolete andunsalable inventory of $9.6 million and $7.6 million at January 1,2006 and January 2, 2005, respectively.

Thefollowing table sets forth a roll forward of the inventory adjustments for theyears ended January 1, 2006, January 2, 2005 and December 28,2003 (in millions):

| ** **             | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **          | ** ** | **Foreign**              | ** ** | ** **     | ** ** | ** **                  | ** ** |
|------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|--------------------------|------------|----------------|------------|-----------------------------|------------|
| ** **             | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | **Charged to** | ** ** | **Currency Effect** | ** ** | ** **     | ** ** | **Balance at**         | ** ** |
| ** **             | ** ** | **Period**            | ** ** | **Expenses**        | ** ** | **Goodwill**        | ** ** | **on Transaction**  | ** ** | **Deductions** | ** ** | **End of Period** | ** ** |
| Year Ended:            |       |                  |       |                |       |                |       |                     |       |           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| January 1,  2006  |       |                  | $          | 7.6                 |       |                |       | $                        | 5.9        |           |       |                        | $          | — |   |   |   | $ | (0.2 | ) |   |   | $ | (3.7 | ) |   |   | $ | 9.6 |   |   |
| January 2,  2005  |       |                  | 5.8        |                |       |                | 3.0        |                     |       |           | 2.6        | (a)                         |       |   | 0.1 |   |   |   | (3.9 | ) |   |   | 7.6 |   |   |
| December 28, 2003 |       |                  | 4.6        |                |       |                | 3.0        |                     |       |           | 1.6        | (b)                         |       |   | (0.3 | ) |   |   | (3.1 | ) |   |   | 5.8 |   |   |
|                        |            |                       |            |                     |            |                     |            |                          |            |                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Adjustment establishedupon purchase of Upstate effective October 1, 2004.

(b)          Adjustment establishedupon purchase of Chemicon effective April 1, 2003.

The estimates may prove to be inaccurate, in whichcase we may have overstated or understated the adjustment required for excess,obsolete or unsaleable inventory and our cost of goods sold, accordingly.

At January 1, 2006, inventory adjustmentsdetermined on specific products, age of inventory and excess supply represented33.0%, 49.3%, and 17.7%, respectively, of the inventory adjustment balance. 

Thefollowing table presents the sensitivity analysis on the inventory adjustmentat January 1, 2006, adjusted for the items that are age sensitive andpotentially in excess supply, assuming the age and forecast were expanded byincreasing the time periods by 25% or reduced by decreasing the time periods by25%, which we consider to be extreme-case scenarios. Adjustments for specificproducts cannot be evaluated for sensitivity. Amounts in the table are inmillions.

| ** **            | ** ** | **As Reported** | ** ** | **Reduced by 25%** | ** ** | **Increased by 25%** | ** ** |
|-----------------------|------------|----------------------|------------|------------------------------|------------|--------------------------------|------------|
| Inventory  adjustment |       |                 | $          | 9.6                          |       |                           |       | $ | 8.0 |   |   |   | $ | 11.2 |   |   |
|                       |            |                      |            |                              |            |                                |            |  |  |  |  |  |  |  |  |  |

 

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*Valuation ofgoodwill and other intangible assets*

Weevaluate our goodwill and intangible assets for potential impairment wheneverevents or changes in circumstances indicate that the carrying value may nolonger be recoverable. We test goodwill and intangible assets with indefiniteuseful lives for impairment, utilizing a combination of valuation techniques,including the expected present value of future cash flows, a market multipleapproach, and a comparable transaction approach. We completed our annualgoodwill and indefinite lived intangible assets test for the year ended January 1,2006 on July 3, 2005 and determined that there was no impairment forfiscal 2005. The estimates used to evaluate the fair value of goodwill and otherintangible assets may prove to be inaccurate, in which case we may be requiredto take a future impairment charge for goodwill and other intangible assets.The most significant assumptions in the impairment analysis are revenue growthand the discount rate. The following table presents the ratio of the fairvalues of the assets of our segments as computed in our annual impairmentanalysis to their carrying values as of July 3, 2005. Amounts less than1.0 would indicate that impairment may exist. Additionally, the table includesthis ratio as if the discount rate were 100 basis points higher and the growthrate were 10% lower than those used in our analysis:

| ** **    | ** ** | ** **     | ** ** | **100 Basis**     | ** ** | ** **            | ** ** |
|---------------|------------|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **Originally** | ** ** | **Points Higher** | ** ** | **10% Lower**    | ** ** |
| ** **    | ** ** | **Computed**   | ** ** | **Discount Rate** | ** ** | **Sales Growth** | ** ** |
| Research      |       |           | 1.65       |                   |       |                  | 1.48       |   |   |   | 1.37 |   |   |
| Bioprocessing |       |           | 1.71       |                   |       |                  | 1.53       |   |   |   | 1.52 |   |   |

 

*Income Taxes*

We recognize deferred tax assets and liabilitiesrelated to temporary differences arising between the tax basis of assets andliabilities and their reported amounts in the financial statements. Thesedifferences will result in taxable or deductible amounts in future periods whenthe reported amounts are recovered or settled, using enacted tax rates ineffect for the year in which the differences are expected to reverse. On aquarterly basis, we evaluate the realizability of deferred tax assets andassess the need for a valuation allowance. Valuation allowances are recorded tothe extent that we believe it is not more likely than not that a deferred taxasset will be realized; factors considered in determining the necessity of avaluation allowance include future taxable income projections and potential taxplanning strategies. We deem all undistributed earnings of foreign subsidiariespermanently invested and, accordingly, we have not established a tax provisionfor any repatriation of earnings from these entities.

Our effective tax ratediffers from the statutory rate primarily as a result of research anddevelopment tax credits and the extraterritorial income tax regime. Because weoperate in a number of domestic and foreign jurisdictions, the statutory rateswithin these various jurisdictions are considered in determining the overalleffective tax rate. Our judgment is required to determine our consolidatedprovision for income tax, deferred income tax balances, and any valuationallowances associated with deferred tax assets. We also consider the potentialimpact of any adverse adjustments resulting from current or anticipated auditsfor open statutory periods on our current and prospective overall effective taxrate; we believe our reserves for these uncertainties are adequate.

*Warranty reserve*

We record an allowance forthe estimated amount of future warranty costs when the related revenue isrecognized, primarily based on claims incurred. Although historical warrantycosts have been within expectations, there can be no assurance that futurewarranty costs will not exceed historical amounts. The warranty reserve was$1.2 million, $0.9 million and $0.5 million at January 1, 2006, January 2,2005 and December 28, 2003, respectively. Warranty claims were $2.9million, $2.0 million and $2.2 million in fiscal 2005, 2004 and 2003,respectively. If actual future warranty costs exceed historical amounts,additional 

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allowancesmay be required, which could have a material adverse impact on our operatingresults in future periods.

**Results of Operations**

*Overview*

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included in this Annual Report on Form 10-K.The following table sets forth certain consolidated operating data as apercentage of net revenue for the fiscal years indicated below.

| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues                                   |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Gross profit                                   |       | 55.3     | %          | 55.3     | %          | 55.9     | %          |
| Selling, general  and administrative expenses  |       | 31.0     | %          | 30.3     | %          | 30.4     | %          |
| Research and  development                      |       | 6.3      | %          | 5.2      | %          | 4.2      | %          |
| Amortization of  intangibles                   |       | 2.6      | %          | 1.9      | %          | 1.5      | %          |
| Purchased  in-process research and development |       | —   |       | 1.7      | %          | —   |       |
| Impairment,  exiting costs and other           |       | 13.8     | %          | —   |       | 1.9      | %          |
| Operating income                               |       | 1.7      | %          | 16.3     | %          | 18.0     | %          |

 

Thecomparability of our results of operations between years is impacted by ouracquisitions during the periods presented. We acquired Chemicon in April 2003and Upstate in October 2004, respectively. We include the results ofoperations of Upstate and Chemicon in our Research segment. The following tablesets forth a breakdown of revenue and gross profit contributed by segment forthe years ended January 1, 2006, January 2, 2005 and December 28,2003 (in thousands):

| ** **    | ** ** | **2005**   | ** ** | **2004**         | ** ** | **2003**   | ** ** |
|---------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **    | ** ** | **Actual** | ** ** | **% Total** | ** ** | **Actual** | ** ** | **% Total** | ** ** | **Actual** | ** ** | **% Total** | ** ** |
| Net revenues: |       |       |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Research      |       | $          | 138,006    |             |       | 50         | %          |   | $ | 78,506 |   |   | 40 | % |   | $ | 43,043 |   |   | 29 | % |   |
| Bioprocessing |       | 136,939    |       |             | 50         | %          |       | 117,417 |   |   | 60 | % |   | 103,872 |   |   | 71 | % |   |
|          |       | $          | 274,945    |             |       | 100        | %          |   | $ | 195,923 |   |   | 100 | % |   | $ | 146,915 |   |   | 100 | % |   |

 

| ** **    | ** ** | **Actual** | ** ** | **Gross Margin %** | ** ** | **Actual** | ** ** | **Gross Margin %** | ** ** | **Actual** | ** ** | **Gross Margin %** | ** ** |
|---------------|------------|------------|------------|------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|------------------------------|------------|
| Gross profit: |       |       |       |                         |       |       |       |                         |       |       |       |                         |       |   |   |   |   |   |   |
| Research      |       | $          | 84,838     |                         |       | 61         | %          |                         | $          | 50,828     |       |                         | 65         | % |   | $ | 26,677 |   |   | 62 | % |   |
| Bioprocessing |       | 67,309     |       |                         | 49         | %          |       | 57,613                       |       |       | 49         | %                            |       | 55,497 |   |   | 53 | % |   |
|          |       | $          | 152,147    |                         |       | 55         | %          |                         | $          | 108,441    |       |                         | 55         | % |   | $ | 82,174 |   |   | 56 | % |   |

 

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***Comparison of Fiscal Years ended January 1, 2006and January 2, 2005***

**Net Revenue**

*Consolidated.**  *Consolidated net revenue increased40.3%, or approximately $79.0 million, from $195.9 million in 2004 to$274.9 million in 2005. Consolidated net revenue increased primarily fromthe inclusion of Upstate for the full year in 2005 versus only three months in2004 and increased sales volumes in certain key products discussed below.

*Research.**  *The net revenue of our Researchsegment increased from $78.5 million in 2004 to $138.0 million in 2005primarily due to inclusion of Upstate. Chemicon achieved revenue growth of11.4% in 2005, compared to the prior year, which was driven by increasedvolumes in the areas of neuroscience, stem cells, bulk reagents and diagnosticproducts. Upstate revenue, while not included in nine months ended September 26,2004 operating results, grew 20.5% in 2005 compared to prior year. Upstaterevenue growth in 2005 was driven primarily by stronger volumes in drugdiscovery services as well as product sales in the areas of nuclear functionand multiplex Beadlyte® assays. Geographically, Research segmentrevenue increased 32% in Asia, 18% in Europe and 13% in North America over theprior year. These geographical increases were driven by increased market share.

*Bioprocessing.**  *The net revenue of ourBioprocessing segment increased $19.5 million, or 16.6%, from $117.4million in 2004 to $136.9 million in 2005 as a result of stronger volumes incell culture products, primarily of EX-CYTE® and IncelligentTM.Selling prices in this segment remained relatively constant between the twoyears as the majority of sales volume was under contractual pricing agreementsthat expire through 2006.

**Gross Profit**

*Consolidated.**  *Consolidated gross profit increasedapproximately $43.7 million, from $108.4 million in 2004 to$152.1 million in 2005. Gross margin was 55.3% in 2005 and 2004.

*Research.**  *Gross profits from our Researchsegment increased $34.0 million, or 66.9%, from $50.8 million in 2004to $84.8 million in 2005. Research segment gross margins decreased from64.7% in 2004 to 61.5% in 2005. Gross margins in 2005 for the Research segmentwere lower than 2004 due to higher bulk sales and sales of instruments at lowergross margin when compared to prior year. In addition, gross margins for the Researchsegment were higher in 2004 as a result of a second quarter 2004 one-timebenefit related to a settlement of a dispute over a licensing arrangement. Thissettlement increased Research gross margin by approximately two percentagepoints in 2004. Research gross margins in 2005 included a charge ofapproximately $2.2 million related to reorganization and integration costsrelated to the integration of Upstate into our Research operations. In 2005 and2004 the Research gross margins include a $0.5 million charge resultingfrom purchase price adjustments to inventory arising from the acquisition ofUpstate.

*Bioprocessing.**  *Gross profit from our Bioprocessingsegment increased $9.7 million, or 16.8%, from $ 57.6 million in 2004to $67.3 million in 2005. Gross profit in 2005 was favorably impacted asthe result of higher EX-CYTE® and IncelligentTM volumes and higher manufacturingproductivity, which resulted in lower unit production costs. Gross profits in2005, when compared to 2004, were further improved due to a charge ofapproximately $0.5 million related to a production halt at our Torontofacility early in the first quarter of 2004 due to a “mad-cow” disease scare inWashington State. The production halt resulted from our inability to transportraw materials from our U.S. supplier to our facility in Toronto. As a result,much of our Toronto plant was idle for approximately one month in 2004 untilall of the importation clearances from the Canadian government were obtained.These favorable increases in Bioprocessing gross margins were offset in 2005 bya $1.3 million in inventory write off of unvalidated lots of EX-CYTE® arising from 

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the decision to notcommence operations in Lawrence, Kansas and $0.9 million in other leasetermination and reorganization costs.

**Selling, Generaland Administrative Expenses**

Consolidated selling,general and administrative expenses (“SG&A”) increased approximately$25.8 million, or 43.6%, from $59.3 million in 2004 to$85.1 million in 2005. As a percentage of revenues, SG&A was 31.0% in2005 compared with 30.3% in 2004. Our Research segment accounted for$50.3 million in SG&A, an increase of $20.9 million over 2004,primarily due to the inclusion of the results of operations of Upstate for thefull year in 2005 versus only three months in 2004. Higher SG&A expenses in2005 compared to 2004 were also due to the increased sales commissions andother incentive compensation arrangements. In 2005, we also incurredapproximately $2.9 million of business integration costs primarily associatedwith the acquisition of Upstate. The majority of these integration costs wereincurred in cross training our sales force to sell all product offerings andintegration of various Research selling, customer service and marketingefforts. In the fourth quarter of 2004, we incurred approximately$1.2 million of such costs. SG&A expense in 2005 also included $1.9million in employee termination costs associated with reorganization activitiesin the Bioprocessing segment and at our corporate headquarters.

**Research andDevelopment**

Research and developmentexpenses (“R&D”) increased from $10.1 million in 2004 to$17.2 million in 2005. The increase was primarily due to the expansion ofour research and development activities. During fiscal 2005, our Researchsegment internally developed approximately 1,700 new products. We continue toadvance various projects in the Bioprocessing segment related to thecharacterization and performance of EX-CYTE® andother cell culture supplements. We also made progress in developing novel cellculture supplements. See “Outlook” below for additional discussion of R&Defforts.

**Amortization ofIntangibles**

Amortization ofintangibles increased from $3.8 million in 2004 to $7.2 million in2005. Approximately $3.4 million of the increase was due to the inclusion ofthe results of operations of Upstate for the full year in 2005 versus onlythree months in 2004.

**Purchased In—ProcessResearch and Development**

Purchased in-processresearch and development (“IPRD”) of $3.3 million in 2004 resulted fromthe acquisition of Upstate and represents acquired current research anddevelopment projects in process. There were no charges for IPRD in 2005.

**Impairment andExiting Costs**

In connection with thedecision to close the facilities in Toronto, Ontario, Canada and to notcommence the operations in Lawrence, Kansas, the Company incurred $38.0 millionin impairment and exiting costs in 2005. See “Note 5—Impairment andExiting Costs” in Item 8 Financial Statements and Supplementary Data forfurther discussion of these costs.

**Other Expense, Net**

Other expenses arepresented net and arise from realized and unrealized gains and losses onforeign currency translations, which were immaterial in 2005 and 2004. Includedin other expense in 2005 is a $0.5 million charge in connection with thecollection of the note from the Buyer of our former therapeutic plasmabusiness.

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**Write-Off ofDeferred Financing Costs**

In 2004, upon the closingof our acquisition of Upstate, we entered into a new $125.0 million CreditAgreement with a syndicate of banks (the “2004 Credit Agreement”) andterminated our previous $30.0 million revolving credit facility (the “2003Credit Facility”). Pursuant to the 2004 Credit Agreement, we obtained an$80.0 million term loan, the proceeds of which we used to finance, inpart, the purchase price for Upstate (the “Upstate Term Loan”). We recorded anon-cash charge of approximately $0.2 million related to the write-off ofdeferred financing costs associated with the termination of the 2003 CreditFacility. On December 21, 2004, we issued 4,830,000 shares of our CommonStock. We used a portion of the proceeds to repay the Upstate Term Loan. Werecorded an additional non-cash charge of approximately $0.8 millionrelated to the early repayment of the Upstate Term Loan.

**Interest Expense**

Interest expense increasedfrom $6.1 million in 2004 to $7.4 million in 2005. The increase ininterest expense was due to increases in variable interest rates through June 2005when we terminated our interest rate swap agreements. Prior to termination, theswaps converted the 4.75% fixed rate on $70.0 million of our Debentures toa variable interest rate based on 6-month LIBOR at the end of eachinterest period plus a spread of 66 basis points. See “Note 8—ConvertibleSenior Subordinated Debentures” in Item 8 Financial Statements andSupplementary Data for further discussion of our interest rate swaps.

**Interest Income**

We recorded interestincome of $1.8 million in 2005 and $0.6 million in 2004. The increase ininterest income was primarily due to more favorable investment rates in 2005and higher available cash, cash equivalents and short-term investment balancesfor much of 2005 over those available in 2004. Interest income in 2005 includes$0.4 million in interest income on the note receivable from the Buyer of ourformer therapeutic plasma business. See “Note 4—Discontinued Operations” inItem 8 Financial Statements and Supplementary Data for further discussion ofthe note.

**Provision forIncome Taxes**

The benefit (provision)for income taxes as a percentage of income from continuing operations beforetaxes was 151.0% in 2005 versus (31%) in 2004. Our effective tax rate remainedbelow the federal statutory rate primarily as a result of research anddevelopment tax credits, the extraterritorial tax regime, and generation ofincome in lower tax jurisdictions. In addition, our 2005 tax rate wassignificantly impacted by the impairment and exiting costs whichsubstantially reduced our income from continuing operations, resulting in alower denominator for calculating our overall effective tax rate.

**Income (Loss) fromDiscontinued Operations**

In October 2005, wereceived $3.1 million in connection with a contractual claim against a customerof our former therapeutic plasma business. The payment, net of income taxes andcollection expenses totaling approximately $1.2 million, is included in “Incomefrom Discontinued Operations” for 2005. Therewere no discontinued operations included in the results for 2004.

***Comparison of Fiscal Years ended January 2, 2005and December 28, 2003***

**Net Revenue**

*Consolidated.**  *Consolidated net revenue increased33%, or approximately $49.0 million, from $146.9 million in 2003 to$195.9 million in 2004.

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*Research.**  *The net revenue of our Researchsegment increased from $43.0 million in 2003 to $78.5 million in2004, primarily due to organic growth in revenue at Chemicon and the inclusionof Chemicon for the full year in 2004 versus only nine months in 2003 and theacquisition of Upstate in the fourth quarter of 2004, which contributed$15.4 million. Chemicon contributed $63.0 million to the net revenueof the segment in 2004 and $38.0 million in 2003. Chemicon achieved anannual revenue growth rate of 27%, which was driven by significantcontributions in the areas of neuroscience, molecular biology, bulk reagentsand custom services. Upstate revenue, while not included in the operatingresults for 2003 or the first nine months of 2004, increased 27% from 2003 to2004. Upstate growth was driven primarily by a 94% increase in revenue fromkinase profiling services. Geographically, Research segment revenue increased85% in Asia, 119% in Europe and 135% in North America over the prior year.

*Bioprocessing.**  *The net revenue of ourBioprocessing segment increased $13.5 million, or 13.0%, from$103.9 million in 2003 to $117.4 million in 2004. This increase wasdue to increased sales of recombinant human insulin and BSA. Recombinant humaninsulin sales were up $11.6 million, from $15.0 million in 2003 to$26.6 million in 2004. Sales of recombinant human insulin increasedprimarily because of the introduction of a new insulin product in 2004 andadditional availability of this product from our supplier. Sales of BSAincreased $0.7 million, from $16.8 million in 2003 to$17.5 million in 2004. BSA sales were negatively impacted during 2003 andagain in 2004 due to partial shutdowns of our Toronto plant during June 2003and January 2004, following the discoveries of two unrelated instances ofa single cow infected with BSE in Canada and the US, respectively. The closurereduced the amount of saleable product during each year due to themanufacturing cycle time required for certain products. Sales of EX-CYTE® were $29.3 million in 2003 and$29.6 million in 2004. Sales of EX-CYTE® inboth years were affected by lower demand for one of our customers’ productsthat utilizes EX-CYTE® in its manufacturing process. In the fourthquarter of 2003, we recorded $3.5 million from a take-or-pay contract forEX-CYTE® with a major customer without having todeliver any product. Accordingly, total and Cell Culture segment net revenue,gross profit and operating income in 2003 were favorably impacted by$3.5 million. Selling prices in this segment remained relatively constantbetween the two years as the majority of sales volume was under contractualpricing agreements that expire through 2006. Net revenue from sales ofmonoclonal antibodies, historically included in the Diagnostics segment,increased from $22.6 million in 2003 to $26.1 million in 2004. Salesof monoclonal antibodies increased $3.2 million due to higher volumes and$0.3 million due to increases in foreign currency. The increase inmonoclonal antibodies was offset by decreased sales of human-sourceddisease state polyclonal antibodies, detection products and other diagnosticproducts. The decline in 2004 sales of these products was anticipated becausewe sold the majority of the products in the human-sourced disease statepolyclonal antibody group with the sale of the therapeutic plasma business.Human-sourced disease state polyclonal antibody sales were furthernegatively impacted by the Health Insurance Portability and Accountability Act(“HIPAA”), which adversely affected access to qualified donors.

**Gross Profit**

*Consolidated.**  *Consolidated gross profit increasedapproximately $26.2 million, from $82.2 million in 2003 to$108.4 million in 2004. Gross margin was 55.3% in 2004 and 55.9% in 2003.

*Research.**  *Gross profits from our Researchsegment increased $24.1 million, or 90%, from $26.7 million in 2003to $50.8 million in 2004. Research segment gross margins increased from62% in 2003 to 65% in 2004. The increase in gross profit was primarily due tothe inclusion of Chemicon for a full year in 2004 versus nine months in 2003.Research segment gross profit contributed by Chemicon included$40.5 million in 2004 and $24.6 million in 2003. Upstate contributed$10.2 million at a 66% gross margin in 2004. Gross profit for 2003 wasnegatively impacted by a $0.4 million charge to cost of sales as a resultof inventory adjustments to Chemicon’s opening inventory, which was requiredunder purchase accounting rules. Gross profit for 2004 was negatively impactedby a $0.4 million charge to cost of sales as a result of 

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inventory adjustments to Upstate’sopening inventory, which was required under purchase accounting rules.

*Bioprocessing.**  *Gross profit from our Bioprocessingsegment increased $2.1 million, or 3.8%, from $55.5 million in 2003to $57.6 million in 2004. Gross profits increased on higher sales volumes,but the margins declined slightly from 53% in 2003 to 49% in 2004, due primarilyto product mix and production variances arising from capacity issues at certainmanufacturing sites and the shut down of our Toronto facility in early 2004 dueto the BSE scare. Gross margins were lower in 2004, primarily due to productmix between EX-CYTE®,which is a higher margin product, and recombinant human insulin, which is adistributed product with a lower gross margin. Additionally, the margins wereapproximately 1% to 2% lower in 2004 and 2003 than expected due tomanufacturing cost variances arising from excess manufacturing capacity atcertain sites. Gross margins for our Bioprocessing segment were positivelyimpacted in 2003 due to a sale of EX-CYTE® at 100% grossmargin under the terms of a take-or-pay contract with one of our customers. Grossmargins for our Bioprocessing segment would have been 53% in 2003, if this salehad been recorded at a normal margin. Gross margins on monoclonal antibodies,historically included in the Diagnostics segment, decreased by 15%, primarilydue to lower production utilization in 2004, which resulted in absorption offixed costs by fewer units. Changes in product mix from traditionally highermargin to lower margin products also adversely impacted 2004 margins. Effectsof foreign currency exchange rates lowered gross margin by approximately 2.6%in 2004 and increased gross margin by approximately 1% in 2003. As previouslydiscussed, pricing was relatively stable between 2003 and 2004. Gross marginsin 2004 were negatively impacted by the reduction in sales of human-sourceddisease state polyclonal antibody products, the majority of which were soldwith the therapeutic plasma business as mentioned above. Availability of theseproducts within the human-sourced disease state polyclonal antibodyproduct group was also negatively impacted by HIPAA, which adversely affectedaccess to qualified donors.

**Selling, Generaland Administrative Expenses**

Consolidated SG&Aincreased approximately $14.7 million, or 33%, from $44.6 million in2003 to $59.3 million in 2004. As a percentage of revenues, SG&A was30% in 2004 compared with 30% in 2003. Chemicon accounted for$22.5 million in SG&A for the full year in 2004 and $17.2 millionfor nine months in 2003. The acquisition of Upstate in the fourth quarter of2004 contributed $6.3 million to SG&A. We expanded our sales andmarketing efforts in our Bioprocessing segment during the second half of 2003and early in 2004. During 2004, we incurred higher public company costs andhigher performance incentive compensation expense. The additional externalcosts to comply with the Sarbanes-Oxley Act of 2002 were approximately$0.5 million in 2004. In the fourth quarter of 2004, we incurredapproximately $1.2 million of business integration costs primarilyassociated with the acquisition of Upstate.

**Research andDevelopment**

R&D expenses increasedfrom $6.2 million in 2003 to $10.1 million in 2004. The increase wasprimarily due to the expansion of our research and development activities,including those acquired as a result of the Upstate acquisition. R&Dincluded $2.1 million incurred by Upstate in the fourth quarter of 2004.R&D at Chemicon was included in 2004 for a full year and for nine monthsduring 2003 resulting in an increase of $2.1 million in 2004.

**Amortization ofIntangibles**

Amortization ofintangibles increased from $2.2 million in 2003 to $3.8 million in2004. Approximately $1.0 million of the increase was due to theacquisition of Upstate in the fourth quarter of 2004. Amortization from theChemicon acquisition was included in 2004 for a full year and for nine monthsduring 2003, resulting in an additional $0.6 million in 2004.

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**Purchased In—ProcessResearch and Development**

Purchased IPRD of$3.3 million in 2004 resulted from the acquisition of Upstate andrepresents acquired current research and development projects in process. Therewere no charges for IPRD arising from previous acquisitions.

