**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-K**

 

| **(Mark One)**                                            |
|-----------------------------------------------------------|
| **ý**                                                | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| **For the fiscal year ended  December 31, 2003, or** |
| **o**                                                     | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

**For the transition period from                                         to                                         **

**Commission file number  000-21615**

 

**BOSTON BIOMEDICA, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Massachusetts**                                                                              |   | **04-2652826**                        |
|------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)                                |   | (I.R.S. Employer  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**

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2) Yes  o No  ý

 

Theaggregate market value of the voting common stock held by non-affiliates of theregistrant at December 31, 2003 was $11,913,113, based on the closingprice of the common stock as quoted on the Nasdaq National Market on that date.The aggregate market value of the voting common stock held by non-affiliates ofthe registrant at June 30, 2003 was $14,004,067 based on the closing priceof the common stock as quoted on the Nasdaq National Market on that date.

 

Asof February 27, 2004,  there were6,827,592 shares of the registrant’s common stock outstanding.

 

 

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**PART I**

 

**ITEM****                 ****1.****                                     ****BUSINESS**

 

**General**

 

BostonBiomedica, Inc. (“BBI”) and its wholly-owned subsidiaries (together, “theCompany”), provide products and services for the detection and treatment ofinfectious diseases such as AIDS and Viral Hepatitis.   The Company was organized as a “C” corporation in Massachusettson August 15, 1978 and commenced significant operations in 1986.  The Company has the following four businessunits, which are comparable to operating segments (the terms “business units”and “operating segments” are used herein interchangeably):

 

(1)          BBIDiagnostics, an ISO 13485 (as of December 12, 2002) certified manufacturerof quality control and other diagnostic products used to ensure the accuracy ofin vitro diagnostic tests;

 

(2)          BBIBiotech Research Laboratories (“BBI Biotech”), the research and development armof the Company which supplements its support for the other BBI business unitswith research contracts and repository services primarily for agencies of theUnited States government;

 

(3)          BBISource Scientific (“BBI Source”), an ISO 9001-2000 and ISO 13485 certifieddeveloper and manufacturer of laboratory and medical instruments, includingproprietary and OEM; and

 

(4)          PressureCycling Technology (“PCT”), the research, development and commercialization ofproducts   utilizing the Company’spatented pressure cycling technology, to provide new solutions for a number ofhealthcare issues, including extraction of nucleic acids, inactivation ofpathogens in human plasma, food safety, and genomics.

 

Asused in this report, the terms “we,” “us,” “our, the “Company” and “BBI” meanBoston Biomedica, Inc. and its wholly-owned subsidiaries (unless the contextindicates a different meaning).

 

RecentBusiness Developments

 

In2003, the Company continued to pursue its strategy to leverage its scientificcapabilities in virology, microbiology, immunology and molecular biology to (1)capitalize on the end-user market for quality control products especially themolecular testing market, (2) develop new products and services for thediagnostics and life sciences industries, (3) enhance technical leadership, and(4) capitalize on complementary business operations.    William Blair & Company, L.L.C., an investment banking firmengaged by the Company in October of 2002, is continuing to advise theCompany in the evaluation of strategic opportunities aimed at increasingshareholder value and increasing the capital needed for growth.

 

In2003, the Company expended significant resources on research and development ofits PCT products and on efforts to place BarocyclerTM instrumentsand disposable PULSETM tubes in academic and industrial researchlaboratories.  The PCT segment, whichincludes both private and public (National Institutes of Health) funding ofsegment research, has experienced lower than expected product sales sincecommercial launch in September 2002 primarily associated with a longerthan expected selling cycle as discussed n further detail hereunder.

 

InJanuary 2003, the $1,000,000 held in an interest bearing deposit accountpledged to a financial institution to secure the Company’s limited guaranty ofloans in the aggregate amount of $2,418,000 from the financial institution toan entity controlled by Mr. Richard T. Schumacher, the Company’s formerChairman and Chief Executive Officer and a current Director of the Company, wasused to satisfy the Company’s limited guaranty obligation to the financialinstitution. The Company has no further obligations to the financialinstitution and has a loan receivable in the amount for $1,000,000 from Mr.Schumacher which is reflected on its balance sheet in stockholders’ equity asof December 31, 2003.  The Companymaintains a junior security interest in the collateral pledged by Mr.Schumacher to the financial institution. As of December 31, 2003, the remaining collateral included certainof Mr. Schumacher’s common stockholdings in the Company.  For a further description of the Company’slimited guaranty and the loans for which the guaranty secured, please see“Management’s Discussion and Analysis – Related Party Transaction.”

