================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]       Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
          Exchange Act of 1934
For the fiscal year ended December 31, 1998, or
[ ]       Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934

For the transition period from  ___________________  to  _______________________
Commission file number 000-21615 .
                      -----------   




                             BOSTON BIOMEDICA, INC.
                             ----------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





              MASSACHUSETTS                                  04-2652826      
              -------------                                  ----------      
     (State or other Jurisdiction of                      (I.R.S. Employer   
        Incorporation or Organization)                   Identification No.)

            375 WEST STREET,                                 
     WEST BRIDGEWATER, MASSACHUSETTS                          02379-1040
     -------------------------------                          ----------
(Address of Principal Executive Offices)                      (zip code)


Registrant's telephone number, including area code    (508) 580-1900
                                                      --------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Common Stock, par value $.01 per share

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated be reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

      The aggregate market value of the voting stock held by  non-affiliates  of
the Registrant at March 26, 1999 was $10,151,102. The aggregate market value was
computed by reference to the closing price as of that date on NASDAQ.

      The number of shares  outstanding of the Registrant's only class of common
stock as of March 26, 1999 was 4,717,822.

                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

      Portions  of the  Registrant's  definitive  Proxy  Statement  for its 1998
annual meeting,  are incorporated by reference into Part III of this Report, and
portions of the Registrant's  Registration  Statement on Form S-1  (Registration
No. 333-10759) are incorporated by reference into Part IV of this Report.


================================================================================




<PAGE>

                                     PART I

ITEM  1.    BUSINESS

      The  Company  is a  worldwide  provider  of  proprietary  quality  control
products  for use with in vitro  diagnostic  test  kits  ("test  kits")  for the
detection,  analysis and  monitoring of  infectious  diseases,  including  AIDS,
Hepatitis  and Lyme  Disease.  These  products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel,  and to help ensure
the  accuracy of test  results.  The  Company's  products are derived from human
plasma and serum using proprietary manufacturing processes. The Company believes
its Quality Control Panel products are viewed as the current  industry  standard
for the  independent  assessment of the  performance  of HIV and Hepatitis  test
kits. The Company also manufactures  diagnostic test kit components,  laboratory
instruments,  and provides  specialty  laboratory  services,  including clinical
trials. It also provides contract instrument  development and related repairs at
its service center in Garden Grove, CA. The Company's customers include test kit
manufacturers,  regulatory  agencies  and  end-users  of test kits such as blood
banks, hospital laboratories and clinical reference laboratories.  Currently the
Company's  products are used in  connection  with the  detection of more than 15
infectious  diseases,   and  its  specialty  laboratory  services  are  used  in
connection with the detection of over 100 such diseases.

      The  Company's  strategy is to leverage  its  scientific  capabilities  in
microbiology,  immunology,  virology, and molecular biology to (i) capitalize on
the emerging  end-user  market,  (ii) develop new products and  services,  (iii)
enhance  technical  leadership,   (iv)  capitalize  on  complementary   business
operations, and (v) pursue strategic acquisitions and alliances.

Industry Overview

      Infectious Disease Test Kits and Testing Methods. Test kits contain in one
compact  package all of the materials  necessary to run a test for an infectious
disease. These include the disposable diagnostic components,  instructions,  and
reaction  mixing  vessels  (generally  96-well  plates or test tubes)  which are
coated  with the  relevant  infectious  disease  antigens,  antibodies  or other
materials.  To perform the test,  either a  technician  or a specially  designed
instrument  typically  mixes the  solutions  from the test kit with human  blood
specimens in a specific  sequence  according to the test kit  instructions.  The
mixture must then  "incubate" for up to 18 hours,  during which time a series of
biochemical  reactions trigger signals  (including color,  light and radioactive
count) which indicate the presence or absence and amount of specific  markers of
the particular disease in the specimen.

      Test kits  generally  employ one of three methods for  infectious  disease
testing: microbiology, immunology or molecular biology. Traditional microbiology
tests use a growth medium that enables an organism, if present, to replicate and
be detected visually.  Immunology tests detect the antigen or antibody, which is
an  indicator  (marker)  of the  pathogen  (e.g.,  virus,  bacterium,  fungus or
parasite).  Molecular diagnostic methods,  such as the polymerase chain reaction
("PCR"),  test for the presence of nucleic acids (DNA or RNA) which are specific
to a particular pathogen.

      Most   infectious   disease  tests   currently  use   microbiological   or
immunological  methods.  However,  molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide. The Company believes
that the advent of  molecular  diagnostic  methods will  complement  rather than
diminish  the  need to test by  microbiological  and  immunological  procedures,
because  different test methods  reveal  different  information  about a disease
state. The Company  anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.

      Quality  Control  for In Vitro  Diagnostic  Test  Kits.  Customers  employ
quality control  products in order to develop and use test kits (both infectious
and non-infectious).  Quality control products help ensure that test kits detect
the  correct  analyte   (specificity),   detect  it  the  same  way  every  time
(reproducibility  or  precision),  and  detect  it  at  the  appropriate  levels
(sensitivity).  The  major  element  of  this  quality  control  process  is the
continuous  evaluation  of test kits by the testing of  carefully  characterized
samples that resemble the donor or patient samples routinely used with the test.
Quality


                                      -2-
<PAGE>



control  is used in both the  infectious  and  non-infectious  disease  markets,
although  currently it is not as prevalent among end-users of infectious disease
test kits.

      The market for quality  control  products  consists of three main customer
segments:  (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the  manufacture  and use of test kits and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.

Company Products and Services

Overview

      The Company offers two broad product classes used in in vitro  diagnostics
("IVD"):  "Diagnostic Products" consisting of Quality Control Panels, Accurun(R)
Run Controls and Diagnostic  Components,  all used in connection with infectious
disease  testing,  and "Laboratory  Instruments".  Diagnostic  Products are used
throughout  the  entire  test  kit  life  cycle,   from  initial   research  and
development, through the regulatory approval process and test kit production, to
training,  troubleshooting  and routine use by end-users.  The Company's Quality
Control  Panels,   which  combine  human  blood  specimens  with   comprehensive
quantitative  data useful for comparative  analysis,  help ensure that test kits
detect  the  correct  analyte  (specificity),  detect it the same way every time
(reproducibility),  and detect it at the appropriate levels  (sensitivity).  The
Company's  Accurun(R) Run Controls enable  end-users of test kits to confirm the
validity of results by monitoring test  performance,  thereby  minimizing  false
negative test results and improving error  detection.  In addition,  the Company
provides  Diagnostic  Components,  which are custom  processed  human plasma and
serum products, to test kit manufacturers.

      Through its wholly owned  subsidiary,  BBI Source  Scientific,  Inc.,  the
Company  designs,  manufactures  and  markets  Laboratory  Instruments  used  in
hospitals,  clinics, and research,  environmental and food testing laboratories.
Utilizing a common hardware technology  platform,  these instruments are used in
connection  with the  performance  of an IVD test,  including  reading  the test
result.

      The Company's  specialty clinical laboratory services include both routine
and  sophisticated  infectious  disease testing in microbiology,  immunology and
molecular biology.  The Company seeks to focus its specialty laboratory services
in advanced areas of infectious disease testing,  and provides contract research
and  clinical  trials for the United  States  government  and for  domestic  and
foreign test kit manufacturers.

Diagnostic Products

      The Company  manufactures  its  Diagnostic  Products from human plasma and
serum which are obtained from nonprofit and commercial blood centers,  primarily
in the United  States.  The Company has acquired  and  developed an inventory of
approximately  50,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which  provides  most of the raw material for its products.
Within the Diagnostic  Products class are two groups:  Quality Control  Products
(Panels and Accurun(R) Run Controls) and Diagnostic Components.

      Quality Control Panels

      Quality  Control  Panels consist of blood  products  characterized  by the
presence or absence of  specific  disease  markers  and a Data Sheet  containing
comprehensive  quantitative data useful for comparative analysis.  These Quality
Control  Panels are designed for  measuring  overall  test kit  performance  and
laboratory proficiency,  as well as for training laboratory  professionals.  The
Company's Data Sheets,  containing  comprehensive  quantitative  data useful for
comparative analysis,  are an integral part of its Quality Control Panels. These
Data Sheets are  created as the result of  extensive  testing of proposed  panel
components in both the Company's  laboratories and at major testing laboratories
on behalf of the  Company in the United  States and Europe,  including  national
public health  laboratories,  research and clinical  laboratories and regulatory
agencies. These laboratories are selected based on their expertise in performing
the  appropriate  tests on a large  scale in an actual  clinical  setting;  this
testing  process  provides  the  Company's  customers  with the benefit that the



                                      -3-
<PAGE>

Quality  Control Panels they purchase from the Company have  undergone  rigorous
testing  in  actual  clinical  settings.  In  addition,   the  Company  provides
information on its Data Sheets on the reactivity of panel  components in all FDA
licensed test kits and all leading  European test kits for the target  pathogen,
as well as for all other appropriate markers of this pathogen.  For example, the
Company's HIV panel Data Sheets include anti-HIV by IFA, ELISA and western blot;
HIV antigen by ELISA; and HIV RNA by several  molecular  diagnostic  procedures.
The Company's Data Sheets require  significant time and scientific  expertise to
prepare.  The  following  table  describes  the types of Quality  Control  Panel
products currently offered by the Company.

                             Quality Control Panels

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------

Product Line     Description                 Use                   Customers
-----------------------------------------------------------------------------------------

<S>             <C>                         <C>                   <C>
Seroconversion   Plasma samples collected    Compare the clinical  Test kit
Panels           from a single individual    sensitivity of        manufacturers and
                 over a specific time        competing             regulators.
                 period showing conversion   manufacturers' test
                 from negative to positive   kits, enabling the
                 for markers of an           user to assess the
                 infectious disease.         sensitivity of a
                                             test in detecting a
                                             developing
                                             antigen/antibody.
-----------------------------------------------------------------------------------------

Performance      A set of 10 to 50 serum     Determine test kit    Test kit
Panels           and plasma samples          performance against   manufacturers and
                 collected from many         all expected levels   regulators.
                 different individuals and   of reactivities in
                 characterized for the       the evaluation of
                 presence or absence of a    new, modified and
                 particular disease marker.  improved test
                                             methods.
-----------------------------------------------------------------------------------------

Sensitivity      Precise dilutions of human  Evaluate the low-end  Test kit
Panels           plasma or serum human       analytical            manufacturers
                 plasma or serum containing  sensitivity of a
                 a known amount of an        test kit.
                 infectious disease marker
                 as calibrated against
                 international standards.
-----------------------------------------------------------------------------------------

Qualification    Dilutions of human plasma   Demonstrate the       Clinical reference
Panels           or serum manifesting a      consistent            laboratories, blood
                 full range of reactivities  lot-to-lot            banks, and hospital
                 in test kits for a          performance of test   laboratories
                 specific marker.            kits, troubleshoot
                                             problems, evaluate
                                             proficiency, and
                                             train laboratory
                                             technicians.
-----------------------------------------------------------------------------------------

OEM Panels       Custom-designed             Train laboratory      Custom designed with
                 Qualification Panels for    personnel on new      test kit
                 regulators and test kit     test kits or          manufacturers and
                 manufacturers for           equipment.            regulators as an
                 distribution to customers                         end-user product or
                 or for internal use.                              for internal use.
-----------------------------------------------------------------------------------------
</TABLE>

      The Company first  introduced  Quality Control Panels in 1987. The Company
currently  offers a broad range of Quality Control Panels that address a variety
of needs of  manufacturers  and  regulators of test kits as well as blood banks,
hospitals,  clinical laboratories and other end-users.  Prices for the Company's
quality control  seroconversion,  performance and sensitivity  panels range from
$450 to $2,000  each,  and its  qualification  and OEM panels range from $100 to
$200 per panel.


                                      -4-
<PAGE>

      Seroconversion  and  Performance  Panels are  comprised of unique and rare
plasma specimens  obtained from individuals during the short period of time when
the markers for a particular  disease are converting  from negative to positive.
As a result, the quantity of any such panel is limited, so that the Company must
replace these panels as they sell out with another panel  comprised of different
specimens  equally unique and rare. The Company  believes that its inventory and
relationships with blood centers affords it a competitive advantage in acquiring
such plasma for  replacement  panels and  developing new products to meet market
demand.  There can be no assurance  that the Company will be able to continue to
obtain such specimens.

      Quality  Control Panels  currently span the  immunologic  markers for AIDS
(i.e.,  HIV),  Hepatitis  (A, B and C),  Lyme  Disease  and  ToRCH  (Toxoplasma,
rubella,  cytomegalovirus and herpes simplex virus). New introductions this year
include Performance Panels for HBsAg,  molecular  Qualification  Panels for HIV,
HBV and HCV, and additional Seroconversion Panels for HIV, HBV and HCV.

      Accurun(R) Run Controls

      End-users  of test kits  utilize Run  Controls to confirm the  validity of
results by monitoring test performance,  thereby  minimizing false negative test
results and  improving  error  detection.  Run  controls  consist of one or more
specimens of known  reactivity  that are tested  together  with donor or patient
samples in an assay to  determine  whether  the assay is  performing  within the
manufacturer's  specifications.  Clinical  laboratories  generally process their
patient  specimens in a batch processing  mode, and typically  include 25 to 100
specimens to be tested in each batch (a "run").  Large  laboratories may perform
several runs per day, while smaller  laboratories  may perform only a single run
each day, or sometimes only several runs per week. A clinical laboratory using a
Run Control will place the Run Control  product in a testing well or  test-tube,
normally used for a specimen,  and will test it in the same manner that it tests
the donor or patient specimens. It will then compare the results generated to an
acceptable range, determined by the user, to measure whether the other specimens
are  being  accurately  tested.  The  Run  Control  result  must be  within  the
acceptable range to be considered  valid. This is often tracked visually using a
Levey-Jennings chart.  Depending upon a particular  laboratory's quality control
practices,  it may use several  Run  Controls on each run or it may simply use a
Run Control in a single run at the beginning and end of the day.


      The Company's  AccuChart(TM) tracking and charting software,  used as part
of a laboratory's  quality  assurance  program,  runs on a PC and is designed to
provide the data tracking capability needed to document laboratory performance.


      The  Company's  Accurun(R)  family of products is targeted at the emerging
market of end-users of infectious  disease test kits. The Company  believes that
it offers the most comprehensive line of Run Controls in the industry,  and that
its Accurun(R) products, in combination with its Quality Control Panel products,
provide an  extensive  line of products  for  quality  assurance  in  infectious
disease  testing.  The  Company  intends  to  continue  to  expand  its  line of
Accurun(R)  products,  thereby  providing its customers with the convenience and
cost effectiveness of a single supplier for independent run controls.

      The Company  introduced its first four Accurun(R) Run Control  products in
the fourth  quarter of 1993 and has since  developed  and  released  for sale an
additional 40 Accurun(R) products,  for a total of 44 Run Controls. The majority
of these products are available for diagnostic  purposes;  the others  currently
are limited to research use.  Current  Accurun(R) Run Control  products range in
price from $5 to $60 per milliliter and are described in the following table.


                                      -5-
<PAGE>


                             ACCURUN(R) RUN CONTROLS

--------------------------------------------------------------------------------


    Product Line          Description       Current Number   Primary Customers
                                              of Products
--------------------------------------------------------------------------------

  Accurun(R)1-99      Multi-marker Run              6        Blood Banks
                     Control for
                     immunological tests
--------------------------------------------------------------------------------

  Accurun(R)100-199  Single-marker Run             23       Hospitals and
                     Control for                            clinical reference
                     immunological tests                    laboratories
--------------------------------------------------------------------------------

  Accurun(R)200-299  Multi-marker Run               2       Research and
                     Control for molecular                  specialty
                     tests                                  laboratories
--------------------------------------------------------------------------------

  Accurun(R)300-399  Single-marker Run              8       Research and
                     Control for                            specialty
                     immunological tests                    laboratories
--------------------------------------------------------------------------------

  Accurun(R)800-899  Negative Run Control           4       All laboratories
                     for immunological and
                     molecular tests
--------------------------------------------------------------------------------

      All of the Company's  Accurun(R) Run Controls require either FDA premarket
clearance (a 510(k)) or validation  studies (if the products are exempt from FDA
submission requirements under the FDA Modernization Act of 1997), prior to being
marketed for diagnostic  use. As of March 1, 1999, a total of 10 products in the
Accurun 1(R) line and 16 single analyte Accurun(R) controls have either received
510(k)  clearance  or have been  validated.  Two  additional  Accurun(R)  single
analyte products have been submitted but have not yet received FDA approval.

      Diagnostic Components

      Diagnostic  Components are the individual materials supplied to infectious
disease test kit manufacturers  and combined (often after further  processing by
the manufacturer) with other materials to become the various fluid components of
the manufacturer's test kit. The Company supplies Diagnostic  Components in four
product  lines:  Normal  Human  Plasma,  Normal  Human  Serum,  Basematrix,  and
Characterized  Disease State Serum and Plasma. Normal Human Plasma and Serum are
both the clear  liquid  portion of blood which  contains  proteins,  antibodies,
hormones  and  other  substances,  except  that the  Serum  product  has had the
clotting factors removed.  Basematrix, the Company's proprietary processed serum
product that has been  chemically  converted  from  plasma,  is designed to be a
highly-stable,  lower cost  substitute  for most  Normal  Human Serum and Plasma
applications.  Characterized  Disease State Serum and Plasma are collected  from
specific  blood  donors  pre-selected  because of the  presence  or absence of a
particular   disease  marker.   The  Company  often  customizes  its  Diagnostic
Components by further  processing the raw material to meet the specifications of
the test kit manufacturer.  The Company's  Diagnostic  Components range in price
from $0.25 to $60 per milliliter, with the majority selling between $0.50 and $5
per milliliter.

                                      -6-

<PAGE>
Laboratory Instruments


      In 1997,  the  Company  acquired  the  business  and net  assets of Source
Scientific,   Inc.,  a  laboratory  instrument  manufacturer  in  Garden  Grove,
California.  As a result of this  acquisition,  the  Company  through its wholly
owned subsidiary, BBI Source Scientific,  Inc. ("BBI Source"), now has expertise
in IVD  instruments,  adding to its existing  capability in IVD quality  control
products.  The  Company  hopes to  capitalize  on this common  customer  base by
expanding  the  products  offered by both sales  forces.  See also Note 2 to the
Company's  Notes  to  Consolidated  Financial  Statements  in  Item 8  hereunder
regarding  the  Company's  purchase  of the  business  and net  assets of Source
Scientific, Inc.


      BBI Source designs,  manufactures and markets Laboratory  Instruments used
in   hospitals,   clinics,   and  research,   environmental   and  food  testing
laboratories.  They are generally sold on a private-label or OEM basis for other
companies  utilizing a common  hardware  technology  platform.  The  instruments
manufactured   by  the   Company  use   advanced   optical   detection   methods
(luminescence,  fluorescence,  reflectance, photometry), robotics, fluidics, and
unique  software,   which  is  desired  by  customer  companies   reselling  the
state-of-the-art   instrumentation   systems  to   clinical   distributors   and
laboratories worldwide.