**Other Expense, Net**

Other expenses arepresented net and arise primarily from realized and unrealized gains and losseson foreign currency translations, which were immaterial in 2004 and 2003.

**Write-Off ofDeferred Financing Costs**

We recorded a non-cashcharge of approximately $0.2 million in 2004 related to the write-off ofdeferred financing costs associated with the termination of the 2003 CreditFacility. We recorded an additional non-cash charge of approximately$0.8 million related to the early repayment of the Upstate Term Loan.

**Interest Expense**

Interest expense increasedfrom $4.4 million in 2003 to $6.1 million in 2004. The increase ininterest expense was because the $130 million principal amount of ourDebentures, which we issued in August 2003, were outstanding for a fullyear in 2004 and only five months in 2003. As described in the market riskdiscussion below, we entered into a $70 million fixed to variable rateswap with respect to our Debentures. During 2004, the variable rate rose 1.7%,further contributing to the increase in interest expense. Also in the fourthquarter of 2004, we had additional borrowings under the Upstate Term Loan,which were outstanding for approximately 60 days. The term loan wassubsequently repaid from proceeds from our equity offering in December, 2004.

**Interest Income**

We recorded interestincome of $0.6 million in 2004 and $0.3 million in 2003. The increasein interest income was primarily due to more favorable investment rates in 2004and higher available cash, cash equivalents and short-term investment balanceson hand for much of 2004 over those available in 2003.

**Provision forIncome Taxes**

The provision for incometaxes as a percentage of income before taxes was 31% in 2004 and 2003. Oureffective tax rate in 2004 and 2003 was below the federal statutory rate as aresult of foreign tax credits, research and development credits and generationof taxable income in lower tax jurisdictions.

**Income (Loss) fromDiscontinued Operations**

As previously discussed,in July, 2003, we announced our intention to exit the therapeutic plasmabusiness. As a result, during the third quarter of fiscal 2003, we classifiedthe therapeutic plasma business as a discontinued operation. In January 2004,effective December 28, 2003, we completed the sale of this business. Therewere no discontinued operations included in the results for 2004. Loss fromdiscontinued operations, net of income taxes, was $10.6 million in 2003.

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**Liquidity andCapital Resources**

Thefollowing table sets forth certain indicators of our consolidated financialcondition and liquidity as of the end of the fiscal years shown (in thousands):

| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash, cash  equivalents and short-term investments |       | $        | 38,452     |     | $          | 62,054   |       | $ | 48,564 |   |
| Working capital                                    |       | 117,625  |       | 122,443  |       | 104,760  |       |
| Total debt and  capital lease obligations          |       | 131,462  |       | 135,008  |       | 130,923  |       |
| Stockholders’  equity                         |       | 406,377  |       | 416,531  |       | 181,506  |       |
| Total debt to equity                               |       | 32.3     | %          | 32.4     | %          | 72.1     | %          |
|                                                    |            |          |            |          |            |          |            |  |  |  |

 

We have three principal sources of near-termliquidity: (1) existing cash, cash equivalents and marketable securities; (2) cashgenerated by operations; and (3) available borrowing capacity under our2004 revolving credit facility (the “2004 Revolving Credit Facility”), whichprovides for a maximum borrowing capacity of $45 million. As of February 28, 2006, we had$60.4 million in cash, cash equivalents and short-term investments and$45.0 million available under the 2004 Revolving Credit Facility. Webelieve that our liquidity and capital resources are sufficient to meet ourworking capital, capital expenditure and other anticipated cash requirements,excluding acquisitions, over the next twelve months.

Net cash provided by operating activities was $24.8million, $37.6 million and $18.1 million in 2005, 2004 and 2003,respectively. Changes in operating assets and liabilities used were $26.6million, $4.2 million and $9.3 million during 2005, 2004 and 2003,respectively. The $4.8 million decrease in working capital from 2004 to2005 is due to $14.5 million in restricted cash included in other long termassets related to our purchase of the two buildings in Temecula, California in January 2006,partly offset by the continued growth of our business. During 2005 and 2004,trade accounts receivable increased $17.7 million and $5.9 million,respectively, over the previous years primarily as a result of increased sales.Days sales outstanding (“DSO”) at the end of 2005 and 2004 were 66 and62 days, respectively. DSO was higher in 2005 than in 2004 because oftiming of shipments at year-end.

Inventories increased overall by $9.7 million in 2005over 2004 as a result of the continued growth of our business. The majority ofthe increase was in our Bioprocessing segment and resulted primarily fromincreased quantities of recombinant human insulin on hand at the end of 2005.Inventory turns at the end of 2005 and 2004 were 2.8 and 2.2, respectively.Inventories increased overall by $16.0 million in 2004 over 2003. Theacquisition of Upstate in the fourth quarter of 2004 increased inventories by$9.5 million. The remaining increase in 2004 over 2003 was due to a largepurchase of insulin in the fourth quarter of 2004, which was partially on handat year-end.

Accounts payable and accrued liabilities decreased by$1.9 million in 2005 over 2004 due to lower deferred revenue and incometaxes partly offset by the timing of purchases of raw materials and increasedaccrued compensation and incentive costs. Accounts payables and accruedliabilities increased $22.3 million in 2004 over 2003 because of theincreased operating and other costs associated with businesses acquired duringthose periods.

The incremental increase in cash used by changes inoperating assets and liabilities in 2005 compared to 2004 was offset byincremental increases in adjustments such as depreciation and amortization,impairment and non-cash exiting costs. Depreciation and amortization increasedin 2005 compared to 2004 due to the inclusion of the results of operations ofUpstate for the full year in 2005 versus only three months in 2004.Depreciation and amortization increased in 2004 compared to 2003 because of theacquisition of Upstate in October 2004 and the inclusion of operatingresults of Chemicon for a full year in 2004 versus only nine months in 2003. In2005, $33.3 million in impairment and $4.0 million in non-cash exiting costsrelated to ongoing plant consolidation and rationalization initiatives in theBioprocessing segment (See “Note 5—Impairment and Exiting Costs” in Item 8Financial Statements and Supplementary 

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Data). In 2004, non-cashcharges and write-off of deferred financing costs related to the write-off of$1.0 million of deferred financing costs in connection with thetermination of our 2003 Credit Facility and our prepayment of the Upstate TermLoan. In addition we incurred a non-cash charge of $3.3 million forpurchased in-process research and development arising from the acquisition ofUpstate in 2004. In 2003, non-cash charges and write-off of deferred financingcosts related primarily to the write-off of $4.5 million in deferredfinancing costs during the year, $0.8 million related to asset impairmentassociated with the relocation of research products produced at our formerGaithersburg, Maryland facility to Chemicon and $1.0 million related toasset impairments associated with the Toronto BSE shutdown. See “Note 5—Impairmentand Exiting Costs” and “Note 8—Convertible Senior Subordinated Debentures”in Item 8 Financial Statements and Supplementary Data for additional discussionof special charges and write-off of deferred financing costs.

Net cash used in investing activities was $19.0million, $138.9 million and $139.7 million in 2005, 2004 and 2003,respectively. Investing activities during 2005 included cash expendituresprimarily for capital expenditures of $16.5 million, purchases of business of$6.8 million, payment of cash in escrow for the purchase of the two buildings inTemecula, California for $14.5 million, partly offset by the net sale of shortterm investments of $11.8 million and proceeds from collection of the principalportion of note receivable of $7.3 million. Capital expenditures in 2005consisted primarily of costs associated with implementation of our EnterpriseResource Planning (“ERP”) system at Upstate and expansion of our manufacturingspace in Temecula. Investing activities during 2004 and 2003 included capitalexpenditures of $19.5 million and $19.6 million, respectively.Capital expenditures during 2004 and 2003 consisted primarily of constructionof a facility in Lawrence, Kansas, which we recently decided not to operate,completion of the implementation of our ERP system and completion of theexpansion of Upstate’s new drug screening facility in Scotland. As part of ourcash investment strategy, we have from time to time purchased and sold auctionrate securities at face value, earning market interest rates. These investmentsare considered as available for sale securities; purchases and proceeds fromsales are reflected as investing activities.

Net cash (used in) provided by financing activities in2005 was ($18.3) million, compared with $109.8 million in 2004. Netcash provided by financing activities in 2004 was $109.8 million compared with$123.0 million in 2003. Financing activities in 2005 primarily consistedof $23.1 million in repurchased common shares under our previously discussedrepurchase program and $2.9 million in repaid capital lease obligations partlyoffset by the proceeds from issuance of common shares in conjunction with stockoption exercises of $7.8 million. Financing activities in 2004 primarilyconsisted of the $80.0 million Upstate Term Loan, which was repaid in 2004from the proceeds of the sale of 4,830,000 shares of our common stock inDecember 2004. Net proceeds from the sale of this stock were approximately$104.8 million. Also in 2004, we entered into a $3.6 million 24-monthcapital lease for certain assets installed in the Lawrence facility. Financingactivities in 2003 primarily consisted of $130.0 million from the issuanceof the Debentures and payment of debt issuance costs of $8.9 million;$4.4 million related to the term loan and $4.5 million related to theDebentures. During 2003, we also received proceeds of $82.5 million from aterm loan entered into during the second quarter of 2003. We subsequentlyrepaid the outstanding balance of the term loan upon issuing the Debenturesduring the third quarter of 2003.

We anticipate that capital expenditures during 2006will be approximately $39 million, including of the purchase of the twoTemecula facilities described below. The most significant expenditures will befor continued implementation of our ERP system at Upstate, continued expansionof research facilities in Temecula, California, investment in e-Commerceapplications and expansion of Celliance’s facility in Kankakee, Illinois.Additionally, in January 2006, we purchased the two buildings in Temecula,California for approximately $17.2 million from the former owner of Chemicon.

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As of January 1,2006, we had outstanding debt of approximately $131.5 million consistingprimarily of the Debentures. We have no borrowings outstanding under the 2004Revolving Credit Facility. The following table sets forth our contractualobligations, excluding interest payments, as of January 1, 2006 (in thousands):

| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                | ** ** | **1 year** | ** ** | **2 - 3 years** | ** ** | **4 - 5 years** | ** ** | **5+ years** | ** ** |
| Debentures(1)                |       | $                                        | 129,905    |   | $ | — |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Capital lease  obligations   |       | 1,029                                    |       | 629 |   |   | 388 |   |   |   | 12 |   |   |   | — |   |   |
| Operating lease  obligations |       | 15,702                                   |       | 2,750 |   |   | 4,742 |   |   |   | 3,267 |   |   |   | 4,943 |   |   |
| Royalty obligation(2)        |       | 6,858                                    |       | 2,088 |   |   | 2,357 |   |   |   | 2,351 |   |   |   | 62 |   |   |
|                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includes approximately$0.1 million related to the fair market value of an interest rate swap asdiscussed in “Note 8—Convertible Senior Subordinated Debentures” in Item 8Financial Statements and Supplementary Data, the Debentures include call andput features which could cause their maturity prior to five years or more fromthe Consolidated Balance Sheet date.

(2)          Represents the minimumroyalty payments we are contractually obligated to pay.

On August 20, 2003, we issued $130.0 millionprincipal amount of Debentures to certain institutional investors. Afterexpenses, we received net proceeds of $126.1 million. Interest on theDebentures accrues at 4.75% per annum and is payable semi-annually on February 15thand August 15th. The Debentures are convertible into shares of our CommonStock at an initial rate of 67.6133 shares of common stock per $1,000 principalamount of the Debentures (or approximately 8.8 million shares of ourCommon Stock at a conversion price of $14.79 per share of our Common Stock),subject to the satisfaction of certain conditions which were met during thefirst quarter of 2004. The terms of the Debentures do not impose anyrestrictive covenants on us. The holders of the Debentures may require us torepurchase some or all of their Debentures on August 15, 2008, August 15,2010, August 15, 2013, August 15, 2018, August 15, 2023 or August 15,2028 at a repurchase price equal to 100% of the principal amount of theDebentures being repurchased, plus any accrued and unpaid interest. The holdersof the Debentures may also require us to repurchase some or all of theirDebentures at any time if we undergo a fundamental change, such as theconsummation of any share exchange, consolidation or merger or any sale of allor substantially all of our assets. See “Note 8—Convertible Senior SubordinatedDebentures” in Item 8 Financial Statements and Supplementary Data for adiscussion of the Debentures.

On October 17, 2003, we entered into an interestrate swap on $70.0 million principal amount of our Debentures. Theobjective of the swap was to convert the 4.75% fixed interest rate on thisportion of the Debentures to a variable interest rate based on the 6-monthLIBOR at the end of each interest period plus a spread of 66 basis points. In June 2005,we terminated our interest rate swap agreements and received $0.1 million incash proceeds.

On October 14, 2004, we entered into the 2004Credit Agreement, which includes the $45.0 million 2004 Revolving CreditFacility. The 2004 Revolving Credit Facility bears interest at a floating rateof interest determined by reference to a base rate or to Eurodollar interestrates, plus a margin. The margin on the Eurodollar interest rate ranges from1.50% to 2.00% and the margin on the base rate ranges from 0.50% to 1.00% basedon our leverage ratio. We are required to pay a commitment fee ranging from0.375% to 0.50% per annum on the undrawn balance of the 2004 Revolving CreditFacility, based on our leverage ratio. The 2004 Credit Agreement is secured bya lien on substantially all of our assets. The 2004 Credit Agreement containscertain financial covenants that require the maintenance of a minimum fixedcharge coverage ratio and earnings before interest, taxes, depreciation andamortization and also provides for a maximum leverage ratio and limitations oncapital expenditures. Furthermore, under the terms of the 2004 CreditAgreement, there are restrictions on our ability to make acquisitions,repurchase common 

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stock and to paydividends. As of January 1, 2006, there were no amounts outstanding underthe 2004 Revolving Credit Facility. See “Note 9—Long-Term Debt and CapitalLease Obligations” in Item 8 Financial Statements and Supplementary Data for adiscussion of the 2004 Credit Agreement and the 2004 Revolving Credit Facility.

At January 1, 2006, we had a commitment with avendor, which requires us to use the vendor in connection with the processingof BSA at our Toronto facility for a minimum of $120,000 per quarter. Thecontract can be terminated by us or the supplier at any time with 180 days’notice. The contract expires in 2006, but can be renewed on a rolling one-yearbasis.

We have guaranteed real estate lease obligationstotaling approximately $3.3 million related to the sale of the therapeuticplasma business. If Life defaults on the lease payments, we would be requiredto assume these leases. We have accrued a stand ready obligation of$0.1 million in accordance with Financial Accounting Standards Board (“FASB”)Interpretation No. 45, “Guarantor Accounting and Disclosure Requirementfor Guarantees” for these guarantees.

We have no off-balancesheet financing arrangements and have not created any special purpose entities.Additionally, we do not undertake any trading activities within our businesswith respect to non-exchange traded contracts accounted for at fairvalue.

**Market Risk**

We are exposed to market risk from changes in foreigncurrency exchange rates and, to a lesser extent, interest rates, which couldaffect our future results of operations and financial condition. We manage ourexposure to these risks through our operating and financing activities.

*ForeignCurrency Exchange Rates.**  *We conduct our foreign-based operations throughmanufacturing operations located in the United Kingdom, Australia and Canada.In 2005, 2004 and 2003, foreign-based operations accounted forapproximately 33.3%, 33.0% and 30.0% of our net revenue, respectively, andapproximately 34.0%, 32.0% and 27.0% of our gross profit, respectively. The netinvestment in foreign subsidiaries translated into United States dollars usingyear-end exchange rates at January 1, 2006, was $30.1 million. Thepotential loss in fair value impacting other comprehensive income resultingfrom a hypothetical 10% change in quoted foreign currency exchange rates wouldamount to $0.2 million. We do not currently use derivative financialinstruments to hedge our exposure to changes in foreign currency exchangerates.

The functional currency of our operations in theUnited Kingdom is the British pound sterling, the functional currency for ourAustralian operations is the Australian dollar and the functional currency forour Canadian operations is the Canadian dollar. Fluctuations in foreignexchange rates can impact our operating results, including net revenues andexpenses, when translations of the subsidiary financial statements are made inaccordance with SFAS No. 52, “Foreign Currency Translation.” Furthermore,we transact business in various foreign currencies, which subjects us toexposure from movements in the exchange rates of those countries relative tothe United States dollar. However, a large portion of our sales to foreigncountries is denominated in United States dollars, thus mitigating asignificant portion of this risk. It has not been our practice to hedge ourassets and liabilities in these countries or our intercompany transactions, andaccordingly, we have not used derivatives or other off-balance sheet items tomanage any significant foreign currency exchange risk. Recognized transactionalforeign currency gains (losses) were immaterial in 2005, 2004 and 2003.

*Interest Rates*.    Currently,all of our long-term debt obligations bear a fixed interest rate.

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**Recent AccountingPronouncements**

In December 2004, the Financial AccountingStandard Board (the “FASB”) issued Statement of Financial Accounting StandardsNo. 123R (revised 2004) “Share-Based Payment,” (“SFAS 123R”) which is arevision or SFAS No 123, “Accounting for Stock-Based Compensation” (“SFAS123”). SFAS 123R supersedes APB 25, “Accounting for Stock issued to Employees,”and amends SFAS No. 95, “Statement of Cash Flows.” The approach in SFAS123R is generally similar to the approach described in SFAS 123. However, SFAS123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the earnings statements based ontheir fair values. Pro forma disclosure will no longer be an alternative.

We adopted SFAS 123R as of January 2, 2006 usingthe modified prospective method. Under this transition method, compensationcost is recognized beginning with the effective date (a) based on therequirements of SFAS 123R for all share based payments granted after the effectivedate and (b) based on the requirements of SFAS 123 for all awards grantedto employees prior to the effective date of SFAS 123R that remain unvestedon the effective date. As permitted by SFAS 123, through January 1, 2006we accounted for share based payments to employees using APB 25’s intrinsicvalue method and, as such, generally have not recognized compensation cost foremployee stock options. We estimate that pretax compensation expense for stockoptions will result in an additional compensation expense of approximately $3.3million in 2006 excluding the effect of any grants issued in 2006.

SFAS 123R also requires the benefits of tax deductionsin excess of recognized compensation cost to be reported as a financing cashflow, rather than as an operating cash flow as previously required. Thisrequirement will reduce net operating cash flows and increase net financingcash flows. While we can not estimate what those amounts will be in the future(because they depend on, among other things, when employees exercise stockoptions), the amounts of operating cash flows recognized in prior periods forsuch excess tax deductions were $4.1 million, $1.2 million and $0.6 million in2005, 2004 and 2003, respectively.

In November 2004, the FASB issued SFAS No. 151“Inventory Costs, an amendment of Accounting Research Bulletin No. 43,Chapter 4” (“SFAS 151”). SFAS 151 requires that abnormal amounts ofidle facility expense, freight, handling costs and spoilage be recognized ascurrent period charges, and it requires the allocation of fixed productionoverhead costs to the costs of conversion based upon the normal capacity of theproduction facility. SFAS 151 is effective for fiscal years beginningafter June 14, 2005. As required by SFAS 151, we adopted this newaccounting standard on January 2, 2006. The adoption of SFAS 151 is notexpected to have a material impact on our financial statements.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 153 (“SFAS 153”), “Exchanges ofNon-monetary Assets—an amendment of APB Opinion No. 29.” SFAS 153addresses the measurement of exchanges of non-monetary assets. It eliminatesthe exception from fair value measurement for non-monetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29“Accounting for Non-monetary Transactions” and replaces it with an exceptionfor exchanges that do not have commercial substance. A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. As required by SFAS 153, we adoptedthis new accounting standard effective July 1, 2005. The adoption of SFAS153 did not have a material impact on our financial statements.

In March 2005, the FASB Issued FIN 47,“Accounting for Conditional Asset Retirement Obligations, an interpretation ofFASB Statement No. 143, Accounting for Asset Retirement Obligations.” FIN47 clarifies that SFAS 143 requires accrual of the fair value of legallyrequired asset retirement obligations if sufficient information exists toreasonably estimate the fair value. We adopted this new accounting standardduring the fourth quarter of 2005. See “Note 5—Impairmentand Exiting Costs” in Item 8 Financial Statements and Supplementary Datafor the effect of FIN 47 on our financial statements.

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In June 2005, theFASB issued Statement of Financial Accounting Standards No. 154 (“SFAS154”), “Accounting Changes and Error Corrections.” SFAS 154 changes therequirements for the accounting for and reporting of a change in accountingprinciple. This Statement requires retrospective application to prior periods’financial statements of a voluntary change in accounting principle unless it isimpracticable. In addition, this Statement requires that a change indepreciation, amortization, or depletion for long-lived, non-financialassets be accounted for as a change in accounting estimate effected by a changein accounting principle. This new accounting standard is effectiveJanuary 1, 2006. The Company will apply the provision of SFAS 154 whenapplicable.

**Outlook**

During 2005, we completed our transformation to a lifescience company supporting drug discovery, drug development and drugproduction. We expanded our research reagents business and our drug screeningand target validation products and services. In addition, we achieved strongresults in our Bioprocessing group, in particular in our cell culturesupplements business. Today, we are well positioned with a strong productportfolio supported by significant intellectual property in markets that weexpect to provide opportunities for revenue growth and profitabilityimprovement.

In 2006, we will continue the implementation of ourstrategic growth plan that has been put in place over the past several years.The key elements of this strategic growth plan are to continue to grow ourbusiness faster than inherent market growth rates, to continue to improve ourgross margin percentages, to continue the emphasis on leveraging andcontrolling overhead costs, to increase our investment in research anddevelopment (R&D) activities and to increase overall profitability andearnings. We are focused onselect, high-growth markets where we can achieve and strengthen our leadershipposition in both the Research and Bioprocessing segments.****Weseek to develop “best in class”products, tools and services though a combination of internal growth, targetedacquisitions, licensing and collaborations. We expect to maintain a leadership position in productdevelopment and customer relationship management to drive revenue andprofitability growth. We plan to identify new opportunities to streamlineoperations, becoming leaner and moreefficient and leveraging our sales force, R&D and facilities infrastructure. We have a focusedbusiness strategy with emphasis on consistent execution in order to drivegrowth, profitability and increased stockholder value.

We are focused on revenue growth through both organicgrowth of our products and services as well as external growth through bothlicensing and acquisition opportunities. In terms of organic growth, we haveboth repositioned and strengthened our sales structure and organization overthe past year through the addition of sales representatives with strongtechnical backgrounds and expanded product training of all salesrepresentatives and focusing sales support personnel in targeted areas. We haveand will continue to add additional research scientists in targeted areas ofgrowth and have realigned our supply chain through creation of product segmentteams, which align product development, sales and marketing, manufacturing andcustomer distribution.

*ResearchSegment.*   In our Research segment,we have completed the implementation ofour direct sales team in Europe and we are continuing to establish anorganization in the Asia-Pacific region. As a result, we are seeking increasedgrowth rates in both regions in 2006. In 2006, we expect to expand andstrengthen our sales and technical support group and further develop our distributornetwork in the Asia-Pacific region.

We are also continuing to focus on new products andservices in markets that have potentially higher growth rates. We have createdbusiness segment teams reflecting our areas of strategic focus and importance.They represent the areas of drug discovery, stem cell research, antibodytechnologies, nuclear function, biotools and multiplexing and platformtechnologies. We expect to continue with the flow of new products and servicesat higher value points. We introducedapproximately 1,700 products in 2005 and 

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expectto introduce approximately 2,500 new products in 2006. The focus for newproduct introductions continues to be on adding products with a higher productvalue and increasing gross margins. In 2005, our Research segment increased itsrevenue per new product, on a rolling twelve-month basis, from approximately$7,600 per product in 2004 to over $8,000 per product in 2005. We seek furtherincreases in 2006.

With increased outsourcing of drug discovery servicesby both pharmaceutical and biotech firms, we continue to see significantopportunities to increase our drug screening and target validation services. Wewill continue to expand our leadership in both kinase products and serviceswith approximately 300 kinases expected to be available in 2006, up fromapproximately 200 in 2005. We will continue investment in the expansion of ourkinase panel and service offering during 2006. Additional focus will be placedon drug discovery and new platforms with the intention of expanding targetofferings and identifying promising new platforms and technologies that willsupport our customers in the drug research and development process.

We plan to grow our proprietary stem cell researchportfolio and develop content-rich applications such as multiplexing productsand other cell-based assays. In March 2006, we launched ESGRO Complete,the first serum free fully formulated media for use in embryonic stem cellresearch, which is derived from a collaboration announced in late 2005. Othercollaborations are anticipated to deliver more stem cell related products, drugdiscovery products and services as well as a significantly expanded portfolioof high-value recombinant research antibodies for several applicationsincluding multiplexing and biomarkers.

During the fall of 2005, we announced the decision tomove the manufacturing, distribution and development operations located at LakePlacid to our facility in Temecula. This move is expected to be completedduring the second quarter of 2006. The Lake Placid facility will besubsequently prepared for sale. This consolidation is expected to streamlinemanufacturing, R&D and administrative functions into a single locationallowing us to concentrate our scientific expertise and supply chain managementskills in one location. We expect to achieve savings from this transfer ofapproximately $5 million on an annual basis beginning in the second half of2006.

With the continued integration of our Chemicon andUpstate subsidiaries, which we expect to be completed in 2006, it will be moredifficult to distinguish their operating performance on a separate basis. As aresult we expect to report results in the Research segment as one unit beginningin 2006, and will no longer provide separate financial data for these twounits.

*BioprocessingSegment.*   The Bioprocessing segment we will continue tofocus on enhancing its product portfolio, streamlining its productionand manufacturing operations, reducing new product development costs andconsolidating customer service to provide a single point-of-contact. There will be addedfocus on delivering superior service by dedicating additional resources to support our EX-CYTE® customers and streamlining the customerdistribution process. We will continueto strengthen our product portfolio by focusing on developing, licensingor acquiring animal component free products. We also expect more process improvements in our bioprocessingfacility in Kankakee.

We previously announcedthe acquisition of the ubiquitous chromatin opening element gene expressiontechnology which significantly improves the yield consistency and stability ofprotein production in mammalian cell culture.We continue to look for other internal and external opportunities to increaseour revenue. We have an aggressive program to work with researchers and theirinstitutions to identify and license new products to expand our portfolio. Inaddition, we continue to identify and evaluate potential acquisitions that willeither strengthen or expand our product portfolio.

Bioprocessing revenues will continue to be direct inNorth America and Europe with distributors used throughout the rest of theworld. As in 2005, we expect approximately 70% of our Bioprocessing revenueswill come from non-substitutable products that either patented, licensed orproprietary. This includes the core product offerings of EX-CYTE®,Probumin, Incelligent and MonoSera. There is a high need in the 

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marketplace today forbioprocessing products; there are over 2,000 biological therapeutic products invarious stages of preclinical and clinical development.