 

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OnFebruary 14, 2003, the Company announced that its Board of Directorsterminated Mr. Schumacher as Chairman and Chief Executive Officer, effectiveimmediately.  Mr. Schumacher remains aDirector of the Company. Kevin W. Quinlan, President and Chief OperatingOfficer, continued to lead day-to-day operations.  A special committee of the Board of Directors was appointed tooversee the management of the affairs of the Company until such time as a newChief Executive Officer is employed.

 

OnJuly 9, 2003, the Company announced that Mr. Schumacher agreed to acceptan engagement with the Company as an Executive Project Consultant to advise theCompany with respect to the strategic direction of the Company’s PCT and BBISource Scientific activities and the Company’s ownership interest in PanacosPharmaceuticals, Inc.  BBI SourceScientific, Inc.  is the Company’sCalifornia-based instrument subsidiary, which developed and manufactures the PCTBarocycler instrument.  As part of thisengagement, Mr. Schumacher has continued to reevaluate the ongoing businessprospects for both the Company’s Laboratory Instrumentation segment and PCTactivities. On February 9, 2004, the Company announced it had extendeduntil December 31, 2004 the Executive Consultant Agreement it has with Mr.Schumacher.  Under the terms of theConsulting Agreement, Mr. Schumacher is serving in an advisory role directingthe Company’s PCT and BBI Source Scientific activities, the Company’s interestin Panacos Pharmaceuticals, Inc. and such other duties as the President or theBoard of Directors of the Company assigns to him.   In connection with his Consulting Agreement, Mr. Schumacher isbeing paid an annualized salary of $250,000. In addition to his salary, Mr. Schumacher may receive, in the discretionof the Company’s Board of Directors, a bonus in an amount to be determined bythe Board of Directors in recognition of the successful completion of hisduties and responsibilities under the agreement, and he is also eligible toparticipate in the Company’s health and medical insurance, disabilityinsurance, group life insurance and group travel insurance, and 401(k)retirement plans.

 

Beginningin February 2004, the Company has brought to market the BBI IgM and IgG *Borrelia burdorferi* Western Blot Test Kit forthe detection of antibodies to the agent that causes Lyme Disease, its firsttest kit cleared by the U.S. Food and Drug Administration (“FDA”) for in vitrodiagnostic use.

 

**Industry Overview**

 

*Infectious Disease Test Kits and Testing Methods.* Test kits contain in one compact package allof the materials necessary to run a test for an infectious disease. Thesematerials include disposable diagnostic components, instructions, and reactionmixing vessels (generally 96-well plates or test tubes) that are coated withthe relevant infectious disease antigens, antibodies or other materials. Toperform the test, typically either a technician or a specially designedinstrument mixes the solutions from the test kit with human blood specimens ina specific sequence according to the test kit instructions.  The mixture must then “incubate” for up to18 hours, during which time a series of biochemical reactions trigger signals(including color, light or radioactive count), that indicate the presence orabsence and amount of specific indicators (or markers) of the particulardisease in the specimen.

 

Testkits generally employ one of three methods for infectious disease testing:microbiology, immunology or molecular biology. Traditional microbiology testsuse a growth medium that enables an organism, if present, to replicate and bedetected visually. Immunology tests detect the antigen or antibody, which is anindicator (marker) of the pathogen (e.g., virus, bacterium, fungus orparasite). Molecular diagnostic methods, such as the polymerase chain reaction(“PCR”), test for the presence of nucleic acids (DNA or RNA) that are specificto a particular pathogen.

 

Mostinfectious disease tests currently use microbiological or immunologicalmethods. However, molecular diagnostic methods are increasingly being used inresearch and clinical laboratories worldwide. The Company believes that theadvent of molecular diagnostic methods complements rather than diminishes theneed to test by microbiological and immunological procedures, because differenttest methods reveal different information about a disease state. The Companyanticipates that as new test methods become more widespread, quality controlproducts used with them, and test kits themselves, will account for a largerportion of the Company’s business.  Thisexpectation for quality control products is based on the rapid growth to dateof sales of BBI’s controls for molecular diagnostics methods.  For test kits, the expectation that thesewill account for a larger portion of the Company’s business is based on thefact that BBI has not previously offered commercial test kits and is seeinggood interest in its first such offering, the BBI *Borrelia burgdorferi* IgM and IgG Western Blot Test Kit (todetect antibodies to the organism that causes Lyme Disease), launched inJanuary 2004.