      The   Products   currently   being   offered  by  BBI  Source   have  been
commercialized  since 1985, and were primarily developed in conjunction with IVD
test kit manufacturers. BBI Source hopes to attract development partners for its
newest prototype  products.  Management believes that products address important
market segments in biomedical and clinical  diagnostic testing and environmental
monitoring and food testing  research.  The BBI Source product line includes the
following:

      MicroChem(R)  Photometer.  A compact,  low-cost,  photometer  designed for
immunoassay and general chemistry applications.

      ChemStat(R) Automated Photometer. A high-speed,  automated photometer with
a sample  capacity  of 95 tubes and a read rate of one sample per  second.  This
product is suited for high-volume processing.

      ChemStat(R)  Plus  Automated  Photometer.  The  ChemStat  Plus is a second
generation photometer compatible with the EXEC-WASH Washing System that features
menu-driven software and optional on-board dispensers.

      E/LUMINA(R) Luminescence Analyzer. A flexible luminometer for both "flash"
and "glow" luminescence  methods,  this automated system reads up to 114 samples
and reports final results.

      E/LUMINA(R) 2E Automated Luminescence  Analyzer.  This detection system is
designed with the same features as the E/LUMINA  Luminescence  Analyzer that can
be used to detect faster "flash"  luminescence  techniques and adapts to various
formats, as well as to liquid phase assays.

      EXEC-WASH(R) Washing System. An automated  immunoassay washing system that
can be  quickly  configured  by the  user to wash  different  solid-phase  assay
formats by a propriety manifold design. The EXEC-WASH is fully compatible with a
variety of other Company products,  such as the ChemStat,  the ChemStat Plus and
the E/LUMINA Luminescence Analyzer.

      PlateMate(R)  Reader.  The  Company  shipped  in 1998 the first  PlateMate
Reader  units  to  a  potential   distributor.   PlateMate  is  a  microfluidics
well-reading  system combining robotics and fluidics.  The current design of the
PlateMate Reader performs  photometric  assays in the 400 to 700 nm range for 96
samples at a time and prints out results directly on a built-in printer.




                                      -7-
<PAGE>
      Protocol Design Software  System.  A development  tool for researchers and
assay manufacturers,  the program operates under Microsoft(R) Windows and serves
as the master  programing  center for EXEC-WASH systems to create fluid handling
protocols.

      FOCUS(R) Florescence Polarization System. Fluorescence polarization ("FP")
is a technology that has dominated the clinical market for therapeutic and abuse
drug level testing for many years.

      FluoroStat(R)  Reader.  The  FluoroStat is a compact  fluorometer  that is
highly sensitive and provides a broad dynamic range for tube-based  fluorometric
assays.  The  instrument  was  introduced  in  September  1995 and is  currently
available for OEM manufacture.

Services

      The Company seeks to focus its specialty  laboratory  services in both the
clinical  reference  laboratory testing and advanced research areas. The Company
concentrates its services in those areas of infectious disease testing which are
complementary to its quality control and diagnostic products businesses.

      Specialty   Clinical   Laboratory   Testing.   Through  its  wholly  owned
subsidiary, BBI Clinical Laboratories,  Inc. the Company operates an independent
specialty  clinical  reference   laboratory  which  performs  both  routine  and
sophisticated  infectious  disease  testing  in  microbiology,   immunology  and
molecular  biology,  with special  emphasis in AIDS,  Viral  Hepatitis  and Lyme
Disease.  The  Company's  specialty  clinical  laboratory  combines  traditional
microbiology,  advanced immunology, and current molecular diagnostic techniques,
such as PCR, to detect and identify  microorganisms,  their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA). Customers include blood
banks, physicians, clinics, hospitals and other clinical/research laboratories.

      Contract Research. The Company,  through its wholly owned subsidiary,  BBI
Biotech  Research  Laboratories,  Inc.  ("BBI  Biotech"),  offers a  variety  of
contract research services in molecular biology,  cell biology and immunology to
governmental   agencies,   diagnostic  test  kit  manufacturers  and  biomedical
researchers.  Molecular biology services include DNA sequencing, recombinant DNA
support,  probe  labeling  and custom PCR assays.  Cell  biology and  immunology
services include sterility testing,  virus infectivity  assays,  cultivations of
virus or bacteria from  clinical  specimens,  preparation  of viral or bacterial
antigens  or  nucleic  acids,  and  production  of  antibodies.  The  Company is
currently  providing  contract  research  services  under several  contracts and
grants. These services primarily related to infectious diseases, and include the
following:  assessment  of the  efficiency of candidate HIV vaccines in a monkey
model system; development of a multiplex RT PCR based test for HIV-1, HTLV I/II,
HCV, and HBV; DNA sequencing of human genes involved in neurological  disorders;
plate assays for HIV-1 genotyping;  eliciting neutralizing  antibodies targeting
HIV, and support for a novel approach to an HIV vaccine  developed by one of the
Company's scientists.  In addition,  since 1983, BBI Biotech, has provided blood
processing and repository  services for the National Cancer  Institute  ("NCI"),
also a part of the National Institutes of Health ("NIH").  The repository stores
over 2,000,000 specimens and processes or ships up to several thousand specimens
per week in support of various  NIH cancer and virus  research  programs.  A one
year NCI repository contract was signed in February 1997 which includes four one
year  renewal  options  exercisable  by NCI.  The  total  value of the  contract
including all options,  is $4.8 million.  To date all renewal  options have been
approved  by the NCI  although  there can be no  assurance  that any  subsequent
options  will be  exercised.  In 1998,  the  Company was awarded a six year $2.9
million repository contract (including five one year extension options) with the
National  Heart,  Lung and Blood Institute of the NIH. There can be no assurance
that option years will be exercised.

      Clinical  Trials.  The Company  conducts  clinical trials for domestic and
foreign test kit manufacturers.  Test kit manufacturers must conduct such trials
to collect data for  submission  to the United  States FDA and other  regulatory
agencies.  By  providing  this  service,  the Company is able to maintain  close
contact with test kit manufacturers and regulators,  and is able to evaluate new
technologies  in various stages of  development.  The Company  believes that the
reputation of its laboratory and scientific  staff,  its large number of Quality
Control Panels,  and its inventory of  characterized  serum and plasma specimens
assist the Company in marketing its clinical trial services to its customers.


                                      -8-
<PAGE>


The  Company has  performed  clinical  trials for a number of United  States and
foreign  test kit  manufacturers  seeking  to  obtain  FDA  approval  for  their
infectious disease test kits.

      Laboratory Instrumentation Services. BBI Source offers design, development
and manufacturing  services to companies  seeking to market biomedical  products
manufactured under government-approved  manufacturing practices.  These services
range in complexity from consulting to full system development and distribution.

      BBI Source also  provides  after-sales-service.  Management  believes that
after-sales  service is a major  marketing  advantage  in many of the  Company's
markets,  since many of the Company's  customers do not maintain  their own full
service  departments.  Servi-Trak(R),  a proprietary  software program, is a key
element of this after-sales service. The Company's service department is located
at BBI Source's facility in Garden Grove, California. A fully functional service
center  located in Giessen,  Germany,  is  contracted  by the Company to provide
European service and support.

      Drug Screening  Program.  As a subcontractor for an NIH AIDS grant held by
the University of North Carolina at Chapel Hill, the Company has  established an
anti-HIV  drug  screening  program to test a large  number of  natural  products
(largely plant derivatives) to determine whether they inhibit HIV replication in
an in vitro assay system. These in vitro assays are also offered as a service to
researchers  and  pharmaceutical  companies  who wish to test various  candidate
anti-viral agents for anti-HIV activity.

Research and Development

      On  September  30, 1998 the Company  acquired the  remaining  common stock
outstanding  of  BioSeq,  Inc.  that  it did not  previously  own.  BioSeq  is a
development  stage  company  with patent  pending  technology  based on pressure
cycling technology ("PCT").  PCT research is focused in two areas:  nucleic acid
extraction  and  purification  of target  pathogens  in  connection  with sample
preparation for PCR or other  molecular  testing;  and pathogen  inactivation of
blood plasma for transfusion.  See Note 2 to the Company's Notes to Consolidated
Financial Statements in Part 8 hereunder for further transaction details.

      In August 1998,  the Company  hired a Vice  President,  Biotheraputics  to
direct its drug discovery and development  efforts.  In  collaboration  with Dr.
K.H. Lee of the School of Pharmacy, University of North Carolina at Chapel Hill,
this  segment   conducts   research   relating  to   compounds,   pharmaceutical
compositions,  therapeutic methods,  and vaccine preparation.  The Company owns,
jointly with UNC,  five United  States  patents  related to this drug  discovery
program.  Two additional United States applications and foreign applications for
all five of the joint patents are pending.

      The  Company's  research  and  development  effort is  focused  on the (i)
development of new and improved Quality Control Products (Panels and Accurun(R))
for the emerging  end-user  market,  (ii)  expansion of its  infectious  disease
testing services using PCR and other amplification  assays, (iii) development of
PCT for nucleic acid  purification and pathogen  inactivation,  (iv) determining
the  mechanism of action and  performing  initial  toxicity  studies on its lead
compounds  in the  Company's  drug  discovery  program;  and (v) new  laboratory
instruments  and mechanical and optical  detection  techniques.  The Company has
approximately  32 full or  part-time  employees  involved  in its  research  and
development  effort.  For 1998 the Company  increased  spending on research  and
development as a percentage of revenue  compared to 1997 and expects to increase
such   expenditures   as  a  percentage  of  revenue  next  year  as  well.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Results of  Operations."  The Company's  research  scientists work
closely with sales, marketing,  manufacturing,  regulatory and finance personnel
to identify and prioritize the development of new products and services.

      In the area of Quality Control Products, the Company's product development
activities center on the  identification and  characterization  of materials for
the manufacture of new products and the replacement of sold-out products. During
1998,  the  Company   introduced  18  new   Seroconversion,   Performance,   and
Qualification Panel products, as well as 11 new Accurun(R) Run Controls,  and 43
OEM Panels.  The Company is developing new Quality Control Products for use with
both  immunological and molecular  diagnostic tests for subtypes and variants of
HIV,  HCV and HBV,  and a variety of controls  targeted  for leading  instrument
platforms. The Company has increased the number of off-the-shelf Quality Control
Products it offers from  approximately 20 products in 1990 to approximately  186
in 1998.

                                      -9-
<PAGE>


      The  Company's  product  development   activities  related  to  Laboratory
Instruments  are  centered on  additional  configurations  for its  PlateMate(R)
microtiter plate reader and the development of a "reflectance" reader to produce
qualitative results from rapid IVD tests using dry chemistry (strip) technology.
In addition, the Company continues to work on applications for existing products
to broaden their utilization.

      The Company is also developing new and improved  infectious  disease tests
which  offer  potential  for  above  average  profit  for  use in its  specialty
laboratory  business.  This includes emphasis on additional  applications of PCR
and other amplification  technologies to infectious disease diagnostics,  beyond
its current assays for the pathogens of AIDS, Viral Hepatitis,  Lyme Disease and
Herpes,  and for the  direct  detection  of other  infectious  agents  in blood,
tissues and other body fluids.

      From time to time in the past,  the  Company  has  funded a portion of its
research and development activities from grants provided by various agencies and
departments  of the  United  States  government.  See also  "--Services-Contract
Research."

Strategic Alliance

      University  of North  Carolina  at Chapel  Hill  ("UNC").  The  Company is
directly  supporting  a drug  discovery  program  at UNC,  in which a  full-time
research  scientist  is working to develop  synthetic  derivatives  of  anti-HIV
compounds   that  have  been   discovered   pursuant  to  the  Company's   joint
collaboration  with UNC.  This  research  scientist is also working to introduce
modifications  to these  derivatives  that  would make them more  soluble,  less
toxic, or otherwise enhance their anti-viral properties. UNC has licensed to the
Company exclusive  worldwide rights to three series of patent applications filed
by the Company and UNC with respect to three classes of anti-HIV compounds.  Two
such compounds have exhibited therapeutic indices in in vitro test model systems
in excess of those recorded for AZT under comparable test conditions. Under this
license,  the Company will also have the rights to any new anti-HIV compounds or
derivatives  developed in the course of this  sponsored  research,  provided the
Company   obtains   certain   regulatory   approvals  from  the  FDA.  See  also
"--Services-Drug Screening program."



                                      -10-
<PAGE>

Sales and Marketing

      The Company's  sales and  marketing  efforts are directed by a Senior Vice
President, who is  responsible  for a group  consisting of 29 sales people and 9
other full-time marketing and customer services employees.

      The Company's  marketing  strategy is focused upon addressing the needs of
its customers in the infectious  disease  testing  market  throughout the entire
test  kit  life-cycle,  from  initial  research  and  development,  through  the
regulatory   approval   process   and  test   kit   production,   to   training,
troubleshooting  and routine  use by  end-users  such as clinical  laboratories,
hospitals and blood banks.

      The  Company  continues  to focus its sales and  marketing  efforts on the
emerging  end-user  market for quality control  products for infectious  disease
test kits. To promote this objective,  the Company implemented a major marketing
platform,  known as "Total Quality System" ("TQS").  TQS is a package of Quality
Control Products,  including the Company's Accurun(R) Run Controls and AccuChart
Quality Control  Software,  which is designed to provide test kit end-users with
the products  needed in an overall  quality  assurance  program.  These products
enable laboratories to evaluate each of the key elements involved in the testing
process:  the test kit,  laboratory  instrument  and laboratory  personnel.  The
Company believes that TQS effectively addresses the need for end-users to ensure
the accuracy of their test  results.  The Company  intends to continue to expand
its sales and marketing  activities  with respect to its Accurun(R)  line of run
control products.

      The  Company's  products  are  currently  sold  through a  combination  of
telephone,   mail,   third  party   distributors   and  direct  sales   efforts.
Domestically,  Diagnostic  Products  are  sold  through  a  direct  sales  force
consisting  of a sales group  manager,  two  regional  managers and twelve sales
representatives.   Internationally,   the  Company  distributes  its  Diagnostic
Products both directly and through 21 independent distributors located in Japan,
Australia,  South  America,  Southeast  Asia,  Israel and Europe.  The Company's
international  sales manager oversees the Company's  foreign  distributors.  The
Company's  Laboratory  Instruments  are  sold  through  a  direct  domestic  and
international   sales  force   consisting   of  one   director   and  one  sales
representative.  Export sales,  including sales to  distributors,  for the years
ended  December 31, 1998,  1997, and 1996 were $4.1 million,  $4.6 million,  and
$4.3  respectively.  See also  Note 8 to the  Company's  Notes  to  Consolidated
Financial Statements in Part 8 hereunder.

      The Company's  Specialty Clinical Laboratory Testing services are marketed
primarily  through a direct  domestic  sales  force  consisting  of eight  sales
representatives  managed by one regional manager and a sales director. The sales
representatives  are located  throughout  the eastern,  mid-western  and western
United   States.   They  are   supported   internally   by  a  client   services
representative.

      The Company  emphasizes  high  quality  products and  services,  technical
knowledge,  and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers and
prospective  customers about its products through a series of detailed marketing
brochures,  technical  bulletins and  pamphlets,  press releases and direct mail
pieces.  These  materials are  supplemented  by  advertising  campaigns in major
industry  publications,  technical  presentations,  and  exhibitions  at  local,
national and international trade shows and expositions.


                                      -11-
<PAGE>

  Customers

      The  Company's  customers for  Diagnostic  Products  comprise  three major
groups:   (i)  international   diagnostics  and   pharmaceutical   manufacturing
companies,  such as Abbott Diagnostics,  Behring,  Boehringer Mannheim,  Chiron,
Fujirebio,  Hoffman LaRoche,  Ortho  Diagnostics  (Johnson and Johnson),  Sanofi
Diagnostics and Sorin  Biomedica;  (ii)  regulatory  agencies such as the United
States FDA, the British Public Health  Laboratory  Service,  the French Institut
National de la Transfusion Sanguine, and the German Paul Ehrlich Institute;  and
(iii)  end-users  of  diagnostic  test kits,  such as hospital  and  independent
clinical laboratories,  including LabCorp, Quest and SmithKline Beecham,  public
health laboratories and blood banks, including the American Red Cross, Swiss Red
Cross, United Blood Services and Kaiser Permanente.  The Company's customers for
Laboratory  Instruments  consist of international  diagnostic and pharmaceutical
manufacturing  companies  and are  generally  sold on an OEM  basis,  for use by
hospitals,  and  clinical  and research  laboratories.  In addition,  Laboratory
Instruments are sold directly to  environmental  and food testing  laboratories,
and wineries.  Customers include Mast Immuno Systems, Hybritech Inc., Vicam, and
Toray Fuji Bionics Inc. The  Company's  Specialty  Clinical  Laboratory  Testing
services  are sold to hospital  and  clinical  laboratories,  physicians,  blood
banks,  researchers  and other health care  providers.  The  Company's  Contract
Research   services  are  typically  offered  under  contracts  to  governmental
agencies, diagnostic test kit manufacturers and biomedical researchers.


      The Company  does not have  long-term  contracts  with its  customers  for
Quality  Control  Products and Diagnostic  Components,  which are generally sold
pursuant to purchase orders for discrete purchases.  Laboratory  Instrumentation
are  generally  sold on an OEM basis under  short term  contracts  with  monthly
delivery  dates.  Although  the Company  believes  that its  relationships  with
customers are satisfactory,  termination of the Company's  relationship with any
one of its customers could have a material adverse effect on the Company.

      During the fiscal years 1998, 1997 and 1996,  sales to the Company's three
largest  customers  accounted  for  an  aggregate  of  approximately  20% of the
Company's net sales,  although the customers  were not identical in each period.
During the fiscal  years  1998,  1997 and 1996,  the  combined  revenues  to all
branches  of the  National  Institutes  of Health,  a United  States  Government
agency,  accounted for approximately 13% of total  consolidated  revenues of the
Company. While the Company believes that the loss of any one customer would have
an  adverse  effect on its  results,  this risk is  partially  mitigated  by the
diversity  of its  customer  base  within  the IVD  industry  and the  different
diseases and instrument platforms on which they focus.

Manufacturing and Operations

      The Company manufactures and assembles Diagnostic Products at its facility
in West Bridgewater,  Massachusetts.  Raw materials (primarily plasma and serum)
are  acquired  from a  variety  of  vendors  and  through  a  program  of  donor
recruitment,    screening,   management,   and   plasma/serum   collection   and
characterization.  All  important  materials  have  multiple  sources of supply.
Laboratory  Instruments are manufactured and assembled at the Company's facility
in Garden Grove, California. Raw materials and subassemblies are acquired from a
variety of vendors with multiple sources of supply.

      The Company also operates a specialty clinical  laboratory in New Britain,
Connecticut,   and  a  research  and  development  laboratory  in  Gaithersburg,
Maryland. See "Item 2 -- PROPERTIES."

Competition

      The market for the Company's products and services is highly  competitive.
Many of the Company's  competitors  are larger than the Company and have greater
financial,   research,   manufacturing,   and  marketing  resources.   Important
competitive  factors for the Company's products include product quality,  price,
ease of use,  customer  service and  reputation.  In a broader  sense,  industry
competition  is based upon  scientific  and  technical  capability,  proprietary
know-how, access to adequate capital, the ability to develop and market products
and processes,  the ability to attract and retain qualified  personnel,  and the
availability of patent protection. To the extent that the Company's products and
services do


                                      -12-
<PAGE>

not reflect  technological  advances,  the Company's ability to compete in those
products and services could be adversely affected.