As a result of the announced closing of our Celliancefacilities in Toronto, Canada and the decision not to open the new facility inLawrence, Kansas, we will be consolidating all our manufacturing for our cellculture products into our facility in Kankakee Illinois. We expect improvementin gross margins and reductions in management diversion by consolidatingfacilities. We expect the Toronto facility will be closed by the end of 2006.Both facilities will be prepared for sale in 2006.

We expect the demand for EX-CYTE® to increase based on approved FDA products,Phase III products and earlier stage projects that utilize EX-CYTE® inthe production process. With expanded Kankakee capacity, we expect continuedgross margin improvement in 2006. We believe the Kankakee facility willeventually be able to produce over 100,000 liters of EX-CYTE® peryear. In January, 2006, we continued to consolidate bioprocessing supply chainactivities with the opening of a state of the art worldwide distribution centerin Kankakee. These activities will focus cell culture operational activitieswithin a single center of excellence.

*Summary.*   Ouroverall organic growth in 2005 was approximately 16% over 2004 revenue. We havea long-term goal to increase our revenue 15% per year organically withoutconsidering acquisitions. Additionally, our long-term goal is to increase grossmargins to over 60% and operating income to at least 25% on a consolidatedbasis.

We also expect to continue our efforts to control andreduce all SG&A costs as a percentage of revenue. In addition, we haveinvested significant capital in our information systems infrastructure over thepast several years and are looking to achieve economies and performanceimprovements as a result of those investments. Overall, we are looking toleverage our overhead structure through both organizational structure andprocess improvements as revenues increase. Our long-term goal is to reduceSG&A costs to less than 25% of consolidated revenue.

We also recognize the importance of investing inR&D activities for all our business units. This investment is required toachieve the portfolio development described above and to maintain our leadershipposition in all of our key markets. We view our investment in R&D ascritical to achieving our strategic growth goals and have stated that we expectto invest at least 10% of our consolidated revenue into R&D activities inthe coming years. Today we are supported by an R&D staff in excess of 150people and we continue to increase our R&D investment. Portfoliodevelopment is one of our major priorities today. We have created a scientificsourcing team which calls on academic institutions in different parts of theworld in identifying future new business opportunities. Their focus is on athree- to five-year horizon.

Capital expenditures for2006 are estimated to be approximately $39.0 million with the continued expansionof facilities at Temecula, Kankakee and Dundee, an increased investment ineCommerce and other information systems initiatives.

**Item 7A.**                Quantitativeand Qualitative Disclosures about Market Risk

Quantitative andqualitative disclosures about market risk are discussed under the caption “MarketRisk” in Item 7 “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.”

**Item 8.**                        FinancialStatements and Supplementary Data

The information requiredin this item is contained in our consolidated financial statements beginning onPage F-1 of this Annual Report on Form 10-K, which areincorporated herein by reference.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes inor disagreements with accountants on accounting and financial disclosure.

**Item 9A.**                Controlsand Procedures

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under the ExchangeAct, as of the end of the period covered by this report (the “Evaluation Date”).Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded as of the Evaluation Date that our disclosure controls andprocedures were effective such that the information relating to us, includingour consolidated subsidiaries, required to be disclosed in our Securities andExchange Commission (“SEC”) reports (i) is recorded, processed, summarizedand reported within the time periods specified in SEC rules and forms and (ii) isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

**Management’sReport on Internal Control over Financial Reporting**

Our management is responsible for establishing and maintainingadequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and15d-15(f) of the Exchange Act. Internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external reporting purposes in accordance with generally acceptedaccounting principles. Internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of our assets; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statementsin accordance with generally accepted accounting principles, and that ourreceipts and expenditures are being made only in accordance with authorizationsof our management; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof our assets that could have a material effect on the financial statements.

Because of its inherent limitations, our internalcontrols over financial reporting provide reasonable, not absolute, assurancethat the financial statements and footnotes thereto are free of material error.In addition, no internal control structure can provide absolute assurance thatall instances of fraud have been detected. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

We, under the supervision of and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, assessed our internal controls over financialreporting as of January 1, 2006, based on criteria for effective internalcontrol over financial reporting described in “Internal Control—IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on this assessment, we concluded that we maintained effectiveinternal controls over financial reporting as of January 1, 2006, based onthe specified criteria.

Management’s assessment of the effectiveness of ourinternal control over financial reporting has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir report which is included herein.

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During the last fiscalquarter of 2005, there were no significant changes in our internal controlsover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

/s/SEROLOGICALS CORPORATION

March 14, 2006

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofSerologicals Corporation:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over Financial Reporting,that Serologicals Corporation and Subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of January 1, 2006,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission. TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records, that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of January 1,2006, is fairly stated, in all material respects, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of January 1, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission.

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Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended January 1,2006 of the Company and our report dated March 14, 2006 expressed anunqualified opinion on those financial statements and financial statementschedule.
| /s/ DELOITTE & TOUCHE  LLP |
|-------------------------------------|
| Atlanta, Georgia                    |
| March 14,  2006                |

 

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**Item 9B.**               OtherInformation

Not applicable

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**PART III.**

**Item 10.**                 Directorsand Executive Officers of the Registrant

**Directors of the Company**

For information regardingour Directors, the sections captioned “Proposal to Elect Directors,” “CorporateGovernance and Board Matters,” “Report of the Audit Committee of the Board ofDirectors” and “Section 16(a) Beneficial Ownership ReportingCompliance” within our 2006 Proxy Statement are incorporated herein byreference. Our Board has a separately designated Audit Committee. Informationregarding the Audit Committee is incorporated by reference to the section inour 2006 Proxy Statement captioned “Corporate Governance and Board Matters;Meetings of the Board; Committees; Audit Committee.”

**Officers and Key Management**

Thefollowing table sets forth the names, ages and all positions and offices heldby our executive officers:

| **Name**                      | ** ** | ** ** | ** ** | **Age**                                                                                              | ** ** | **Positions and Offices Presently Held** |
|-------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------------------|
| David A. Dodd                 |       | 56         |       | President, Chief  Executive Officer and Director                                                     |
| David L. Bellitt              |       | 57         |       | Vice President and  President, Celliance Corporation                                                 |
| Robert P. Collins             |       | 52         |       | Vice President, Human  Resources                                                                     |
| Dennis W.  Harris, Ph.D. |       | 49         |       | Vice President,  Research & Development, Business Development and Chief Scientific  Officer |
| Harold W. Ingalls             |       | 58         |       | Vice President, Finance  and Chief Financial Officer                                                 |
| James J. Kramer, Ph. D.       |       | 50         |       | Vice President,  Corporate Operations                                                                |
| Jeffrey D. Linton             |       | 43         |       | Vice President and  President, Chemicon International, Inc. and Upstate Group LLC               |
| Samuel R. Schwartz            |       | 56         |       | Vice President,  Controller and Chief Accounting Officer                                             |
| Philip A. Theodore            |       | 52         |       | Vice President, General  Counsel and Corporate Secretary                                             |
| M. Dwain Wilcox               |       | 38         |       | Vice President, Global Information Systems                                                           |

 

*David A. Dodd* hasserved as our President, Chief Executive Officer and as a Director since June 2000.From August 1995 to June 2000, Mr. Dodd served as President andChief Executive Officer of Solvay Pharmaceuticals, Inc., the U.S.subsidiary of an international chemical and pharmaceutical group, and as amember of the Management Board for the Pharmaceutical Sector of Solvay S.A. (“Solvay”).In addition, Mr. Dodd served as Chairman of the Board of UnimedPharmaceuticals, Inc., a subsidiary of Solvay, from July 1999 to June 2000.Prior to joining Solvay, Mr. Dodd served in a number of management andexecutive positions for major life science corporations, including AmericanHome Products, Bristol-Myers Squibb Company and Abbott Laboratories. Mr. Doddcurrently also serves on the board of directors of two non-profit organizations,the American Foundation for Suicide Prevention, of which he is the Chairman andthe Georgia Biomedical Partnership.

*David L. Bellitt* has served asVice President and President of Celliance Corporation since November 2004.He served as Vice President, Global Commercial Operations from January 2003until he was appointed to his current position. During his career, Mr. Bellitthas served in numerous management positions within the healthcare industry.From October 2000 to October 2002, Mr. Bellitt served as SeniorVice President with Aksys, Ltd., a start-up medical device company, incharge of global marketing, sales and service. From June 1997 to November 1999,Mr. Bellitt served as Senior Vice President with Akzo Nobel, a medicaldiagnostic instrumentation and reagents company, in charge of marketing, salesand service.

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*Robert P. Collins* has served asVice President, Human Resources since August 2001. From April 2000 toAugust 2001, Mr. Collins was a partner with Ray & Berndtson,one of the nation’s largest retained executive search firms. From February 1999to April 2000, Mr. Collins served as President and Chief OperatingOfficer for Vision Twenty-One, Inc., a leading eye-care company. From September 1998to February 1999, Mr. Collins worked as a self-employed consultant.From February 1986 to September 1998, Mr. Collins held a varietyof leadership positions in human resources, business development, mergers andacquisitions and strategic initiatives with Magellan Health Services, Inc.,a managed behavioral health and wellness organization, including serving asPresident of Beacon Behavioral Health Group and President and Chief ExecutiveOfficer of Group Practice Affiliates, Inc. Mr. Collins is a member ofthe Georgia State Human Resource Roundtable, the Human Resource PlanningSociety, the Society for Human Resource Management and the BiotechnologyIndustry Organization.

*Dennis W. Harris, PhD,* hasserved as Vice President, Global Research & Development, BusinessDevelopment and Chief Scientific Officer since May 2004. Prior to joiningus, Dr. Harris served as the Executive Vice President, Research andDevelopment of Vitra Biosciences, a private company engaged in the developmentof multiplexed cell based imaging systems, from November 2003 through May 2004.From May 2003 through October 2003, Dr. Harris was anindependent consultant to a number of life sciences companies. From April 2001until April 2003, Dr. Harris served at ACLARA Biosciences, a publiccompany engaged in research and development of microfluidic and multiplexingsystems, most recently as Senior Vice President, System Integration andBusiness Development. Prior to April 2001, Dr. Harris worked in anumber of positions of increasing responsibility at Amersham Pharmacia Biotech.In his most recent position, as Vice President, Research and Development, NorthAmerica, Dr. Harris had responsibility for AP Biotech’s global genomicsR&D strategy, and managed a North American R&D organization ofapproximately 250 scientists and engineers. Dr. Harris is a member of theBoard of Directors of Microchip Technologies, Inc., a privately heldcompany engaged in the research and development of microfluidic technologiesfor integrated sample preparation and analysis.

*Harold W. Ingalls* has served asVice-President, Finance and Chief Financial Officer since October 2001.From August 1998 to August 2001, Mr. Ingalls served as Presidentand Chief Executive Officer and as a member of the Board of Directors forLaRoche Industries, Inc., a diversified commodity and specialty chemicalmanufacturer with operations in the United States, France and Germany. LaRocheIndustries, Inc. filed a petition for reorganization under Chapter 11of the Federal Bankruptcy Code on May 3, 2000. In September 2001,LaRoche emerged from Chapter 11 under a court approved plan ofreorganization. From April 1996 to August 1998, Mr. Ingallsserved as Chief Financial Officer and Treasurer of LaRoche. In addition, from April 2001until August 2001, Mr. Ingalls served as President and Chief ExecutiveOfficer and a member of the Board of Directors of Nutec Sciences Corporation, astart up informatics company serving both the petroleum and life sciencesindustries.

*James J. Kramer, Ph.D,* has servedas Vice President, Corporate Operations since January 2005. Prior to thisposition, he has served as Vice President, Global Manufacturing Operations andVice President, Plasma Operations since joining the company in August 2002.Prior to joining the Company, Dr. Kramer served in various capacities withOrtho Clinical Diagnostics, Inc, a Johnson and Johnson Company, most recentlyas Program Director, Lifeblood. Previously, he held additional leadershippositions at Ortho-Clinical Diagnostics, including Director, Manufacturing andDirector, RhoGAM Operations. Over his twenty year career in medical devices,biopharmaceuticals and biologics, he has held various leadership positions inR&D, Quality Control, Regulatory Affairs and Manufacturing. Dr. Kramerearned his Bachelor of Arts in Biology from Kean College and his Ph.D. inBiochemistry from the University of Medicine and Dentistry of New Jersey.

*Jeffrey D. Linton* has served asVice President and President of Chemicon since April 2003 and as aPresident of Upstate Group LLC since July 2005. From October 2000 to April 2003,Mr. Linton served as Vice President, Corporate Business Development, Legaland Public Affairs. From June 1993 until 

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October 2000, Mr. Lintonserved in various capacities with Solvay America, Inc. companies, mostrecently as Vice President of Law, Government, and Public Affairs for SolvayPharmaceuticals, Inc., a U.S. component of an international chemical andpharmaceutical group, from April 1999 until October 2000. From December 1996until April 1999, Mr. Linton served as Vice President, HumanResources of Solvay Automotive, Inc., a partner and supplier to automotivecompanies throughout the world, and from June 1993 until December 1996,Mr. Linton served as Staff Attorney of Solvay America, Inc., theparent of North American operating subsidiaries of Solvay.

*Samuel R. Schwartz, CPA,* hasserved as Vice President, Controller and Chief Accounting Officer since January 2005.Prior to his appointment to the office of Vice President, he served as ChiefAccounting Officer and Corporate Controller since September 2001. From March 1998to September 2001, Mr. Schwartz served in various senior financialmanagement roles with us. From October 1990 to December 1997, Mr. Schwartzserved as President and Chief Executive Officer of a privately-held manufacturingcompany. From 1973 to 1990, Mr. Schwartz was employed by Coopers &Lybrand, LLC where he became a partner in 1985.

*Philip A. Theodore* has served asVice President, General Counsel and Corporate Secretary since January 2004.Prior to joining us he was a partner of King & Spalding, LLP, a lawfirm based in Atlanta, Georgia. Mr. Theodore joined King &Spalding, LLP in 1981 and became a partner in 1986. While at King &Spalding, LLP, Mr. Theodore represented clients in a wide variety ofcorporate, securities and mergers and acquisitions transactions.

*M. Dwain Wilcox* has served asVice President, Global Information Systems since October 1998. Prior tojoining us, Mr. Wilcox held several positions at Lanier Worldwide, asubsidiary of Harris Corporation, most recently as Director, SystemsIntegration from June 1996 until October 1998 and Program Manager,System Integration from November 1993 until June 1996.

In addition, the following individual is a keyemployee:

*JosephT. Kozma,* 55, is the Vice President, Sales of Celliance sinceNovember 2004. Mr. Kozma joined us when we acquired Intergen in 2001.Prior to assuming his current position, he served as our Vice President,Strategic Market Development. From 1987 until joining the Company, Mr. Kozmaserved in various capacities with Intergen, a privately-owned supplier ofbiological products and technologies to the life sciences industry acquired bySerologicals in 2001, most recently as Executive Vice President of WorldwideSales and Marketing. Mr. Kozma was a co-founder of Intergen.

**Code of Ethics**

We adopted a code ofethics applicable to our chief executive officer, chief financial officer,chief accounting officer and other senior financial managers. The code is a “codeof ethics” as defined by applicable rules of the Securities and ExchangeCommission. Our code of ethics is publicly available on our website. Theinternet address of our website is www.serologicals.com. Our code of ethics isposted in the “Company Overview” section of our website, under the caption “CorporateGovernance.” If we make amendments to this code other than technical,administrative, or other non-substantive amendments, or if we grant anywaivers, including implicit waivers, from a provision of this code to our chiefexecutive officer, chief financial officer or chief accounting officer, we willdisclose the nature of the amendment or waiver, its effective date and to whomit applies in the “Company Overview” section of our website under the “CorporateGovernance” caption or in a Current Report on Form 8-K filed withthe Securities and Exchange Commission.

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**Item 11.**                 ExecutiveCompensation

For descriptions of our equity compensation plans,refer to the heading “Note 7—Stock Compensation Plans” in Item 8Financial Statements and Supplementary Data.

The sections under theheading “Executive Compensation” within the 2006 Proxy Statement areincorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management

The section under theheading “Security Ownership of Certain Stockholders and Management” within the2006 Proxy Statement is incorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

The section under theheading “Certain Relationships and Related Transactions” within the 2006 ProxyStatement is incorporated by reference.

**Item 14.**                 PrincipalAccountant Fees and Services

The section under the heading “Independent Auditors—FeesPaid to Independent Auditors” within the 2006 Proxy Statement is incorporatedby reference.

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**PART IV.**

**Item 15.**                 Exhibits,Financial Statement Schedules.

(a)(1)                    FinancialStatements

The financialstatements listed in the accompanying Index to Financial Statements are filedas part of this Annual Report on Form 10-K.

(a)(2)                    FinancialStatement Schedules

Schedule II—Valuation and Qualifying Accounts

All other scheduleshave been omitted because the information is not required or is not so materialas to require submission of the schedule, or because the information isincluded in the financial statements or the notes thereto.

(c)          Exhibits

| 2.1.1 |   | Earnout Agreement dated December 13, 2001, by  and among the Registrant, Intergen Investors, L.P., STJ Bio Corp., Spencer  Paige Corp., Ronald Dilling, Donald Gutenkunst, President and Fellows of  Harvard College and University of Illinois Foundation (Exhibit 2.3 to  the Registrant’s Current Report on Form 8-K, dated  December 19, 2001, is hereby incorporated by reference). |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2.1 |   | Amended and Restated  Securities Purchase Agreement, dated as of February 11, 2003, between  Serologicals Research Products, Inc. and Falcon International Investment  Holdings LLC (Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K, dated April 11, 2003, is hereby incorporated by  reference).                                                                      |
| 2.2.2 |   | European Purchase  Agreement, dated February 11, 2003, between Serologicals Research  Products, Inc. and Falcon International Investment Holdings LLC  (Exhibit 2.6 to the Registrant’s Annual Report on Form 10-K  for the year ended December 29, 2002 is hereby incorporated by  reference).                                                                                     |
| 2.2.3 |   | Deed of Variation, dated  April 4, 2003, between Serologicals Research Products, Inc. and  Falcon International Investment Holdings LLC (Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K, dated April 11,  2003, is hereby incorporated by reference).                                                                                                                  |
| 2.2.4 |   | Guaranty Agreement dated  February 11, 2003 by and among Serologicals Research  Products, Inc., The Beckman Family Trust, David Alan Beckman, Keiko Koga  Beckman and Falcon International Investment Holdings LLC (Exhibit 10.24  to the Registrant’s Annual Report on Form 10-K for the year ended  December 29, 2002 is hereby incorporated by reference).                       |
| 2.3.1 |   | Stock Purchase  Agreement, dated as of December 19, 2003, by and among Gradipore  Limited, Gradipore Inc., Serologicals Finance Company and Serologicals  Corporation (Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K, dated January 27, 2004, is hereby incorporated by  reference).                                                                                  |
| 2.3.2 |   | First Amendment, dated  as of January 15, 2004, to the Stock Purchase Agreement, dated as of  December 19, 2003, by and among Gradipore Limited, Gradipore Inc.,  Serologicals Finance Company and Serologicals Corporation (Exhibit 2.2  to the Registrant’s Current Report on Form 8-K, dated  January 27, 2004, is hereby incorporated by reference).                       |
| 2.3.3 |   | Exchange Agreement,  dated as of December 17, 2004, between Life Therapeutics Limited and  Serologicals Finance Company (Exhibit 1.1 to the Registrant’s Current  Report on Form 8-K dated December 17, 2004 is hereby  incorporated by reference).                                                                                                                                      |

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| 2.3.4  |   | Promissory Note, dated as of December 17, 2004,  made by Life Therapeutics Limited, Life Gels, Inc., Life Therapeutics  Plasma Holdings, Inc., LifeSera, Inc., LifeSera Nevada, Inc.,  LifeSera Business Trust, LifeSera Investments, LLC, LifeSera Management  Partnership, LP, and Allegheny Biologicals, Inc. to Serologicals Finance  Company (Exhibit 1.2 to the Registrant’s Current Report on Form 8-K  dated December 17, 2004 is hereby incorporated by reference).                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.3.5  |   | Mutual Release  Agreement, dated as of December 17, 2004, by Life Therapeutics Limited,  Life Gels, Inc., Life Therapeutics Plasma Holdings, Inc.,  LifeSera, Inc., LifeSera Nevada, Inc., LifeSera Business Trust,  LifeSera Investments, LLC, LifeSera Management Partnership, LP, and Allegheny  Biologicals, Inc., on the one hand, and Serologicals Corporation and  Serologicals Finance Company, on the other hand (Exhibit 1.3 to the  Registrant’s Current Report on Form 8-K dated December 17,  2004 is hereby incorporated by reference). |
| 2.3.6  |   | Letter Agreement, dated  September 27, 2005, between the Registrant and Life Therapeutics, Ltd.  (Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 2, 2005 is hereby incorporated by  reference).                                                                                                                                                                                                                                                                                                                                 |
| 2.4.1  |   | Plan and Agreement of  Merger, dated as of June 29, 2004, by and among the Registrant, Carmel  Acquisition Corporation, AltaGen BioSciences, Inc. and William R.  Srigley (Exhibit 2.1 to the Registrant’s Current Report on Form 8-K,  dated June 30, 2004, is hereby incorporated by reference).                                                                                                                                                                                                                                                                   |
| 2.4.2  |   | Earnout and Indemnity  Agreement, dated as of June 29, 2004, by and among the Registrant,  AltaGen BioSciences, Inc. and Mr. William R. Srigley  (Exhibit 2.2 to the Registrant’s Current Report on Form 8-K,  dated June 30, 2004, is hereby incorporated by reference).                                                                                                                                                                                                                                                                                       |
| 2.5.1  |   | Agreement and Plan of  Merger, dated as of September 7, 2004, by and among the Registrant,  Upstate Acquisition Company, LLC, Upstate Group, Inc. and the  Stockholder Representative (Exhibit 2.1 to the Registrant’s Current  Report on Form 8-K dated September 7, 2004 is hereby  incorporated by reference).                                                                                                                                                                                                                                                         |
| 2.5.2. |   | Amendment to Agreement  and Plan of Merger, dated as of October 14, 2004, by and among the  Registrant and Upstate Group, Inc. (Exhibit 2.1 to the Registrant’s  Current Report on Form 8-K dated October 14, 2004 is hereby  incorporated by reference).                                                                                                                                                                                                                                                                                                                 |
| 2.5.3  |   | Registration Rights  Agreement, dated as of October 14, 2004, by and among the Registrant and  certain former stockholders of Upstate Group, Inc. (Exhibit 4.1 to  the Registrant’s Registration Statement of Form S-3 (file number  333-120379) filed on November 10, 2004 is hereby incorporated by  reference).                                                                                                                                                                                                                                                        |
| 3.1.1  |   | Amended and Restated  Certificate of Incorporation (Exhibit 3.1 to the Registrant’s Annual  Report on Form 10-K for the year ended December 29, 2002 is  hereby incorporated by reference).                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1.2  |   | Certificate of Amendment  of Amended and Restated Certificate of Incorporation (Exhibit 3.1.2 to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  April 3, 2005 is hereby incorporated by reference).                                                                                                                                                                                                                                                                                                                                                         |
| 3.2.1  |   | Amended and Restated By-laws  (Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1  (File No. 33-91176), effective June 14, 1995, is hereby  incorporated by reference).                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2.2. |   | Amendment to  Section 6.1 of Amended and Restated By-laws (the Registrant’s Current  Report on Form 8-K dated March 1, 2006 is hereby incorporated  by reference).                                                                                                                                                                                                                                                                                                                                                                                                                  |

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| 4.1.1  |   | Specimen Common Stock Certificate (Exhibit 4.1  to the Registrant’s Registration Statement on Form S-1 (File  No. 33-91176), effective June 14, 1995, is hereby  incorporated by reference).                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1.2  |   | Specimen Form of Rights Certificate  (incorporated herein by reference to Exhibit 2.1 of the Registration  Statement on Form 8-A filed August 10, 1999).                                                                                                                                                                                                                                                                                                                |
| 4.1.3  |   | Form of Rights  Agreement, dated as of August 2, 1999, between the Company and State  Street Bank & Trust Company, N.A. (incorporated herein by reference  to Exhibit 2.2 of the Registration Statement on Form 8-A  filed August 10, 1999).                                                                                                                                                                                                              |
| 4.1.5  |   | Summary of Rights Plan  (incorporated herein by reference to Exhibit 2.4 of the Registration  Statement on Form 8-A filed August 10, 1999).                                                                                                                                                                                                                                                                                                                                  |
| 4.2.1  |   | Indenture, dated as of August 20, 2003, between  Serologicals Corporation and The Bank of New York, as Trustee, for the 4.75%  Convertible Senior Subordinated Debentures due 2033, including the form of  4.75% Convertible Senior Subordinated Debentures due 2033 (Exhibit 4.1  to the Registrant’s Current Report on Form 8-K, dated  August 21, 2003 is hereby incorporated by reference).                                                                    |
| 4.2.2  |   | Registration Rights  Agreement, dated as of August 20, 2003, by and among Serologicals  Corporation and Banc of America Securities LLC, J.P. Morgan  Securities Inc. and UBS Securities LLC, as representatives of the  initial purchasers of the Registrant’s 4.75% Convertible Senior Subordinated Debentures  due 2033 (Exhibit 4.2 to the Registrant’s Current Report on Form 8-K,  dated August 21, 2003 is hereby incorporated by reference). |
| 10.1.1 |   | $125,000,000 Credit  Agreement, dated as of October 14, 2004, among the Registrant, as  Borrower, the several lenders from time to time parties thereto, LaSalle Bank  National Association, as Documentation Agent, Bank of America, N.A., as  Syndication Agent and JP Morgan Chase Bank, as Administrative Agent  (Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  dated October 14, 2004 is hereby incorporated by reference).               |
| 10.1.2 |   | First Amendment to the  Credit Agreement and Waiver, dated as of December 28, 2005, to the  Credit Agreement, dated as of October 14, 2004, among the Registrant, as  Borrower, the several lenders from time to time parties thereto, LaSalle Bank  National Association, as Documentation Agent, Bank of America, N.A., as  Syndication Agent and JP Morgan Chase Bank, as Administrative Agent*.                                                                          |
| 10.1.3 |   | Lease Agreement dated  October 6, 2000, between the Registrant and Spalding Triangle, L.L.C.  (Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 24, 2000 is hereby incorporated by  reference).                                                                                                                                                                                                                    |
| 10.2.1 |   | Amended and Restated 2005  Incentive Plan (Exhibit 99.1 to the Registrant’s Current Report on  Form 8-K dated May 17, 2005 is hereby incorporated by  reference).†                                                                                                                                                                                                                                                                                                 |
| 10.2.2 |   | 1996 Employee Stock  Purchase Plan (Exhibit 10.7 to the Registrant’s Annual Report on  Form 10-K for the year ended December 29, 2002 is hereby  incorporated by reference).†                                                                                                                                                                                                                                                                                      |
| 10.2.3 |   | Serologicals Corporation  1996 UK Sharesave Scheme (Exhibit 3.1 to the Registrant’s Annual Report  on Form 10-K for the year ended December 29, 2002 is hereby  incorporated by reference).†                                                                                                                                                                                                                                                                       |
| 10.2.4 |   | Serologicals Corporation  UK Share Incentive Plan (Exhibit 4.1 to the Registrant’s Registration  Statement on Form S-8 (File No. 333-104703), effective  April 23, 2003, is hereby incorporated by reference).†                                                                                                                                                                                                                                               |