 

*Quality Control for In Vitro Diagnostic Test Kits.* Customers use quality control products inorder to develop, evaluate and monitor the performance of test kits (both forinfectious diseases and other disease states). Quality control products helpensure that test kits detect the correct analyte (“specificity”), detect it thesame way every time (“reproducibility” or “precision”), and detect it at theappropriate levels (“sensitivity”). The major element of this quality controlprocess is the continuous evaluation of test kits by the testing of carefullycharacterized

 

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samplesthat resemble the donor or patient samples routinely used with the test. This methodof quality control is used in both the infectious and non-infectious diseasemarkets, although currently it is not as prevalent among end-users ofinfectious disease test kits.

 

Themarket for quality control products consists of three main customer groups: (i)manufacturers of test kits, (ii) regulatory agencies that oversee themanufacture and use of test kits, and (iii) end-users of test kits, such ashospitals, clinical reference laboratories, plasma centers, and blood banks.

 

**Company Products and Services**

** **

**Overview**

 

TheCompany’s products and services are classified into the following four businesssegments: BBI Diagnostics, Laboratory Instrumentation, Biotech and PCT.

 

*BBI Diagnostics.* Through its business unit BBI Diagnostics,the Company offers a broad array of “Quality Control Products,” for use inclinical laboratories, consisting of Quality Control Panels, Accurun® ExternalRun Controls and ACCUCHARTTM quality control software, andDiagnostic Components. BBI’s Quality Control Products are used throughout theentire test kit life cycle, from initial research and development, through theregulatory approval process and test kit production, to training,troubleshooting and routine use by end-users. The Company’s Quality ControlPanels, which combine human blood specimens with comprehensive quantitativedata useful for comparative analysis, help ensure that test kits are asspecific, reproducible, and sensitive as possible. The Company’s Accurun®External Run Controls enable end-users of test kits to confirm the validity ofresults by monitoring test performance, thereby minimizing false negative testresults and improving error detection. The Company’s ACCUCHART quality controlsoftware is a data management program for customers who use BBI’s qualitycontrol products. In addition, the Company provides Diagnostic Components,which are custom processed human plasma and serum products, to test kitmanufacturers, as well as the newly introducted Lyme Western Blot Test Kit.

 

*Laboratory Instrumentation.* Through its wholly-owned subsidiary, BBISource Scientific, Inc. (“BBI Source”), the Company designs, develops,manufactures and markets “Laboratory Instruments”, primarily consisting ofreaders and washers and other small medical devices.  These instruments are used in hospitals and clinics, and inresearch, environmental and wine and food testing laboratories. Built with acommon hardware technology platform, these instruments are used in connectionwith the performance of an *in-vitro*diagnostics test, including reading the test result. The Company’s PCT productsare produced at the BBI Source production facility.  BBI Source also serves as a contract manufacturer of analyticaland diagnostic instruments and biomedical devices.

 

*Biotech*.  BBI Biotech ResearchLaboratories, Inc., another wholly-owned subsidiary, is the research anddevelopment “arm” of the Company, assisting in the development of new productsand services for the other business units, such as the development of the PCTBarocyclerTM andPULSETM tubes and related protocols used to prepare specimens, andthe ACCURUN nucleic acid controls. BBI Biotech also developed the BBI IgM andIgG *Borrelia burgdorferi* WesternBlot Test Kit, initially for use at BBI Clinical Laboratories. BBI Biotechseeks to obtain government grants and other research support wherever possibleto help fund the cost of this research and development. In addition, BBIBiotech provides repository services for the United States government andindustry, and specialty reagents and molecular and cellular biology servicesfor laboratories and test kit manufacturers.

 

*PCT.* The PCT segment involves research, development and commercializationof products utilizing the Company’s patented Pressure Cycling Technology. InSeptember 2002, the Company released for sale the BarocyclerTMinstrument and disposable PULSETM tubes, the first productsmanufactured by the Company that utilize the PCT.  PCT uses high pressure equipment to rapidly, reversibly, andrepeatedly modulate solid and liquid phases of solutions and the bindinginteractions of biomolecules.  PCT, asapplied in the BarocyclerTM and PULSETM tubes, releasesbiologically active nucleic acids and proteins from plant and animal tissues,as well as from other organisms that are not easily disrupted by standardchemical methods.

 

Duringeach of the last three years, BBI Diagnostics and BBI Biotech contributed atleast 15% of the Company’s consolidated revenues.  The combined revenues from all branches of the NationalInstitutes of Health (“NIH”), a United States Government agency and the largestcustomer of BBI Biotech, accounted for approximately

 

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25%,31% and 31%, respectively, of total consolidated revenues from continuingoperations of the Company for the years ended December 31, 2003, 2002, and2001, respectively.  The Company’sconsolidated financial statements set forth in Item 8 of this report providefinancial information relating to each of the Company’s operating segments. Seealso the discussion on “Customers” below.