      In the area of Quality  Control  Products,  the  Company  competes  in the
United  States with NABI  (formerly  North  American  Biologicals,  Inc.) in run
controls and quality control panel products,  with Dade  International,  Bio-Rad
Laboratories,  Inc., and Blackhawk  Biosystems Inc. in run controls,  and with a
number of smaller,  privately  held  companies  in quality  control  panels.  In
Europe,  in addition to the above,  the Netherlands Red Cross offers several run
control and panel products.  The Company believes that all of these  competitors
currently  offer a more limited line of panel and run control  products than the
Company,  although  there can be no assurance  these  companies  will not expand
their product lines.

      In the Diagnostic Components area, the Company competes against integrated
plasma collection and processing companies such as Serologicals,  Inc. and NABI,
as well as smaller,  independent plasma collection centers and brokers of plasma
products.  In the Diagnostic  Components area, the Company competes on the basis
of quality, breadth of product line, technical expertise and reputation.

      The  laboratory  instrument  manufacturing  industry is diverse and highly
competitive.   The  Company  believes  its  technology   base,   reputation  for
reliability,  systems  integration  and service  capabilities  provide it with a
competitive  advantage  over  its  competitors  which  include:  Dynatech  Corp,
Kollsman  Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado  Medtech,  Inc.), as well as numerous,  smaller  companies,  such as
Awareness Technology Inc.

      In the  Specialty  Clinical  Laboratory  Testing  services  portion of the
Company's business, it competes with large national reference laboratories, such
as LabCorp of  America,  Quest  Laboratories  and  SmithKline  Beecham  Clinical
Laboratories,  as well as several independent  regional  laboratories,  hospital
laboratories,  government contract laboratories and large research institutions.
The  Company  believes  that by focusing on the  specialty  clinical  laboratory
market,  it is able to offer its customers a higher  value-added  service on the
more complex diagnostic tests than the larger national reference laboratories.

Intellectual Property

      The Company  holds as trade  secrets  current  technology  used to prepare
Basematrix and other blood-based products. None of the Company's Quality Control
Products  or  Diagnostic  Components  has  been  patented.  The  Company  relies
primarily  on  a   combination   of  trade   secrets  and   non-disclosure   and
confidentiality  agreements to establish and protect its  proprietary  rights in
its  technology  and  products.  There can be no assurance  that others will not
independently  develop or otherwise  acquire the same,  similar or more advanced
trade secrets and know-how.

      BBI Source has also relied on trade secrets and  proprietary  know-how for
its  Laboratory   Instruments  which  it  protects  in  part  by  entering  into
confidentiality  agreements  with  persons  or  parties  deemed  appropriate  by
management.  In addition,  the Company  currently  has six issued  United States
patents,   covering   significant  aspects  of  the  Company's  core  instrument
technology and techniques,  as well as several electronic and mechanical designs
employed in the Company's existing products.

      The Company owns two United  States  patents  related to its contracts and
services work, and, jointly with UNC, has five additional  United States patents
relating to compounds,  pharmaceutical  compositions,  therapeutic  methods, and
vaccine preparation in connection with the Company's drug discovery program. Two
additional United States  applications and foreign  applications for all five of
the joint patents are pending.

      The Company has  fifteen  pending  patent  applications  for the  Pressure
Cycling  Technology  acquired  from  BioSeq in 1998.  Several of these have been
followed  up  with  foreign  applications,  and  the  Company  expects  to  file
additional foreign applications in 1999.

      The Company has no reason to believe  that its  products  and  proprietary
methods  infringe the  proprietary  rights of any other  party.  There can be no
assurance,  however,  that other parties will not assert  infringement claims in
the future.


                                      -13-
<PAGE>

Government Regulation

      The manufacture and  distribution of medical devices,  including  products
manufactured  by the Company that are intended for in vitro  diagnostic use, are
subject to extensive  government  regulation  in the United  States and in other
countries.

      In the United States,  the Food, Drug, and Cosmetic Act ("FDCA") prohibits
the marketing of most in vitro diagnostic  products until they have been cleared
or  approved  by the FDA,  a  process  that is  time-consuming,  expensive,  and
uncertain.  In  vitro  diagnostic  products  must be the  subject  of  either  a
premarket  notification clearance (a "510(k)") or an approved premarket approval
application  ("PMA").  With  respect  to  devices  reviewed  through  the 510(k)
process,  a company may not market a device for diagnostic use until an order is
issued by the FDA  finding  the  product  to be  substantially  equivalent  to a
legally marketed  device. A 510(k)  submission may involve the presentation of a
substantial  volume  of  data,  including  clinical  data,  and  may  require  a
substantial  period of review.  With respect to devices reviewed through the PMA
process,  a  company  may not  market  a device  until  FDA has  approved  a PMA
application,  which must be supported by extensive data,  including  preclinical
and clinical trial data, literature,  and manufacturing information to prove the
safety and effectiveness of the device.

      The Company's  Accurun(R) Run Controls,  when marketed for diagnostic use,
have been  classified  by the FDA as medical  devices  that until 1998  required
clearance under the 510(k) process.  In 1998, new rules took effect which exempt
unassayed  controls from 510(k) clearance.  BBI may label these products "For in
vitro diagnostic use" if they are validated according to the Company's protocols
and manufactured according to cGMP (current Good Manufacturing Practices,  which
is FDA guidance for manufacturing  processes for medical devices). The FDA still
requires 510(k) clearance for assayed controls, and could, in addition,  require
that some products be reviewed through the PMA process, which generally involves
a longer review period and the submission of more  information to FDA. There can
be no assurance  that the Company will obtain  regulatory  approvals on a timely
basis, if at all. Failure to obtain regulatory  approvals in a timely fashion or
at all could have a material adverse effect on the Company.

      As of March 1, 1999,  a total of 10 products in the Accurun  1(R) line and
16 single analyte  Accurun(R)  controls have either received 510(k) clearance or
have been validated. Two additional Accurun(R) single analyte products have been
submitted  but have not yet  received  FDA  approval.  Certain of the  Company's
Accurun(R)  run controls are  currently  marketed  "for research use only." Such
products do not  currently  require FDA  premarket  clearance or  approval.  The
labeling  of these  products  limits  their  use to  research.  It is  possible,
however,  that some  purchasers  of these  products may use them for  diagnostic
purposes  despite the Company's  intended use. In these  circumstances,  the FDA
could allege that these products should have been cleared or approved by the FDA
prior to marketing,  and initiate enforcement action against the Company,  which
could have a material adverse effect on the Company. The FDA has recently issued
a Draft Policy Compliance Guideline,  which, if it takes effect as written, will
strictly limit the sale of products labeled "for research use only." The Company
is monitoring this situation, and will adapt its policies as required.

      BBI  Source   generally   obtains  510(k)   approval  for  all  laboratory
instrumentation designed and manufactured in its Garden Grove facility.

      The  Company's  Diagnostic  Products and  Laboratory  Instruments  product
groups are both  registered as medical  device  manufacturers  with the FDA, and
file listings of their products semi-annually.  The Company's facilities in West
Bridgewater,  Massachusetts for Diagnostic Products and Garden Grove, California
for  Laboratory  Instruments  are FDA  Good  Manufacturing  Practices  (FDA/GMP)
facilities,  and, as such,  maintain high standards of quality in manufacturing,
testing and documentation, and implement strict GMP guidelines governing reagent
and instrument manufacturing.

      Once cleared or  approved,  medical  devices are subject to pervasive  and
continuing regulation by the FDA, including, but not limited to, GMP regulations
governing  testing,  control,  and  documentation;   and  reporting  of  adverse
experiences  with the use of the device.  Ongoing  compliance with GMP and other
applicable  regulatory  requirements is monitored through periodic  inspections.
FDA regulations require agency clearance or approval for certain changes if they
do or could affect the safety and  effectiveness of the device,  including,  for
example,  new  indications  for use,  labeling  

                                      -14-
<PAGE>

changes or changes in design or manufacturing methods. In addition,  both before
and after  clearance or approval,  medical devices are subject to certain export
and  import  requirements  under  the FDCA.  Product  labeling  and  promotional
activities are subject to scrutiny by the FDA and, in certain instances,  by the
Federal Trade Commission. Products may be promoted by the Company only for their
approved use. Failure to comply with these and other regulatory requirements can
result,  among other  consequences,  in failure to obtain  premarket  approvals,
withdrawal of approvals,  total or partial  suspension of product  distribution,
injunctions,  civil  penalties,  recall or  seizures of  products  and  criminal
prosecution.

      The Company  believes that its Quality Control Panels are not regulated by
the FDA because  they are not  intended  for  diagnostic  purposes.  The Company
believes  that its  Diagnostic  Components,  which  are  components  of in vitro
diagnostic products, may be subject to certain regulatory requirements under the
FDCA and other laws administered by the FDA, but do not require that the Company
obtain a premarket  approval or clearance.  There can be no assurance,  however,
that  the  FDA  would  agree  or  that  the  FDA  will  not  adopt  a  different
interpretation  of the FDCA or other  laws it  administers,  which  could have a
material adverse effect on the Company.

      The Company's  Diagnostic  Products and Laboratory  Instruments groups are
both ISO9001  certified,  with  registration  by TUV Rheinland in the Diagnostic
Products group and British  Standard  Institute for the  Laboratory  Instruments
group. The Laboratory  Instrument  group is also certified to EN46001,  a set of
supplementary requirements applicable to their products.

      Laws and  regulations  affecting  some of the  Company's  products  are in
effect in many of the  countries  in which the  Company  markets  or  intends to
market its products.  These  requirements  vary from country to country.  Member
states of the European  Economic  Area (which is composed of the European  Union
members and the European Free Trade  Association  members) are in the process of
adopting various product and service  "Directives" to address  essential health,
safety, and environmental  requirements associated with the subject products and
services.  The "Directives"  cover both quality system  requirements (ISO Series
9000 Standards and the EN46001  Requirements)  and product and marketing related
requirements.  In addition,  some  jurisdictions  have  requirements  related to
marketing of the Company's products.  There can be no assurance that the Company
will be able to obtain any regulatory  approvals required to market its products
on a timely basis,  or at all.  Delays in receipt of, or failure to receive such
approvals,  or the  failure  to comply  with  regulatory  requirements  in these
countries or states could lead to compliance action, which could have a material
adverse effect on the Company's  business,  financial  condition,  or results of
operations.

      The  Company's   service-related  business  (clinical  trials,  infectious
disease testing,  and contract  research) is subject to other national and local
requirements.  The  Company's  facilities  are  subject to  review,  inspection,
licensure or accreditation by some states,  national professional  organizations
(College of  American  Pathologists),  and other  national  regulatory  agencies
(Health  Care  Financing  Administration).  Studies  to  evaluate  the safety or
effectiveness  of FDA regulated  products  (primarily  human and animal drugs or
biologics) must also be conducted in conformance with relevant FDA requirements,
including Good Laboratory Practice ("GLP") regulations, investigational new drug
or device  regulations,  Institutional  Review  Board  ("IRB")  regulations  and
informed consent regulations.

      The Clinical Laboratory  Improvement Amendments of 1988 ("CLIA") prohibits
laboratories  from  performing  in vitro  tests  for the  purpose  of  providing
information  for the  diagnosis,  prevention  or  treatment  of any  disease  or
impairment  of, or the assessment of, the health of human beings unless there is
in effect for such  laboratories  a  certificate  issued by the US Department of
Health and Human Services  ("HHS")  applicable to the category of examination or
procedure performed.

      The Company currently holds permits issued by HHS (CLIA license),  Centers
for Disease Control and Prevention (Importation of Etiological Agents or Vectors
of  Human  Diseases),   the  US  Department  of  Agriculture   (Importation  and
Transportation  of  Controlled  Materials  and Organisms and Vectors) and the US
Nuclear  Regulatory  Commission (in vitro testing with byproduct  material under
general license, covering the use of certain radioimmunoassay test methods).

                                      -15-
<PAGE>


      The Company is also subject to government regulation under the Clean Water
Act, the Toxic  Substances  Control Act, the Resource  Conservation and Recovery
Act, the Atomic  Energy Act, and other  national,  state and local  restrictions
relating  to the  use  and  disposal  of  biohazardous,  radioactive  and  other
hazardous  substances  and  wastes.  The  Company  is an exempt  small  quantity
generator  of  hazardous  waste  and has a US  Environmental  Protection  Agency
identification  number.  The  Company  is also  registered  with the US  Nuclear
Regulatory Commission for use of certain radioactive  materials.  The Company is
also subject to various state regulatory  requirements governing the handling of
and disposal of biohazardous,  radioactive and hazardous wastes. The Company has
never been a party to any environmental proceeding.

      Internationally,  some of the Company's products are subject to additional
regulatory requirements,  which vary significantly from country to country. Each
country  in which the  Company's  products  and  services  are  offered  must be
evaluated independently to determine the country's particular  requirements.  In
foreign  countries,  the Company's  distributors  are generally  responsible for
obtaining any required government consents.

Employees

      As of December 31, 1998 the Company employed 264 persons, all of whom were
located  in  the  United  States.   Of  these,  101  persons  were  employed  in
Massachusetts,   72  by  the  New  Britain,   Connecticut  company,  54  by  the
Gaithersburg,  Maryland company, and 37 by the Garden Grove, California company.
None of the Company's employees is covered by a collective bargaining agreement.
The Company believes that it has a satisfactory relationship with its employees.


                                      -16-
<PAGE>


Executive Officers of the Registrant

      The  following  table  sets  forth the names,  ages and  positions  of the
current executive officers of the Registrant as of December 31, 1998:

Name                     Age     Position
Richard T. Schumacher    48      President; Chief Executive Officer and Chairman
                                 of the Board
Kevin W. Quinlan         48      Senior Vice President, Finance; Chief Financial
                                 Officer; Treasurer and Director
Patricia E. Garrett,     55      Senior Vice President, Regulatory Affairs &
Ph.D.                            Strategic Programs
Mark M. Manak, Ph.D.     47      Senior Vice President, Research and Development
David Petersen           52      Vice President, Laboratory Instrumentation
Richard C. Tilton, Ph.D. 62      Senior Vice President, Specialty Laboratory
                                 Services
Barry M. Warren          51      Senior Vice President, Sales & Marketing
Ronald V. DiPaolo, Ph.D. 54      Vice President, Manufacturing
Richard H. Newhouse,     55      Vice President, Materials Management
Ph.D.

      Mr. Schumacher,  the founder of the Company,  has been the President and a
Director  since 1986, and Chief  Executive  Officer and Chairman since 1992. Mr.
Schumacher  served as the Director of Infectious  Disease  Services for Clinical
Science Laboratory, a New England-based medical reference laboratory,  from 1986
to 1988. From 1972 to 1985, Mr.  Schumacher was employed by the Center for Blood
Research, a nonprofit medical research institute associated with Harvard Medical
School.  Mr.  Schumacher  received a B.S. in zoology from the  University of New
Hampshire.

      Mr. Quinlan, a Director of the Company since 1986, has been Senior Vice
President,  Finance,  Chief Financial  Officer and Treasurer since January 1993.
From 1990 to December 1992, he was the Chief Financial Officer of ParcTec,  Inc.
a New  York-based  leasing  company.  Mr.  Quinlan  served as Vice President and
Assistant  Treasurer of American  Finance Group,  Inc. from 1981 to 1989 and was
employed  by Coopers & Lybrand  from 1975 to 1980.  Mr.  Quinlan is a  certified
public accountant and received a M.S. in accounting from Northeastern University
and a B.S. in economics from the University of New Hampshire.

      Dr. Garrett has been Senior Vice President, Regulatory Affairs & Strategic
Programs  since 1988.  From 1980 to 1987,  Dr.  Garrett  served as the Technical
Director of the Chemistry  Laboratory,  Department of Laboratory Medicine at the
Lahey Clinic Medical Center. Dr. Garrett earned her Ph.D. from the University of
Colorado and was a postdoctoral research associate at Harvard University, Oregon
State  University,  Massachusetts  Institute of Technology and the University of
British Columbia.

      Dr. Manak has served as Senior Vice  President,  Research and  Development
since 1992. From 1980 to 1992, he served as Senior Research Scientist, Molecular
Biology,  of Biotech  Research  Laboratories.  Dr. Manak  received his Ph.D.  in
biochemistry  from the  University of  Connecticut  and  completed  postdoctoral
research work in biochemistry/virology at Johns Hopkins University.

      Mr.  Petersen has over 22 years in  operations  management  and  materials
planning.  Before joining the Company in November of 1988, he was the Manager of
Manufacturing  for Matrix  Instruments  from 1985 to 1988;  and  previously  was
Manager of Production and Inventory Control for Farr Company,  Inc. from 1977 to
1985.  He is certified in  production  and  inventory  management  (CPIM) by the
American   Production  and  Inventory  Control  Society  (APICS).  As  Assistant
Professor at California  State  University  Dominguez  Hills, he instructs upper
division courses in manufacturing  techniques and material resource planning. He
holds a B.S. in business  management  from the University of LaVerne in LaVerne,
California.

      Dr.  Tilton  has served as Senior  Vice  President,  Specialty  Laboratory
Services  since the Company's  acquisition  of BBI Clinical  Laboratories,  Inc.
("BBICL")  in 1993 and was one of the  founders  of  BBICL,  where he  served as
President from 1989 to 1993. Dr. Tilton has 25 years of experience in university
hospital clinical microbiology laboratories and is




                                      -17-
<PAGE>

board certified in medical and public health  microbiology.  Dr. Tilton received
his Ph.D. in microbiology from the University of Massachusetts.

      Mr. Warren has served as Senior Vice  President,  Sales & Marketing  since
1993.  From 1985 to 1993,  Mr. Warren  served as Group  Director of Marketing of
Organon  Teknika,  a manufacturer  of infectious  disease  reagents.  Mr. Warren
received an M.A. in political  science from Loyola  University  of Chicago and a
B.A. from Loyola University.
      
      Dr. DiPaolo has served as Vice President,  Manufacturing since 1997. Prior
to that he served as Vice  President of Operations  from 1993 to 1997.  Prior to
joining the Company, Dr. DiPaolo served as Vice President and General Manager of
the Biomedical Products Division of Collaborative  Research,  a medical research
products  company from 1986 to 1989. From 1975 to 1986 he was employed by DuPont
New England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo received his
Ph.D. in  biochemistry  from  Massachusetts  Institute of  Technology  and later
completed  postdoctoral  research  at the  Eunice  Shriver  Center  in  Waltham,
Massachusetts.

      Dr. Newhouse has been Vice President of Materials  Management  since 1997.
Prior  to  joining  the  Company,  Dr.  Newhouse  served  as Vice  President  of
Laboratory  Services for  Serologicals  Corporation,  an Atlanta,  Georgia based
biopharmaceutical  company from 1989 to 1997.  Prior to that he was employed for
20 years in several medical  diagnostics  companies  holding titles such as Vice
President Operations,  Laboratory Director,  and Director of Manufacturing.  Dr.
Newhouse  received  his Ph.D.  in  clinical  pathology  from the  University  of
Maryland.