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| 10.2.5  |   | Form of Change in Control Executive Severance  Package between the Registrant and each Vice President. (Exhibit 10.20  to the Registrant’s Annual Report on Form 10-K for the year ended  December 28, 2003 is hereby incorporated by reference).† |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2.6  |   | Employment  Agreement between the Company and David A. Dodd (Exhibit 10.27 to  the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended June 25, 2000 is hereby incorporated by reference).†                                          |
| 10.2.7  |   | Change in Control  Executive Severance Package between the Registrant and David A. Dodd  (Exhibit 10.10.2 to the Registrant’s Annual Report on Form 10-K  for the year ended December 28, 2003 is hereby incorporated by  reference).†             |
| 10.2.8  |   | Employment Agreement  between the Registrant and Harold W. Ingalls (Exhibit 10.2 of the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001 is hereby incorporated by reference).†                               |
| 10.2.9  |   | Revised Employment  Agreement between the Registrant and Jeffrey D. Linton  (Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 30, 2003 is hereby incorporated by  reference).†                          |
| 10.2.10 |   | Employment Agreement  between the Registrant and Robert P. Collins (Exhibit 10.1 to the  Registrant’s Quarterly Report on Form 10Q for the quarter ended  September 30, 2001, is incorporated herein by reference).†                               |
| 10.2.11 |   | Employment Agreement between the Registrant and  Joseph T. Kozma (Exhibit 10.20 to the Registrant’s Annual Report on  Form 10-K for the year ended December 30, 2001 is hereby  incorporated by reference).†                                       |
| 10.2.12 |   | Employment Agreement  between the Registrant and James J. Kramer, Ph. D.  (Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002 is hereby incorporated by  reference).†                   |
| 10.2.13 |   | Employment Agreement  between the Registrant and David L. Bellitt (Exhibit 10.23 to the  Registrant’s Annual Report on Form 10-K for the year ended  December 29, 2002 is hereby incorporated by reference).†                                      |
| 10.2.14 |   | Employment Agreement  between the Registrant and Philip A. Theodore. (Exhibit 10.19 to  the Registrant’s Annual Report on Form 10-K for the year ended  December 28, 2003 is hereby incorporated by reference).†                                   |
| 10.2.15 |   | Employment Agreement  between the Registrant and Dennis W. Harris, Ph.D.  (Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 28, 2004 is hereby incorporated by  reference).†                       |
| 10.2.16 |   | Employment Agreement  between the Registrant and Samuel R. Schwartz. (Exhibit 10.2.25 to  the Registrant’s Annual Report on Form 10-K for the year ended  January 2, 2005 is hereby incorporated by reference).†                                   |
| 10.2.17 |   | Non-Employee Directors  Compensation Arrangements dated March 15, 2005 (Exhibit 99.2 to the  Registrant Current Report on Form 8-K dated May 17, 2005 is hereby  incorporated by reference).                                                                 |
| 14.1    |   | Code of Ethics for  Senior Executive and Financial Officers (Exhibit 14.1 to the  Registrant’s Annual Report on Form 10-K for the year ended  December 28, 2003 is hereby incorporated by reference).                                                        |
| 21      |   | Subsidiaries of the  Registrant.*                                                                                                                                                                                                                                                |
| 23.1    |   | Consent of  Deloitte & Touche LLP.*                                                                                                                                                                                                                                     |

59

----

 

| 31.1 |   | Certification Pursuant  to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.*                                         |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification Pursuant  to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.*                                         |
| 32.1 |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.* |
| 32.2 |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.* |
| 99.1 |   | Code of Business Conduct  and Ethics.*                                                                                                                               |

----

*                    Filed herewith

†                    CompensatoryPlan or Arrangement

60

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, Serologicals Corporation has duly caused this annual report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized on March 16,2006.
|        | SEROLOGICALS CORPORATION |
|--------|--------------------------|
|   | (Registrant)             |
|   | By:                      | /s/ DAVID A. DODD |
|   |                     | *President and Chief Executive Officer* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of Serologicals Corporation andin the capacities indicated on March 16, 2006:
|                                 | **Signature** | ** **                                               | ** ** |  | **Title** | ** ** |
|---------------------------------|---------------|----------------------------------------------------------|------------|--|-----------|------------|
| /s/  DAVID A. DODD              |          | President, Chief  Executive Officer and Director         |
| David A. Dodd                   |          |                                                     |
| /s/  HAROLD W. INGALLS          |          | Vice President, Finance  and Chief Financial Officer     |
| Harold W. Ingalls               |          |                                                     |
| /s/  SAMUEL R. SCHWARTZ         |          | Vice President,  Controller and Chief Accounting Officer |
| Samuel R.  Schwartz             |          |                                                     |
| /s/  DESMOND H. O’CONNELL  |          | Chairman of the Board of  Directors                      |
| Desmond H.  O’Connell      |          |                                                     |
| /s/  RALPH E. CHRISTOFFERSEN    |          | Director                                                 |
| Ralph E.  Christoffersen, Ph.D. |          |                                                     |
| /s/  ROBERT J. CLANIN           |          | Director                                                 |
| Robert J. Clanin                |          |                                                     |
| /s/  WADE FETZER                |          | Director                                                 |
| Wade  Fetzer, III          |          |                                                     |
| /s/  RONALD G. GELBMAN          |          | Director                                                 |       |
| Ronald G. Gelbman               |          |                                                     |       |
| /s/  GERARD M. MOUFFLET         |          | Director                                                 |       |
| Gerard M.  Moufflet             |          |                                                     |       |
|                                 |               |                                                          |            |  |           |            |  |  |

61

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| /s/ AARON J. SHATKIN         |   | Director |
|------------------------------|--------|----------|
| Aaron J. Shatkin, Ph.D       |   |     |
| /s/ GEORGE M. SHAW           |   | Director |
| George M. Shaw, M.D.,  Ph.D. |   |     |
| /s/  LAWRENCE E. TILTON      |   | Director |
| Lawrence E.  Tilton          |   |     |

 

 

62

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                       | ** ** |     | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----|----------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                                              |       | F-2 |     |
| Consolidated Balance  Sheets—January 1, 2006 and January 2, 2005                                                                       |       | F-3 |     |
| Consolidated Statements of  Income—For the years ended January 1, 2006, January 2, 2005 and  December 28, 2003                    |       | F-4 |     |
| Consolidated Statements of  Stockholders’ Equity—For the years ended January 1, 2006,  January 2, 2005 and December 28, 2003 |       | F-5 |     |
| Consolidated Statements of  Cash Flows—For the years ended January 1, 2006, January 2, 2005 and  December 28, 2003                |       | F-6 |     |
| Notes  to Consolidated Financial Statements                                                                                                           |       | F-7 |     |
|                                                                                                                                                       |            |     |          |            |  |

 

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofSerologicals Corporation:

We have audited the accompanying consolidated balancesheets of Serologicals Corporation and Subsidiaries (the “Company”) as of January 1,2006 and January 2, 2005, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for each of the three years in theperiod ended January 1, 2006. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position ofSerologicals Corporation and Subsidiaries as of January 1, 2006 and January 2,2005, and the results of its operations and its cash flows for each of thethree years in the period ended January 1, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

As discussed in Note 2, in 2005, the Company changedthe presentation of its consolidated statements of cash flows to presentseparate disclosure of the cash flows from operating, investing and financingactivities of discontinued operations and retroactively revised the statementsof cash flows for the years ended January 2, 2005 and December 28,2003, for the change.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of January 1, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 14,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

| /s/ DELOITTE & TOUCHE  LLP |
|-------------------------------------|
| Atlanta, Georgia                    |
| March 14,  2006                |

 

F-2

----

**SEROLOGICALS CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSJanuary 1, 2006 and January 2, 2005(in thousands, except share amounts)**

| ** **                                                                                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                                                                           |       |     |       |     |       |
| **CURRENT ASSETS:**                                                                                                                                                                  |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                            |       | $        | 21,227     |     | $          | 33,024 |   |
| Short-term investments                                                                                                                                                               |       | 17,225   |       | 29,030   |       |
| Trade accounts receivable, less allowance for  doubtful accounts of $1,435 and $953 at January 1, 2006 and  January 2, 2005, respectively                                  |       | 64,172   |       | 46,899   |       |
| Inventories                                                                                                                                                                          |       | 59,418   |       | 49,846   |       |
| Other current assets                                                                                                                                                                 |       | 15,798   |       | 15,226   |       |
| Total current assets                                                                                                                                                                 |       | 177,840  |       | 174,025  |       |
| **PROPERTY AND EQUIPMENT, NET**                                                                                                                                                      |       | 70,015   |       | 96,887   |       |
| **GOODWILL**                                                                                                                                                                         |       | 239,520  |       | 241,038  |       |
| **INTANGIBLE ASSETS, NET**                                                                                                                                                           |       | 120,027  |       | 119,612  |       |
| **OTHER ASSETS**                                                                                                                                                                     |       | 16,217   |       | 8,245    |       |
| Total assets                                                                                                                                                                         |       | $        | 623,619    |     | $          | 639,807 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       |     |       |     |       |
| **CURRENT  LIABILITIES:**                                                                                                                                                            |       |     |       |     |       |
| Accounts payable                                                                                                                                                                     |       | $        | 17,377     |     | $          | 11,827 |   |
| Accrued liabilities                                                                                                                                                                  |       | 41,757   |       | 37,336   |       |
| Current maturities of long-term debt                                                                                                                                                 |       | 1,081    |       | 2,419    |       |
| Total current liabilities                                                                                                                                                            |       | 60,215   |       | 51,582   |       |
| **CONVERTIBLE SUBORDINATED DEBENTURES  (Note 8)**                                                                                                                               |       | 129,905  |       | 130,395  |       |
| **LONG TERM DEBT LESS CURRENT MATURITIES  (Note 9)**                                                                                                                            |       | 476      |       | 2,194    |       |
| **DEFERRED INCOME TAXES (Note 11)**                                                                                                                                             |       | 25,736   |       | 38,012   |       |
| **OTHER LIABILITIES**                                                                                                                                                                |       | 910      |       | 1,093    |       |
| Total liabilities                                                                                                                                                                    |       | 217,242  |       | 223,276  |       |
| **COMMITMENTS  AND CONTINGENCIES (Note 10)**                                                                                                                                    |       |     |       |     |       |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                      |       |     |       |     |       |
| Preferred stock, $.01 par value; 1,000,000 shares  authorized, no shares issued                                                                                                      |       | —   |       | —   |       |
| Common stock, $.01 par value; 115,000,000 and  50,000,000 shares authorized, 38,567,881 and 37,752,120 shares issued at  January 1, 2006 and January 2, 2005, respectively |       | 385      |       | 377      |       |
| Additional paid-in capital                                                                                                                                                           |       | 347,183  |       | 334,429  |       |
| Retained earnings                                                                                                                                                                    |       | 94,077   |       | 91,378   |       |
| Accumulated other comprehensive income                                                                                                                                               |       | 8,854    |       | 11,046   |       |
| Less:                                                                                                                                                                                |       |     |       |     |       |
| Common stock held in treasury; 4,462,964 and 3,288,000  shares at January 1, 2006 and January 2, 2005, respectively                                                        |       | (43,472  | )          | (20,347  | )          |
| Deferred compensation                                                                                                                                                                |       | (650     | )          | (352     | )          |
| Total stockholders’ equity                                                                                                                                                      |       | 406,377  |       | 416,531  |       |
| Total liabilities  and stockholders’ equity                                                                                                                                     |       | $        | 623,619    |     | $          | 639,807 |   |

 

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

F-3

----

**SEROLOGICALS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOMEFor the Years Ended January 1, 2006, January 2, 2005 andDecember 28, 2003(in thousands, except per share amounts)**

| ** **                                              | ** ** | **2005**   | ** **  | **2004**   | ** ** | **2003**    | ** ** |
|---------------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
| **NET  REVENUES**                                       | ** ** | **$**      | **274,945** | ** ** | **$**      | **195,923** | ** ** | **$** | **146,915** | ** ** |
| **COSTS AND EXPENSES:**                                 |       |       |        |       |       |        |       |
| Cost of revenues                                        |       | 122,798    |        | 87,482     |       | 64,741      |       |
| Selling, general and administrative                     |       | 85,141     |        | 59,293     |       | 44,602      |       |
| Research and development                                |       | 17,199     |        | 10,144     |       | 6,214       |       |
| Amortization of intangibles                             |       | 7,206      |        | 3,771      |       | 2,175       |       |
| Purchased in-process research and development (Note  3) |       | —     |        | 3,263      |       | —      |       |
| Impairment and exiting costs (Note 5)                   |       | 38,025     |        | —     |       | 2,778       |       |
| **OPERATING  INCOME**                                   |       | **4,576**  | ** **  | **31,970** | ** ** | **26,405**  |       |
| Other expense (income), net                             |       | 597        |        | (54        | )          | 180         |       |
| Write-off of deferred financing costs (Note 9)          |       | —     |        | 965        |       | 4,492       |       |
| Interest expense                                        |       | 7,361      |        | 6,052      |       | 4,384       |       |
| Interest income                                         |       | (1,782     | )           | (587       | )          | (255        | )          |
| **INCOME  (LOSS) BEFORE INCOME TAXES**                  |       | **(1,600** | **)**       | **25,594** | ** ** | **17,604**  |       |
| **PROVISION  (BENEFIT) FOR INCOME TAXES**               |       | **(2,416** | **)**       | **7,933**  | ** ** | **5,537**   |       |
| **INCOME  FROM CONTINUING OPERATIONS**                  |       | **816**    | ** **  | **17,661** | ** ** | **12,067**  |       |
| Income (loss)  from discontinued operations (Note 4)    |       | 1,883      |        | —     |       | (10,561     | )          |
| **NET  INCOME**                                         | ** ** | **$**      | **2,699**   | ** ** | **$**      | **17,661**  | ** ** | **$** | **1,506** | ** ** |
| **BASIC  EARNINGS (LOSS) PER SHARE:**                   |       |       |        |       |       |        |       |
| Continuing operations                                   | ** ** | $          | 0.02        |       | $          | 0.68        |       | $ | 0.49 |   |
| Discontinued operations                                 |       | 0.06       |        | —     |       | (0.43       | )          |
| Net income                                              | ** ** | $          | 0.08        |       | $          | 0.68        |       | $ | 0.06 |   |
| **DILUTED  EARNINGS (LOSS) PER SHARE, (Note 2):**       |       |       |        |       |       |        |       |
| Continuing operations                                   | ** ** | $          | 0.02        |       | $          | 0.59        |       | $ | 0.47 |   |
| Discontinued operations                                 |       | 0.06       |        | —     |       | (0.37       | )          |
| Net income                                              | ** ** | $          | 0.08        |       | $          | 0.59        |       | $ | 0.10 |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING:**               |       |       |        |       |       |        |       |
| Basic                                                   |       | 34,729     |        | 26,148     |       | 24,549      |       |
| Diluted, (Note 2)                                       |       | 35,195     |        | 35,525     |       | 28,134      |       |

 

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

F-4

----

**SEROLOGICALS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYFor the Years Ended January 1, 2006, January 2, 2005 andDecember 28, 2003(in thousands)**

| ** **                                            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**         | ** ** | ** **   | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                            | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | **other**               | ** ** | ** **   | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | **Comprehensive**       | ** ** | ** **   | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Income**   | ** ** | **Treasury Stock** | ** ** | **Deferred** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **(Loss)**              | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **BALANCE, December 29, 2002**                   |       |                  | 27,730     |        |       |           | $          | 277          |       |                    |       | $            | 118,116    |       |       |             | $          | 72,211     |       |   |   | $ | 731 |   |   |   | (3,288 | ) |   | $ | (20,347 | ) |   | $ | — |   |   | $ | 170,988 |   |
| Comprehensive income:                                 |       |                  |       |        |       |           |       |         |       |                    |       |         |       |       |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 1,506      |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 1,506 |   |
| Foreign currency translation adjustments              |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | —     |             |       |       | 5,994      |   |   |   | — |   |   | — |   |   | — |   |   | 5,994 |   |
| Comprehensive income                                  |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 1,506      |             |       |       | 5,994      |   |   |   | — |   |   | — |   |   | — |   |   | 7,500 |   |
| Exercise of stock options                             |       |                  | 288        |        |       |           | 3          |         |       |                    | 1,956      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 1,959 |   |
| Shares issued through employee stock purchase plans   |       |                  | 42         |        |       |           | 1          |         |       |                    | 352        |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 353 |   |
| Deferred and other  compensation                      |       |                  | 2          |        |       |           | —     |         |       |                    | 83         |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 83 |   |
| Tax effect of stock option  exercise                  |       |                  | —     |        |       |           | —     |         |       |                    | 623        |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 623 |   |
| **BALANCE, December 28, 2003**                   |       |                  | 28,062     |        |       |           | 281        |         |       |                    | 121,130    |         |       |       | 73,717     |             |       |       | 6,725      |   |   |   | (3,288 | ) |   | (20,347 | ) |   | — |   |   | 181,506 |   |
| Comprehensive income:                                 |       |                  |       |        |       |           |       |         |       |                    |       |         |       |       |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 17,661     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 17,661 |   |
| Foreign currency translation adjustments              |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | —     |             |       |       | 4,321      |   |   |   | — |   |   | — |   |   | — |   |   | 4,321 |   |
| Comprehensive income                                  |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 17,661     |             |       |       | 4,321      |   |   |   | — |   |   | — |   |   | — |   |   | 21,982 |   |
| Shares issued in connection with business combination |       |                  | 4,333      |        |       |           | 43         |         |       |                    | 102,456    |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 102,499 |   |
| Stock issued in equity offering,  net                 |       |                  | 4,830      |        |       |           | 48         |         |       |                    | 104,730    |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 104,778 |   |
| Exercise of stock options                             |       |                  | 473        |        |       |           | 4          |         |       |                    | 3,976      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 3,980 |   |
| Shares issued through employee stock purchase plans   |       |                  | 39         |        |       |           | 1          |         |       |                    | 482        |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 483 |   |
| Deferred and other  compensation                      |       |                  | 15         |        |       |           | —     |         |       |                    | 394        |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | (352 | ) |   | 42 |   |
| Tax effect of stock option  exercise                  |       |                  | —     |        |       |           | —     |         |       |                    | 1,261      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 1,261 |   |
| **BALANCE, January 2, 2005**                     |       |                  | 37,752     |        |       |           | 377        |         |       |                    | 334,429    |         |       |       | 91,378     |             |       |       | 11,046     |   |   |   | (3,288 | ) |   | (20,347 | ) |   | (352 | ) |   | 416,531 |   |
| Comprehensive income:                                 |       |                  |       |        |       |           |       |         |       |                    |       |         |       |       |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                            |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 2,699      |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 2,699 |   |
| Foreign currency translation adjustments              |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | —     |             |       |       | (2,192     | ) |   |   | — |   |   | — |   |   | — |   |   | (2,192 | ) |
| Comprehensive income                                  |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | 2,699      |             |       |       | (2,192     | ) |   |   | — |   |   | — |   |   | — |   |   | 507 |   |
| Exercise of stock options                             |       |                  | 703        |        |       |           | 7          |         |       |                    | 6,423      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 6,430 |   |
| Shares issued through employee stock purchase plans   |       |                  | 74         |        |       |           | 1          |         |       |                    | 1,348      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 1,349 |   |
| Deferred and other  compensation                      |       |                  | 39         |        |       |           | —     |         |       |                    | 839        |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | (298 | ) |   | 541 |   |
| Tax effect of stock option  exercise                  |       |                  | —     |        |       |           | —     |         |       |                    | 4,144      |         |       |       | —     |             |       |       | —     |   |   |   | — |   |   | — |   |   | — |   |   | 4,144 |   |
| Stock acquired though stock repurchase program        |       |                  | —     |        |       |           | —     |         |       |                    | —     |         |       |       | —     |             |       |       | —     |   |   |   | (1,175 | ) |   | (23,125 | ) |   | — |   |   | (23,125 | ) |
| **BALANCE,  January 1, 2006**                    |       |                  | 38,568     |        |       |           | $          | 385          |       |                    |       | $            | 347,183    |       |       |             | $          | 94,077     |       |   |   | $ | 8,854 |   |   |   | (4,463 | ) |   | $ | (43,472 | ) |   | $ | (650 | ) |   | $ | 406,377 |   |

 

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

F-5

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**SEROLOGICALS CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF CASH FLOWSFor the Years Ended January 1, 2006, January 2, 2005 andDecember 28, 2003(in thousands)**

| ** **                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **CONTINUING OPERATIONS:**                                                                                        |       |     |       |     |       |     |       |
| **OPERATING ACTIVITIES:**                                                                                         |       |     |       |     |       |     |       |
| Net income                                                                                                        |       | $        | 2,699      |     | $          | 17,661   |       | $ | 1,506 |   |
| Income (loss) from  discontinued operations                                                                       |       | 1,883    |       | —   |       | (10,561  | )          |
| Net income from  continuing operations                                                                            |       | 816      |       | 17,661   |       | 12,067   |       |
| Adjustments to reconcile net income from operations  to net cash provided by operating activities:                |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                    |       | 15,543   |       | 11,021   |       | 9,477    |       |
| Tax benefit from exercise  of stock options                                                                       |       | 4,144    |       | 1,238    |       | 623      |       |
| Deferred and other  compensation                                                                                  |       | 533      |       | 43       |       | 83       |       |
| Deferred income tax  (benefit) provision                                                                          |       | (9,280   | )          | 5,538    |       | (1,257   | )          |
| Impairment of property  plant and equipment                                                                       |       | 33,348   |       | —   |       | 800      |       |
| Non-cash exiting costs,  write off of deferred financing costs and purchased in process research and  development |       | 4,917    |       | 4,228    |       | 5,602    |       |
| Other, net                                                                                                        |       | 1,364    |       | 2,040    |       | —   |       |
| Changes in operating assets and liabilities, net of  acquisition of business:                                     |       |     |       |     |       |     |       |
| Trade accounts  receivable, net                                                                                   |       | (17,686  | )          | (5,860   | )          | (6,518   | )          |
| Inventories                                                                                                       |       | (9,655   | )          | (5,772   | )          | (6,552   | )          |
| Prepaid and other current  assets                                                                                 |       | (1,092   | )          | (1,004   | )          | 961      |       |
| Accounts payable                                                                                                  |       | 5,514    |       | 397      |       | (1,185   | )          |
| Accrued liabilities                                                                                               |       | (3,598   | )          | 8,703    |       | 4,895    |       |
| Other, net                                                                                                        |       | (50      | )          | (621     | )          | (891     | )          |
| Total adjustments                                                                                                 |       | 24,002   |       | 19,951   |       | 6,038    |       |
| **Net cash  provided by operating activities**                                                                    |       | 24,818   |       | 37,612   |       | 18,105   |       |
| **INVESTING ACTIVITIES:**                                                                                         |       |     |       |     |       |     |       |
| Purchases of short-term  investments                                                                              |       | (70,310  | )          | (121,330 | )          | (40,285  | )          |
| Proceeds from sale of  short-term investments                                                                     |       | 82,115   |       | 119,385  |       | 17,800   |       |
| Purchases of property and  equipment and intangible assets                                                        |       | (16,475  | )          | (19,482  | )          | (19,644  | )          |
| Proceeds from collection  of principal portion of note receivable                                                 |       | 7,249    |       | —   |       | —   |       |
| Purchase of businesses,  net of cash acquired                                                                     |       | (6,752   | )          | (117,680 | )          | (97,344  | )          |
| Restricted cash held in  escrow                                                                                   |       | (14,505  | )          | —   |       | —   |       |
| Other, net                                                                                                        |       | (283     | )          | 254      |       | (246     | )          |
| **Net cash  used in investing activities**                                                                        |       | (18,961  | )          | (138,853 | )          | (139,719 | )          |
| **FINANCING ACTIVITIES:**                                                                                         |       |     |       |     |       |     |       |
| Proceeds from issuance of  convertible debentures                                                                 |       | —   |       | —   |       | 130,000  |       |
| Proceeds from term loan                                                                                           |       | —   |       | 80,000   |       | 82,500   |       |
| Repayment of term loan                                                                                            |       | —   |       | (80,000  | )          | (82,500  | )          |
| Proceeds from equity  offering, net of offering expenses                                                          |       | —   |       | 104,777  |       | —   |       |
| Proceeds (payments) on  capital lease obligations                                                                 |       | (2,952   | )          | 1,986    |       | (387     | )          |
| Proceeds from issuance of  common shares under stock plans                                                        |       | 7,786    |       | 4,486    |       | 2,312    |       |
| Payment of debt issuance  costs                                                                                   |       | —   |       | (1,454   | )          | (8,931   | )          |
| Purchase of common shares                                                                                         |       | (23,125  | )          | —   |       | —   |       |
| **Net cash  (used in) provided by financing activities**                                                          |       | (18,291  | )          | 109,795  |       | 122,994  |       |
| **DISCONTINUED OPERATIONS (Revised - See Note 2):**                                                               |       |     |       |     |       |     |       |
| **OPERATING  ACTIVITIES**                                                                                         |       | 1,883    |       | (3,479   | )          | 9,174    |       |
| **INVESTING  ACTIVITIES**                                                                                         |       | —   |       | 5,613    |       | 2,288    |       |
| **FINANCING  ACTIVITIES**                                                                                         |       | —   |       | (172     | )          | (180     | )          |
| **Net cash provided by discontinued operations:**                                                                 |       | 1,883    |       | 1,962    |       | 11,282   |       |
| Effects of exchange rate  changes on cash and cash equivalents                                                    |       | (1,246   | )          | 1,029    |       | (1,825   | )          |
| Net (decrease) increase  in cash and cash equivalents                                                             |       | (11,797  | )          | 11,545   |       | 10,837   |       |
| Cash and cash  equivalents, beginning of period                                                                   |       | 33,024   |       | 21,479   |       | 10,642   |       |
| Cash and cash  equivalents, end of period                                                                         |       | $        | 21,227     |     | $          | 33,024   |       | $ | 21,479 |   |
| **SUPPLEMENTAL DISCLOSURE:**                                                                                      |       |     |       |     |       |     |       |
| Cash paid during the period for:                                                                                  |       |     |       |     |       |     |       |
| Income taxes , net of  refunds                                                                                    |       | $        | 5,121      |     | $          | 2,370    |       | $ | 3,214 |   |
| Interest paid, net of  amounts capitalized                                                                        |       | 5,694    |       | 5,741    |       | 2,269    |       |
| Non-cash investing and financing activities:                                                                      |       |     |       |     |       |     |       |
| Accrued acquisition  consideration                                                                                |       | 92       |       | 956      |       | —   |       |
| Accrued purchase of  property and equipment                                                                       |       | 1,138    |       | —   |       | 1,235    |       |
| Fair market value  of stock issued for acquisition                                                                |       | —   |       | 102,499  |       | —   |       |

 

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

F-6

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**SEROLOGICALS CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSJanuary 1, 2006, January 2, 2005 and December 28, 2003**

**1.   ORGANIZATIONAND BUSINESS OPERATIONS**

Serologicals Corporation, a Delaware corporation,(together with its subsidiaries, “we”, “our”, the “Company” or “Serologicals”),with facilities in North America, Europe and Australia, is a global leader indeveloping and commercializing consumable biological products, enablingtechnologies and services in support of biological research, drug discovery andthe bioprocessing of life-enhancing products. Our customers include major lifescience companies and leading research institutions involved in keydisciplines, such as neurology, oncology, hematology, immunology, cardiology, proteomics,infectious diseases, cell signaling and stem cell research. In addition, we arethe world’s leading provider of monoclonal antibodies for the blood typingindustry.