 

**Quality Control Products**

 

TheCompany manufactures its Quality Control Products from human plasma and serumthat are obtained from nonprofit and commercial blood centers, primarily in theUnited States. The Company has acquired and developed an inventory ofapproximately 20,000 individual blood units and specimens (with volumes rangingfrom 1 ml to 800 ml) that provide most of the raw material for its products.Within the Quality Control Products class are Quality Control Panels, Accurun®External Run Controls and ACCUCHARTTM quality control software.

 

***Quality Control Panels***

 

QualityControl Panels consist of blood products characterized by the presence orabsence of specific disease markers and a data sheet containing comprehensivequantitative data useful for comparative analysis. These Quality Control Panelsare designed for measuring overall test kit performance and laboratoryproficiency, as well as for training laboratory professionals. The Company’sdata sheets, which contain comprehensive quantitative data useful forcomparative analysis, are an integral part of its Quality Control Panels. Thesedata sheets are created as the result of extensive testing of proposed panelcomponents in both the Company’s laboratories and at major testing laboratorieson behalf of the Company in the United States, Asia and Europe, includingnational public health laboratories, research and clinical laboratories andregulatory agencies. These laboratories are selected based on their expertisein performing the appropriate tests on a large scale in an actual laboratorysetting; this testing process provides the Company’s customers with the benefitthat the Quality Control Panels they purchase from the Company have undergonerigorous testing in actual clinical laboratory settings. In addition, theCompany provides information on its data sheets on the reactivity of panelcomponents in FDA licensed test kits and leading European test kits for thetarget 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, ELISAand Western blot; HIV antigen by ELISA; and HIV RNA by several moleculardiagnostic procedures. The Company’s data sheets require significant time andscientific expertise to prepare.

 

TheCompany first introduced Quality Control Panels in 1987. The Company currentlyoffers a broad range of Quality Control Panels that address a variety of needsof manufacturers and regulators of test kits as well as blood banks, hospitals,clinical laboratories and other end-users. Prices for the Company’sSeroconversion, Performance and Sensitivity panels range from $450 to $2,000each, and its Qualification, OEM, and Verification panels generally range from$100 to $200 per panel.

 

QualityControl 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), West Nile Virus (WNV) and Epstein-BarrVirus (EBV).   The following tabledescribes the types, usage and customers of Quality Control Panel productscurrently offered by the Company:

 

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**QUALITY CONTROL PANELS**

 
| **Product Line**       |   | **Description**                                                                                                                                                          |   | **Use**                                                                                                                                                                                                                                 |   | **Customers**                                                                                            |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|
| Seroconversion  Panels |   | Rare  plasma samples collected from a single individual over a specific time period  showing conversion from negative to positive for markers of an infectious  disease. |   | Compare  the clinical sensitivity of competing manufacturers’ test kits, enabling the  user to assess the specificity and sensitivity of a test in detecting a  developing antigen/antibody, or presence of pathogen nucleic acid. |   | Test  kit manufacturers and regulators and researchers.                                                  |   |
|                   |   |                                                                                                                                                                     |   |                                                                                                                                                                                                                                    |   |                                                                                                     |   |
| Performance  Panels    |   | A  set of 10 to 50 serum and plasma samples collected from many different  individuals and characterized for the presence or absence of a particular  disease marker.    |   | Determine  test kit performance against all expected levels of reactivities in the  evaluation of new, modified and improved test methods.                                                                                              |   | Test  kit manufacturers, clinical laboratories that evaluated test kits, and  regulators.                |
|                   |   |                                                                                                                                                                     |   |                                                                                                                                                                                                                                    |   |                                                                                                     |
| Sensitivity  Panels    |   | Precise  dilutions of human plasma or serum containing a known amount of an infectious  disease marker as calibrated against international standards.                    |   | Evaluate  the linearity and low-end analytical sensitivity of a test kit.                                                                                                                                                               |   | Test  kit manufacturers, regulators and researchers.                                                     |
|                   |   |                                                                                                                                                                     |   |                                                                                                                                                                                                                                    |   |                                                                                                     |
| Qualification  Panels  |   | Dilutions  of human plasma or serum manifesting a full range of reactivity in test kits  for a specific marker.                                                          |   | Demonstrate  the consistent lot-to-lot performance of test kits, troubleshoot problems,  evaluate proficiency, and train laboratory technicians.                                                                                        |   | Clinical  reference laboratories, blood banks, and hospital laboratories.                                |
|                   |   |                                                                                                                                                                     |   |                                                                                                                                                                                                                                    |   |                                                                                                     |
| OEM  Panels            |   | Custom-designed  Qualification Panels for regulators and test kit manufacturers for  distribution to customers or for internal use.                                      |   | Train  laboratory personnel on new test kits or equipment.                                                                                                                                                                              |   | Custom  designed with test kit manufacturers and regulators as an end-user product or  for internal use. |
|                   |   |                                                                                                                                                                     |   |                                                                                                                                                                                                                                    |   |                                                                                                     |
| Verification  Panels   |   | Verification  Panels contain naturally occurring undiluted samples at varying titers.                                                                                    |   | Verify  accuracy and ensure that reagents perform to expectations:  also used to troubleshoot system problems  and to document problem resolution.                                                                                 |   | Clinical  reference laboratories, blood banks, hospital laboratories.                                    |