      Officers  are  elected  by,  and serve at the  pleasure  of,  the Board of
Directors.


ITEM 2.     PROPERTIES.

      The  Company  owns  its   corporate   offices  and   Diagnostic   Products
manufacturing  facility  located in a two story,  32,000 square foot building in
West Bridgewater,  Massachusetts.  The Company has been renovating and expanding
this  facility  during the past  year,  and  believes  that upon  completion  of
renovations in mid 1999, its facility in West  Bridgewater will be sufficient to
meet its foreseeable needs.

      The Company leases 41,000 square feet of space in Garden Grove, California
where it manufactures Laboratory Instruments. The lease continues until February
1, 2002 and the Company has an option to renew at market rates.

      The Company leases its laboratory facilities in Gaithersburg, Maryland and
New Britain,  Connecticut. The Gaithersburg facility contains 36,500 square feet
of custom built laboratory space, and is occupied under a ten-year lease that is
due to expire on October 31, 2007.  The New Britain  facility has 15,000  square
feet,  most of which is dedicated  to  laboratory  space.  The lease is for five
years and is due to expire on July 30, 2000;  the Company has an option to renew
for an additional five years.

      The Company leases  approximately 2,500 square feet of laboratory space in
Woburn, MA through August 1999, assumed through the BioSeq Acquisition.

ITEM 3.     LEGAL PROCEEDINGS.

      There are no material legal proceedings pending against the Company or its
subsidiaries.


                                      -18-
<PAGE>


ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      No matter was submitted during the fourth quarter of fiscal 1998 to a vote
of security holders of the Company.

                                     PART II


ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 
            MATTERS.

      The Company completed an initial public offering of its Common Stock, $.01
par value,  (the "Common Stock") on October 31, 1996. The Common Stock is listed
on the NASDAQ National Market under the symbol "BBII".

      The following table sets forth the high and low closing price, by quarter,
since the Company's initial public offering.

                     Q1            Q2           Q3            Q4
                ------------- ------------- ------------  ------------
                 High   Low     High  Low    High   Low     High  Low
                ------ ------ ------- ----- ------ -----  ------ -----
         1998    8.063 5.125    7.313 4.500  5.125 2.500   4.375 2.000

         1997   10.250 6.063   11.375 7.750  8.875 6.000   8.000 4.875

         1996     ---   ---      ---   ---    ---   ---    8.500 6.750

      As of December  31,  1998,  there were  20,000,000  shares of Common Stock
authorized  of which  4,667,816  shares  were  outstanding,  held of  record  by
approximately 1,500 stockholders.

      The Company has not declared or paid any dividends on its Common Stock. In
accordance with the terms of the Company's loan agreement with its bank, payment
of dividends on Common Stock requires bank approval. The Company does not expect
to  recommend  the  payment of a dividend  as it plans to  continue  to reinvest
profits to expand its business.


                                      -19-
<PAGE>

ITEM 6.     SELECTED FINANCIAL DATA

      The statement of income data for each of the fiscal years in the five year
period ended  December 31, 1998,  and the balance  sheet data as of December 31,
1998,  1997,  1996,  1995 and 1994,  have  been  derived  from the  consolidated
financial   statements   of   the   Company   which   have   been   audited   by
PricewaterhouseCoopers LLP, independent accountants. This data should be read in
conjunction with Item  8--Consolidated  Financial  Statements and  Supplementary
Data, and Item  7--Management's  Discussion and Analysis of Financial  Condition
and Results of Operations appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                              ----------------------------------------------------------
                                                                1998 (1)    1997 (2)     1996        1995        1994
                                                              ----------  ----------  ----------  ----------  ----------
Consolidated Statement of Income Data:                                      (In thousands, except per share data)
REVENUE:
<S>                                                            <C>         <C>         <C>         <C>         <C>     
    Products ...............................................   $ 13,075    $ 11,711    $  8,470    $  6,622    $  5,982
    Services ...............................................     13,006      10,588       7,039       5,649       4,741
                                                               --------    --------    --------    --------    --------
         Total revenue .....................................     26,081      22,299      15,509      12,271      10,723
                                                               --------    --------    --------    --------    --------

COSTS AND EXPENSES:
    Cost of products .......................................      7,180       5,773       4,252       3,564       3,194
    Cost of services .......................................      8,897       7,239       4,856       4,168       3,416
    Research and development ...............................      2,461       1,311         797         375         469
    Acquired research and development (3) ..................      4,231        --          --          --          --
    Selling and marketing ..................................      3,939       3,241       2,188       1,340       1,192
    General and administrative .............................      4,275       3,343       2,401       2,316       2,047
                                                               --------    --------    --------    --------    --------
         Total operating costs and expenses ................     30,983      20,907      14,494      11,763      10,318
                                                               --------    --------    --------    --------    --------
         (Loss) income from operations .....................     (4,902)      1,392       1,015         508         405
Interest (expense) income, net .............................        (51)        283        (213)       (336)       (244)
                                                               --------    --------    --------    --------    --------
    (Loss) income before income taxes and extraordinary item     (4,953)      1,675         802         172         161
Benefit from (provision for) income taxes ..................        564        (670)       (321)        (69)        (64)
                                                               --------    --------    --------    --------    --------
    Net (loss) income ......................................   $ (4,389)   $  1,005    $    481    $    103    $     97
                                                               --------    --------    --------    --------    --------
Net (loss) income per share, basic .........................   $  (0.94)   $   0.23    $   0.17    $   0.04    $   0.04
Net (loss) income per share, diluted .......................   $  (0.94)   $   0.21    $   0.14    $   0.03    $   0.03

Number of shares used to calculate net income per share
    Basic ..................................................      4,655       4,438       2,916       2,570       2,552
    Diluted ................................................      4,655       4,780       3,340       3,040       3,019
</TABLE>
<TABLE>
<CAPTION>
                                                            December 31,
                                         -------------------------------------------------
                                           1998      1997      1996      1995      1994
                                         --------- --------- --------- --------- ---------
Consolidated Balance Sheet Data:               (In thousands, except per share data)

<S>                                       <C>       <C>       <C>       <C>       <C>    
Working capital .......................   $ 9,095   $ 9,633   $12,836   $ 4,688   $ 4,686
Total assets ..........................    24,082    23,650    19,798     9,928     8,076
Long term debt, less current maturities     3,989        26        41     4,216     3,180
Total stockholders' equity ............    14,069    18,067    16,290     3,187     3,041
Dividends .............................      --        --        --        --        --
</TABLE>

------------

(1)   Effective September 30, 1998, the Company acquired all classes of stock of
      BioSeq,  Inc., a development  stage  company with no revenue,  for a total
      purchase price of $4,226,000.

(2)   Effective July 1, 1997,  the Company  acquired the business and net assets
      of Source Scientific,  Inc. for $1,994,000 which increased 1997 revenue by
      $2,608,000.

(3)   Consists of $3,381,000 of in-process  research and development  related to
      the BioSeq  acquisition,  and a charge of $850,000 related to the purchase
      of license technology in the first quarter of 1998.


                                      -20-
<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS.

Overview

      The  Company   generates  revenue  from  products  and  services  provided
primarily to the in vitro diagnostic infectious disease industry.  There are two
broad  product  classes:   Diagnostic   Products  and  Laboratory   Instruments.
Diagnostic Products consist of three groups: Quality Control Panels,  Accurun(R)
Run Controls, and Diagnostic Components.  Services consist of Specialty Clinical
Laboratory   Testing,    Contract   Research,    Clinical   Trials,   Laboratory
Instrumentation Services, and Drug Screening.

      The Company's gross profit margin increased from 33.9% in 1993 to 38.4% in
1998  principally  as a result of the  increased  percentage  of  higher  margin
product  revenues.  Within  products,  the Company's  Quality  Control  Products
(Accurun(R)  Run Controls and Quality  Control  Panels) have higher margins than
the Company's Laboratory Instruments and Diagnostic Components. Within services,
Contract  Research gross margins are lower than other  services.  However,  such
contracts  enable the Company to retain  certain  scientific  staff and maintain
capability that it could not otherwise  afford.  The Company intends to continue
to  concentrate  on the  growth in sales of its  Quality  Control  Products  and
Specialty Clinical Laboratory testing.

      Historically,  the Company's  results of  operations  have been subject to
quarterly  fluctuations  due  to  a  variety  of  factors,   primarily  customer
purchasing  patterns,  driven by end-of-year  expenditures,  and seasonal demand
during the summer months for certain laboratory testing services. In particular,
the Company's  sales of its Quality Control  Products and Diagnostic  Components
typically  have been  highest  in the  fourth  quarter  and  lowest in the first
quarter of each fiscal year, whereas Specialty  Clinical  Laboratory Testing has
generally reached a seasonal peak during the third quarter,  coinciding with the
peak  incidence of Lyme  Disease.  Research  Contracts  are  generally for large
dollar  amounts  spread over a one to five year  periods,  and upon  completion,
frequently  do not have  renewal  phases.  As a  result  they  can  cause  large
fluctuations  in revenue and net  income.  In  addition  to staff  dedicated  to
internal research and development, certain of the Company's technical staff work
on both  Contract  Research for  customers  and Company  sponsored  research and
development.  The allocation of certain technical staff to such projects depends
on the  volume of  Contract  Research.  As a result,  research  and  development
expenditures  fluctuate  due to  increases  or  decreases  in contract  research
performed.

      With the acquisition of Pressure Cycling  Technology,  and the hiring of a
Vice President for Drug Discovery and Development  program,  the Company expects
to increase its rate of research and development  spending,  while continuing to
develop new Quality Control Products and new tests for its clinical  laboratory.
Additional  sales and support  will be added as needed with the  expectation  of
continued future revenue growth.

      The Company  does not have any foreign  operations.  However,  the Company
does have  significant  export sales in Europe,  the Pacific Rim  countries  and
Canada to agents under distribution agreements,  as well as directly to test kit
manufacturers.  All sales are  denominated  in US dollars.  Export sales for the
years ended December 31, 1998,  1997, and 1996 were $4.1 million,  $4.6 million,
and $4.3  million,  respectively.  The Company  expects  that export  sales will
continue to be a significant source of revenue and gross profit.



                                      -21-
<PAGE>

Results of Operations

      The following table sets forth for the periods indicated the percentage of
total  revenue   represented  by  certain  items   reflected  in  the  Company's
consolidated statements of operations:

                                         Year Ended December 31
                                         ----------------------
                                         1998     1997     1996
                                       -------- -------- --------
Revenue:
    Products                              50.1%    52.5%    54.6%
    Services                              49.9     47.5     45.4
                                       -------- -------- --------
           Total revenue                 100.0    100.0    100.0
Gross profit                              38.4     41.6     41.3
Operating expenses:
    Research and development               9.4      5.9      5.1
    Acquired Research and development     16.2        -        -
    Selling and marketing                 15.1     14.5     14.1
    General and administrative            16.4     15.0     15.5
                                       -------- -------- --------
           Total operating expenses       57.1     35.4     34.7
                                       -------- -------- --------
    Income from operations               (18.8)     6.2      6.5
Interest income (expense)                 (0.2)     1.3     (1.4)
                                       -------- -------- --------
    Income before income taxes           (19.0)     7.5      5.1
    Net income                           (16.8)     4.5      3.1
                                       ======== ======== ========
Product gross profit                      45.1%    50.7%    49.8%
Services gross profit                     31.6%    31.6%    31.0%

Years Ended December 31, 1998 and 1997

      In July 1997 the Company acquired the business of Source Scientific,  Inc.
The acquisition was completed by a wholly owned  subsidiary of the Company,  BBI
Source  Scientific,  Inc.,  ("BBI  Source")  and was  accounted  for as an asset
purchase.  The income  statement for 1997 includes the results of BBI Source for
the last six months of the year,  effecting  comparability of results with 1998.
See the Company's  financial  statement  footnotes  for further  details on this
acquisition.

      Total revenue increased 17.0%, or $3,782,000,  to $26,081,000 in 1998 from
$22,299,000  in 1997. The increase in revenue was the result of a 11.6% increase
in product revenue of $1,364,000 to $13,075,000  from  $11,711,000,  and a 22.8%
increase in service  revenue of $2,418,000 to  $13,006,000  from  $10,588,000 in
1997.  Most of the product  increase  was  attributable  to  increased  sales of
Quality Control  Products,  particularly  Accurun(R) which doubled in sales over
last year,  and the  inclusion  of BBI Source for the full year in 1998 versus a
half year in 1997.  Quality Control Panel sales declined from 1997 as sales fell
short of expectations  due to  consolidation in the in vitro diagnostic test kit
industry. This shortfall was partially offset by increased sales of custom (OEM)
panels.  Service  revenue  increased as a result of a 49.8% increase in contract
research  due to new  contracts,  and a 19.5%  increase  in  specialty  clinical
laboratory testing revenue.  The Company experienced  continued pricing pressure
from competitors in its testing business which resulted in lower gross margins.

      Overall gross profit  increased 7.7%, or $717,000,  to $10,004,000 in 1998
from $9,287,000 in 1997. Product gross profit decreased (0.7)%, or $(43,000), to
$5,895,000 in 1998 from $5,938,000 in 1997 and product gross margin decreased to
45.1%  in 1998  from  50.7%.  The  1997  product  gross  margin  benefited  from
significant one time sales of two "world-wide panels".  These panels sold out in
the first quarter of 1998,  with minimal impact on 1998.  The remaining  product
gross  margin  decrease  was the  result of lower  capacity  utilization  at BBI
Source.  Services gross profit  increased  22.7%, or $759,000,  to $4,109,000 in
1998 from  $3,350,000 in 1997 and gross margin  remained steady at 31.6% in 1998
and 1997, as higher  margins on contracts and at BBI Source offset lower margins
in its clinical laboratory testing services.



                                      -22-
<PAGE>

      Research and development  expenditures increased 87.7%, or $1,150,000,  to
$2,461,000 in 1998 from $1,311,000 in 1997. The increase resulted primarily from
new laboratory  instrument  development  expenditures  at BBI Source,  increased
development   expenditures  for  Accurun(R)   molecular  and  immunological  Run
Controls, new specialized molecular assays for use at BBI Clinical Laboratories,
and fourth quarter research activities related to pressure cycling technology.

      There were two accounting  charges during the twelve months ended December
31, 1998 which were classified as acquired  in-process research and development.
In the first quarter there was an accounting  charge of $850,000  related to the
acquisition of the worldwide  exclusive rights to BioSeq Inc's  immunodiagnostic
research and development technology.  In the third quarter, the Company recorded
a charge of  $3,381,000  related  to  in-process  technology  as a result of the
Company's $4,226,000 acquisition of BioSeq, Inc.

      Selling and marketing expenses increased 21.5%, or $698,000, to $3,939,000
in 1998 from  $3,241,000  in 1997.  The increase was  attributable  primarily to
inclusion  for a full year in 1998 of the  expanded  TQS sales,  marketing,  and
technical  support staff added in the Spring of 1997.  The Company also expanded
its presence at tradeshows, resulting in higher expenditures in this category.

      General  and  administrative  costs  increased  27.9%,  or  $933,000,   to
$4,276,000  in 1998 from  $3,343,000  in 1997.  This  increase was  attributable
primarily  to  additional  support  staff,  and  increased  information  systems
consulting and investor relations activities.  In addition, the inclusion of BBI
Source for a full year added $412,000 of expense to this category.

      As a result of all of the above, the Company experienced an operating loss
of ($4,902,000) versus income of $1,392,000 in 1997. This decrease was primarily
a result of the acquired in-process  research and development  expense, a higher
operating loss at BBI Source,  increased research and development  expenditures,
and lower  profitability  at its  Diagnostic  Products and  Clinical  Laboratory
Testing operating segments.

      The Company had net interest  expense of $(51,000) in 1998 versus interest
income of $283,000 in 1997. The Company has  productively  employed its proceeds
from its initial public  offering and, at the end of the second quarter of 1998,
began to  borrow  funds  from its  revolving  line of  credit  to  continue  its
infrastructure investments.

      Based on current tax planning,  the Company provided taxes at the combined
federal and state  statutory  rate of 38% for 1998 versus 40% in the prior year.
There was no tax benefit associated with the acquired in-process technology from
BioSeq,  Inc. as the acquisition was structured as a stock purchase.  Therefore,
the effective benefit rate for 1998 was approximately 11%.

      The  Company had a net loss of  ($4,389,000)  in 1998 versus net income of
$1,005,000 in 1997 as a result of the operating loss described above and a shift
to interest expense in 1998 versus interest income in 1997.

Years Ended December 31, 1997 and 1996

      The most significant event in 1997 effecting comparability of results with
1996 was the acquisition of the business of Source  Scientific,  Inc.  effective
July 1, 1997. The acquisition was completed by a wholly owned  subsidiary of the
Company, BBI Source Scientific, Inc., ("BBI Source") and was accounted for as an
asset purchase. This effected every line of the income statement.

      Total revenue increased 43.8%, or $6,790,000,  to $22,299,000 in 1997 from
$15,509,000  in 1996. The increase in revenue was the result of a 38.3% increase
in product  revenue of $3,241,000 to $11,711,000  from  $8,470,000,  and a 50.4%
increase in service  revenue of $3,549,000  to  $10,588,000  from  $7,039,000 in
1996.  Approximately  $1,416,000 of the product increase was attributable to the
inclusion  of BBI Source for the first time.  The balance of the  increase was a
result of a 34.0% increase in sales of Quality  Control  Products,  particularly
Accurun(R)  from a higher  volume of both new and existing  products,  offset in
part by price decreases.  Service revenue included  $1,192,000 from inclusion of
BBI Source,  a 49.1%  increase in contract  research  revenue as a result of new
contracts, and a 32.6% increase in specialty clinical laboratory testing revenue
as the Company's HIV PCR test  introduced in September  1996,  was offered for a
full year in 1997.  Overall for both  products  and  services,  prices  declined
slightly in 1997 versus 1996. In summary,  even after excluding BBI Source,  the
Company's  total revenue  increased  27.0% in 1997 compared to 1996 with a 21.5%
increase in 




                                      -23-
<PAGE>

product  revenue,  and a 33.5%  increase  in service  revenue  on strong  volume
performance  by Quality  Control  Products,  contract  research,  and  specialty
clinical laboratory testing.

      Gross profit increased  45.1%, or $2,886,000,  to $9,287,000 for 1997 from
$6,401,000 in 1996.  Product gross profit  increased  40.8%,  or $1,720,000,  to
$5,938,000  in 1997 from  $4,218,000  in 1996 and product  gross  profit  margin
increased to 50.7% in 1997 from 49.8%.  The products gross margin increase was a
result of a favorable  shift in product mix  towards  Accurun  sales and overall
volume increase, thereby spreading fixed costs over a larger base, and despite a
lower gross  profit  margin in BBI Source's  instrument  sales.  Services  gross
profit increased 53.5%, or $1,167,000,  to $3,350,000 in 1997 from $2,183,000 in
1996 as the testing volume increased at a faster rate than laboratory headcount,
thereby  causing the services  gross profit  margin to increase to 31.6% in 1997
from 31.0% in 1996. BBI Source's service gross profit margin was slightly higher
than the Company above average, which is expected to continue.