We report operatingresults in two business segments, “Research” and “Bioprocessing.” Theoperations of Celliance represent the Bioprocessing segment and the operationsof Chemicon and Upstate represent the Research segment. Prior to 2005, wereported operating results in three business segments: Research, Cell Cultureand Diagnostics. These segments were based primarily on the differingproduction, manufacturing and other value-added processes that we performedwith respect to our products and, to a lesser extent, the differing nature ofthe ultimate end use of our products. All amounts in this Annual Report on Form 10-Kreflect the restatement of the pre-2005 segments so that they areconsistent with the current year presentation.Priorto 2003, we reported a fourth segment, Therapeutic Products. The TherapeuticProducts segment is accounted for as discontinued operations for all periodspresented as discussed in Note 4.

**2.   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTS**

*Basis of Presentation*

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All intercompany accounts and transactionshave been eliminated in consolidation. The Company’s fiscal period-end forfinancial reporting purposes is the last Sunday of each period and the fiscalyear ends on the Sunday closest to December 31 of each year. Fiscal years2005 and 2003 included 52 weeks while fiscal year 2004 included 53 weeks. Allreferences to years relate to fiscal years rather than calendar years. Certainamounts for prior years have been reclassified to conform with the current yearpresentation.

*Use of Estimatesand Assumptions*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. On an ongoing basis, the Company evaluates its estimates. TheCompany bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances. Actualresults could differ from those estimates and assumptions.

F-7

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*Cash and CashEquivalents and Marketable Securities*

The Company considers all cash held in banks andhighly liquid investments with an original maturity of three months or lesswhen purchased to be cash equivalents. Cash equivalents at January 1,2006, January 2, 2005 and December 28, 2003, consisted primarily ofovernight money market accounts, time deposits, commercial paper, demand notesand bonds with maturities of less than three months.

The Company invests its excess cash in marketablesecurities, principally auction rate securities (ARS), corporate notes andgovernment securities.

In accordance withStatement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities” (“SFAS 115”), theCompany has classified all short-term investments as available-for-sale.

*FinancialInstruments*

The carrying values of cash and cash equivalents,short-term investments, accounts receivable, other assets, accounts payable,accrued expenses, capital lease obligations and loans payable to financial andlending institutions included in the Company’s consolidated balance sheetsapproximate their fair values at January 1, 2006 and January 2, 2005.

The fair value of the Company’s 4.75% ConvertibleSenior Subordinated Dentures (the “Debentures”) was approximately $193.7million and $224.0 million at January 1, 2006 and January 2,2005, respectively. The Debentures had a carrying amount of $129.9 million and$130.4 million at January 1, 2006 and January 2, 2005, respectively.

Disclosure about theestimated fair value of financial instruments is based on pertinent informationavailable to the Company as of January 1, 2006 and January 2, 2005.Although the Company is not aware of any factors that would significantlyaffect the reasonable fair value amounts, such amounts have not beencomprehensively revalued for purposes of these financial statements since theperiods presented and current estimates of fair value may differ significantlyfrom the amounts presented herein.

*Accounts Receivableand Allowances*

The Company provides anallowance for doubtful accounts equal to estimated uncollectible accounts. TheCompany’s estimate is based on a regular review of individual account balancesover 90 days, historical collection experience and consideration of otherfactors such as a customer’s financial status and other business risk. It isreasonably possible that the Company’s estimate of the allowance for doubtfulaccounts will change. Write-offs of uncollectible accounts receivable, net ofrecoveries, were $0.4 million, $0.6 million and $0.7 million in 2005, 2004and 2003, respectively.

*Inventories*

Inventories are stated at the lower of cost or marketon a first-in, first-out basis. Cost includes materials, labor and overhead.Market, with respect to all inventories, is replacement cost or net realizablevalue. The Company regularly reviews inventory on hand for slow-moving,obsolete or impaired inventory and records appropriate reserves or writes offinventory balances for permanent loss of value. Finished goods andwork-in-process inventory acquired in connection with business acquisitionstypically includes purchase price adjustments that record a write-up in valueto estimated selling prices less costs to complete, costs to dispose and areasonable profit allowance for the distribution of products.

F-8

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Inventoriesat January 1, 2006 and January 2, 2005 consisted of the following (inthousands):

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 7,157      |     | $          | 10,950 |   |
| Work in process |       | 21,999   |       | 12,995   |       |
| Finished goods  |       | 30,262   |       | 25,901   |       |
|            |       | $        | 59,418     |     | $          | 49,846 |   |

 

*Property andEquipment*

Property and equipment are stated at cost lessaccumulated depreciation. Major property additions, replacements, andbetterments are capitalized, while maintenance and repairs which do not extendthe useful lives of these assets are expensed as incurred. When assets are soldor otherwise disposed of, the cost and associated accumulated depreciation isremoved from the accounts and a resulting gain or loss is included in theoperating results for the period. Depreciation is provided using thestraight-line method over the estimated useful lives for financial reportingpurposes. For income tax purposes, the Company uses accelerated depreciationmethods. Depreciable lives for equipment, furniture and fixtures generallyrange from three to ten years. Purchased software and capitalized softwareproject costs are depreciated over five years. Leasehold improvements areamortized over the shorter of the lease term or the economic lives of the assets.Buildings and improvements are depreciated over lives ranging from twenty tothirty-five years.

Interest is capitalized as part of the historical costof certain property, plant and equipment constructed by the Company for itsuse. The amount of interest capitalized is based upon a weighted average of theinterest rates of outstanding borrowings during the construction period.

Software developed or acquired for internal use isaccounted for in accordance with Statement of Position 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”),issued by the Accounting Standards Executive Committee of the AmericanInstitute of Certified Public Accountants. During 2005 and 2004, the Companycapitalized costs associated with various software projects totalingapproximately $3.2 million and $1.3 million, respectively. As of January 1,2006 and January 2, 2005, the net book value of capitalized softwareproject costs was approximately $5.6 and $3.4 million, respectively.Software is included in furniture, fixtures and equipment.

Included in construction in progress at January 1,2006 is $1.1 million related to expenditures and capitalized interest on theimplementation costs of the enterprise resource planning (“ERP”) system atUpstate, $1.0 million related to a facility improvement project in Temecula,California and $1.1 million related to a new distribution center in Kankakee,Illinois. The Company estimates completion of these currently underway systemimplementations in the second quarter of 2006.

Propertyand equipment at January 1, 2006 and January 2, 2005 consisted of thefollowing (in thousands):

| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Land, buildings  and improvements          |       | $        | 17,411     |     | $          | 37,128 |   |
| Leasehold  improvements                    |       | 12,130   |       | 10,371   |       |
| Furniture,  fixtures and equipment         |       | 70,337   |       | 76,733   |       |
| Construction in  progress                  |       | 4,888    |       | 2,779    |       |
| Total property and equipment               |       | 104,766  |       | 127,011  |       |
| Accumulated  depreciation and amortization |       | (34,751  |       | (30,124  | )          |
| Property and  equipment, net               |       | $        | 70,015     |     | $          | 96,887 |   |

 

F-9

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Depreciation andamortization expense was $8.3 million, $7.3 million and $6.6 millionin 2005, 2004 and 2003, respectively. During the fourth quarter of 2005, theCompany recorded an impairment loss related to property plant and equipment of$33.3 million (Note 5).

*Goodwill and OtherIntangible Assets*

Goodwill represents the excess of cost over fair valueof the net assets of businesses acquired. Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”)required companies to cease amortizing goodwill and establish a new method fortesting goodwill for impairment on an annual basis or an interim basis if anevent occurs that might reduce the fair value of a reporting unit below itscarrying value. SFAS 142 also requires that an identifiable intangible assetwhich is determined to have an indefinite useful economic life not beamortized, but be tested separately for impairment using a fair value basedapproach.

Thechanges in the carrying amount of goodwill during 2005 and 2004 are summarizedas follows (in thousands):

| ** **                               | ** ** | **Research** | ** ** | **Bioprocessing** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|--------------|------------|-------------------|------------|-----------|------------|
| Balance as of  December 28, 2003    |       | $            | 63,976     |              |       | $         | 29,601     |   |   | $ | 93,577 |   |
| Goodwill acquired                        |       | 134,907      |       |              | 10,933     |      |       | 145,840 |   |
| Acquisition earn-out  payments           |       | —       |       |              | 1,621      |      |       | 1,621 |   |
| Balance as of  January 2, 2005      |       | 198,883      |       |              | 42,155     |      |       | 241,038 |   |
| Goodwill acquired (Note  3)              |       | 6,030        |       |              | —     |      |       | 6,030 |   |
| Acquisition earn-out  payments           |       | —       |       |              | 466        |      |       | 466 |   |
| Purchase accounting  adjustment (Note 3) |       | (7,969       | )          |              | (45        | )         |       | (8,014 | ) |
| Balance as of January 1, 2006       |       | $            | 196,944    |              |       | $         | 42,576     |   |   | $ | 239,520 |   |

 

The Company evaluates the long-lived assets, includingother intangibles and goodwill, of identifiable business activities forimpairment when events or changes in circumstances indicate that the carryingvalue may not be recoverable. The Company tested goodwill and intangible assetswith indefinite useful lives for impairment, utilizing a combination ofvaluation techniques including the expected present value of future cash flows,a market multiple approach, and a comparable transaction approach. The Companycompleted its annual goodwill and indefinite lived intangible assets test, forthe year ended January 1, 2006, on July 3, 2005, as required bySFAS 142 and determined that there was no impairment for fiscal 2005.

Developedproducts, patents and proprietary know-how, customer relationships, and otherintangibles are initially measured based on their fair values and amortizedover their estimated economic lives. The Company does not amortize trademarksunless certain products have been specifically identified for phase out. Thefollowing table sets forth the gross balance and accumulated amortization ofall intangible assets as of January 1, 2006 and January 2, 2005 (inthousands):

| ** **                               | ** ** | **Weighted**      | ** ** | **2005**  | ** ** | **2004**                      | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Average  Life** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** |
| **Finite lived intangible assets:**      |       |              |       |      |       |                          |       |   |   |   |   |   |   |   |   |
| Developed products                       |       | 17.5 years        |       | $         | 29,089     |                          |       | $ | (5,221 | ) |   | $ | 80,670 |   |   | $ | (4,221 | ) |   |
| Patents and proprietary  know-how        |       | 15 years          |       | 63,496    |       |                          | (6,835     | ) |   | 11,362 |   |   | (2,333 | ) |   |
| Customer relationships                   |       | 15.6 years        |       | 20,200    |       |                          | (1,887     | ) |   | 14,700 |   |   | (588 | ) |   |
| Other intangibles                        |       | 6.5 years         |       | 3,707     |       |                          | (1,322     | ) |   | 2,272 |   |   | (1,050 | ) |   |
|                                     |       |              |       | 116,492   |       |                          | (15,265    | ) |   | 109,004 |   |   | (8,192 | ) |   |
| **Indefinite lived intangible  assets:** |       |              |       |      |       |                          |       |   |   |   |   |   |   |   |   |
| Trademarks                               |       |              |       | 18,800    |       |                          | —     |   |   | 18,800 |   |   | — |   |   |
| Total intangible assets                  |       |              |       | $         | 135,292    |                          |       | $ | (15,265 | ) |   | $ | 127,804 |   |   | $ | (8,192 | ) |   |

 

F-10

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The amortization expenseof intangible assets was approximately $7.2 million, $3.8 million and$2.9 million in 2005, 2004 and 2003, respectively. Amortization expense isexpected to be $7.3 million per year through 2009 and $7.1 million in2010.

*Other Assets*

Included in other assetsat January 1, 2006 is $14.5 million in restricted cash placed in escrowagainst the Company’s commitment to purchase two buildings in Temecula,California. On January 3, 2006, the Company disbursed the entire amount ofrestricted cash and completed the acquisition of these buildings.

*Accrued Liabilities*

Accruedliabilities at January 1, 2006 and January 2, 2005 consisted of thefollowing (in thousands):

| **Description**                                           | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Accrued payroll,  bonuses, severance and related benefits |       | $          | 18,803     |     | $          | 11,955   |       |
| Accrued taxes                                             |       | 1,057      |       | 3,067    |       |
| Accrued exiting  costs                                    |       | 5,186      |       | 4,248    |       |
| Accrued royalties                                         |       | 533        |       | 4,278    |       |
| Accrued interest                                          |       | 2,358      |       | 2,104    |       |
| Accrued purchase  of property and equipment               |       | 1,138      |       | —   |       |
| Accrued accounts  payable                                 |       | 2,709      |       | 900      |       |
| Accrued inventory  purchases                              |       | 1,715      |       | 642      |       |
| Deferred revenue                                          |       | 323        |       | 3,270    |       |
| Other                                                     |       | 7,936      |       | 6,872    |       |
|                                                      |       | $          | 41,758     |     | $          | 37,336   |       |

 

*Revenue Recognitionand Deferred Revenue*

The Company generallyrecognizes product revenue when persuasive evidence of an arrangement exists,delivery has occurred, the sales price is fixed or determinable, andcollectibility is probable. In instances where final acceptance of the productis specified by the customer, revenue is deferred until all acceptance criteriahave been met. Cash payments received in advance are recorded as deferredrevenue. In certain situations, the Company permits returns of products, inaccordance with contractual agreements with certain customers, if returned in atimely manner, in good condition, from normal channels of distribution. TheCompany records an allowance for estimated future returns, price concessions, andother discounts based upon an analysis of the Company’s historical pattern ofreturns matched against the sales from the period in which they originated. Theallowance is recognized in the same period revenue is recorded in accordancewith Statement of Financial Accounting Standards No. 48, “RevenueRecognition When Right of Return Exists.” When the Company grants specificcustomer credit for such items, the allowance is reflected as a reduction toaccounts receivable. The Company’s allowance was approximately $1.4 million and$1.0 million at January 1, 2006 and January 2, 2005,respectively.

*Shipping andHandling Costs*

Shipping and handling feescharged to customers are included in net revenues in accordance with EITF 00-10,“Accounting for Shipping and Handling Fees and Costs.” The shipping andhandling costs incurred by the Company are included in “Cost of revenues.”

F-11

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*Research andDevelopment Costs*

Research and developmentcosts are charged to operations as incurred. Research and developmentactivities generally relate to creating new products, improving or creatingvariations of existing products, or modifying existing products to meet newapplications.

*Foreign CurrencyTranslation*

The financial statements of the Company’smanufacturing operations located in the United Kingdom, Australia, and Canadahave been translated into U.S. dollars from their local functional currenciesin accordance with Statement of Finanical Accounting Standards No. 52, “ForeignCurrency Translation” (“SFAS 52”). Under SFAS 52, all assets and liabilitiesare translated at year-end exchange rates. Income statement items aretranslated at average exchange rates for the year. Translation adjustments arenot included in determining net income, but are accumulated and reported as a componentof stockholders’ equity as accumulated other comprehensive income. Realized andunrealized gains and losses, which result from foreign currency translations,are included in “Other expenses, net.” Realized foreign currency gains andlosses were immaterial in all periods presented.

The Company generatessignificant sales outside the United States and is subject to risks generallyassociated with international operations. Our operations in the United Kingdom,Australia and Canada, which accounted for approximately 29.1% of our net salesin 2005, generate certain net sales and incur expenses in foreign currencies.Accordingly, our financial results from international operations may beaffected by fluctuations in currency exchange rates.

*Earnings Per Share*

Basic earnings per share is calculated by dividing netincome by the weighted average number of common shares outstanding during theperiod. The calculation of the Company’s diluted earnings per share is similarto basic earnings per share, except that net income is adjusted by theafter-tax interest expense on convertible indebtedness that is dilutive and theweighted average number of shares includes the dilutive effect of stockoptions, stock awards, convertible indebtedness and similar instruments.

F-12

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Thefollowing table sets forth the calculation of basic and diluted earnings pershare in accordance with SFAS 128 (in thousands, except per share amounts):

| ** **                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                                                   |       |     |       |     |       |     |       |
| Income from continuing operations                                            |       | $        | 816        |     | $          | 17,661   |       | $ | 12,067 |   |
| Income (loss) from discontinued operations                                   |       | 1,883    |       | —   |       | (10,561  | )          |
| Net income                                                                   |       | 2,699    |       | 17,661   |       | 1,506    |       |
| Add back: interest expense on convertible  debentures,   net of income taxes |       | —   |       | 3,320    |       | 1,269    |       |
| Numerator for diluted earnings per share                                     |       | $        | 2,699      |     | $          | 20,981   |       | $ | 2,775 |   |
| Denominator:                                                                 |       |     |       |     |       |     |       |
| Basic earnings  per share—weighted average shares   outstanding         |       | 34,729   |       | 26,148   |       | 24,549   |       |
| Effect of  dilutive securities:                                              |       |     |       |     |       |     |       |
| Stock options                                                                |       | 381      |       | 554      |       | 388      |       |
| Convertible debentures                                                       |       | —   |       | 8,790    |       | 3,174    |       |
| Common stock awards                                                          |       | 85       |       | 33       |       | 23       |       |
| Diluted earnings  per share—weighted average shares outstanding    |       | 35,195   |       | 35,525   |       | 28,134   |       |
| Basic earnings  (loss) per share                                             |       |     |       |     |       |     |       |
| Continued operations                                                         |       | $        | 0.02       |     | $          | 0.68     |       | $ | 0.49 |   |
| Discontinuing operations                                                     |       | 0.06     |       | —   |       | (0.43    | )          |
| Net income                                                                   |       | $        | 0.08       |     | $          | 0.68     |       | $ | 0.06 |   |
| Diluted earnings  (loss) per share                                           |       |     |       |     |       |     |       |
| Continued operations                                                         |       | $        | 0.02       |     | $          | 0.59     |       | $ | 0.47 |   |
| Discontinuing operations                                                     |       | 0.06     |       | —   |       | (0.37    | )          |
| Net income                                                                   |       | $        | 0.08       |     | $          | 0.59     |       | $ | 0.10 |   |

 

Thefollowing shares issuable under stock option agreements and the Debentures wereexcluded from the calculation of diluted earnings per share for the periodspresented because either the option price exceeded the average market price forthe Company’s stock or the conversion of the Debentures would have been antidilutive(in thousands):

| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Stock options          |       | 40       |       |     | 300        |     |       |   | 100 |   |   |
| Convertible debentures |       | 8,790    |       |     | —     |     |       |   | — |   |   |

 

*Stock-BasedCompensation Plan*

The Company has a stock-based compensation plan,which is described more fully in Note 7. The Company accounts for thisplan under the recognition and measurement principles of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. Excluding amortization of restricted stock andcompensation expense related to performance shares (Note 7), no other stock-basedemployee compensation cost was reflected in net income as all options grantedunder these plans had an exercise price equal to the market value of theunderlying common stock on the date of grant.

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Thefollowing table illustrates the effect on net income and earnings (loss) pershare if the Company had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” (“SFAS 123”) to stock-basedemployee compensation (in thousands, except per share amounts):

| ** **                                                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income as  reported                                                                                                                       |       | $        | 2,699      |     | $          | 17,661   |       | $ | 1,506 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                  |       | 666      |       | 163      |       | 226      |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effects |       | (2,950   | )          | (2,111   | )          | (2,708   | )          |
| Pro forma net  income (loss)                                                                                                                  |       | $        | 415        |     | $          | 15,713   |       | $ | (976 | ) |
| Earnings (loss) per share:                                                                                                                    |       |     |       |     |       |     |       |
| Basic—as reported                                                                                                                        |       | $        | 0.08       |     | $          | 0.68     |       | $ | 0.06 |   |
| Basic—pro forma                                                                                                                          |       | $        | 0.01       |     | $          | 0.60     |       | $ | (0.04 | ) |
| Diluted—as reported                                                                                                                      |       | $        | 0.08       |     | $          | 0.59     |       | $ | 0.10 |   |
| Diluted—pro forma                                                                                                                        |       | $        | 0.01       |     | $          | 0.54     |       | $ | (0.04 | ) |

 

Convertible debentures are antidilutive and excludedfrom the pro forma diluted earnings per share calculation for the year ended January 1,2006.

UnderSFAS 123, the fair value of stock-based awards is calculated throughthe use of option-pricing models, even though such models were developedto estimate the fair value of freely tradable, fully transferable optionswithout vesting restrictions, which differ significantly from the Company’sstock option grants. These models also require subjective assumptions,including future stock price volatility and expected lives of each optiongrant. The fair value for each option grant was estimated on the grant dateusing the Lattice option-pricing model for grants made during 2005 and2004 and the Black-Scholes option-pricing model for all grants madeprior to 2004 using the following assumptions:

| ** **                                             | ** ** | **2005**       | ** ** | **2004**       | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------------|------------|----------------|------------|----------|------------|
| Expected life  (weighted-average in years)             |       | 4.4            |       | 4.7            |       | 4.3      |       |
| Dividend yield                                         |       | 0%             |       | 0%             |       | 0%       |       |
| Expected stock  price volatility                       |       | 29%  to 37%    |       | 25%  to 37%    |       | 65%      |       |
| Risk-free interest  rates (weighted-average   in 2003) |       | 3.35% to 3.85% |       | 1.31% to 4.18% |       | 2.06%    |       |

 

Usingthese assumptions, the fair value of options calculated under the Latticemethod ranged from $5.72 to $7.68 per share. The weighted average fair valueper share of options granted in 2003 calculated under the Black-Scholesmethod was $6.10. Had the Black-Scholes method been used to compute thefiscal 2004 and 2005 stock-based compensation expense, the fiscal 2004and 2005 pro forma net income would not have been materially different.

*Income Taxes*

The Company accounts forincome taxes under the provisions of Financial Accounting Standards BoardStatement No. 109, “Accounting for Income Taxes” (“SFAS 109”). UnderSFAS 109, the Company recognizes liabilities or assets for the deferredtax consequences of temporary differences between the tax basis of assets andliabilities and their reported amounts in the financial statements. Thesedifferences will result in taxable or deductible amounts in future periods whenthe reported amounts are recovered or 

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settled,using enacted tax rates in effect for the year in which the differences areexpected to reverse. The Company’s effective tax rate differs from thestatutory rate primarily as a result of tax credits and the extraterritorialincome tax regime. Because the Company operates in a number of domestic andforeign jurisdictions, the statutory rates within these various jurisdictionsare considered in determining the overall effective tax rate.

*ComprehensiveIncome*

In accordance withStatement of Financial Accounting Standards No. 130, “ReportingComprehensive Income” (“SFAS 130”) comprehensive income (loss) is reportedon the Consolidated Statements of Stockholders’ Equity and accumulated othercomprehensive income (loss) on the Consolidated Balance Sheets. Othercomprehensive income includes certain changes to stockholders’ equity that areexcluded from net income and includes the effect of foreign currencytranslation adjustments of the Company’s foreign operations.

*Statement of CashFlows*

During 2005, the Companychanged the presentation of cash flows from discontinued operations to presentseparate disclosure of the cash flows from operating, investing, and financingactivities.

*Recent AccountingPronouncements*

In December 2004, the Financial AccountingStandards Board (the “FASB”) issued Statement of Financial Accounting StandardsNo. 123R (revised 2004) “Share-Based Payment,” (“SFAS 123R”) which is arevision or SFAS No 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).SFAS 123R supersedes APB 25, “Accounting for Stock issued to Employees,” andamends SFAS No. 95, “Statement of Cash Flows.” The approach in SFAS 123Ris generally similar to the approach described in SFAS 123. However, SFAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the earnings statements based on their fairvalues. Pro forma disclosure will no longer be an alternative.

We adopted SFAS 123R as of January 2, 2006 usingthe modified prospective method. Under this transition method, compensationcost is recognized beginning with the effective date (a) based on therequirements of SFAS 123R for all share based payments granted after theeffective date and (b) based on the requirements of SFAS 123 for allawards granted to employees prior to the effective date of SFAS 123R thatremain unvested on the effective date. As permitted by SFAS 123, through January 1,2006 we accounted for share based payments to employees using APB 25’sintrinsic value method and, as such, generally have not recognized compensationcost for employee stock options. We estimate that pretax compensation expensefor stock options will result in an additional compensation expense ofapproximately $3.3 million in 2006 excluding the effect of any grants issued in2006.

SFAS 123R also requires the benefits of tax deductionsin excess of recognized compensation cost to be reported as a financing cashflow, rather than as an operating cash flow as previously required Thisrequirement will reduce net operating cash flows and increase net financingcash flows. While we can not estimate what those amounts will be in the future(because they depend on, among other things, when employees exercise stockoptions), the amounts of operating cash flows recognized in prior periods forsuch excess tax deductions were $4.1 million, $1.2 million and $0.6 million in2005, 2004 and 2003, respectively.

In November 2004, the FASB issued SFAS No. 151“Inventory Costs, an amendment of Accounting Research Bulletin No. 43,Chapter 4” (“SFAS 151”). SFAS 151 requires that abnormal amounts ofidle facility expense, freight, handling costs and spoilage be recognized ascurrent period charges, and it requires the allocation of fixed productionoverhead costs to the costs of conversion based upon the 

F-15

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normal capacity of theproduction facility. SFAS 151 is effective for fiscal years beginningafter June 14, 2005. As required by SFAS 151, the Company adopted this newaccounting standard on January 2, 2006. The adoption of SFAS 151 is notexpected to have a material impact on the Company’s financial statements.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 153 (“SFAS 153”), “Exchanges ofNon-monetary Assets—an amendment of APB Opinion No. 29.” SFAS 153addresses the measurement of exchanges of non-monetary assets. It eliminatesthe exception from fair value measurement for non-monetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29 “Accountingfor Non-monetary Transactions” and replaces it with an exception for exchangesthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. As required by SFAS 153, the Companyadopted this new accounting standard effective July 1, 2005. The adoptionof SFAS 153 did not have a material impact on the Company’s financialstatements.