      Research and development  expenditures  increased  64.6%, or $514,000,  to
$1,311,000 in 1997 from $797,000 in 1996. The increase  resulted  primarily from
new  Laboratory  Instrument  development  activities  at BBI Source,  as well as
increased development  expenditures for Accurun(R),  molecular and immunological
Run Controls, and specialized molecular assays.

      Selling  and  marketing  expenses  increased  48.1%,  or  $1,053,000,   to
$3,241,000  in 1997 from  $2,188,000  in 1996.  The  increase  was  attributable
primarily  to an  eleven  person  expansion  of the TQS  sales,  marketing,  and
technical support staff and related increased trade show and travel expenses. In
addition,  the  inclusion  of BBI  Source  added  $167,000  of  expense  to this
category.

      General  and  administrative  costs  increased  39.2%,  or  $942,000,   to
$3,343,000  in 1997 from  $2,401,000  in 1996.  This  increase was  attributable
primarily  to: the  addition  of a  Director  of Human  Resources  and wide area
network  systems   analyst;   higher   expenditures  for  accounting  and  legal
professionals  and  investor  relations  activities  in our first full year as a
public company; increased travel associated with the BBI Source acquisition; and
non-recurring  moving  costs of  $40,000  associated  with  moving  BBI  Biotech
Research  Laboratories  to a  new  facility  in  Gaithersburg,  Maryland.  These
increases were partially offset by a lower provision for doubtful  accounts as a
result  of  improved  accounts  receivable  collections  from  patients  at  the
Company's clinical reference testing laboratory.  In addition,  the inclusion of
BBI Source added $442,000 of expense to this category.

      Operating income increased 37.1%, or $377,000,  to $1,392,000 in 1997 from
$1,015,000 in 1996.  This  increase was  primarily a result of continued  strong
performance  in the  Company's  Quality  Control  Products  business  and clinic
reference  testing  laboratory,  partially  offset  by a loss at BBI  Source  of
$189,000.

      The  Company  had net  interest  income of  $283,000  in 1997  versus  net
interest  expense of  ($213,000) in 1996 as  substantially  all of the Company's
debt was repaid in November  1996 with a portion of the  proceeds  from its IPO.
The Company had positive cash balances to invest for all of 1997.

      Net income  increased  108.9%,  or $524,000,  to  $1,005,000  in 1997 from
$481,000 in 1996. Of this increase,  43% was  attributable  to higher  operating
income,  and the balance was due to the shift from net interest  expense in 1996
to net interest  income in 1997.  Diluted  earnings per share  increased  50% to
$0.21 for 1997 versus $0.14 in 1996.  This  increase  was  achieved  even though
weighted  average diluted shares  outstanding  increased 43%. Basic earnings per
share increased 35% to $0.23 for 1997 versus $0.17 in 1996.


                                      -24-
<PAGE>

Liquidity and Capital Resources

      At  December  31,  1998,  the  Company  had cash and cash  equivalents  of
approximately  $147,000  and  working  capital  of  $9,095,000.  Trade  accounts
receivable increased $705,000 or 11.7% primarily as a result of temporary delays
in collections on government  contracts.  Inventory increased $787,000 or 13.3%,
due to increased work-in-process activity for both panels and Accurun.

      The Company has  financed  its  operations  to date through cash flow from
operations,  borrowings from banks and the sale of its common stock. The Company
expects its cash flow,  working  capital,  and  available  borrowings  under its
revolving line of credit to meet existing operational needs in 1999. The Company
has recently  received  approval for an increased  revolving line of credit with
more liberal financial covenants,  which it expects to meet existing operational
needs for the foreseeable future.

      Net cash used in  operations  for 1998 was  $(1,215,000)  as  compared  to
$727,000  provided by operations in 1997. As discussed  above,  this decrease in
cash flow was primarily  attributable to carrying additional accounts receivable
and inventory as of year end.

      Cash used in  investing  activities  for 1998,  1997 and 1996  amounted to
$5,462,000,  $5,396,000,  and  $1,412,000,  respectively.  In addition to normal
capital  expenditures,  three  items  accounted  for most of the 1998  investing
activities.  First,  effective  September  30, 1998,  the Company  completed the
acquisition  of the  remaining  common  stock of  BioSeq,  Inc.  and  technology
acquisition  for a  cash  expenditure  of  $2,557,000.  Second,  $1,460,000  was
expended for additional improvements at the Company's Massachusetts and Maryland
facilities. Finally, $437,000 has been expended so far on software, hardware and
implementation  costs for a new fully  integrated  business  information  system
("ERP") to improve  operational  efficiency.  In 1997,  four items accounted for
most of the investing  activities.  First,  the Company  exercised its option to
purchase an additional 165,000 shares of BioSeq, Inc. stock at an aggregate cost
of $750,000, thereby increasing its ownership of BioSeq to 19.9%. Second, in May
1997,  the  Company's  BBI  Biotech  subsidiary  signed a ten year lease for new
laboratory  space in  Gaithersburg,  Maryland  and spent  $566,000 on  leasehold
improvements  for new  laboratory  space for its  contract  research and product
development  activities.  Third,  the expansion and renovation of its Diagnostic
Products  manufacturing  facility in West Bridgewater,  Massachusetts  commenced
construction and approximately $920,000 was expended. Finally, effective on July
1, 1997, the Company completed the acquisition of the business and net assets of
Source Scientific,  Inc. at a purchase price of $1,994,000 including acquisition
costs.  The Company has accounted for the acquisition as an asset purchase,  and
is amortizing  goodwill of approximately  $2.2 million over 15 years. See Note 3
to the Company's Notes to Consolidated Financial Statements in Item 8 hereunder.
The cash used in investing activities in 1996 included the initial investment in
BioSeq, Inc. of $732,500.

      During 1998, net cash provided by financing activities was $4,052,000 from
a  combination  of net  borrowings of  $3,963,000  under the  revolving  line of
credit, and proceeds of $89,000 from the exercise of stock options. During 1997,
net cash generated from financing activities included $300,000 from the exercise
of  warrants,  and  $182,000  from  exercising  stock  options.  Also  in  1997,
$1,124,000  was used to pay down debt  acquired  in  connection  with the Source
acquisition. In 1996, net cash generated from common stock issued, including the
IPO, approximated $12,600,000. This was used to pay down net debt of $4,577,000.

      In 1998,  1997 and  1996  capital  expenditures  amounted  to  $2,930,000,
$2,613,000,  and $669,000,  respectively and are described above under investing
activities.

      On March 9, 1998, the Company  announced  plans to modify the a previously
announced  3-year  contract  with ABX  Hematology,  Inc.  ("ABX") and its parent
company, ABX Hematologie,  SA (France). Under the contract, the Company provided
technical, customer and field services for instruments sold by ABX in the United
States. Under the modified agreement, individual customer service contracts were
assigned  to  ABX  and  ABX  assumed   responsibility   for  its  United  States
instruments.  The Company has provided certain consulting services through March
1999 to assist ABX in establishing a sales, customer service, technical support,
and field service  operation in the United States for its hematology  instrument
and reagent  business.  In addition,  the Company sublet space at its California
facility  to ABX during the period of the  agreement.  The  Company's  personnel
associated   with  this  contract,   including  the  nationwide   field  service
organization and hotline technical support, were offered employment by ABX.




                                      -25-
<PAGE>

      The  Company  anticipates  significant  capital  expenditures  in  1999 to
continue as it plans to compete  renovations  to its  manufacturing  facility in
Massachusetts,  as well as install the ERP system at all of its  locations.  The
Company believes that existing cash balances,  the borrowing  capacity available
under the revolving  line of credit,  and cash  generated  from  operations  are
sufficient to fund  operations and  anticipated  capital  expenditures  in 1999.
Except for purchase  orders in connection with the  manufacturing  expansion and
the ERP  system,  there  were no  material  financial  commitments  for  capital
expenditures as of December 31, 1999.

Year 2000 Readiness

      The  following  disclosure  is a Year 2000  ("Y2K")  readiness  disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.

      Boston   Biomedica's  Year  2000  program  is  designed  to  minimize  the
possibility  of serious Year 2000  interruption.  Possible  Year 2000 worst case
scenarios  include  the  interruption  of  significant  parts  of the  Company's
business as a result of internal  business  system failure or the failure of the
business  systems  of  its  suppliers,   distributors  or  customers.  Any  such
interruption  may have a material  adverse  impact on the future  results of the
Company.

      In 1997  the  Company  decided  to  significantly  upgrade  its  "business
systems"  (all  computer  hardware  and  software  used  to run  its  businesses
including its  operations  management,  administration  and financial  systems).
Specifications  were  developed for desired  capabilities,  including  Year 2000
compliance.  In 1998 the Company  began  assessing  its Year 2000  exposure  and
commenced implementation of a plan to achieve Year 2000 readiness.  Based on its
review to date, the Company believes that its products are Year 2000 compliant.

      During  the  third   quarter   of  1998,   after   investigating   several
alternatives,  implementation  of an enterprise  resource  planning system ("ERP
system")  was  started  at two of the  Company's  four  sites.  The  vendor  has
certified that the system is Year 2000 compliant.  As of the filing date of this
Form 10-K,  business  systems at the other two sites have been  upgraded  to Y2K
compliant   versions  of  their   existing   software  at  a  combined  cost  of
approximately $5,000.

      A task force with  participants and a site leader at each BBI location has
begun reviewing all other infrastructure areas including communications systems,
building security systems, and embedded technologies in areas such as laboratory
instruments and  manufacturing  equipment.  The Company has also begun to survey
major  suppliers,  distributors,  and  customers  to  determine  the  status and
schedule for their Year 2000  compliance.  To date, no  significant  issues have
been identified, and the survey is expected to be completed in the third quarter
of  1999.  Where  it  believes  that a  particular  supplier's  situation  poses
unacceptable risks, the Company plans to identify an alternative source.

      The  costs  of  the  readiness   program  for  business   systems,   other
infrastructure  areas,  and suppliers  and  distributors  are a  combination  of
incremental external spending and use of existing internal resources.  In total,
the Company expects to spend less than $150,000 to achieve  readiness,  of which
approximately  40% has been expended to date.  This amount is based on the costs
to upgrade the existing business systems to Y2K compliant versions, and excludes
the costs of implementing the ERP system which is being  implemented for reasons
beyond Y2K compliance.

      Milestones  and  implementation  dates  and the  costs of BBI's  Year 2000
readiness  program are  subject to change  based on new  circumstances  that may
arise or new  information  becoming  available  that may change  the  underlying
assumptions or requirements.


                                      -26-
<PAGE>

Recent Accounting Pronouncements

      Accounting for Derivative Instruments and Hedging Activities

      Statement of  Financial  Accounting  Standards  No. 133,  "Accounting  for
Derivative  Instruments  and Hedging  Activities"  (SFAS 133) was issued in June
1998. It is effective for all fiscal years  beginning  after June 15, 1999.  The
new standard  requires  companies to record  derivatives on the balance sheet as
assets or liabilities,  measured at fair value.  Gains or losses  resulting from
changes in the values of those  derivatives  would be accounted for depending on
the use of the  derivatives and whether they qualify for hedge  accounting.  The
key criterion  for hedge  accounting  is that the hedging  relationship  must be
highly  effective in achieving  offsetting  changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
The Company  will adopt SFAS 133 in the fiscal year ending  December  31,  1999,
although no impact on operating results or financial position is expected.

      Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use

      In March of 1998, the American  Institute of Certified Public  Accountants
issued  Statement  of  Position  98-1,  "Accounting  for the  Costs of  Computer
Software  Developed or Obtained for Internal  Use".  SOP 98-1 requires  computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning  January 1, 1999.  The Company is currently  assessing the impact that
adoption of this  statement  will have on  consolidated  financial  position and
results of operations.

Forward - Looking Information

      The  Annual  Report  on  Form  10-K  contains  forward-looking  statements
concerning the Company's  financial  performance  and business  operations.  The
Company wishes to caution readers of this Annual Report on Form 10-K that actual
results  might differ  materially  from those  projected in the  forward-looking
statements contained herein.


      Factors which might cause actual results to differ  materially  from those
projected  in  the  forward-looking  statements  contained  herein  include  the
following:  finalization of SEC guidelines for valuation of in process  research
and development as it relates to purchase  accounting;  inability of the Company
to develop the end user market for quality  control  products;  inability of the
Company to integrate the business of Source Scientific,  Inc. into the Company's
business;  inability of the Company to grow the sales of Source Scientific, Inc.
to the extent  anticipated;  the  renewal  and full  funding of  contracts  with
National  Institutes of Health (NIH),  National Heart,  Lung and Blood Institute
(NHLBI) and other government  agencies;  the inability of the Company to develop
the technology  recently acquired as part of its purchase of BioSeq, Inc. to the
level of commercial utilization;  inability of the Company to obtain an adequate
supply of the  unique  and rare  specimens  of plasma  and serum  necessary  for
certain of its  products;  significant  reductions  in  purchases  by any of the
Company's  major  customers;  the  interruption  of  significant  parts  of  the
Company's  business  as a result of  internal  business  system  failure  or the
failure of the business systems of its suppliers,  distributors or customers due
to the  inability  of such systems to properly  interpret  dates  subsequent  to
December  31,  1999;  and the  potential  insufficiency  of  Company  resources,
including  human  resources,  plant and equipment  and  management  systems,  to
accommodate  any future  growth.  Certain of these and other factors which might
cause actual results to differ  materially  from those  projected are more fully
set  forth  under the  caption  "Risk  Factors"  in the  Company's  Registration
Statement on Form S-1 (SEC File No. 333-10759).

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not Applicable


                                      -27-
<PAGE>


ITEM 8.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     -----------------------------
                                                                         1998             1997
                                                                     ------------    -------------
                               ASSETS
CURRENT ASSETS:
<S>                                                                  <C>             <C>         
    Cash and cash equivalents ....................................   $    146,978    $  2,772,360
    Accounts receivable, less allowances of $623,710 in 1998 and
       $446,517 in 1997 ..........................................      6,086,693       5,558,710
    Inventories ..................................................      6,689,768       5,902,821
    Prepaid expense and other ....................................        479,983         288,481
    Deferred income taxes ........................................        847,268         328,562
                                                                     ------------    ------------
                Total current assets .............................     14,250,690      14,850,934
                                                                     ------------    ------------

Property and equipment, net ......................................      6,925,423       4,980,164

OTHER ASSETS:
    Long term investment .........................................           --         1,482,500
    Goodwill and other intangibles, net ..........................      2,809,825       2,212,220
    Notes receivable and other ...................................         96,447         124,178
                                                                     ------------    ------------
                                                                        2,906,272       3,818,898
                                                                     ------------    ------------
              TOTAL ASSETS .......................................   $ 24,082,385    $ 23,649,996
                                                                     ============    ============


                LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable .............................................   $  2,369,495    $  2,218,685
    Accrued compensation .........................................      1,284,162       1,103,837
    Accrued income taxes .........................................           --           132,802
    Other accrued expenses .......................................        795,642         498,247
    Current maturities of long term debt .........................         15,569          14,878
    Deferred revenue .............................................        690,760       1,249,024
                                                                     ------------    ------------
                Total current liabilities ........................      5,155,628       5,217,473
                                                                     ------------    ------------

LONG-TERM LIABILITIES:
    Long term debt, less current maturities ......................      3,988,602          26,820
    Other liabilities ............................................        730,138         189,117
    Deferred income taxes ........................................        139,363         149,333

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value; authorized 20,000,000 shares in
       1998 and 1997; issued and outstanding 4,667,816 in 1998 and
       4,622,566 in 1997 .........................................         46,678          46,226
    Additional paid-in capital ...................................     16,418,717      16,029,049
    Retained earnings ............................................     (2,396,741)      1,991,978
                                                                     ------------    ------------
                Total stockholders' equity .......................     14,068,654      18,067,253
                                                                     ------------    ------------
             TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ............   $ 24,082,385    $ 23,649,996
                                                                     ============    ============
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                   statements
                                      -28-
<PAGE>


                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                 --------------------------------------------
                                                                     1998            1997            1996
                                                                 ------------    ------------    ------------

REVENUE:
<S>                                                              <C>             <C>             <C>         
     Products ................................................   $ 13,075,085    $ 11,711,026    $  8,469,890
     Services ................................................     13,005,991      10,588,311       7,039,406
                                                                 ------------    ------------    ------------
            Total revenue ....................................     26,081,076      22,299,337      15,509,296

COSTS AND EXPENSES:
     Cost of product sales ...................................      7,179,920       5,773,417       4,252,068
     Cost of services ........................................      8,897,046       7,238,527       4,856,630
     Research and development ................................      2,461,316       1,311,190         796,805
     Acquired research and development .......................      4,230,812            --              --
     Selling and marketing ...................................      3,938,753       3,241,422       2,188,152
     General and administrative ..............................      4,275,627       3,342,829       2,400,681
                                                                 ------------    ------------    ------------
            Total operating costs and expenses ...............     30,983,474      20,907,385      14,494,336

            (Loss) income from operations ....................     (4,902,398)      1,391,952       1,014,960

Interest income ..............................................         27,901         295,998          72,144
Interest expense .............................................        (78,621)        (13,227)       (285,113)
                                                                 ------------    ------------    ------------

            (Loss) income before income taxes ................     (4,953,118)      1,674,723         801,991

Benefit from (provision for) income taxes ....................        564,399        (669,889)       (320,771)
                                                                 ------------    ------------    ------------

            Net (loss) income ................................   $ (4,388,719)   $  1,004,834    $    481,220
                                                                 ============    ============    ============

            Net (loss) income per share, basic ...............   $      (0.94)   $       0.23    $       0.17
            Net (loss) income per share, diluted .............   $      (0.94)   $       0.21    $       0.14

Number of shares used to calculate net (loss) income per share
            Basic ............................................      4,654,609       4,437,801       2,915,522
            Diluted ..........................................      4,654,609       4,780,070       3,340,236
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                   statements
                                      -29-
<PAGE>


                    BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                           Common Stock          Additional    Retained                     Total
                                                    --------------------------
                                                                    $.01 Par      Paid-In      Earnings     Treasury   Stockholders'
                                                       Shares         Value       Capital      (Deficit)      Stock       Equity
                                                    ------------  ------------  ------------  -----------  ----------- -------------
<S>                                                   <C>        <C>           <C>           <C>          <C>          <C>        
BALANCE, December 31, 1995 .........................   2,640,417  $     26,404  $  2,798,620  $   505,924  $  (144,000) $ 3,186,948
  Issuance of common stock, net of issuance costs ..   1,637,647        16,377    12,371,469                   144,000   12,531,846
  Stock options and warrants exercised .............      85,760           858        67,210                                 68,068
  Conversion of note payable .......................      14,333           143        21,357                                 21,500
  Net income .......................................                                              481,220                   481,220
                                                    ------------  ------------  ------------  -----------  ----------- ------------
BALANCE, December 31, 1996 .........................   4,378,157        43,782    15,258,656      987,144         --     16,289,582
  Stock options and warrants exercised .............     244,409         2,444       480,032                                482,476
  Tax benefit of stock options exercised ...........                                 290,361                                290,361
  Net income .......................................                                            1,004,834                 1,004,834
                                                    ------------  ------------  ------------  -----------  ----------- ------------
BALANCE, December 31, 1997 .........................   4,622,566        46,226    16,029,049    1,991,978         --     18,067,253
  Stock options and warrants issued with acquisition                                 236,327                                236,327
  Stock options exercised ..........................      45,250           452        88,697                                 89,149
  Tax benefit of stock options exercised ...........                                  64,644                                 64,644
  Net (loss) .......................................                                           (4,388,719)               (4,388,719)
                                                    ------------  ------------  ------------  -----------  ----------- ------------
BALANCE, December 31, 1998 .........................   4,667,816  $     46,678  $ 16,418,717  $(2,396,741)        --   $ 14,068,654
                                                    ============  ============  ============  ===========  =========== ============

</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                   statements
                                      -30-
<PAGE>


                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                              --------------------------------------------
                                                                   1998            1997            1996
                                                              ------------    ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                           <C>             <C>             <C>         
    Net (loss) income .....................................   $ (4,388,719)   $  1,004,834    $    481,220
    Adjustments to reconcile net (loss) income to net
       cash (used in) provided by operating activities:
    Depreciation and amortization .........................      1,280,049         858,434         600,495
    Provision for doubtful accounts .......................        154,335         174,925         247,080
    Deferred rent .........................................        117,911         (71,381)        (87,152)
    Deferred income taxes .................................       (528,676)          2,391        (155,495)
    Tax benefit of stock options exercised ................         64,644         290,361            --
    Acquired research and development .....................      4,230,812            --              --
Changes in operating assets and liabilities:
    Accounts receivable ...................................       (675,171)     (1,907,413)       (587,204)
    Other assets ..........................................           --           (13,930)         14,188
    Inventories ...........................................       (786,947)       (640,301)       (503,483)
    Prepaid expenses and other ............................       (144,199)          2,546          14,249
    Accounts payable ......................................        105,122         797,690         246,623
    Accrued compensation and other expenses ...............        (86,054)       (102,199)        883,063
    Deferred revenue ......................................       (558,264)        330,855         306,076
                                                              ------------    ------------    ------------
        Net cash (used in) provided by operating activities     (1,215,157)        726,812       1,459,660
                                                              ------------    ------------    ------------

CASH FLOWS FOR INVESTING ACTIVITIES:
    Acquired research and development .....................       (850,000)           --              --
    Payments for additions to property and equipment ......     (2,929,568)     (2,612,697)       (669,154)
    Purchase of intangible assets .........................         (3,470)        (39,625)         (9,999)
    Return of deposits and other...........................         27,731            --              --
    Purchase of long term investment ......................           --          (750,000)       (732,500)
    Acquisitions, net of cash aquired .....................     (1,706,540)     (1,993,722)           --
                                                              ------------    ------------    ------------
        Net cash used in investing activities .............     (5,461,847)     (5,396,044)     (1,411,653)
                                                              ------------    ------------    ------------

CASH FLOWS FOR FINANCING ACTIVITIES:
    Proceeds from issuance of debt ........................      3,977,351            --           226,300
    Repayments of long-term debt ..........................        (14,878)     (1,123,526)     (4,803,042)
    Proceeds from issuance of common stock ................         89,149         482,476      13,581,315
    Offering costs associated with issuance of common stock           --              --          (981,401)
                                                              ------------    ------------    ------------
        Net cash provided by (used in) financing activities      4,051,622        (641,050)      8,023,172
                                                              ------------    ------------    ------------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: .........     (2,625,382)     (5,310,282)      8,071,179
    Cash and cash equivalents, beginning of year ..........      2,772,360       8,082,642          11,463
                                                              ------------    ------------    ------------
    Cash and cash equivalents, end of year ................   $    146,978    $  2,772,360    $  8,082,642
                                                              ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
    Conversion of note payable to common stock ............           --              --      $     21,500
    Noncash exercise of warrants to stockholder ...........           --              --      $    180,650

SUPPLEMENTAL INFORMATION:
    Income taxes paid .....................................   $    113,287    $    662,304    $     85,460
    Interest paid .........................................   $     72,755    $      5,731    $    300,587

</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                   statements
                                      -31-
<PAGE>



                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Business and Significant Accounting Policies

      Boston Biomedica,  Inc. ("BBI") and Subsidiaries (together, the "Company")
provide  infectious  disease diagnostic  products,  laboratory  instrumentation,
contract  research and  specialty  infectious  disease  testing  services to the
in-vitro diagnostic industry,  government agencies,  blood banks,  hospitals and
other health care providers worldwide. The Company is subject to risks common to
companies  in the  biotechnology,  medical  device  and  diagnostic  industries,
including but not limited to,  development by the Company or its  competitors of
new  technological  innovations,  dependence  on key  personnel,  protection  of
proprietary technology, and compliance with governmental regulations.

      Significant  accounting  policies  followed  in the  preparation  of these
consolidated financial statements are as follows:

  (i) Principles of Consolidation

      The consolidated  financial statements include the accounts of BBI and its
wholly-owned  subsidiaries,  BBI  Biotech  Research  Laboratories,   Inc.  ("BBI
Biotech"),  BBI Clinical  Laboratories,  Inc. ("BBICL"),  BBI Source Scientific,
Inc. ("BBI Source"), and BBI BioSeq, Inc. ("BBI BioSeq"). BBI consists primarily
of the Diagnostic Products segment as well as executive corporate officers.  All
significant  intercompany  accounts and transactions have been eliminated in the
consolidation. Certain amounts included in the prior year's financial statements
may have been reclassified to conform to the current presentation.

  (ii) Use of Estimates

      To prepare the financial  statements in conformity with generally accepted
accounting principles,  management is required to make significant estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  In particular,  the Company  records  reserves for estimates
regarding the collectability of accounts receivable, the value and realizability
of intangible assets, as well as the net realizable value of its inventory.

      The valuation  methodology applied to the acquisition of BioSeq, Inc. (see
Note 2) was based on estimated  discounted future cash flows. The purchase price
accounting is based on this valuation. Significant assumptions include gross and
operating profit margins, and future tax, discount, and royalty rates.

      Actual  results could differ from the estimates  and  assumptions  used by
management.

  (iii) Revenue Recognition

      Products revenue are recognized as sales upon shipment of the products or,
for  specific  orders at the request of the  customer,  on a bill and hold basis
after completion of manufacture.  All bill and hold  transactions meet specified
revenue  recognition  criteria which include normal billing,  credit and payment
terms, and transfer to the customers of all risks and rewards of ownership.

      Services are recognized as revenue upon  completion of tests for specialty
laboratory services. Revenue from service contracts and research and development
contracts for the Company's laboratory instrumentation business is recognized as
the service and research and  development  activities  are  performed  under the
terms of the contracts.

      Revenue  under  long-term  contracts,  generally  from one to five  years,
including  funded  research and  development  contracts,  is recorded  under the
percentage of  completion  method,  wherein  costs plus profit,  are recorded as
service revenue and billed monthly as the work is performed.  Certain  customers
make  advance   payments  that  are  deferred   until  revenue   recognition  is
appropriate.  When the current contract estimates indicate a loss,  provision is
made for the total  anticipated loss. The Company does not believe there are any
material collectability issues associated with these receivables.

      Total revenue related to long-term contracts was approximately $4,175,000,
$3,125,000, and $2,224,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.  Total  contract  costs  associated  with  these  agreements  were
approximately  $3,950,000,  $2,782,000,  and  $2,042,000  for  the  years  ended
December 1998, 1997 and 1996, respectively.


                                      -32-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Business and Significant Accounting Policies -- (Continued)

  (iv) Cash and cash equivalents

      The Company's policy is to invest available cash in short-term, investment
grade,  interest bearing  obligations,  including money market funds,  municipal
notes,  and bank and  corporate  debt  instruments.  Securities  purchased  with
initial  maturities  of three  months or less,  are valued at cost plus  accrued
interest,   which  approximates  fair  market  value,  and  classified  as  cash
equivalents.

  (v) Research and Development Costs

      Research and development costs are expensed as incurred.

  (vi) Inventories

      Inventories  are stated at the lower of cost or net  realizable  value and
include material, labor and manufacturing overhead.

  (vii) Property and Equipment

      Property  and  equipment  are  stated  at cost.  For  financial  reporting
purposes,   depreciation  is  recognized  using  accelerated  and  straight-line
methods,  allocating  the cost of the assets over their  estimated  useful lives
ranging  from  five  to ten  years  for  certain  manufacturing  and  laboratory
equipment,  from  three to five years for  management  information  systems  and
office equipment, three years for automobiles and thirty years for the building.
Leasehold  improvements  are  amortized  over  the  shorter  of the  life of the
improvement  or the remaining  life of the leases,  which range from four to ten
years. Upon retirement or sale, the cost and related accumulated depreciation of
the asset are removed from the accounting records. Any resulting gain or loss is
credited or charged to income.

  (viii) Goodwill and Intangibles

      The Company has  classified as goodwill,  the cost in excess of fair value
of the  assets  of the  business  acquired.  Goodwill  is being  amortized  on a
straight  line basis  over ten to fifteen  years.  Other  intangibles  primarily
consist of patents, licenses, and intellectual property rights and are amortized
over periods ranging from four to sixteen years.

  (ix) Impairment of Long-Lived Assets

      The  Company  periodically  evaluates  the  potential  impairment  of  its
long-lived assets whenever events or changes in circumstances  indicate that the
carrying  amount  of an asset may not be  recoverable.  At the  occurrence  of a
certain event or change in  circumstances,  the Company  evaluates the potential
impairment of an asset based on estimated future undiscounted cash flows. In the
event impairment  exists, the Company will measure the amount of such impairment
based on the present value of estimated  future cash flows using a discount rate
commensurate  with the risks involved.  Based on  management's  assessment as of
December 31, 1998, the Company has  determined  that no impairment of long-lived
assets exists.

  (x) Income Taxes

      The Company  utilizes the liability method of accounting for income taxes.
Under this method,  deferred taxes arise from temporary  differences between the
financial  statement and tax bases of assets and  liabilities  using enacted tax
rates in effect in the years in which the differences are expected to reverse. A
valuation  allowance  is provided  for net  deferred tax assets if, based on the
weighted available evidence,  it is more likely than not that some or all of the
deferred  tax assets  will not be  realized.  Tax credits  are  recognized  when
realized using the flow through method of accounting.


                                      -33-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) Business and Significant Accounting Policies -- (Continued)

  (xi) Concentration of Credit Risk

      Financial   instruments   which   potentially   subject   the  Company  to
concentrations  of credit risk are principally  cash and cash  equivalents,  and
accounts  receivable.  The Company places its cash in federally chartered banks,
each of which  is  insured  up to  $100,000  by the  Federal  Deposit  Insurance
Corporation.  The Company  limits credit risk in cash  equivalents  by investing
only in short-term,  investment  grade  securities  including money market funds
restricted  to such  securities.  Concentration  of credit risk with  respect to
accounts  receivable  is limited to certain  customers to whom the Company makes
substantial sales (see Note 8). The Company does not require collateral from its
customers. To reduce risk, the Company routinely assesses the financial strength
of its  customers  and,  as a  consequence,  believes  that its  trade  accounts
receivable credit risk exposure is limited.

  (xii) Deferred Revenue

      Deferred revenue  consists of payments  received from customers in advance
of services performed.

  (xiii) Computation of Earnings per Share

      Basic  earnings  per share is  computed by dividing  income  available  to
common shareholders by the weighted average number of common shares outstanding.
Diluted  earnings per share is computed by dividing  income  available to common
shareholders by the weighted  average common shares  outstanding plus additional
common  shares that would have been  outstanding  if dilutive  potential  common
shares had been issued.  For  purposes of this  calculation,  stock  options are
considered  common  stock  equivalents  in periods in which they have a dilutive
effect.  Options and warrants  that were  antidilutive  were  excluded  from the
calculation.

 (xiv) Segment Reporting

      The  Company  adopted  SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise  and  Related  Information,"  on  December  31,  1998.  SFAS No.  131
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
selected  information about operating segments in interim financial reports.  It
also establishes  standards for related disclosures about products and services,
geographic  areas and major  customers.  SFAS No.  131  supersedes  SFAS No. 14,
Financial  Reporting  for  Segments  of a Business  Enterprise,  but retains the
requirements to report information about major customers.  Disclosures  required
by this new  standard are  included in the notes to the  consolidated  financial
statements under the caption "Segment Reporting and Related Information."

  (xv) Recent Accounting Standards

      Accounting for Derivative Instruments and Hedging Activities

      Statement of  Financial  Accounting  Standards  No. 133,  "Accounting  for
Derivative  Instruments  and Hedging  Activities"  (SFAS 133) was issued in June
1998. It is effective for all fiscal years  beginning  after June 15, 1999.  The
new standard  requires  companies to record  derivatives on the balance sheet as
assets or liabilities,  measured at fair value.  Gains or losses  resulting from
changes in the values of those  derivatives  would be accounted for depending on
the use of the  derivatives and whether they qualify for hedge  accounting.  The
key criterion  for hedge  accounting  is that the hedging  relationship  must be
highly  effective in achieving  offsetting  changes in fair value or cash flows.
The Company does not currently engage in derivative trading or hedging activity.
The Company  will adopt SFAS 133 in the fiscal year ending  December  31,  2000,
although no impact on operating results or financial position is expected.

      Accounting  for the Costs of Computer  Software  Developed or Obtained for
Internal Use

      In March of 1998, the American  Institute of Certified Public  Accountants
issued  Statement  of  Position  98-1,  "Accounting  for the  Costs of  Computer
Software  Developed or Obtained for Internal  Use".  SOP 98-1 requires  computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning  January 1, 1999.  The Company is currently  assessing the impact that
adoption of this  statement  will have on  consolidated  financial  position and
results of operations.


                                      -34-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2) Acquisition of BioSeq, Inc.

      On  September  30, 1998 the Company  acquired the  remaining  common stock
outstanding  of BioSeq  (approximately  81%) for  $879,000  in cash (net of cash
acquired of  $121,000),  warrants to purchase  100,000  shares of the  Company's
stock at an  exercise  price of  $2.50  per  share,  minimum  long-term  royalty
payments of $424,000,  debt and accrued  interest  owed by BioSeq at the time of
acquisition of approximately  $736,000, and other acquisition costs. The Company
also  exchanged  BioSeq's  stock  options for 46,623 BBI stock  options  with an
average exercise price of $2.74.  Accordingly,  the Company's  aggregate cost of
acquiring all of BioSeq's  equity,  including the original 19% investment  under
the 1996 Purchase Agreement of $1,482,000 (classified as long-term investment at
December 31, 1997, see Note 7), was approximately  $4,226,000.  The cash portion
of the  acquisition  was  financed  from a  combination  of debt and  cash.  The
acquisition has been recorded using purchase  accounting,  and BioSeq's  results
are included in the consolidated  results of the Company  commencing  October 1,
1998.

      BioSeq is a development stage company with patent pending technology based
on pressure cycling technology ("PCT"). Approximately $3,381,000 of the purchase
price has been allocated to in-process  research and development and expensed in
the third quarter based on an independent valuation of the assets acquired.  The
patents on the core technology have been valued and capitalized at $778,000, and
are being  amortized over their  remaining  life,  approximately  sixteen years.
Other  assets  acquired  are  primarily  laboratory  equipment,  which are being
depreciated over their remaining useful lives of three to ten years.

      Allocated  in-process  research and  development  consists of two projects
that were on going at the time of the  acquisition  related to pathogen  nucleic
acid extraction and  inactivation.  BioSeq expended  approximately  $1.6 million
prior to  September  30, 1998 on these  projects.  Both of these  projects  have
encouraging  preliminary data demonstrating  potential  feasibility on a limited
number of pathogens,  but with  significant  scientific,  mechanical  and design
issues  remaining.  The Company  estimates  that it will spend in excess of $4.8
million  through the year 2002 to complete  the  development  into  commercially
viable products and to begin generating revenue.  Remaining  development efforts
are focused on feasibility  studies to establish the key performance  parameters
and  biological  activities  to be retained;  designing and building a prototype
instrument; further development of the prototype for the applications;  scale-up
of design; data generation and clinical trials;  applying and obtaining Food and
Drug  Administration  approval;  final  design  modifications;  and  transfer to
manufacturing. In addition to the risk of the technology ultimately not working,
failure to  complete on a timely  basis  could  allow new or existing  competing
technologies to be developed and commercially accepted.

      The valuation  methodology was based on estimated  discounted  future cash
flows.  Significant  assumptions include gross and operating profit margins, and
future  tax,  discount,  and  royalty  rates.  Recent  Securities  and  Exchange
Commission ("SEC") guidelines on valuation methodologies for in-process research
and  development  are still  evolving.  The amount  written off maybe subject to
adjustment as the SEC  continues to focus on accounting  for acquired in process
research and development.

      The following  unaudited pro forma  information  combines the consolidated
results  of  operations  of the  Company  and BioSeq as if the  acquisition  had
occurred at the beginning of 1997,  after giving effect to certain  adjustments,
including  amortization of intangible assets,  increased interest expense on the
acquisition  debt,  and related  income tax  effects.  The  unaudited  pro forma
information is shown for comparative  purposes only and is based on management's
estimates of research and development expenditures.

                                               Years Ended December 31,
                                             ----------------------------
Unaudited ..................................     1998            1997
                                             ------------    ------------
Revenue .................................... $ 26,081,076    $ 22,299,337
Operating (loss) income ....................   (1,474,694)        191,952
Net (loss) income ..........................     (989,327)        242,834
Pro forma (loss) income per share, basic ...        (0.21)           0.05
Pro forma (loss) income per share, diluted .        (0.21)           0.05

      The pro forma  information  excludes  acquired research and development of
$4,231,000.


                                      -35-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(3) Purchase of the Business and Net Assets of Source Scientific, Inc.

      In July 1997, the Company,  through its wholly owned subsidiary BBI Source
Scientific, Inc. ("BBI-Source"), completed the acquisition of all of the assets,
business,  and selected liabilities of Source Scientific,  Inc.  ("Source").  In
addition to the cash payment of $1,894,000 to Source,  the total  purchase price
was $1,994,000  including  consulting,  legal,  accounting and other acquisition
costs, net of cash acquired.  The acquisition is treated as an asset purchase as
of July 1, 1997 and the  results of  operations  have been  included  since that
date. The purchase  price exceeded the fair market value of net assets  acquired
by  approximately  $2,202,000,  which is  recognized  as  goodwill  and is being
amortized on a straight line basis over fifteen years.