In March 2005, the FASB Issued FIN 47, “Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143, Accounting for Asset Retirement Obligations.” FIN 47clarifies that SFAS 143 requires accrual of the fair value of legally requiredasset retirement obligations if sufficient information exists to reasonablyestimate the fair value. The Company adopted this new accounting standardduring the fourth quarter of 2005. See Note 5 for the effect of FIN 47 on theCompany’s financial statements.

In June 2005, theFASB issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”),“Accounting Changes and Error Corrections.” SFAS 154 changes the requirementsfor the accounting for and reporting of a change in accounting principle. ThisStatement requires retrospective application to prior periods’ financial statementsof a voluntary change in accounting principle unless it is impracticable. Inaddition, this Statement requires that a change in depreciation, amortization,or depletion for long-lived, non-financial assets be accounted for as a changein accounting estimate effected by a change in accounting principle. This newaccounting standard is effective January 1, 2006. The Company will applythe provision of SFAS 154 when applicable.

**3.   ACQUISITIONS**

*Specialty Media*

On February 22, 2005, Chemicon acquired SpecialtyMedia, a division of Cell & Molecular Technologies, Inc., whollyowned by Sentigen Holding Corporation. Specialty Media, based in Phillipsburg,New Jersey, develops and supplies a variety of specialty stem cell culturemedia formulations and supplements, cells and research reagent tools to thelife sciences industry. Serologicals acquired all of the assets of SpecialtyMedia for $6.5 million in cash and assumption of certain liabilities. TheSpecialty Media acquisition provides a number of important strategic productofferings for our Research segment; most significantly, its products extendChemicon’s stem cell product portfolio.

Thecomponents of the purchase price were (in thousands):

| Cash paid                  |   | $   | 6,500  |   |
|----------------------------|--------|-----|--------|--------|
| Direct costs               |   | 84  |   |
| Mortgage debt  assumed     |   | 245 |   |
| Other liabilities  assumed |   | 340 |   |
|                       |   | $   | 7,169  |   |

 

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TheCompany has completed its valuation of the fair market value of the underlyingassets acquired and the allocation of assets acquired was as follows (inthousands):

| ** **                         | ** ** | ** ** | ** ** | **Weighted Average  Useful Life** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Current assets                     |       | $          | 630        |                                        |       |   |   |   |
| Property and equipment             |       | 509        |       |                                        |       |   |   |
| Intangibles, principally  goodwill |       | 6,030      |       |                                        | Indefinite |   |   |
|                               |       | $7,169     |       |                                        |       |   |   |
|                                    |            |            |            |                                             |            |  |  |  |

 

The Company believes the depreciation expense on thefair value assigned to property and equipment and the amortization ofintangible assets and goodwill will be deductible for federal income taxpurposes.

The results of SpecialtyMedia were not material to the results of operations for the twelve monthsended January 1, 2006 or January 2, 2005; accordingly, no pro formadisclosure is presented.

*Acquisition ofUpstate Group, Inc.*

Effective October 1, 2004, Serologicals completedthe acquisition of Upstate, a privately held company headquartered in Charlottesville,Virginia with operations in the United States and Scotland. Upstate is aleading supplier of innovative cell signaling products, technologies, platformsand services. Upstate provides pharmaceutical and biotechnology companies,universities and government agencies with advanced tools to accelerate lifescience research and drug discovery. The acquisition extended and expanded theCompany’s strategic position in the research market and provided an entry intothe growing market for drug screening and target validation services. Theresults of operations of Upstate have been included in the Research segmentsince the effective date of acquisition.

The Company acquired 100% of the outstanding preferredand common shares of Upstate for total consideration of $203.3 million.The acquisition was financed through a combination of Serologicals commonstock, cash on hand and proceeds from a new credit agreement. In addition,Serologicals paid approximately $4.0 million in related transaction costs,primarily for investment banking and professional services in connection withthe acquisition.

The Company issued approximately 4.3 millionunregistered shares of its common stock at an average price of $23.6539 pershare, based on the average trading price on NASDAQ during the 20 trading daysbetween September 14, 2004 and October 11, 2004, to stockholders ofUpstate. The remaining purchase price was paid through a combination of cash onhand and proceeds from an $80.0 million term loan available under a $125.0 millioncredit agreement. The term loan was subsequently repaid in December 2004from proceeds received from a secondary public offering of common stock. (Notes6 and 9).

The excess of purchase price over the fair value ofassets acquired and liabilities assumed was $135.1 million, and has beenrecorded as goodwill. None of the goodwill related to the acquisition isexpected to be deductible for tax purposes.

During 2005, the Companyfinalized its evaluation of the purchase price allocation based on the fairmarket value of the assets and liabilities assumed as of the date of purchase.The components of the purchase price are presented below (in thousands):

| ** **                                 | ** ** | **As Originally  Reported** | ** ** | **Adjustments** | ** ** | **Final Purchase   Price** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-----------------|------------|--------------------------------------|------------|
| Stock issued and cash paid to shareholders |       |                             | $          | 203,325         |       |                                 |       | $ | — |   |   |   | $ | 203,325 |   |   |
| Direct costs of acquisition                |       |                             | 3,998      |            |       |                                 | —     |   |   |   | 3,998 |   |   |
| Liabilities assumed                        |       |                             | 34,781     |            |       |                                 | (1,308     | ) |   |   | 33,473 |   |   |
| Total consideration and acquisition costs  |       |                             | $          | 242,104         |       |                                 |       | $ | (1,308 | ) |   |   | $ | 240,796 |   |   |

 

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During2005, the Company completed its analysis of the fair market value at the dateof acquisition of the finished goods inventory, certain intangible assets,deferred income taxes and preacquisition liabilities of Upstate, resulting in anet decrease in goodwill of $8.0 million. The adjusted allocation of purchaseprice to the underlying assets is as follows (in thousands):

| ** **                                     | ** ** | **As Originally   Reported** | ** ** | **Adjustments** | ** ** | **Adjusted   Allocation** | ** ** | **Intangible Weighted  Average Useful Life** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|-----------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| Cash and cash  equivalents                     |       |                                   | $          | 1,238           |       |                           |       | $                                                           | —     |   |   | $ | 1,238 |   |   |   |
| Accounts  receivable, net                      |       |                                   | 6,403      |            |       |                           | —     |                                                        |       | 6,403 |   |   |   |
| Inventory                                      |       |                                   | 9,420      |            |       |                           | 2,361      |                                                        |       | 11,781 |   |   |   |
| Other current  assets                          |       |                                   | 1,907      |            |       |                           | —     |                                                        |       | 1,907 |   |   |   |
| Property and  equipment                        |       |                                   | 9,515      |            |       |                           | —     |                                                        |       | 9,515 |   |   |   |
| Developed  products                            |       |                                   | 53,200     |            |       |                           | (1,200     | )                                                           |       | 52,000 |   | 17  years |   |
| Trademarks and  trade name                     |       |                                   | 9,800      |            |       |                           | —     |                                                        |       | 9,800 |   | Indefinite |   |
| Other intangible  assets                       |       |                                   | 12,200     |            |       |                           | 5,500      |                                                        |       | 17,700 |   | 15  years |   |
| Purchased  in-process research and development |       |                                   | 3,263      |            |       |                           | —     |                                                        |       | 3,263 |   | Expensed  in 2004 |   |
| Goodwill                                       |       |                                   | 135,158    |            |       |                           | (7,969     | )                                                           |       | 127,189 |   | Indefinite |   |
|                                           |       |                                   | $          | 242,104         |       |                           |       | $                                                           | (1,308     | ) |   | $ | 240,796 |   |   |   |

 

The Company is continuing its plan of integration ofcertain activities at Upstate. These activities are accounted for in accordancewith EITF 95-3, “Recognition of Liabilities in Connection with a PurchaseBusiness Combination” (“EITF 95-3”). They primarily include the closureof facilities, the abandonment or redeployment of equipment, employeeterminations and other activities in the United States. Such costs have beenrecognized as liabilities assumed in the acquisition. During 2005, the Companyrecorded a $2.2 million liability as a result of severance costs andrelocation costs related to the acquisition with a corresponding adjustment togoodwill and $0.2 million in accrued retention bonuses with the correspondingadjustment to current period expense. At January 1, 2006, the Company had$2.5 million in accrued expenses and other current liabilities in theaccompanying consolidated balance sheet related to this integration.

Changesin accrued acquisition and business integration costs for all periods presentedsubsequent to the acquisition date are as follows (in thousands):

| ** **                     | ** ** | **Original  amount   recorded** | ** ** | **Prior year  amounts  paid** | ** ** | **Balance at  January 2,   2005** | ** ** | **Additional  accruals** | ** ** | **Amounts  paid** | ** ** | **Balance at  January 1,   2006** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|-------------------|------------|--------------------------------------------------|------------|
| Severance and  relocation cost |       |                                 | $          | 293                                |       |                                             |       | $                        | (185       | )                 |       |                                             | $          | 108 |   |   |   | $ | 1,916 |   |   | $ | (1,014 | ) |   | $ | 1,010 |   |   |
| Facility closure               |       |                                 | 1,470      |                               |       |                                             | (10        | )                        |       |              | 1,460      |                                             |       |   | 136 |   |   | (430 | ) |   | 1,166 |   |   |
| Other                          |       |                                 | 530        |                               |       |                                             | —     |                     |       |              | 530        |                                             |       |   | 121 |   |   | (375 | ) |   | 276 |   |   |
|                           |       |                                 | $          | 2,293                              |       |                                             |       | $                        | (195       | )                 |       |                                             | $          | 2,098 |   |   |   | $ | 2,173 |   |   | $ | (1,819 | ) |   | $ | 2,452 |   |   |

 

*Acquisition of ChemiconInternational, Inc.*

Effective April 1,2003, Serologicals completed the acquisition of 100% of the outstanding commonstock of Chemicon. During the first quarter of 2004, the Company completed itsevaluation of a restructuring of certain components of Chemicon’s operations,which was contemplated at the date of acquisition. As a result, the Companyaccrued $1.8 million related to lease terminations and site relocationcosts. This amount was recorded to goodwill in the first quarter of 2004 as anadjustment to the purchase price of Chemicon in accordance with EITF 95-3.At January 1, 2006, the Company had $1.7 million remaining in accruedexpenses and other current liabilities in the accompanying consolidated balancesheet 

F-18

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relatedto this integration. The Company expects to complete the activities associatedwith this restructuring in 2006. Activity of accrued acquisition and businessintegration costs for all periods presented subsequent to the acquisition dateis as follows (in thousands):

| ** **       | ** ** | **Original   amount   recorded** | ** ** | **Prior year   amounts   paid** | ** ** | **Balance at   January 2,   2005** | ** ** | **Amounts   paid** | ** ** | **Balance at   January 1,   2006** | ** ** |
|------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|
| Facility closure |       |                                       | $          | 1,250                                          |       |                                                   |       | $                       | (46        | )                                                      |       |   | $ | 1,204 |   |   |   | $ | — |   |   |   | $ | 1,204 |   |   |
| Other            |       |                                       | 503        |                                           |       |                                                   | (46        | )                       |       |                                                   | 457        |   |   |   | (3 | ) |   |   | 454 |   |   |
|             |       |                                       | $          | 1,753                                          |       |                                                   |       | $                       | (92        | )                                                      |       |   | $ | 1,661 |   |   |   | $ | (3 | ) |   |   | $ | 1,658 |   |   |

 

**4.   DISCONTINUED OPERATIONS**

On July 10, 2003, the Company announced itsintention to exit the therapeutic plasma business, which consisted of a networkof ten plasma collection centers and a central testing laboratory. Thedivestiture was completed with the sale of these operations on January 15,2004, effective December 28, 2003, with Life Therapeutics, a company basedin Sydney, Australia (the “Buyer”). Under the provisions of Statement ofFinancial Accounting Standards No. 144, “Impairment of Long-Lived Assetsand Discontinued Operations” (“SFAS 144”) this business was classified asa discontinued operation. The results of operations for this business have beenclassified as discontinued operations in all periods presented.

In October 2005,the Company received $3.1 million as settlement of a contractual claim with acustomer of the Company’s former therapeutic plasma business. The payment, netof income taxes and collection expenses totaling approximately $1.2 million, isincluded in “Income from discontinued operations” in the accompanyingconsolidated income statement for the twelve months ended January 1, 2006.During 2004 the Company did not incur any income or expenses as a result ofdiscontinued operations.The following table containsresults of operations from discontinued operations for the twelve months ended December 28,2003 (in thousands):

| ** **                           | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|
| Net revenues                         |       | $        | 29,736     |   |
| Cost of revenues                     |       | 26,676   |       |
| Gross profit                         |       | 3,060    |       |
| Selling, general  and administrative |       | 3,772    |       |
| Research and  development            |       | 550      |       |
| Amortization of  intangibles         |       | 13       |       |
| Impairment loss                      |       | 12,554   |       |
| Special charges                      |       | 1,657    |       |
| Operating loss                       |       | (15,486  | )          |
| Other expenses,  net                 |       | (110     | )          |
| Loss before taxes                    |       | (15,596  | )          |
| Income tax  benefit                  |       | 5,035    |       |
| Loss from discontinued  operations   |       | $        | (10,561    | ) |

 

During 2003, the Company recorded an impairment lossof $12.6 million, based on the total consideration received for thistransaction, which is included as a component of “Loss from discontinuedoperations.” No additional gain or loss was recorded in 2004 at the timeof closing.

Part of the sale proceeds consisted of securedpromissory notes, which were recorded at their estimated net realizable valueof $7.9 million. In December 2004, the Company renegotiated the termsof the promissory notes, combining them into one secured promissory note (“newnote”) with a stated face value of $7.8 million. The new note receivablewas payable in variable quarterly installments through 

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December 2007. TheCompany recorded an imputed interest charge on this new note in December 2004because the stated interest rate on the new note was considered below market.

In September 2005, the Buyer prepaid the entireremaining outstanding principal balance on the note. Under the terms of thetransaction, the remaining debt balance of $6.8 million was settled for $6.0million in cash and a royalty-bearing, non-exclusive commercial license to apurification technology. The amount of the discount, less unamortized imputedinterest income, was reported as a $0.5 million charge and is included as “Otherexpense, net” in the accompanying consolidated income statement for the yearended January 1, 2006.

The current portion, $1.9 million, and long termportion, $5.3 million, of the note were included in “Other current assets” and “Otherassets”, respectively, in the January 2, 2005 consolidated balance sheet.

The Company has guaranteedreal estate lease obligations totaling approximately $3.3 million relatedto the therapeutic plasma business. If the buyer defaults on the leasepayments, the Company would be required to assume these leases. The Company hasaccrued a stand ready obligation of $0.1 million in accordance with FASBInterpretation No. 45, “Guarantor Accounting and Disclosure Requirementfor Guarantees” for these guarantees.

**5.   IMPAIRMENT AND EXITING COSTS**

*2005*

As a result of the Company’s ongoing plantconsolidation and rationalization initiatives, in January 2006 the Companyannounced a plan to rationalize, integrate and align the resources of theCompany’s Bioprocessing segment. This rationalization program includesworkforce reduction, impairment of certain facilities, and other charges. Theexpected completion of the program is anticipated for late 2006.

As a result of the rationalization plan, the Companydecided to close the Celliance manufacturing facilities in Toronto, Ontario,Canada and to dispose of the plant assets, machinery and equipment at thefacilities. The Company expects that the final sale and disposal of the assetswill be completed in 2006. In connection with the plan of disposal, the Companydetermined that the carrying values of some of the underlying assets exceededtheir fair values. Consequently the Company recorded an impairment loss of$16.0 million, which represents the amounts by which the carrying values ofthese assets exceeded their estimated fair values determined by their estimatedfuture discounted cash flows. The impairment loss is included in the “Impairmentand exiting costs” line item in the accompanying consolidated income statementfor 2005. The remaining value of the impaired assets is included in the “Propertyand equipment, net” line item in the accompanying consolidated balance sheetfor the period ended January 1, 2006 since the operations will continueuntil at least mid 2006.

In January 2006, management committed to a planto not commence operations at its manufacturing facility in Lawrence, Kansasand to dispose of the plant assets, machinery and equipment at this facility.The Company expects that the final sale and disposal will be completed in 2006.In connection with the plan of disposal, the Company determined that thecarrying values of some of the underlying assets exceeded their fair values.Consequently the Company recorded an impairment loss of $17.1 million, which representsthe excess of the carrying values of the assets over their fair values, lesscost to sell. The impairment loss is included in the “Impairment and exitingcosts” line item in the accompanying consolidated income statement for 2005.The remaining value of impaired assets is included in the “Property andequipment, net” line item in the accompanying consolidated balance sheet forthe period ended January 1, 2006.

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In conjunction with the decision to close thesefacilities the Company identified an asset retirement cost of $1.2 million.Under the provisions of FIN 47 and SFAS 143 the entire amount of identifiedasset retirement costs is included in “Impairment and exiting costs” and theassociated liability of $1.2 million is included in “Accrued liabilities” inthe accompanying consolidated financial statements for the period ended January 1,2006. None of the recorded liability was settled in the period ended January 1,2006.

During 2005, the Company incurred certain otherimpairment charges related to the disposition of certain other assets in theBioprocessing segment of $0.2 million.

The rationalization program resulted in certainnon-impairment related costs expected to be incurred primarily for workforcereduction, abandonment of excess facilities relating to lease terminations,inventory write-off and miscellaneous costs.

Asummary of the impairment and exiting costs recognized for the year ended January 1,2006 are as follows (in thousands):

| ** **                                  | ** ** | **Impairment** | ** ** | **Workforce   Reduction** | ** ** | **Lease   Termination  Costs** | ** ** | **Other Exit  Costs** | ** ** | **Subtotal** | ** ** | **Inventory  Write-off** | ** ** | **Grand  Total** | ** ** |
|---------------------------------------------|------------|----------------|------------|--------------------------------|------------|-------------------------------------|------------|----------------------------|------------|--------------|------------|--------------------------|------------|------------------|------------|
| Amounts expensed in 2005                    |       |           | $          | 33,348                         |       |                                |       | $                          | 1,016      |         |       |                     | $          | 946              |       |   |   | $ | 2,715 |   |   |   | $ | 38,025 |   |   |   | $ | 1,336 |   |   | $ | 39,361 |   |
| Additional amounts  expected to be incurred |       |           | —     |                           |       |                                | $          | 1,393                      |       |         |       | $                        | 150        |             |       |   | $ | 80 |   |   |   | $ | 1,623 |   |   |   | $ | — |   |   | $ | 1,623 |   |

 

At January 1,2006, the accrued liability associated with the exiting plan consisted of thefollowing (in thousands):

| ** **                                   | ** ** | **Impairment** | ** ** | **Workforce  Reduction** | ** ** | **Lease  Termination  Costs** | ** ** | **Other Exit   Costs** | ** ** | **Subtotal** | ** ** | **Inventory  Write-off** | ** ** | **Grand   Total** | ** ** |
|----------------------------------------------|------------|----------------|------------|--------------------------|------------|-------------------------------|------------|----------------------------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|
| Charges in 2005                              |       |           | $          | 33,348                   |       |                          |       | $                                | 1,016      |         |       |                     | $          | 946                    |       |   |   | $ | 2,715 |   |   |   | $ | 38,025 |   |   |   | $ | 1,336 |   |   | $ | 39,361 |   |
| Payments and non-cash charges  in 2005       |       |           | (32,098    | )                        |       |                          | —     |                             |       |         | (741       | )                        |       |                   | —     |   |   |   | (32,839 | ) |   |   | (1,336 | ) |   | (34,175 | ) |
| Accrued liability  at   January 1, 2006 |       |           | $          | 1,250                    |       |                          |       | $                                | 1,016      |         |       |                     | $          | 205                    |       |   |   | $ | 2,715 |   |   |   | $ | 5,186 |   |   |   | $ | — |   |   | $ | 5,186 |   |

 

The remaining accruals at January 1, 2006 of $5.2million are expected to be paid through December 31, 2006.

The workforce reduction, impairment, lease terminationand other exit costs are included in “Impairment and exiting costs” in theaccompanying consolidated income statement. Inventory write off costs areincluded in “Costs of revenues” in the accompanying consolidated incomestatement. All impairment and exiting costs discussed above relate to theBioprocessing segment.

During 2005, the Companyincurred certain other employee termination costs related to a closure of itsLake Placid plant included in the Research segment of $1.4 million, of which$0.9 million is included in “Cost of revenues” and $0.5 million in “Selling,general and administrative” expenses in the January 1, 2006 consolidatedincome statement. None of these costs were paid in 2005 and the entire amountof accrued liabilities of $1.4 million associated with the closure of the LakePlacid plant is included in “Accrued liabilities” in the accompanyingconsolidated balance sheet as of January 1, 2006.

*2003*

During 2003, the Companytransferred the responsibility for manufacturing and distribution of researchproducts produced at a Maryland facility to Chemicon. The Company reduced itsworkforce at various locations and recorded $2.8 million in impairment andexiting costs. The components of these charges included approximately$0.6 million for employee severance, $0.8 million related to the 

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impairmentof certain long-lived assets at Gaithersburg, Maryland, a charge of$0.9 million for a temporary plant shutdown in Toronto due to a Bovine SpongiformEncephalopathy scare in Canada and $0.5 million of other miscellaneouscosts.

**6.**   STOCKHOLDERS’EQUITY

*Preferred Stock*

Under the terms of itsamended and restated articles of incorporation, the Company is authorized toissue 1,000,000 shares of Preferred Stock that may contain such preferences,rights and restrictions as may be determined by the Company’s Board ofDirectors. There is no preferred stock outstanding.

*Common Stock*

On May 11, 2005, the Company’s shareholdersapproved an amendment to Article Four of the Company’s Amended andRestated Certificate of Incorporation that increased the number of authorizedshares of Common Stock from 50,000,000 shares to 115,000,000 shares.

In December 2004, the Company completed a publicequity offering in which 4.8 million shares of common stock were sold fora price of $22.80 per share. The net proceeds received from the sale wereapproximately $104.7 million after deducting underwriting discounts,commissions and other direct issuance costs. The Company used a portion of theproceeds to retire the $80.0 million term loan used to complete theUpstate purchase.

In November 2004, the Company completed theregistration of the 4.3 million shares of its common stock issued in theUpstate acquisition under the terms of a registration rights agreement with theselling shareholders of Upstate.

In June 2004, theCompany completed the registration of approximately 8.8 million shares ofits common stock under the terms of its Debentures (Note 8). TheDebentures are convertible into shares at an initial rate of 67.6133 shares ofcommon stock per $1,000 principal amount of the Debentures. In January 2004,the Debentures became convertible (Notes 2 and 8).

*Common StockRepurchases*

On June 10, 2005 theCompany announced that its Board of Directors authorized a stock repurchaseprogram to repurchase up to 2.0 million shares of the Company’s common stockover the next three years ending in June 2008. The program is intended tobe implemented through purchases made from time to time in the open market orthrough private transactions in accordance with applicable securities laws. Thetiming, pricing and size of purchases will depend on market conditions,prevailing stock prices and other considerations. During 2005, the Company repurchasedapproximately 1.2 million shares of common stock for $23.1 million. Prior to2005, the Company acquired 3.3 million shares of common stock at anaggregate cost of approximately $20.0 million. The Company recordstreasury shares at cost. The purchase of the shares was funded primarilythrough cash provided by operating activities.

*Stockholder RightsPlan*

On July 26, 1999, the Board of Directors adopteda stockholder rights plan, pursuant to which one preferred stock purchase right(a “Right”) was distributed for each outstanding share of common stock held ofrecord on August 25, 1999. Each Right represents a right to purchase,under certain circumstances, one one-thousandth ( 1¤1000) of a share of a new series ofpreferred stock at an exercise price of $45.00. If any person or group acquires15% or more of the common stock of the Company (except in transactions approvedby the Board of Directors of the Company in advance), each Right will thenentitle its holder, other than the person or group owning 15% or such otherpersons or groups, to acquire, at the exercise 

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price, shares of theCompany’s common stock with a market value equal to twice the exercise price.The Company may elect, however, to exchange a newly issued share of the Company’scommon stock for each Right. If any person or group owns 15% or more of theCompany’s common stock, and the Company is acquired in a merger or otherbusiness combination, or if 50% of its earning power or assets are sold, eachRight will entitle its holder, other than the person or group owning 15%, toacquire, at the exercise price, shares of the acquiring company’s common stockwith a market value of twice the exercise price.

Persons owning 15% or moreof Company’s common stock on the date the plan was adopted were exempt, so longas they do not acquire an additional number of shares greater than 2% of theoutstanding shares, other than in a transaction approved by the Board ofDirectors of the Company in advance. The Rights expire on August 2, 2009.

*Common Shares Reservedfor Issuance*

Sharesof common stock reserved for issuance at January 1, 2006 and January 2,2005 consisted of the following (in thousands):

| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Various stock  option plans    |       | 10,131   |       | 3,746    |       |
| Employee stock  purchase plans |       | 308      |       | 456      |       |
| Convertible  debentures        |       | 8,790    |       | 8,790    |       |
|                           |       | 19,229   |       | 12,992   |       |

 

**7.   STOCK COMPENSATION PLANS**

*SerologicalsCorporation 2005 Incentive Plan*

On May 11, 2005, the Company’s shareholdersapproved the Serologicals Corporation 2005 Incentive Plan (the “2005 IncentivePlan”), under which 10,000,000 shares of Common Stock are reserved forissuance. The 2005 Incentive Plan provides specific limitations on the size ofgrants that any one participant in the 2005 Incentive Plan may be granted.Pursuant to the 2005 Incentive Plan, the Committee is authorized to issueawards consisting of stock options, deferred stock units, performance shareunits, restricted stock, restricted stock units, stock appreciation rights (“SARs”)and other stock-based awards and cash payments.

The exercise price of stock options is the fair marketvalue of the common stock on the date of grant. Options granted in 2005 underthe 2005 Incentive Plan vest ratably over a period of four years and have termsof seven years. Vested options held by terminated employees allow for exerciseperiods of three months following termination. As of January 1, 2006,options to purchase approximately 0.6 million shares were outstandingunder the 2005 Incentive Plan, none of which were exercisable.

Under the 2005 Incentive Plan the Company grantedperformance shares to certain employees. The vesting of performance shares isbased on achieving certain performance targets over the performance periodending December 31, 2006. Included in net income for the year ended January 1,2006 is $0.3 million of compensation expense net of tax related toperformance shares.