(4) Inventories

      The Company  purchases  human  plasma and serum from  various  private and
commercial  blood  banks.  Upon  receipt,   such  purchases   generally  undergo
comprehensive  testing,  and  associated  costs are included in the value of raw
materials.  Most plasma is  manufactured  into  Basematrix and other  diagnostic
components  to  customer  specifications.  Plasma  and  serum  with the  desired
antibodies or antigens are sold or  manufactured  into Quality  Control  Panels,
Accurun(R) Run Controls,  and reagents ("Finished  Goods").  Panels and reagents
are unique to specific donors and/or collection periods, and require substantial
time to characterize and manufacture due to stringent technical  specifications.
Panels play an important role in diagnostic test kit development,  licensure and
quality  control.  Panels are  manufactured  in  quantities  sufficient  to meet
expected  user  demand  which may  exceed  one  year.  Inventory  also  includes
component parts used in the manufacture of laboratory instrumentation. Inventory
balances at December 31, 1998 and 1997 consist of the following:

                                                    1998                 1997
                                                 ----------           ----------

Raw materials ........................           $2,407,154           $2,033,040
Work-in-process ......................            1,788,399            1,190,567
Finished goods .......................            2,494,215            2,679,214
                                                 ----------           ----------
                                                 $6,689,768           $5,902,821
                                                 ==========           ==========
(5) Property and Equipment

      Property  and  equipment  at  December  31,  1998 and 1997  consist of the
following:

                                                        1998            1997
                                                     -----------     -----------
Laboratory and manufacturing equipment .........     $ 3,082,834     $ 2,297,590
Management information systems .................       2,556,193       1,925,194
Office equipment ...............................         821,538         686,608
Automobiles ....................................         206,693         189,775
Leasehold improvements .........................       1,610,260         687,714
Land, building and improvements ................       2,307,039       1,872,747
                                                     -----------     -----------
                                                      10,584,557       7,659,628
Less accumulated depreciation ..................       3,659,134       2,679,464
                                                     -----------     -----------

Net book value .................................     $ 6,925,423     $ 4,980,164
                                                     ===========     ===========

      Depreciation  expense for the years ended December 31, 1998, 1997 and 1996
was approximately $1,096,000,  $731,000, and $585,500 respectively.  Included in
1998 and 1997 land,  building and improvements is  approximately  $1,345,000 and
$920,000, respectively, of construction in progress.


                                      -36-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(6) Intangible Assets

      Intangible assets at December 31, 1998 and 1997 consist of the following:

                                                       1998              1997
                                                    ----------        ----------
Goodwill ...................................        $2,293,045        $2,293,045
Patents ....................................           796,380            14,754
Licences ...................................            37,752            37,751
                                                    ----------        ----------
                                                     3,127,177         2,345,550
Less accumulated amortization ..............           317,352           133,330
                                                    ----------        ----------

Net book value .............................        $2,809,825        $2,212,220
                                                    ==========        ==========

      Amortization  expense for the years ended December 31, 1998, 1997 and 1996
was approximately $184,000, $125,000, and $16,000 respectively.

(7) Long-term Investment

      On December 31, 1997 the Company had a long-term investment of $1,482,500.
This amount  represented 19.9% of the common stock of BioSeq,  Inc. During 1998,
the Company  purchased the remaining stock of BioSeq and included the investment
in the purchase price (see Note 2).

(8) Segment Reporting and Related Information (all dollar amounts in thousands)

      Operating  segments are  components  of an enterprise  for which  separate
financial  information  is  available  that is  evaluated  regularly  by  senior
management in deciding how to allocate resources and in assessing performance of
the  segment.  The  Company is  organized  along legal  entity  lines and senior
management  regularly  reviews  financial  results  for all  entities,  focusing
primarily on revenue and operating income.

      The Company has four operating  segments.  The Diagnostics  segment serves
the worldwide in vitro diagnostics  industry,  including users and regulators of
their test  kits,  with  quality  control  products,  test kit  components,  and
clinical trial and research services. This segment pursues third party contracts
to help fund the  development  of its  products  and  services,  primarily  with
agencies of the United  States  Government.  The  Clinical  Laboratory  Services
segment  performs  specialty  infectious  disease  testing for hospitals,  blood
banks, doctors and other clinical laboratories,  primarily in North America. The
Laboratory Instrumentation segment sells diagnostic instruments primarily to the
worldwide in vitro  diagnostic  industry on an OEM basis,  as well as performing
in-house  instrument  servicing.  Finally,  "Other"  consists  of  research  and
development  in  two  areas:   pressure  cycling  technology  ("PCT")  and  drug
discovery. The Company performs basic and applied research in the development of
PCT, with  particular  focus in the areas of pathogen  inactivation  and nucleic
acid purification.  The Company also conducts active research, together with Dr.
K. H. Lee and  collaborators  at the  School of  Pharmacy,  University  of North
Carolina at Chapel Hill, in the area of anti-HIV drug discovery,  with exclusive
focus on natural products and their synthetic derivatives.

      The  Company's  underlying  accounting  records are  maintained on a legal
entity basis for government and public  reporting  requirements,  as well as for
segment performance and internal management  reporting.  Inter-segment sales are
recorded on a "third  party best price" basis and are  significant  in measuring
segment operating results.  The cost of most corporate functions are included in
the  Diagnostic  Products  segment  as the  senior  management  group  has  dual
responsibility  to this segment as well as the Company.  The  following  segment
information  has  been  prepared  in  accordance  with the  internal  accounting
policies of the Company, as described above.

                                      -37-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) Segment Reporting and Related Information (Continued)

      Operating  segment revenue for the years ended December 31, 1998, 1997 and
1996 were as follows: 
                                        1998        1997        1996
                                      --------------------------------
       Diagnostics ................   $ 15,901    $ 14,282    $ 11,518
       Clinical Laboratory Services      7,187       6,024       4,568
       Laboratory Instrumentation..      3,929       2,608        --
       Other ......................       --          --          --
       Eliminations ...............       (936)       (615)       (577)
                                      --------------------------------
          Total Revenue ...........   $ 26,081    $ 22,299    $ 15,509
                                      ================================

      Operating  segment  (loss)  income for the years ended  December 31, 1998,
1997 and 1996 were as follows:
                                                  1998       1997       1996
                                                -----------------------------
       Diagnostics ..........................   $   714    $ 1,277    $ 1,115
       Clinical Laboratory Services .........       134        403         55
       Laboratory Instrumentation............      (906)      (189)      --
       Other ................................      (613)       (99)      (155)
       Acquired R&D .........................    (4,231)      --         --
                                                -----------------------------
          Total (Loss) Income from Operations   $(4,902)   $ 1,392    $ 1,015
                                                =============================

      Operating  segment  depreciation  and  amortization  expense for the years
ended December 31, 1998, 1997 and 1996 were as follows:

                                       1998     1997     1996
                                      ------------------------
       Diagnostics ................   $  754   $  520   $  454
       Clinical Laboratory Services      217      175      146
       Laboratory Instrumentation .      289      163     --
       Other ......................       20     --       --
                                      ------------------------
          Total ...................   $1,280   $  858   $  600
                                      ========================

      Identifiable  operating  segment  assets  are all  located  in the  United
States, and as of December 31, 1998, 1997 and 1996 were as follows:

                                       1998      1997      1996
                                      ---------------------------
       Diagnostics ................   $16,548   $16,958   $17,802
       Clinical Laboratory Services     2,348     1,948     1,996
       Laboratory Instrumentation .     4,428     4,744      --
       Other ......................       758      --        --
                                      ---------------------------
          Total assets ............   $24,082   $23,650   $19,798
                                      ===========================


                                      -38-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8) Segment Reporting and Related Information (Continued)

      Operating  segment capital  expenditures  for the years ended December 31,
1998, 1997 and 1996 were as follows:

                                       1998     1997     1996
                                      ------------------------
       Diagnostics ................   $2,702   $2,148   $  503
       Clinical Laboratory Services      202      196      176
       Laboratory Instrumentation .       22      269     --
       Other ......................        4     --       --
                                      ------------------------
          Total ...................   $2,930   $2,613   $  679
                                      ========================

      Revenue by geographic area for the years ended December 31, 1998, 1997 and
1996 are as follows:
                                   1998      1997      1996
                                 ----------------------------
      United States ...........  $21,978   $17,706   $11,183
      Europe ..................    2,453     2,614     2,844
      Pacific Rim .............    1,063     1,285       948
      Total all others ........      587       694       534
                                 ----------------------------
           Total ..............  $26,081   $22,299   $15,509
                                 ============================

      Revenue of Product  and Service  classes in excess of 10% of  consolidated
revenue  (excludes  inter-segment  sales) for the years ended December 31, 1998,
1997 and 1996 are as follows:
                                    1998    1997    1996
                                   ----------------------

      Quality Control Products ..  $9,369  $8,220  $6,132
      Clinical Laboratory Testing   6,806   5,695   4,296
      Government Contracts ......   3,535   2,638   1,920


      The  government  contract  revenues  are  from  United  States  government
agencies,  primarily  the National  Institutes of Health (NIH) and represent the
only customer with revenue in excess of 10% of consolidated revenue.

(9) Debt

      Effective  March 28,  1997,  as amended,  the Company  entered into a $7.5
million  uncollateralized  revolving  line of credit (the "Line") with its bank.
The Line matures on June 30, 2000;  bears interest at the Company's option based
on either  base rate,  LIBOR plus 1.75%,  or  overnight  money  market rate plus
1.75%; and carries a facility fee of .25% per annum, payable quarterly. The Line
contains covenants regarding the Company's ratio of total liabilities-to-equity,
minimum  tangible net worth,  and minimum debt service  coverage ratio. The Line
further provides for  restrictions on the payment of dividends,  and limitations
on additional borrowings.  At December 31, 1998, the interest rate was 7.75% and
the total balance due was  approximately  $3,977,000.  At December 31, 1998, the
Company was in violation of certain  covenants however it obtained a waiver from
its bank on March 31, 1999. The Company did not draw upon the Line during 1997.

      The Company's  outstanding  debt includes an installment note payable with
an interest rate of 9.75%, due August 2001. The note is collateralized by office
furniture  and  laboratory  equipment.  The amounts  outstanding  including  the
current  portion,  at  December  31,  1998  and 1997 was  $26,820  and  $40,948,
respectively.


                                      -39-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(10) Other Liabilities

      The Company's  California  facility  lease  includes  scheduled  base rent
increases  over the term of the  lease.  The  amount  of base rent  payments  is
charged to expense using the straight-line method over the term of the lease. As
of December 31, 1998 and 1997, the Company has recorded a long-term liability of
$153,290 and $189,867, respectively ($188,519 and $223,748 including the current
portion),  to  reflect  the  excess of rent  expense  over cash  payments  since
inception  of the lease.  In addition to base rent,  the Company  pays a monthly
allocation  of the  operating  expenses  and real  estate  taxes  for the  above
facility.

      Included in  long-term  liabilities  at  December  31, 1998 is the present
value of future minimum royalty  payments of  approximately  $424,000 payable to
the former owners of BioSeq, Inc. (See Note 2)

(11) Accrued Compensation

      Accrued compensation consists of the following:

                                            Year Ended December 31
                                              1998         1997
                                           ----------   ----------
              Accrued payroll ..........   $  598,937   $  421,369
              Accrued vacation .........      360,509      370,332
              Other accrued compensation      324,716      312,136
                                           ----------   ----------
                                            1,284,162    1,103,837
                                           ==========   ==========

(12) Income Taxes

      The components of the (benefit) provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                                        1998         1997         1996
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>      
Current (benefit) provision: federal .............   $ (63,868)   $ 567,373    $ 404,775
Current provision: state .........................   $  28,145    $ 100,125    $  71,431
                                                     ---------    ---------    ---------
    Total current (benefit) provision ............     (35,723)     667,498      476,206

Deferred (benefit) provision: federal ............    (417,315)      (5,078)    (132,120)
Deferred (benefit) provision: state ..............    (111,361)       7,469      (23,315)
                                                     ---------    ---------    ---------
    Total deferred (benefit) provision ...........    (528,676)       2,391     (155,435)

                                                     =========    =========    =========
        Total (benefit) provision for income taxes   $(564,399)   $ 669,889    $ 320,771
                                                     =========    =========    =========
</TABLE>

      Significant  items  making up deferred  tax  liabilities  and deferred tax
assets are as follows:

                                                           1998         1997
                                                         ---------    ---------
Current deferred taxes:
   Inventory .........................................   $ 169,796    $  72,249
   Accounts receivable allowance .....................     224,240      153,469
   Technology licensed ...............................     322,516         --
   Other accruals ....................................     130,716      102,844
                                                         ---------    ---------
         Total current deferred tax assets ...........     847,268      328,562
Long term deferred taxes:
   Accelerated tax depreciation ......................    (279,358)    (217,029)
   Goodwill and intangibles ..........................      17,729       15,176
   Tax credits .......................................      60,000         --
   Operating loss carryforwards ......................     861,066       52,520
   Less: valuation allowance .........................    (798,800)        --
                                                         ---------    ---------
         Total long term deferred tax liabilities, net    (139,363)    (149,333)
                                                         ---------    ---------
         Total net deferred tax assets ...............   $ 707,905    $ 179,229
                                                         =========    =========

                                      -40-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) Income Taxes (Continued)

      On December 31, 1998,  operating loss  carryforwards were partially offset
by a valuation  allowance  of  $798,800.  This  allowance  is to reserve for the
entire loss  carryforward  obtained through the acquisition of BioSeq,  Inc. The
Company  establishes  valuation  allowances in accordance with the provisions of
SFAS 109  "Accounting  for Income Taxes".  The Company  continually  reviews the
adequacy of the valuation allowance.  The state net operating loss carryforwards
expire at various dates beginning in 1999 through 2007. As of December 31, 1998,
the Company had $60,000 of federal research credits which expire during 2019.

      The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:

                                                            1998    1997   1996
                                                            ----    ----   ----
Federal tax (benefit) provision rate ...................... (34%)    34%    34%
State tax (benefit) provision, net of federal benefit .....  (1%)     6%     6%
Nondeductable writeoff of acquired research and development  23%      -      -
Other items, net ..........................................   1%      -      -

                                                            ----    ----   ----
Effective income tax (benefit) provision rate ............. (11%)    40%    40%
                                                            ====    ====   ====

(13) Commitments and Contingencies

      The  Company  leases  certain  office  space,  laboratory,   research  and
manufacturing  facilities  under  operating  leases with various  terms  through
October 2007.  All of the real estate leases include  renewal  options at either
market or increasing levels of rent.

      Rent  expense for the years ended  December  31,  1998,  1997 and 1996 was
$914,440  $506,300,  and  $365,700,  respectively.  At December  31,  1998,  the
remaining fixed lease commitment was as follows:


                            Year Ended       Amount
                            ----------   ----------
                            1999          1,038,483
                            2000            900,122
                            2001            840,438
                            2002            572,061
                            2003            582,050
                            2004 and      2,389,455
                            thereafter
                                         ----------
                                         $6,322,609
                                         ----------


      Commencing  in  February  1995,  the Company  committed  under a sponsored
research  agreement with a university to fund a research  scientist at a cost of
$13,125 per  quarter  for three  years  which costs are charged to research  and
development expense. In return, the Company has exclusive rights to any anti-HIV
compounds or derivatives developed in the course of this research,  provided the
Company obtains certain regulatory approvals from the FDA.

(14) Retirement Plan

      In January  1993,  the Company  adopted a retirement  savings plan for its
employees, which has been qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the plan through payroll
deductions within statutory  limitations and subject to any limitations included
in the plan. Company contributions are made at the discretion of management.  To
date,  no such  contributions  have been made.  During  1998,  1997 and 1996 the
Company recognized administrative expense of approximately $32,000, $23,000, and
$18,000, respectively in connection with the plan.


                                      -41-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) Stockholders' Equity

   Common Stock

      On October 31, 1996, the Company  commenced trading on the NASDAQ National
 Market as a result of the initial public  offering of its common stock ("IPO"),
 raising net proceeds of $11,633,000  from the sale of 1,600,000 shares at $8.50
 per share.

      On April 26, 1996, the Company entered into a Stock Purchase Agreement and
Exclusive  Distributor  Agreement  for five  years  with a foreign  distributor.
Pursuant to the Stock Purchase  Agreement,  the Company issued 117,647 shares of
redeemable common stock at a price per share of $8.50, for which it received net
proceeds  of  $898,503.  Issuance  costs were  $101,497.  Completion  of the IPO
terminated the redemption  feature.  The distributor was restricted from selling
these  securities for a one-year period after completion of the IPO. The Company
issued 80,000 shares of Treasury Stock in connection with this transaction.

      On August 8, 1996 the Board of Directors  approved a 1-for-2 reverse stock
split and an increase in authorized common shares to 20,000,000,  and authorized
1,000,000 shares of preferred stock (par value $.01), which were approved by the
stockholders  on  September  10,  1996.  The stock split has been  retroactively
reflected in the  accompanying  financial  statements  and notes for all periods
presented.

   Options and Warrants

      The Company has a  nonqualified  stock option plan and an incentive  stock
option  plan  both of which  are  administered  by a  committee  of the Board of
Directors.  The  exercise  price of an option  generally  equals the fair market
value of the stock at grant date.  Generally,  options become exercisable at the
rate of 25% at the end of each of the four years  following the  anniversary  of
the grant.  Options expire ten years from the date of grant, or 30 days from the
date the grantee's affiliation with the Company terminates.

      At December 31, 1998,  1,245,775  shares have been  reserved for incentive
stock  options,  of which 179,887 are available for future  grants.  In December
1997 the non-qualified  stock option plan terminated and became  unavailable for
future grants.

      On December 11, 1998,  the  Company's  Board of Directors  authorized  the
Company to offer a reduction  of the stock  option  exercise  price to $3.25 per
share,  which  represented a premium over the market price of $3.00 on that day.
Any option holder with  outstanding  stock options with an exercise price higher
than $3.25 was  eligible to  participate  in the  repricing.  A total of 411,417
options were repriced,  which represents substantially all eligible options. The
original  vesting  schedule,  generally  four years from date of grant,  remains
unchanged.  However,  all  optionees  accepting the offer agreed not to exercise
vested,  repriced  options for a period of one year from the date of  amendment.
The previous weighted average exercise price of the options repriced was $6.72.

      The Company has elected to follow Accounting  Principles Board Opinion No.
25,   "Accounting   for  Stock  Issued  to  Employees"   (APB  25)  and  related
interpretations  in accounting  for its employee  stock  options.  Under APB 25,
because the exercise  price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation  expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation" (SFAS
123).  Pro forma  information  regarding  net income and  earnings  per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee  stock options under the fair value method of that  statement.  The
fair  value  of  these  options  was  estimated  at the  date of  grant  using a
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions  for 1998.  The minimum value option  pricing model was used for all
grants during 1996 as they were granted prior to the Company's IPO.

                                         1998          1997           1996
                                       ---------     ----------     ---------
             Risk-free interest rate      4.69%          5.72%         6.18%
             Volatility factor           75.57%         55.00%         0.10%
             Weighted average           5 years        5 years       5 years
             expected life
             Expected dividend yield          0              0             0



                                      -42-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) Stockholders' Equity-(Continued)

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma net income and pro forma net income per share is as follows:

                                            1998          1997          1996
                                         -----------   -----------    ----------
       Net (loss) income-as reported     $(4,388,719)  $1,004,834      $481,220
       Net (loss) income-pro forma       $(4,959,228)     851,408       424,921
       Net (loss) income per share-as           (.94)         .23           .17
       reported, basic
       Net (loss) income per share-as           (.94)         .21           .14
       reported, diluted
       Net (loss)  income per  share-pro       (1.07)         .19           .14
       forma, basic
       Net (loss)  income per  share-pro       (1.07)         .18           .13
       forma, diluted

      Because  SFAS 123  provides  for pro forma  expense  for  options  granted
beginning in 1995, the pro forma expense will likely increase in future years as
new option grants become subject to the pricing model. The average fair value of
options  granted  during 1998,  1997 and 1996 is  estimated as $1.89,  $4.44 and
$1.86, respectively.