The 2005 Incentive Planreplaced the Serologicals Corporation Stock Incentive Plan, which was approvedby shareholders on May 8, 2001 (the “2001 Incentive Plan”) and isdescribed in further detail below. The 2001 Incentive Plan automaticallyterminated as of the date the shareholders approved the 2005 Incentive Plan,except that such termination did not affect any grants or awards outstandingunder the 2001 Incentive Plan or prior plans. Shares previously reserved forissuance under the 2001 Incentive Plan that remained available for grants underthe 2001 Incentive Plan and any shares subject to awards 

F-23

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underthe 2001 Incentive Plan that subsequently are forfeited, cancelled or expireunexercised are available for issuance under the 2005 Incentive Plan.

*2001 Incentive Plan*

The Company’s 2001Incentive Plan was replaced by the 2005 Incentive Plan described above. Uponapproval, the 2001 Incentive Plan replaced prior plans described in furtherdetail below. The exercise price of the options is the fair market value of thecommon stock on the date of grant. Options granted in 2004, 2003 and 2002 underthe 2001 Incentive Plan vest ratably over a period of one year for directorsand four years for employees, and have terms of six years. Vested options heldby terminated employees allow for exercise periods of three months followingtermination. As of January 1, 2006, options to purchase approximately1.6 million shares were outstanding under the 2001 Incentive Plan,approximately 0.8 million of which were exercisable. No further grantswill be issued under the 2001 Incentive Plan.

*Other StockCompensation Plans*

The Company’s SecondAmended and Restated 1994 Omnibus Incentive Plan, as Amended and the Restated1995 Non-Employee Directors’ Stock Option Plan, as Amended  were replaced by the 2001 Incentive Plan. Asof January 1, 2006, an immaterial number of options outstanding and/orexercisable was outstanding under these plans.

*Stock OptionActivity*

Thefollowing table summarizes the activity for all stock options and performanceshares outstanding (shares in thousands):

| ** **                          | ** ** | **2005**   | ** ** | **2004**      | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Outstanding at  beginning of year   |       |       | 2,560      |          |       |       | $          | 15.31 |   |   |   | 2,395 |   |   |   | $ | 13.28 |   |   |   | 2,249 |   |   |   | $ | 13.46 |   |   |
| Granted                             |       |       | 788        |          |       |       | 17.25      |   |   |   | 960 |   |   |   | 19.33 |   |   |   | 632 |   |   |   | 11.71 |   |   |
| Exercised                           |       |       | (652       | )             |       |       | 9.63       |   |   |   | (473 | ) |   |   | 8.42 |   |   |   | (265 | ) |   |   | 7.09 |   |   |
| Forfeited or  expired               |       |       | (270       | )             |       |       | 20.95      |   |   |   | (321 | ) |   |   | 22.47 |   |   |   | (222 | ) |   |   | 17.97 |   |   |
| Outstanding at  end of year         |       |       | 2,426      |          |       |       | 16.83      |   |   |   | 2,561 |   |   |   | 15.31 |   |   |   | 2,394 |   |   |   | 13.28 |   |   |
| Options exercisable at  end of year |       |       | 940        |          |       |       | 16.34      |   |   |   | 1,176 |   |   |   | 12.81 |   |   |   | 1,317 |   |   |   | 13.58 |   |   |

 

Thefollowing table summarizes information about all stock options and performanceshares outstanding and exercisable at January 1, 2006 (shares inthousands):

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Life (years)** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $0.00    - $5.00                  |       |                         | 200        |                         |       |   | 5.3 |   |   |   | $ | 0.00 |   |   |   | 59 |   |   |   | $ | 0.00 |   |   |
| $5.01    - $10.00                 |       |                         | 9          |                         |       |   | 3.4 |   |   |   | 7.06 |   |   |   | 9 |   |   |   | 7.06 |   |   |
| $10.01 - $15.00                             |       |                         | 413        |                         |       |   | 3.2 |   |   |   | 11.92 |   |   |   | 201 |   |   |   | 12.03 |   |   |
| $15.01 - $20.00                             |       |                         | 977        |                         |       |   | 3.7 |   |   |   | 18.35 |   |   |   | 479 |   |   |   | 17.86 |   |   |
| $20.01 - $25.00                             |       |                         | 797        |                         |       |   | 5.4 |   |   |   | 21.35 |   |   |   | 162 |   |   |   | 21.16 |   |   |
| $25.01 - $30.00                             |       |                         | 30         |                         |       |   | 3.0 |   |   |   | 29.75 |   |   |   | 30 |   |   |   | 29.75 |   |   |
|                                        |       |                         | 2,426      |                         |       |   | 4.3 |   |   |   | 16.83 |   |   |   | 940 |   |   |   | 16.34 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-24

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*Employee StockPurchase Plan*

Pursuant to the terms of the Company’s 1996 EmployeeStock Purchase Plan (the “Purchase Plan”), eligible employees are able topurchase shares of the Company’s common stock through a payroll deductionprogram. The Company has reserved 0.6 million shares for issuance pursuantto the Purchase Plan. Employees may have up to 25% of their compensationwithheld to purchase shares at a price equal to 85% of the lower of the closingprice on the first or last day of each successive three-month purchaseperiod. As of January 1, 2006, approximately 0.3 million shares hadbeen acquired pursuant to the Purchase Plan.

Pursuant to the terms ofthe Company’s United Kingdom Share Incentive Plan (the “UK Plan”), eligibleemployees are able to purchase shares of the Company’s common stock through apayroll deduction program. The Company has reserved 0.1 million shares forissuance pursuant to the UK Plan. Employees may have up to 10% of theircompensation withheld to purchase shares of the Company’s common stock at thelower of fair market value at the beginning of the accumulation period or theacquisition date, as defined in the UK Plan. The Company matches 1 share forevery 6 shares purchased in an accumulation period. Employees are required tohold these matching shares for a period of at least 3 years. As of January 1,2006, approximately 2,700 shares had been acquired pursuant to the UK Plan.

*Restricted Stock*

Periodically the Companyhas awarded restricted common stock and restricted stock units to eligible keyemployees and non-employee directors under the Company’s equity-based incentiveplans. These awards have restriction periods tied primarily to service andattainment of specified performance goals. The awards are recorded at marketvalue on the date of the grant to unearned compensation; compensation expenseis recognized over the restriction period on a straight-line basis, net offorfeitures. In the twelve months ended January 1, 2006 the Company issuedshares under this program to certain key employees and non-employee directors,which were recorded at their fair market value on the date of issue, $0.7million. These restricted shares cliff vest over one to five years from date ofissuance. The Company recorded these shares as outstanding with an offsettingentry to “Deferred compensation”, a component of stockholders’ equity. Includedin net income for the year ended January 1, 2006 is $0.3 million innet of tax compensation expense related to restricted stock. The net of taxcompensation expense related to restricted shares for the two years in theperiod ended January 2, 2005 was immaterial.

**8.   CONVERTIBLESENIOR SUBORDINATED DEBENTURES**

On August 20, 2003, the Company completed aprivate placement of 4.75% Convertible Senior Subordinate Debentures(“Debentures”) to certain institutional investors totaling $130.0 million,or $126.1 million after expenses. The offering costs of $3.9 millionare recorded as “Other assets” and are being amortized over five years, whichis the expected term of the Debentures. The Debentures are convertible intoshares of Serologicals’ common stock at an initial rate of 67.6133 shares ofcommon stock per $1,000 principal amount of the Debentures, or approximately8.8 million shares of common stock at a conversion price of $14.79 pershare. These Debentures became convertible in January 2004 under theconversion features in the Debenture Indenture. Interest on the Debentures ispayable semi-annually on February 15th and August 15th.

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The Debentures may be redeemed, in whole or in part,at the Company’s option on or after August 22, 2008 at 100% of theprincipal amount. In addition, the holders of the Debentures may require theCompany to repurchase all or a portion of the Debentures for 100% of theprincipal amount, plus accrued interest, on August 15, 2008, August 15,2010, August 15, 2013, August 15, 2018, August 15, 2023, August 15,2028, or at any time prior to their maturity following a fundamental change inthe business, as defined in the Indenture for the Debentures. For anyDebentures that the holders require the Company to repurchase, other than on August 15,2008, the Company may, at its option, pay the repurchase price in cash orshares of the Company’s common stock. The Company has established a policy thatall repurchases will be in cash. The Debentures are unsecured obligations ofthe Company and are subordinated to all of the Company’s senior debt, includingany debt incurred under its credit facility (Note 9).

In October 2003, the Company entered intointerest rate swap agreements with the objective of converting $70.0 millionprincipal amount of its Debentures to a variable interest rate based on the 6-monthsLIBOR rate at the end of each interest period plus a spread of 66 basis points.In June 2005, the Company terminated its interest rate swap agreements andreceived $0.1 million in cash proceeds.

The interest rate swaps were designated and qualifiedas fair value hedges in accordance with Statement of Financial AccountingStandards No. 133, “Accounting for Derivatives and Hedging Activities” andrelated interpretations and amendments. Accordingly, the portion of theDebentures hedged was adjusted by the fair value of the changes related to theswaps. In June, 2005, the Company adjusted the swap values by marking-to-marketthe swaps so that they equaled the net proceeds received on the termination.Simultaneously, the Company recorded a $0.2 million gain in hedgeineffectiveness. The resulting net adjustment to the carrying value of theDebentures of $0.1 million will be accreted as additional interest expense overthe remaining estimated life of the Debentures.

At January 2, 2005, the fair market value of theinterest rate swaps was an asset of $0.4 million and was included in “Otherassets” in the accompanying consolidated balance sheet.

TheCompany has presented the carrying value of the Debentures as of January 1,2006 and January 2, 2005 as follows:

| ** **                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Face value of  Debentures                                          |       | $        | 130,000    |     | $          | 130,000 |   |
| Mark-to-market  value as a result of interest rate swap agreements |       | (95      | )          | 395      |       |
| Carrying value of  Debentures                                      |       | $        | 129,905    |     | $          | 130,395 |   |

 

**9.   LONGTERM DEBT AND CAPITAL LEASE OBLIGATIONS**

In October 2004, the Company and a bank syndicateentered into a new $125.0 million credit agreement consisting of an$80.0 million seven-year term loan and a $45.0 million five-yearrevolving credit facility (“Revolver”), and terminated a previously existing$30.0 million revolving credit facility. In connection with thetermination of the existing facility, the Company incurred a non-cash charge of$0.2 million associated with the write-off of the unamortized deferredfinancing costs in 2004. As of January 1, 2006 and January 2, 2005,there were no amounts outstanding under the Revolver. The Company used theproceeds of the $80.0 million term loan, less deferred financing costs ofapproximately $1.1 million, to fund a portion of the Upstate acquisition.(See Note 3)

As discussed in Note 6, the Company used aportion of the proceeds from its common stock offering to repay the$80.0 million term loan in December 2004. In 2004, the Companyincurred a non-cash charge of $0.8 million associated with the write-offof the unamortized deferred financing costs which had been allocated to the termloan. The remaining deferred financing costs, $0.3 million, associatedwith the Revolver, were capitalized and included in other assets and are beingamortized to interest expense over the five-year term of the Revolver.

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Borrowings under the terms of the Revolver bearinterest payable quarterly at the Company’s option at a rate of either the bank’sbase rate plus a margin of .50% to 1.00%, or the prevailing Eurodollar rateplus a margin of 1.50% to 2.00%, depending on certain financial ratios. TheCompany is required to pay an annual commitment fee ranging from .375% to..500%, depending on the Company’s leverage and amounts borrowed under theRevolver. The applicable margins for the Revolver and commitment fees on theunused portion of the Revolver are subject to adjustment on future adjustmentdates based on the consolidated leverage ratio of the Company on the adjustmentdates. The credit agreement is secured by substantially all of the assets ofthe Company. Under the terms of the credit agreement, the Company is obligatedto abide by certain affirmative and negative covenants, including but notlimited to total leverage ratio, fixed charge coverage ratio, totalindebtedness, restriction of acquisitions, disposition of property,repurchasing common stock and the Company’s ability to pay dividends.

In August 2003, the Company repaid in full andterminated the outstanding principal and interest due on an $82.5 millionterm loan and $35.0 million revolving credit facility. A non-cash chargeof approximately $4.1 million related to the write-off of deferredfinancing costs associated with the terminated facilities was recorded.Additionally, during 2003, the Company recorded a charge of approximately$0.4 million related to the write-off of deferred financing costs relatedto the Company’s revolving credit facility that was in place prior to the$82.5 million term loan.

In July 2004, the Company entered into a two yearlease for $3.6 million for production equipment at its new manufacturingfacility in Lawrence, Kansas. The Company accounted for this transaction as acapital lease in accordance with Statement of Financial Accounting Standards No. 13,“Accounting for Leases.” In connection with the acquisition of Upstate, theCompany assumed outstanding obligations under capital leases, primarily forproduction and office equipment with various terms and conditions.

Obligationsunder capital leases at January 1, 2006 and January 2, 2005 consistedof the following (in thousands):

| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Equipment under  capital leases                    |       | $        | 1,557      |     | $          | 4,613 |   |
| Less: current  portion                             |       | (1,081   | )          | (2,419   | )          |
| Obligations under  capital leases—non-current |       | $        | 476        |     | $          | 2,194 |   |

 

Thefollowing table sets forth the cash payments, interest expense and capitalizedinterest during active construction periods of major capital projects foroutstanding debt and capital leases (in thousands):

| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest payments  made |       | $        | 6,320      |     | $          | 5,741    |       | $ | 2,269 |   |
| Interest expense        |       | 6,574    |       | 6,052    |       | 4,384    |       |
| Interest capitalized    |       | 129      |       | 1,094    |       | 443      |       |
|                         |            |          |            |          |            |          |            |  |  |  |

 

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**10.   COMMITMENTS AND CONTINGENCIES**

*Operating Leases*

TheCompany has entered into non-cancelable operating lease agreements for itscorporate headquarters, manufacturing facilities, laboratory equipment, andother equipment that expire at various dates. The information below includescommitment amounts related to vacated facilities associated with exitedactivities (Note 4). In addition, the Company entered into a subleaseagreement for a vacated laboratory facility in 2003. Future minimum annualrental obligations and related sublease income under the non-cancelable portionof operating leases as of January 1, 2006 were as follows (in thousands):

| ** **           | ** ** | ** **     | ** ** | **Sublease** | ** ** |
|----------------------|------------|----------------|------------|--------------|------------|
| ** **           | ** ** | **Obligation** | ** ** | **Income**   | ** ** |
| 2006                 |       |           | $          | 2,750        |       |   |   | $ | 274 |   |   |
| 2007                 |       |           | 2,622      |         |       |   | 280 |   |   |
| 2008                 |       |           | 2,121      |         |       |   | 285 |   |   |
| 2009                 |       |           | 1,799      |         |       |   | 97 |   |   |
| 2010                 |       |           | 1,468      |         |       |   | — |   |   |
| 2011 and  thereafter |       |           | 4,943      |         |       |   | — |   |   |
|                 |       |           | $          | 15,703       |       |   |   | $ | 936 |   |   |

 

Rent expense wasapproximately $4.5 million, 3.9 million and $2.6 million in 2005, 2004 and2003, respectively. Sublease rental income was approximately $0.3 million in2005 and 2004 and $0.1 million in 2003.

*Litigation*

The Company is involved incertain litigation arising from the ordinary course of business. In management’sopinion, the ultimate resolution of these matters will not have a materialadverse effect on the Company’s financial position or results of operations.

*Royalty Commitments*

TheCompany has entered into various license agreements whereby the Company usesand sells certain technologies and products. Such license agreements call forroyalties to be paid at 1% to 65% of net sales with minimum guarantees andadvance payments. Royalty expense under these agreements, which is included in “Costof sales,” was approximately $6.0 million, $4.9 million and$3.1 million in 2005, 2004 and 2003, respectively. Future annual minimumroyalty commitments as of January 1, 2006, are as follows (in thousands):

| 2006   |   | $     | 2,088  |   |
|--------|--------|-------|--------|--------|
| 2007   |   | 1,176 |   |
| 2008   |   | 1,181 |   |
|   |   | $     | 4,445  |   |

 

F-28

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**11.   INCOME TAXES**

Theincome tax provision for the years ended January 1, 2006, January 2, 2005and December 28, 2003 consisted of the following (in thousands):

| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax provision  (benefit) from continuing operations:    |       |     |       |     |       |     |       |
| Current:                                                       |       |     |       |     |       |     |       |
| US federal and state                                           |       | $        | 3,119      |     | $          | (372     | )          | $ | 3,294 |   |
| Foreign                                                        |       | 3,745    |       | 2,767    |       | 3,500    |       |
|                                                           |       | 6,864    |       | 2,395    |       | 6,794    |       |
| Deferred:                                                      |       |     |       |     |       |     |       |
| US federal and state                                           |       | (6,908   | )          | 5,396    |       | (1,090   | )          |
| Foreign                                                        |       | (2,372   | )          | 142      |       | (167     | )          |
|                                                           |       | (9,280)  |       | 5,538    |       | (1,257   | )          |
| Income tax provision (benefit) — continuing  operations   |       | $        | (2,416     | )        | $          | 7,933    |       | $ | 5,537 |   |
| Income tax provision (benefit) — discontinued  operations |       | $        | 1,014      |     | $          | —   |       | $ | (5,035 | ) |
| Income tax  provision (benefit)                                |       | $        | (1,402     | )        | $          | 7,933    |       | $ | 502 |   |

 

Theincome tax provision from continuing operations as reported in the accompanyingConsolidated Statements of Income differs from the amounts computed by applyingfederal statutory rates due to the following (in thousands):

| ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income  tax (benefit) at statutory rates             |       | $(560    | )          | $8,957   |       | $6,161   |       |
| State income tax,  net of federal income tax benefit    |       | 668      |       | —   |       | —   |       |
| Impact of foreign  tax rates and credits and permanent items |       | (2,450   | )          | (948     | )          | (1,108   | )          |
| Other tax  (benefit)                                         |       | (74      | )          | (76      | )          | 484      |       |
|                                                         |       | $(2,416  | )          | $7,933   |       | $5,537   |       |

 

Income(loss) from continuing operations before taxes summarized by region for theyears ended January 1, 2006, January 2, 2005 and December 28,2003 was as follows (in thousands):

| ** **    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| United States |       | $(4,478  | )          | $17,199  |       | $6,998   |       |
| Foreign       |       | 2,878    |       | 8,395    |       | 10,606   |       |
|          |       | $(1,600  | )          | $25,594  |       | $17,604  |       |

 

F-29

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Deferredincome tax assets and liabilities reflect the impact of temporary differencesbetween the amounts of assets and liabilities for financial reporting andincome tax reporting purposes. Temporary differences which gave rise todeferred tax assets and liabilities at January 1, 2006 and January 2,2005, were as follows (in thousands):

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                         |       |     |       |     |       |
| Current deferred tax  assets:                |       |     |       |     |       |
| Accruals and reserves                        |       | $        | 5,697      |     | $          | 1,738 |   |
| Unearned compensation                        |       | 1,286    |       | 750      |       |
| Other                                        |       | 1,127    |       | 1,835    |       |
| Total current deferred  tax assets           |       | 8,110    |       | 4,323    |       |
| Long-term deferred tax  assets:              |       |     |       |     |       |
| Excess book  depreciation/impairment         |       | 2,916    |       | —   |       |
| Unearned Compensation                        |       | 377      |       | —   |       |
| Net operating loss and  credit carryforwards |       | 17,426   |       | 10,292   |       |
| Less valuation  allowances                   |       | (6,012   | )          | (4,038   | )          |
| Total long-term deferred  tax assets         |       | 14,707   |       | 6,254    |       |
| Total deferred tax  assets                   |       | 22,817   |       | 10,577   |       |
| Deferred tax  liabilities:                   |       |     |       |     |       |
| Goodwill and intangible  amortization        |       | (39,989  | )          | (37,431  | )          |
| Other                                        |       | (454     | )          |     |       |
| Excess tax depreciation                      |       | —   |       | (4,824   | )          |
| Total long-term deferred  tax liabilities    |       | (40,443  | )          | (42,255  | )          |
| Net deferred tax  liability                  |       | $        | (17,626    | )        | $          | (31,678 | ) |

 

The Company has approximately $10.5 million of USnet operating loss (NOL) carryforwards resulting from acquisitions during 2004which begin to expire in 2018. Although the utilization of these losses issubject to limitations pursuant to Section 382 of the Internal RevenueCode, the Company expects to fully utilize the acquired NOL’s prior to theirexpiration. As of January 1, 2006, the Company has NOL carryforwards ofapproximately $2.5 million in Canada with an indefinite expiration period;due to the Company’s intention to exit Canada in 2006, a full valuationallowance was recorded against the Canadian NOL deferred tax asset in 2005.

The Company had foreign tax credit carryovers ofapproximately $1.5 million and Research & Development Tax Creditsof approximately $2.6 million in the U.S. as of January 1, 2006,which expire in 2014 and 2024, respectively. The Company has a $6.8 millioncapital loss carryover that expires in 2009. Management considers projectedfuture taxable income and tax planning strategies in assessing the need forvaluation allowances that reduce deferred tax assets. Based upon historicaltaxable income, management believes it is more likely than not that the Companywill fully realize the benefits of the above US NOL, capital loss and taxcredit carryforwards; accordingly, no valuation allowance has been recordedagainst these related deferred tax assets as of January 1, 2006.

As of January 1, 2006, the Company has stateincome tax NOL carryforwards totaling approximately $96.2 million,expiring in various amounts over the next 15 years. Due to the uncertaintyover the Company’s ability to utilize a portion of these state NOLs prior toexpiration, a valuation allowance was recorded against the deferred tax assettotaling $5.2 million and $3.5 million as of January 1, 2006 andJanuary 2, 2005, respectively.

F-30

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On October 22, 2004, the American Jobs CreationAct (“AJCA”) was enacted. The AJCA includes a one-time opportunity that allowsUS-based multinational corporations to repatriate foreign earnings at a reducedrate of tax. Subject to meeting certain conditions and restrictions, 85% ofqualifying repatriated foreign earnings, as defined by the AJCA, can beexcluded from US taxable income. The Company did not elect to apply thisprovision and did not repatriate any foreign earnings in 2005. The AJCA alsoprovides a deduction for income from qualified domestic production activities,which will be phased in from 2005 through 2010 as the extraterritorial taxregime is phased-out. The Company did not obtain any tax benefit in 2005 fromthe deduction due to operating losses in the US. The impact, if any, on theCompany’s future provision for income taxes is not expected to be material.

The Company has not provided for US federal income andforeign withholding taxes on approximately $50.4 million of undistributedearnings of foreign subsidiaries as of January 1, 2006. The Companyconsiders these undistributed earnings as permanently invested in theoperations of such subsidiaries. Upon distribution of those earnings in theform of dividends or otherwise, the Company would be subject to US incometaxes, adjusted for foreign tax credits. Determination of the amount ofunrecognized deferred U.S. income tax liability is not practicable because ofthe complexities associated with its hypothetical calculation.

The Company believes that its tax reserves areadequate to cover any additional tax liability that may result from anyfederal, state, or foreign audits for all years still subject to audit.

The Company made incometax payments of approximately $5.1 million, $3.9 million and$3.2 million during 2005, 2004 and 2003, respectively. As of January 1,2006 and January 1, 2005 the Company had an income tax receivable of $ 0.1million and income taxes payable of approximately $1.8 million,respectively. Income tax receivable is included in “Other current assets” andincome tax payable is included in “Accrued liabilities” in the accompanyingconsolidated financial statements.

**12.   CONCENTRATIONOF CUSTOMERS AND SUPPLIERS**

TheCompany’s ten largest customers accounted for approximately 31%, 38% and 45% oftotal net revenues for the years ended January 1, 2006, January 2,2005 and December 28, 2003, respectively. Only one customer made upgreater than 10% of net revenues of the Company during each period as follows:

| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Johnson &  Johnson |       |     | 10         | %        |       |     | 15         | % |   |   | 17 | % |   |
|                             |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

At January 1, 2006 and January 2, 2005, theCompany’s five largest customers represented 28% and 29%, respectively, of theCompany’s accounts receivable balance.

At January 1, 2006, the Company purchased all ofits bovine serum from a single vendor who sources from two abattoirs in theMidwestern United States. The Company has a long-term agreement with thesupplier pursuant to which the Company is guaranteed certain minimum levels ofserum. Additionally, the contract provides the Company with certain rights inthe event of a change in control of this supplier.

At January 1, 2006,the Company purchased all of its recombinant human insulin from one vendorunder a supply agreement which guarantees availability of minimum levels ofinsulin through the end of 2006. In March 2006 the Company and the vendor haveconcluded an extension of the supply agreement through 2009.

**13.   EMPLOYEE RETIREMENT PLANS**

The Company maintains adefined contribution 401(k) savings plan for all eligible employees. Underthe plan, the Company matches a specified percentage of each participatingemployee’s compensation. Employees become immediately vested in the Company’scontributions as they are made. The Company’s 

F-31

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contributionswere approximately $1.5 million, $1.0 million and $0.7 million in2005, 2004 and 2003, respectively.

**14.   SEGMENTAND GEOGRAPHIC INFORMATION**

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information” (“SFAS No. 131”), definesoperating segments to be those components of a business for which separatefinancial information is available that is regularly evaluated bymanagement in makingoperating decisions and in assessing performance. SFAS No. 131 furtherrequires that segment information be presented consistently with the basis andmanner in which management internally disaggregates financial information forthe purposes of assisting in making internal operating decisions.

We report operating results in two business segments, “Research”and “Bioprocessing.” The operations of Celliance represent the Bioprocessingsegment and the operations of Chemicon and Upstate represent the Researchsegment.

Our Research segment sells a broad range of researchproducts, including specialty reagents, kits, antibodies and molecular biologytools to research customers working in the areas of neuroscience, infectiousdisease, oncology, stem cell research and cell signaling. We are also a leadingsupplier of monoclonal antibodies, conjugates, antibody blends and molecularand cell biology-based detection kits for use in diagnostic laboratories. Inaddition, we are one of the leading suppliers of tools for kinase research andone of the leading providers of drug discovery services to pharmaceuticalcompanies targeting kinase biology-based drugs. We market our research productsand services under our Chemicon® andUpstate® brand names.

Our Bioprocessing segment sells a variety of cellculture products, including highly purified proteins and tissue culture mediacomponents. These products are used primarily by biopharmaceutical andbiotechnology companies as nutrient additives in cell culture media. One of ourmost significant products within the Bioprocessing segment is EX-CYTE®, a patented serum-freesolution of cholesterol, lipoproteins and fatty acids. EX-CYTE® isused, in combination with other cell culture supplements, to reduce or replaceanimal serum in cell culture processes. We also provide a range of serum-basedproducts in this segment, including Bovine Serum Albumin (“BSA”), under thebrand name “ProbuminTM”, for which we are the world’s leading supplier. We alsosell recombinant human insulin, under the brand name of “IncelligentTM”, for useas a media supplement. This segment also manufactures and sells monoclonalantibodies, under the brand name “MonoSeraTM”, that are used in products such asblood typing reagents and in controls for diagnostic tests for certaininfectious diseases. We believe these products comprise the world’s mostcomprehensive range of commercially available human monoclonal antibodies forblood grouping.

Prior to 2005, we reported operating results in threebusiness segments: Research, Cell Culture and Diagnostics. These segments werebased primarily on the differing production, manufacturing and othervalue-added processes that we performed with respect to our products and, to alesser extent, the differing nature of the ultimate end use of our products. Prior to 2003, the Company reported a fourthsegment, Therapeutic Products, which is accounted for as discontinuedoperations in all periods presented in the accompanying financial statements(Note 4). All amounts in the accompanying financial statementsreflect the restatement of the pre-2005 segments so that they areconsistent with the current year presentation.

The Company’s senior management utilizes multipleforms of analysis of operating and financial data to assess segment performanceand to make operating decisions with respect to the segments.

F-32

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The Company’s segmentinformation for the years ended January 1, 2006, January 2, 2005 and December 28,2003 is as follows (in thousands):

| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Net revenues:**                         |       |     |       |     |       |     |       |
| Research                                       |       | $        | 138,006    |     | $          | 78,506   |       | $ | 43,043 |   |
| Bioprocessing                                  |       | 136,939  |       | 117,417  |       | 103,872  |       |
| Total                                          |       | $        | 274,945    |     | $          | 195,923  |       | $ | 146,915 |   |
| Gross profit:                                  |       |     |       |     |       |     |       |
| Research                                       |       | $        | 84,838     |     | $          | 50,828   |       | $ | 26,677 |   |
| Bioprocessing                                  |       | 67,309   |       | 57,613   |       | 55,497   |       |
| Total                                          |       | 152,147  |       | 108,441  |       | 82,174   |       |
| Reconciling items:                             |       |     |       |     |       |     |       |
| Selling, general and  administrative expenses  |       | 85,141   |       | 59,293   |       | 44,602   |       |
| Research and development                       |       | 17,199   |       | 10,144   |       | 6,214    |       |
| Amortization of  intangibles                   |       | 7,206    |       | 3,771    |       | 2,175    |       |
| Purchased in process  research and development |       | —   |       | 3,263    |       | —   |       |
| Impairment and exiting  costs.                 |       | 38,025   |       | —   |       | 2,778    |       |
| Other expense (income),  net                   |       | 597      |       | (54      | )          | 180      |       |
| Write-off of deferred  financing costs         |       | —   |       | 965      |       | 4,492    |       |
| Interest expense                               |       | 7,361    |       | 6,052    |       | 4,384    |       |
| Interest income                                |       | (1,782   | )          | (587     | )          | (255     | )          |
| Income from continuing  operations, before tax |       | $        | (1,600     | )        | $          | 25,594   |       | $ | 17,604 |   |

 

Priorto 2005, the Company did not determine operating income and income beforeincome taxes or segregate assets by segment because a significant portion ofselling, general and administrative expenses, research and development expensesand assets were shared and not allocated to operating units. Beginning in 2005,with the decision to change from a company organized primarily by functionalorganizational units to a company with distinct operating units in two businesssegments and a separate corporate group, we are able to provide additionalsegment information for 2005; however, comparable information for 2004 is notavailable and as a result not presented. The additional segment information forthe year ended January 1, 2006 is as follows (in thousands):

| ** **                                                             | ** ** | **2005**     | ** ** |
|------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                             | ** ** | **Research** | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Gross profit                                                           |       | $            | 84,838     |   |   | $ | 67,309 |   |   | $ | — |   | $ | 152,147 |   |
| Selling, general  and administrative expenses (excluding depreciation) |       | 47,157       |       |   | 12,536 |   |   | 17,397 |   | 77,090 |   |
| Research and  development  (excluding depreciation)                    |       | 12,904       |       |   | 3,235 |   |   | 774 |   | 16,913 |   |
| Depreciation                                                           |       | 3,302        |       |   | 3,463 |   |   | 1,572 |   | 8,337 |   |
| Amortization                                                           |       | 6,159        |       |   | 1,047 |   |   | — |   | 7,206 |   |
| Impairment and  exiting costs                                          |       | —       |       |   | 38,025 |   |   | — |   | 38,025 |   |
| Operating income (loss)                                                |       | 15,316       |       |   | 9,003 |   |   | (19,743 | ) | 4,576 |   |
| Other expense  (income), net                                           |       | 287          |       |   | (149 | ) |   | 6,038 |   | 6,176 |   |
| Income (loss)  from continuing operations before income tax            |       | $            | 15,029     |   |   | $ | 9,152 |   |   | $ | (25,781 | ) | $ | (1,600 | ) |
| Assets at  January 1, 2006                                        |       | $            | 386,744    |   |   | $ | 180,568 |   |   | $ | 56,307 |   | $ | 623,619 |   |

 

F-33

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**Geographic Information**

TheCompany markets its products and services to numerous countries worldwide andhas manufacturing operations in the United States, Canada, the United Kingdomand Australia. Other than in the United States, the Company does not conductbusiness in any one country in which its revenues in that country are more than10% of the Company’s consolidated net revenues. However, the majority of theCompany’s remaining foreign sales are to Western Europe. Net revenues areattributed to regions based on the country to which the Company ships itsproducts, which can differ from their ultimate destination. The composition ofthe Company’s net revenues to unaffiliated customers between those in theUnited States and other foreign locations and of the Company’s long-livedassets for the years ended January 1, 2006, January 2, 2005 and December 28,2003 are set forth below (in thousands):

| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues to  unaffiliated customers: |       |     |       |     |       |     |       |
| United States                            |       | $        | 182,431    |     | $          | 122,244  |       | $ | 93,523 |   |
| Other foreign                            |       | 92,514   |       | 73,679   |       | 53,392   |       |
|                                     |       | $        | 274,945    |     | $          | 195,923  |       | $ | 146,915 |   |
| Long-lived assets:                       |       |     |       |     |       |     |       |
| United States                            |       | $        | 433,133    |     | $          | 433,046  |       | $ | 191,040 |   |
| Canada                                   |       | 2,398    |       | 22,999   |       | 17,166   |       |
| United Kingdom                           |       | 9,892    |       | 9,248    |       | 9,317    |       |
| Australia                                |       | 355      |       | 489      |       | 525      |       |
|                                     |       | $        | 445,778    |     | $          | 465,782  |       | $ | 218,048 |   |

 

**15.   QUARTERLYRESULTS OF OPERATIONS (UNAUDITED)**

The quarterlyresults of operations for the years ended January 1, 2006 and January 2,2005, respectively, are as follows (in thousands, except per share amounts):

| **2005**                                      | ** ** | ** ** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| Net revenues                                  |       | $          | 56,635     |      | $          | 64,208     |       | $         | 66,969     |       | $          | 87,133 |   |
| Gross profit                                  |       | 30,839     |       | 36,713    |       | 38,226     |       | 46,369    |       |
| Income (loss)  from continuing operations(1)  |       | 1,904      |       | 4,846     |       | 7,654      |       | (13,588   | )          |
| Income from  discontinued operations (Note 4) |       | —     |       | —    |       | —     |       | 1,883     |       |
| Net income(loss)                              |       | 1,904      |       | 4,846     |       | 7,654      |       | (11,705   | )          |
| Basic earnings  (loss) per share(2)           |       | 0.06       |       | 0.14      |       | 0.22       |       | (0.34     | )          |
| Diluted earnings per  share(2)                |       | 0.05       |       | 0.14      |       | 0.20       |       | (0.34     | )          |
|                                               |            |            |            |           |            |            |            |           |            |            |            |  |  |  |  |

 

| **2004**                       | ** ** | ** ** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| Net revenues                   |       | $          | 36,504     |      | $          | 43,963     |       | $         | 46,294     |       | $          | 69,162 |   |
| Gross profit                   |       | 19,470     |       | 24,931    |       | 24,981     |       | 39,059    |       |
| Net income(3)                  |       | 2,983      |       | 5,398     |       | 5,739      |       | 3,541     |       |
| Basic earnings  per share(2)   |       | 0.12       |       | 0.22      |       | 0.23       |       | 0.12      |       |
| Diluted earnings per  share(2) |       | 0.11       |       | 0.18      |       | 0.19       |       | 0.12      |       |
|                                |            |            |            |           |            |            |            |           |            |            |            |  |  |  |  |

----

(1)          Net income in the fourthquarter of 2005 includes pretax charges of $38.0 million for impairmentand exiting costs and $1.3 million in inventory write off costs (Note 5).

(2)          Basic and dilutedearnings per share are computed independently for each of the quarterspresented. As such, the summation of the quarterly amounts may not equal thetotal basic and diluted earnings per share reported for the year.

F-34

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(3)          Netincome in the fourth quarter of 2004 includes a pretax charge of$3.3 million for purchased in-process research and development.

**16.   SUBSEQUENT EVENTS**

On January 13, 2006, the Company completed a saleof its diagnostic production facility and distribution warehouse based inMilford, Massachusetts for cash proceeds of $3.3 million. The Company expectsto report a gain on the sale of approximately $1.2 million in the first quarter2006.

On March 13, 2006, Serologicals UK HoldingCompany Limited, our wholly-owned subsidiary, entered into a definitiveagreement to acquire the entire issued ordinary share capital of CytomyxLimited for aggregate cash consideration of $7 million. The consideration willbe subject to a post-closing working-capital adjustment. Cytomyx Limited, whichis based in Cambridge, England, and is a wholly owned subsidiary of CytomyxHoldings Plc, is a leading provider of ion channel cell lines and drugdiscovery services. The acquisition is subject to approval of the shareholdersof Cytomyx Holdings Plc and to other customary closing conditions. CytomyxHoldings Plc has obtained irrevocable written undertakings from the holders ofapproximately 40% of its voting shares to approve the sale. Followingcompletion of the acquisition, which is expected to occur on March 31,2006, Cytomyx Limited will operate as part of our Research segment.

F-35

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**SEROLOGICALS CORPORATION**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

Ananalysis of the allowance for doubtful accounts and warranty reserve for thethree fiscal years ended January 1, 2006 is as follows (in thousands):

| ** **                          | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged  to Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance  at End of  Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| **Allowance for Doubtful Accounts** |       |                                           |       |                                          |       |                                 |       |           |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Year Ended  January 1, 2006    |       |                                           | $          | 953                                           |       |                                 |       | $              | 864        |                                     |       |   | $ | — |   |   |   | $ | (382 | ) |   |   | $ | 1,435 |   |   |
| Year Ended  January 2, 2005    |       |                                           | 1,214      |                                          |       |                                 | 36         |           |       |                                     | 339        | (a) |   |   | (637 | ) |   |   | 953 |   |   |
| Year Ended  December 28, 2003  |       |                                           | 954        |                                          |       |                                 | 497        |           |       |                                     | 500        | (b) |   |   | (737 | ) |   |   | 1,214 |   |   |
|                                     |            |                                                |            |                                               |            |                                      |            |                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                         | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Net Sales** | ** ** | **Charged  to Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance  at End of  Period** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| **Warranty Reserve**               |       |                                           |       |                                |       |                                 |       |           |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Year Ended  January 1, 2006   |       |                                           | $          | 915                                 |       |                                 |       | $              | 492        |                                     |       |   | $ | — |   |   |   | $ | (236 | ) |   |   | $ | 1,171 |   |   |
| Year Ended  January 2, 2005   |       |                                           | 486        |                                |       |                                 | 2,157      |           |       |                                     | 243        | (a) |   |   | (1,971 | ) |   |   | 915 |   |   |
| Year Ended  December 28, 2003 |       |                                           | 227        |                                |       |                                 | 2,353      |           |       |                                     | 114        | (b) |   |   | (2,208 | ) |   |   | 486 |   |   |
|                                    |            |                                                |            |                                     |            |                                      |            |                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Reserve establishedupon purchase of Upstate effective October 1, 2004.

(b)          Reserve established uponpurchase of Chemicon effective April 1, 2003.

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**EXHIBIT INDEX**

| 2.1.1 |   | Earnout Agreement dated December 13, 2001, by  and among the Registrant, Intergen Investors, L.P., STJ Bio Corp., Spencer  Paige Corp., Ronald Dilling, Donald Gutenkunst, President and Fellows of  Harvard College and University of Illinois Foundation (Exhibit 2.3 to  the Registrant’s Current Report on Form 8-K, dated  December 19, 2001, is hereby incorporated by reference).                                                                                                                                                                                       |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2.1 |   | Amended and Restated  Securities Purchase Agreement, dated as of February 11, 2003, between  Serologicals Research Products, Inc. and Falcon International Investment  Holdings LLC (Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K, dated April 11, 2003, is hereby incorporated by  reference).                                                                                                                                                                                                                                                            |
| 2.2.2 |   | European Purchase  Agreement, dated February 11, 2003, between Serologicals Research  Products, Inc. and Falcon International Investment Holdings LLC  (Exhibit 2.6 to the Registrant’s Annual Report on Form 10-K  for the year ended December 29, 2002 is hereby incorporated by  reference).                                                                                                                                                                                                                                                                           |
| 2.2.3 |   | Deed of Variation, dated  April 4, 2003, between Serologicals Research Products, Inc. and  Falcon International Investment Holdings LLC (Exhibit 2.2 to the  Registrant’s Current Report on Form 8-K, dated April 11,  2003, is hereby incorporated by reference).                                                                                                                                                                                                                                                                                                        |
| 2.2.4 |   | Guaranty Agreement dated  February 11, 2003 by and among Serologicals Research  Products, Inc., The Beckman Family Trust, David Alan Beckman, Keiko Koga  Beckman and Falcon International Investment Holdings LLC (Exhibit 10.24  to the Registrant’s Annual Report on Form 10-K for the year ended  December 29, 2002 is hereby incorporated by reference).                                                                                                                                                                                                             |
| 2.3.1 |   | Stock Purchase  Agreement, dated as of December 19, 2003, by and among Gradipore  Limited, Gradipore Inc., Serologicals Finance Company and Serologicals  Corporation (Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K, dated January 27, 2004, is hereby incorporated by  reference).                                                                                                                                                                                                                                                                        |
| 2.3.2 |   | First Amendment, dated  as of January 15, 2004, to the Stock Purchase Agreement, dated as of  December 19, 2003, by and among Gradipore Limited, Gradipore Inc.,  Serologicals Finance Company and Serologicals Corporation (Exhibit 2.2  to the Registrant’s Current Report on Form 8-K, dated  January 27, 2004, is hereby incorporated by reference).                                                                                                                                                                                                             |
| 2.3.3 |   | Exchange Agreement, dated  as of December 17, 2004, between Life Therapeutics Limited and  Serologicals Finance Company (Exhibit 1.1 to the Registrant’s Current  Report on Form 8-K dated December 17, 2004 is hereby  incorporated by reference).                                                                                                                                                                                                                                                                                                                            |
| 2.3.4 |   | Promissory Note, dated  as of December 17, 2004, made by Life Therapeutics Limited, Life  Gels, Inc., Life Therapeutics Plasma Holdings, Inc.,  LifeSera, Inc., LifeSera Nevada, Inc., LifeSera Business Trust,  LifeSera Investments, LLC, LifeSera Management Partnership, LP, and Allegheny  Biologicals, Inc. to Serologicals Finance Company (Exhibit 1.2 to  the Registrant’s Current Report on Form 8-K dated  December 17, 2004 is hereby incorporated by reference).                                                                         |
| 2.3.5 |   | Mutual Release  Agreement, dated as of December 17, 2004, by Life Therapeutics Limited,  Life Gels, Inc., Life Therapeutics Plasma Holdings, Inc.,  LifeSera, Inc., LifeSera Nevada, Inc., LifeSera Business Trust,  LifeSera Investments, LLC, LifeSera Management Partnership, LP, and Allegheny  Biologicals, Inc., on the one hand, and Serologicals Corporation and  Serologicals Finance Company, on the other hand (Exhibit 1.3 to the  Registrant’s Current Report on Form 8-K dated December 17,  2004 is hereby incorporated by reference). |
| 2.3.6 |   | Letter Agreement, dated  September 27, 2005, between the Registrant and Life Therapeutics, Ltd.  (Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 2, 2005 is hereby incorporated by  reference).                                                                                                                                                                                                                                                                                                                                 |

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| 2.4.1  |   | Plan and Agreement of Merger, dated as of  June 29, 2004, by and among the Registrant, Carmel Acquisition  Corporation, AltaGen BioSciences, Inc. and William R. Srigley  (Exhibit 2.1 to the Registrant’s Current Report on Form 8-K,  dated June 30, 2004, is hereby incorporated by reference).                                                                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.4.2  |   | Earnout and Indemnity  Agreement, dated as of June 29, 2004, by and among the Registrant,  AltaGen BioSciences, Inc. and Mr. William R. Srigley  (Exhibit 2.2 to the Registrant’s Current Report on Form 8-K,  dated June 30, 2004, is hereby incorporated by reference).                                                                                                                                                                            |
| 2.5.1  |   | Agreement and Plan of  Merger, dated as of September 7, 2004, by and among the Registrant,  Upstate Acquisition Company, LLC, Upstate Group, Inc. and the  Stockholder Representative (Exhibit 2.1 to the Registrant’s Current  Report on Form 8-K dated September 7, 2004 is hereby incorporated  by reference).                                                                                                                                              |
| 2.5.2. |   | Amendment to Agreement  and Plan of Merger, dated as of October 14, 2004, by and among the  Registrant and Upstate Group, Inc. (Exhibit 2.1 to the Registrant’s  Current Report on Form 8-K dated October 14, 2004 is hereby  incorporated by reference).                                                                                                                                                                                                      |
| 2.5.3  |   | Registration Rights  Agreement, dated as of October 14, 2004, by and among the Registrant and  certain former stockholders of Upstate Group, Inc. (Exhibit 4.1 to  the Registrant’s Registration Statement of Form S-3 (file number  333-120379) filed on November 10, 2004 is hereby incorporated by  reference).                                                                                                                                             |
| 3.1.1  |   | Amended and Restated  Certificate of Incorporation (Exhibit 3.1 to the Registrant’s Annual  Report on Form 10-K for the year ended December 29, 2002 is  hereby incorporated by reference).                                                                                                                                                                                                                                                                              |
| 3.1.2  |   | Certificate of Amendment  of Amended and Restated Certificate of Incorporation (Exhibit 3.1.2 to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  April 3, 2005 is hereby incorporated by reference).                                                                                                                                                                                                                                              |
| 3.2.1  |   | Amended and Restated By-laws  (Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1  (File No. 33-91176), effective June 14, 1995, is hereby  incorporated by reference).                                                                                                                                                                                                                                                                             |
| 3.2.2. |   | Amendment to  Section 6.1 of Amended and Restated By-laws (the Registrant’s Current  Report on Form 8-K dated March 1, 2006 is hereby incorporated  by reference).                                                                                                                                                                                                                                                                                                       |
| 4.1.1  |   | Specimen Common Stock  Certificate (Exhibit 4.1 to the Registrant’s Registration Statement on  Form S-1 (File No. 33-91176), effective June 14,  1995, is hereby incorporated by reference).                                                                                                                                                                                                                                                                        |
| 4.1.2  |   | Specimen Form of  Rights Certificate (incorporated herein by reference to Exhibit 2.1 of  the Registration Statement on Form 8-A filed August 10,  1999).                                                                                                                                                                                                                                                                                                                |
| 4.1.3  |   | Form of Rights  Agreement, dated as of August 2, 1999, between the Company and State  Street Bank & Trust Company, N.A. (incorporated herein by reference  to Exhibit 2.2 of the Registration Statement on Form 8-A  filed August 10, 1999).                                                                                                                                                                                                               |
| 4.1.5  |   | Summary of Rights Plan  (incorporated herein by reference to Exhibit 2.4 of the Registration  Statement on Form 8-A filed August 10, 1999).                                                                                                                                                                                                                                                                                                                                   |
| 4.2.1  |   | Indenture, dated as of  August 20, 2003, between Serologicals Corporation and The Bank of New  York, as Trustee, for the 4.75% Convertible Senior Subordinated Debentures  due 2033, including the form of 4.75% Convertible Senior Subordinated  Debentures due 2033 (Exhibit 4.1 to the Registrant’s Current Report on  Form 8-K, dated August 21, 2003 is hereby incorporated by  reference).                                                                    |
| 4.2.2  |   | Registration Rights  Agreement, dated as of August 20, 2003, by and among Serologicals  Corporation and Banc of America Securities LLC, J.P. Morgan  Securities Inc. and UBS Securities LLC, as representatives of the  initial purchasers of the Registrant’s 4.75% Convertible Senior Subordinated  Debentures due 2033 (Exhibit 4.2 to the Registrant’s Current Report on  Form 8-K, dated August 21, 2003 is hereby incorporated by  reference). |

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| 10.1.1  |   | $125,000,000 Credit Agreement, dated as of  October 14, 2004, among the Registrant, as Borrower, the several lenders  from time to time parties thereto, LaSalle Bank National Association, as  Documentation Agent, Bank of America, N.A., as Syndication Agent and  JP Morgan Chase Bank, as Administrative Agent (Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated October 14, 2004  is hereby incorporated by reference). |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1.2  |   | First Amendment to the  Credit Agreement and Waiver, dated as of December 28, 2005, to the  Credit Agreement, dated as of October 14, 2004, among the Registrant, as  Borrower, the several lenders from time to time parties thereto, LaSalle Bank  National Association, as Documentation Agent, Bank of America, N.A., as  Syndication Agent and JP Morgan Chase Bank, as Administrative Agent.*                                                            |
| 10.1.3  |   | Lease Agreement dated  October 6, 2000, between the Registrant and Spalding Triangle, L.L.C.  (Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 24, 2000 is hereby incorporated by  reference).                                                                                                                                                                                                      |
| 10.2.1  |   | Amended and Restated 2005  Incentive Plan (Exhibit 99.1 to the Registrant’s Current Report on  Form 8-K dated May 17, 2005 is hereby incorporated by  reference).†                                                                                                                                                                                                                                                                                   |
| 10.2.2  |   | 1996 Employee Stock  Purchase Plan (Exhibit 10.7 to the Registrant’s Annual Report on  Form 10-K for the year ended December 29, 2002 is hereby  incorporated by reference).†                                                                                                                                                                                                                                                                        |
| 10.2.3  |   | Serologicals Corporation  1996 UK Sharesave Scheme (Exhibit 3.1 to the Registrant’s Annual Report  on Form 10-K for the year ended December 29, 2002 is hereby  incorporated by reference).†                                                                                                                                                                                                                                                         |
| 10.2.4  |   | Serologicals Corporation  UK Share Incentive Plan (Exhibit 4.1 to the Registrant’s Registration  Statement on Form S-8 (File No. 333-104703), effective  April 23, 2003, is hereby incorporated by reference).†                                                                                                                                                                                                                                 |
| 10.2.5  |   | Form of Change in  Control Executive Severance Package between the Registrant and each Vice  President. (Exhibit 10.20 to the Registrant’s Annual Report on  Form 10-K for the year ended December 28, 2003 is hereby  incorporated by reference).†                                                                                                                                                                                             |
| 10.2.6  |   | Employment Agreement  between the Company and David A. Dodd (Exhibit 10.27 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 25, 2000 is hereby incorporated by reference).†                                                                                                                                                                                                                                       |
| 10.2.7  |   | Change in Control  Executive Severance Package between the Registrant and David A. Dodd  (Exhibit 10.10.2 to the Registrant’s Annual Report on Form 10-K  for the year ended December 28, 2003 is hereby incorporated by  reference).†                                                                                                                                                                                                          |
| 10.2.8  |   | Employment Agreement  between the Registrant and Harold W. Ingalls (Exhibit 10.2 of the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001 is hereby incorporated by reference).†                                                                                                                                                                                                                            |
| 10.2.9  |   | Revised Employment  Agreement between the Registrant and Jeffrey D. Linton  (Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 30, 2003 is hereby incorporated by  reference).†                                                                                                                                                                                                                       |
| 10.2.10 |   | Employment Agreement  between the Registrant and Robert P. Collins (Exhibit 10.1 to the  Registrant’s Quarterly Report on Form 10Q for the quarter ended  September 30, 2001, is incorporated herein by reference).†                                                                                                                                                                                                                            |
| 10.2.11 |   | Employment Agreement  between the Registrant and Joseph T. Kozma (Exhibit 10.20 to the  Registrant’s Annual Report on Form 10-K for the year ended  December 30, 2001 is hereby incorporated by reference).†                                                                                                                                                                                                                                    |
| 10.2.12 |   | Employment Agreement  between the Registrant and James J. Kramer, Ph. D.  (Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002 is hereby incorporated by  reference).†                                                                                                                                                                                                                |

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| 10.2.13 |   | Employment Agreement  between the Registrant and David L. Bellitt (Exhibit 10.23 to the Registrant’s  Annual Report on Form 10-K for the year ended December 29,  2002 is hereby incorporated by reference).†                |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2.14 |   | Employment Agreement  between the Registrant and Philip A. Theodore. (Exhibit 10.19 to  the Registrant’s Annual Report on Form 10-K for the year ended  December 28, 2003 is hereby incorporated by reference).†             |
| 10.2.15 |   | Employment Agreement  between the Registrant and Dennis W. Harris, Ph.D.  (Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 28, 2004 is hereby incorporated by  reference).† |
| 10.2.16 |   | Employment Agreement  between the Registrant and Samuel R. Schwartz. (Exhibit 10.2.25 to  the Registrant’s Annual Report on Form 10-K for the year ended  January 2, 2005 is hereby incorporated by reference).†             |
| 10.2.17 |   | Non-Employee Directors  Compensation Arrangements dated March 15, 2005 (Exhibit 99.2 to the  Registrant’s Current Report on Form 8-K dated May 17, 2005 is  hereby incorporated by reference).                                    |
| 14.1    |   | Code of Ethics for  Senior Executive and Financial Officers (Exhibit 14.1 to the  Registrant’s Annual Report on Form 10-K for the year ended  December 28, 2003 is hereby incorporated by reference).                                  |
| 21      |   | Subsidiaries of the  Registrant.*                                                                                                                                                                                                                          |
| 23.1    |   | Consent of  Deloitte & Touche LLP.*                                                                                                                                                                                                               |
| 31.1    |   | Certification Pursuant to  Rule 13a-14(a), as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.*                                                                                                                               |
| 31.2    |   | Certification Pursuant  to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.*                                                                                                                               |
| 32.1    |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.*                                                                                       |
| 32.2    |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.*                                                                                       |
| 99.1    |   | Code of Business Conduct  and Ethics.*                                                                                                                                                                                                                     |

 

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