                                      -43-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(15) Stockholders' Equity-(Continued)

      In 1991 and 1993, the Company issued  warrants in connection  with certain
debt financings. During 1997 all of those warrants were exercised.

      The Company has reserved  shares of its  authorized  but  unissued  common
stock for the following:

<TABLE>
<CAPTION>
                                              Stock Options                    Warrants
                                          -------------------------- -------------------------- 
                                                         Weighted                     Weighted
                                                       Average price              Average price           Total
                                                                                                -------------------------
                                            Shares       per share     Shares       per share      Shares    Exercisable
                                          ------------ ------------- ----------- -------------- -----------  -----------
<S>                                       <C>           <C>         <C>         <C>             <C>            <C>    
Balance outstanding, December 31, 1995        800,287       $2.45       260,338     $2.85         1,060,625      879,038
      Granted                                 140,600        7.27             -       -             140,600
      Exercised                                (1,500)       4.50       (84,260)    2.88            (85,760)
      Expired                                 (21,500)       6.05       (56,078)    3.54            (77,578)
                                          ------------               -----------                ------------
Balance outstanding, December 31, 1996        917,887        3.10       120,000     2.50          1,037,887      839,272
      Granted                                 263,050        7.42             -       -             263,050
      Exercised                              (124,409)       1.44      (120,000)    2.50           (244,409)
      Expired                                 (30,435)       7.36             -       -             (30,435)
                                          ------------               -----------                ------------
Balance outstanding, December 31, 1997      1,026,093        4.28             -       -           1,026,093      672,231
      Granted                                 358,836        3.80 *     100,000     2.50            458,836
      Exercised                               (45,250)       1.97             -       -             (45,250)
      Expired                                (165,013)       6.05             -       -            (165,013)
                                          ------------               -----------                ------------
Balance outstanding, December 31, 1998      1,174,666        2.75 **    100,000     2.50          1,274,666      669,434
                                          ============               ===========                ============
</TABLE>

      *     Includes  46,623  shares at $2.74  granted  in  connection  with the
            BioSeq, Inc. acquisition.

      **    Includes  the effect of 411,417  options  repriced in December  1998
            from a weighted average price of $6.72 to $3.25 per share.

      The following table summarizes  information concerning options outstanding
and exercisable as of December 31, 1998:

<TABLE>
<CAPTION>
                                             Options Outstanding         Options Exercisable
                                           -------------------------- ------------------------
  Range of Exercise Prices      Weighted                  Weighted                  Weighted 
                                 Average                   Average                   Average
                                Remaining    Number of    Exercise     Number of    Exercise
                                  Life        Options       Price       Options      Price                           
                              ------------ ------------ ------------- ----------- ------------
<S>                           <C>          <C>         <C>            <C>         <C>     
    $0.00-$0.85 ..............     0.40         40,000      $ 0.2500       40,000   $ 0.2500
    $0.86-$1.70 ..............     2.20        187,334      $ 1.4981      187,334   $ 1.4981
    $1.71-$2.55 ..............     3.70        194,767      $ 2.4920      189,767   $ 2.5000
    $2.56-$3.25 ..............     7.80        740,253      $ 3.2008      245,571   $ 3.1720
    $3.26-$8.50 ..............     1.30         12,312      $ 6.4446        6,762   $ 6.0262
                                           ------------               -----------
                                             1,174,666                    669,434
                                           ============               ===========

</TABLE>



                                      -44-
<PAGE>

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(16) Computation of Net Income per Share

      The following  illustrates the computation of basic and diluted net income
per share.

                                                 Year Ended December 31,
                                         --------------------------------------
                                             1998          1997         1996
                                         -----------    ----------   ----------

 Shares, basic ........................    4,654,609     4,437,801    2,915,522

 Net effect of dilutive common stock
    equivalents-based on treasury stock
    method using average market price *                    342,269      424,714

                                         -----------    ----------   ----------
 Shares, diluted ......................    4,654,609     4,780,070    3,340,236
                                         ===========    ==========   ==========



 Net (loss) income, basic and diluted .  $(4,388,719)   $1,004,834   $  481,220
                                         ===========    ==========   ==========

 Net (loss) income per share-basic ....        (0.94)         0.23         0.17
 Net (loss) income per share-diluted ..        (0.94)         0.21         0.14


         * Potentially  dilutive  securities of 192,826 were not included in the
         computation  of diluted  earnings per share because to do so would have
         been antidilutive for twelve months ended December 31, 1998.

(17) Selected Quarterly Financial Data (Unaudited)


      Unaudited (Amounts in thousands, except for per share data)

1998                                   1st Qtr    2nd Qtr   3rd Qtr    4th Qtr
                                       -------    -------   -------    -------
 Total revenue ..............          $ 6,273    $ 6,383   $ 6,181    $ 7,244
 Gross profit ...............            2,178      2,709     2,448      2,669
 Net (loss) income ..........             (645)       134    (3,377)      (502)
 Net (loss) income per share, basic      (0.14)      0.03     (0.72)     (0.11)
 Net (loss) income per share, diluted    (0.14)      0.03     (0.72)     (0.11)


1997                                   1st Qtr    2nd Qtr   3rd Qtr    4th Qtr
                                       -------    -------   -------    -------
 Total revenue ..............          $ 4,209    $ 4,649   $ 6,140    $ 7,301
 Gross profit ...............            1,678      1,921     2,541      3,148
 Net income .................              148        176       246        435
 Net income per share, basic              0.03       0.04      0.06       0.10
 Net income per share, diluted            0.03       0.04      0.05       0.09


                                      -45-
<PAGE>





                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
BOSTON BIOMEDICA, INC.:

      In our  opinion,  the  accompanying  consolidated  balance  sheets and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows present fairly, in all material  respects,  the financial position of
Boston Biomedica, Inc. and its subsidiaries (the "Company") at December 31, 1998
and 1997,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1998,  in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial statement schedule listed in the index appearing under Item 14 (a) (2)
presents  fairly,  in all material  respects,  the information set forth therein
when read in conjunction  with the related  consolidated  financial  statements.
These   financial   statements   and  financial   statement   schedule  are  the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial  statements and financial statement schedule based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

                                                PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts 
February 24, 1999,  Except as to certain  information in the first  paragraph of
Note 9, for which the date is March 31, 1999.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE


      None.


                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


      The information  called for by Item 10 is incorporated by reference to the
information  under  Part I,  Item 1 -  Business  under  the  heading  "Executive
Officers of the Registrant" at page 14 of this Report, and to the information in
the Registrant's definitive Proxy Statement which is expected to be filed by the
Registrant within 120 days after the close of its fiscal year.


ITEM 11.    EXECUTIVE COMPENSATION


      The information  called for by Item 11 is incorporated by reference to the
information in the  Registrant's  definitive  Proxy  Statement under the heading
"Executive Compensation," which is expected to be filed by the Registrant within
120 days after the close of its fiscal year.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT


      The information  called for by Item 12 is incorporated by reference to the
information in the  Registrant's  definitive  Proxy  Statement under the heading
"Security Ownership of Directors, Officers and Certain Beneficial Owners," which
is expected to be filed by the Registrant within 120 days after the close of its
fiscal year.


                                      -46-
<PAGE>


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


      The information  called for by Item 13 is incorporated by reference to the
information in the  Registrant's  definitive  Proxy  Statement under the heading
"Certain  Relationships and Related Transactions," which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.




                                      -47-
<PAGE>



                                     PART IV


ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

 (a) 1. Index to Financial Statements:
 (a) 1. Index to Financial Statements:
       Consolidated Balance Sheets as of December 31, 1998 and 1997..... .....28
       Consolidated Statements of Income for the three years ended 
                        December 31, 1998.....................................29
       Consolidated Statements of Changes in Stockholders' Equity for 
                        the three years ended December 31, 1998...............30
       Consolidated Statements of Cash Flows for the three years ended 
                        December 31, 1998.....................................31
       Notes to Consolidated Financial Statements.............................32
       Report of Independent Accountants...................... ...............46
(a) 2. Financial Statement Schedule:
       Schedule II-Valuation and Qualifying Accounts..........................53

     All  supplemental  schedules  other than as set forth  above are omitted as
inapplicable or because the required information is included in the Consolidated
Financial Statements or the Notes to Consolidated Financial Statements.

(a) 3. Exhibits:

     Exhibit No.
     3.1    Amended and Restated Articles of Organization of the Company**

     3.2    Amended and Restated Bylaws of the Company**

     4.1    Specimen Certificate for Shares of the Company's Common Stock**

     4.2    Description of Capital Stock (contained in the Restated  Articles of
            Organization of the Company filed as Exhibit 3.1) **

     10.1   Agreement, dated January 17, 1994, between Roche Molecular Systems,
            Inc. and the Company**

     10.2   Exclusive  License  Agreement,  dated December 6, 1994,  between the
            University of North Carolina at Chapel Hill and the Company**

     10.3   Agreement, dated October 1, 1995, between Ajinomoto Co., Inc. and
            the Company**

     10.4   Lease Agreement,  dated July 28, 1995, for New Britain,  Connecticut
            Facility between MB Associates and the Company**

     10.5   Stock Purchase Agreement, dated April 26, 1996, between Kyowa Medex
            Co., Ltd. And the Company**

     10.6   1987 Non-Qualified Stock Option Plan**++

     10.7   Employee Stock Option Plan**++

     10.8   Underwriters  Warrants,  each dated  November  4, 1996,  between the
            Company  and  each of Oscar  Gruss & Son  Incorporated  and  Kaufman
            Bros., L.P. **

     10.9   Purchase Agreement, dated October 7, 1996, between BioSeq, Inc. and
            the Company**

     10.10  Warrant Agreement, dated October 7, 1996, between BioSeq, Inc. and
            the Company**

     10.11  Stockholders' Agreement, dated October 7, 1996, between BioSeq,
            Inc. and the Company**



                                      -48-
<PAGE>

     10.12  License Agreement, dated October 7, 1996, between BioSeq, Inc. and
            the Company**

     10.13  Commercial Loan Agreement,  dated as of March 28, 1997,  between The
            First National Bank of Boston and the Company**

     10.14  Asset Purchase Agreement, dated March 26, 1997 between Source
            Scientific, Inc. and the Company**

     10.15  Contract, dated March 1, 1997, between National Cancer Institute and
            the Company**

     10.16  Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland
            facility between B.F. Saul Real Estate Investment Trust and the
            Company**

     10.17  Lease Agreement, dated January 30, 1995 for Garden Grove, California
            facility  between TR Brell, Cal Corp. and Source  Scientific,  Inc.,
            and  Assignment  of Lease,  dated  July 2, 1997,  for Garden  Grove,
            California   facility  between  Source  Scientific  and  BBI  Source
            Scientific**

     10.18  Contract,  dated July 1, 1998,  between the National  Institutes  of
            Health and the Company (NO1-AI-85341)**

     10.19  Contract,  dated July 1, 1998,  between the National  Heart Lung and
            Blood Institute and the Company (NO1-HB-87144)**

     21.1   Subsidiaries of the Company

     23     Consent of PricewaterhouseCoopers LLP

     27     Financial Data Schedule

------------------------

++    Management contract or compensatory plan or arrangement.

**   In accordance  with Rule 12b-32 under the Securities  Exchange Act of 1934,
     as amended,  reference is made to the documents  previously  filed with the
     Securities and Exchange Commission, which documents are hereby incorporated
     by reference.

(b) REPORTS ON FORM 8-K.

            The Registrant  did not file any Current  Reports on Form 8-K during
the quarter ended December 31, 1998.


                                      -49-
<PAGE>

                                   Signatures

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: April 15, 1999                               Boston Biomedica, Inc.

                                               By: /s/Richard T. Schumacher
                                                  ----------------------------
                                                   Richard T. Schumacher
                                                   President and Chief 
                                                   Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

  SIGNATURES                  TITLES                              DATE


  /s/ Richard T. Schumacher   President, Chief Executive Officer, April 15, 1999
  ---------------------------
  Richard T. Schumacher       and Chairman of the Board
                              (Principal Executive Officer)

  /s/ Kevin W. Quinlan        Senior Vice President, Finance;     April 15, 1999
  ---------------------------
  Kevin W. Quinlan            Chief Financial Officer; Treasurer
                              and Director
                              (Principal Accounting Officer)

  /s/ Calvin A. Saravis       Director                            April 15, 1999
  ---------------------------
  Calvin A. Saravis

  /s/ Henry A. Malkasian, Sr. Director                            April 15, 1999
  ---------------------------
  Henry A. Malkasian, Sr.

  /s/ Francis E. Capitanio    Director                            April 15, 1999
  ---------------------------
  Francis E. Capitanio


                                      -50-
<PAGE>


EXHIBIT INDEX
-------------

     Exhibit No.                                                     Reference
     -----------                                                     ---------

     3.1    Amended and Restated Articles of Organization of the        A**
            Company

     3.2    Amended and Restated Bylaws of the Company                  A**

     4.1    Specimen Certificate for Shares of the Company's            A**
            Common Stock

     4.2    Description of Capital Stock (contained in the              A** 
            Restated Articles of Organization of the Company 
            filed as Exhibit 3.1)

     10.1   Agreement, dated January 17, 1994, between Roche            A**
            Molecular Systems, Inc. and the Company

     10.2   Exclusive License Agreement, dated December 6, 1994,        A** 
            between the University of North Carolina at Chapel 
            Hill and the Company

     10.3   Agreement, dated October 1, 1995, between Ajinomoto         A**
            Co., Inc. and the Company

     10.4   Lease  Agreement, dated July 28, 1995, for New Britain,     A**
            Connecticut Facility between MB Associates and the Company

     10.5   Stock Purchase Agreement, dated April 26, 1996,             A**
            between Kyowa Medex Co., Ltd. and the Company

     10.6   1987 Non-Qualified Stock Option Plan*                       A**

     10.7   Employee Stock Option Plan*                                 A**

     10.8   Underwriters Warrants, each dated November 4, 1996,         B** 
            between the Company and each of Oscar  Gruss & Son  
            Incorporated  and  Kaufman Bros., L.P.

     10.9   Purchase Agreement, dated October 7, 1996, between          A**
            BioSeq, Inc. and the Company

     10.10  Warrant Agreement, dated October 7, 1996, between           A**
            BioSeq, Inc. and the Company

     10.11  Stockholders' Agreement, dated October 7, 1996,             A**
            between BioSeq, Inc. and the Company

     10.12  License Agreement, dated October 7, 1996, between           A**
            BioSeq, Inc. and the Company

     10.13  Commercial Loan  Agreement,  as of dated March 28, 1997,    C** 
            between The First National Bank of Boston and the Company

     10.14  Asset Purchase Agreement, dated March 26, 1997 between      C**
            Source Scientific, Inc. and the Company

     10.15  Contract, dated March 1, 1997, between National Cancer      D**
            Institute and the Company

     10.16  Lease Agreement, dated May 16, 1997, for Gaithersburg,      E**
            Maryland facility between B.F. Saul Real Estate
            Investment Trust and the Company

                                      -51-
<PAGE>

     10.17  Lease  Agreement,  dated  January  30,  1995 for  Garden    F** 
            Grove,  California  facility  between TR Brell, Cal Corp. 
            and Source Scientific, Inc., and Assignment of Lease, 
            dated July 2, 1997, for Garden Grove, California facility 
            between Source Scientific and BBI Source Scientific

     10.18  Contract, dated July 1, 1998, between the National          G** 
            Institutes of Health and the Company (NO1-AI-85341)

     10.19  Contract, dated July 1, 1998, between the National          G**
            Heart Lung and Blood Institute and the Company
            (NO1-HB-87144)

     21.1   Subsidiaries of the Company                                Filed
                                                                       herewith

     23     Consent of PricewaterhouseCoopers LLP                      Filed
                                                                       herewith

     27     Financial Data Schedule                                    Filed
                                                                       herewith
------------------------

A    Incorporated by reference to the Company's  Registration  Statement on Form
     S-1 (Registration No. 333-10759)(the  "Registration Statement"). The number
     set  forth  herein  is the  number  of the  Exhibit  in  said  registration
     statement.
B    Incorporated by reference to the Registration Statement,  where the Exhibit
     was filed as Exhibit No. 10.17 and contained in Exhibit 1.1.
C    Incorporated  by reference to the  Company's  Annual Report on Form 10K for
     the fiscal year ended December 31, 1996.
D    Incorporated by reference to the Company's Quarterly Report on Form 10Q for
     the fiscal quarter ended March 31, 1997.
E    Incorporated by reference to the Company's Quarterly Report on Form 10Q for
     the fiscal quarter ended June 30, 1997.
F    Incorporated  by reference to the  Company's  Annual Report on Form 10K for
     the fiscal year ended December 31, 1997.
G    Incorporated by reference to the Company's Quarterly Report on Form 10Q for
     the fiscal quarter ended June 30, 1998.

*    Management contract or compensatory plan or arrangement.

**   In accordance  with Rule 12b-32 under the Securities  Exchange Act of 1934,
     as amended,  reference is made to the documents  previously  filed with the
     Securities and Exchange Commission, which documents are hereby incorporated
     by reference.


                                      -52-
<PAGE>

     SCHEDULE II

                     BOSTON BIOMEDICA, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                        Recoveries
                          Balance At                   for Accounts   Uncollectable    Balance at
Allowance for Doubtful   Beginning of   Additions to    Previously      Accounts          End of   
----------------------
Accounts                    Period       Allowances     Written Off    Written Off      Period
--------                -------------  -------------  -------------- ---------------  -----------     

<S>                       <C>           <C>            <C>              <C>             <C>      
1998                      $ 446,517     $ 429,036      $ 126,658        $(378,501)      $ 623,710
1997                        352,058       395,272        194,154         (494,967)        446,517
1996                        142,372       429,677         62,753         (282,744)        352,058

</TABLE>


                                      -53-
<PAGE>



                                                                   EXHIBIT 21.1





                           Subsidiaries of the Company
                           ---------------------------

<TABLE>
<CAPTION>
Name                                     Jurisdiction of Organization        Location
----                                     ----------------------------        --------

<S>                                     <C>                                 <C>
BBI Clinical Laboratories, Inc.          Massachusetts                       New Britain, CT

BBI Biotech Research Laboratories, Inc.  Massachusetts                       Gaithersburg, MD

BBI Source Scientific, Inc.              Massachusetts                       Garden Grove, CA

BBI BioSeq, Inc.                         Massachusetts                       Woburn, MA

</TABLE>



                                      -54-
<PAGE>


                                                                      EXHIBIT 23


                       CONSENT OF INDEPENDENT ACCOUNTANTS

      We consent to the incorporation by reference in the registration statement
of Boston Biomedica,  Inc. on Form S-8 (File Nos. 333-24749) of our report dated
February 24, 1999,  except as to certain  information in the first  paragraph of
Note 9, for which the date is March 31, 1999, on our audits of the  consolidated
financial statements and financial statements schedule of Boston Biomedica, Inc.
as of December  31, 1998 and 1997,  and for the years ended  December  31, 1998,
1997, and 1996, which report is included in this Annual Report on Form 10-K.

                                                      PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 14, 1999



                                      -55-
<PAGE>