 

Asmentioned above, the Company’s Seroconversion and Performance Panels arecomprised of rare plasma specimens that are obtained from individuals duringthe short period of time when the markers for a particular disease areconverting from negative to positive. As a result, the quantity of any suchpanel is limited, so that the Company must replace these panels as inventory issold with another panel comprised of different specimens from a differentindividual, equally rare. The Company believes that its inventory andrelationships with blood centers affords it a competitive advantage in acquiringsuch plasma for replacement panels and developing new products to meet marketdemand. However, the Company cannot be certain these relationships willcontinue, that the market for these panels will remain strong, or that it willbe able to continue to obtain such specimens.

 

***Accurun® External RunControls and ACCUCHART Software***

 

End-usersof test kits use run controls to monitor test performance, in order to minimizefalse negative and false positive test results and improve error detection. Runcontrols consist of one or more specimens of known reactivity that are testedwith donor or patient samples in an assay to determine whether the assay isperforming within the manufacturer’s specifications. Clinical laboratoriesgenerally process their patient specimens in a batch processing mode, andtypically include 25 to 100 specimens to be tested in each batch (a “run”).Large laboratories may perform several runs per day, while smaller laboratoriesmay perform only a single run each day, or sometimes only several runs perweek. A clinical laboratory using a run control will place the run controlproduct in a testing well or test tube, normally used for a specimen, and willtest it in the same manner that it tests the donor or patient specimens. Itwill then compare the results generated to an acceptable range for the runcontrol, determined by the user, to assess whether the results of the other,unknown specimens may be relied upon. The run control result must be within theacceptable range to be considered valid. This is often tracked visually usingwhat is known as a Levey-

 

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Jenningschart. Depending upon a particular laboratory’s quality control practices, itmay use several run controls on each run or it may simply use a run control ina single run at the beginning and end of the day.

 

TheCompany’s AccuChartTM data management tracking and charting software, used aspart of a laboratory’s quality assurance program, runs on a personal computerand is designed to provide the data tracking capability needed to documentlaboratory performance.

 

TheCompany’s Accurun® family of products is targeted at the end-users ofinfectious disease test kits. The Company believes that it offers the mostcomprehensive line of serological and nucleic acid based run controls in theindustry, and that its Accurun® products, in combination with its QualityControl Panel and Accuchart products, provide an extensive line of products forquality assurance in infectious disease testing. The Company intends tocontinue to expand its line of Accurun® products, thereby providing itscustomers with the convenience and cost effectiveness of a single supplier forindependent run controls.

 

TheCompany introduced its first four Accurun® Run Control products in 1993 and hassince developed and released for sale an additional 81 Accurun® products.Twelve products have been discontinued, for a total of 73 run controlsavailable as of December 31, 2003. Forty-four of these products areavailable for clinical diagnostic purposes; the others currently are limited toresearch use. Current Accurun® External Run Control products generally range inprice from $5 to $60 per milliliter.

 

DiagnosticComponents and Test Kits

 

***Diagnostic Components***

 

DiagnosticComponents are custom processed human plasma and serum materials or viruscultures supplied to infectious disease test kit manufacturers and combined(often after further processing by the manufacturer) with other materials tobecome various reagents (fluid components) of manufacturer’s test kits. TheCompany supplies Diagnostic Components in four product lines: Normal HumanPlasma and Serum, Basematrix, Characterized Disease State Serum and Plasma, andcultured virus. Normal Human Plasma is the clear liquid portion of blood whichcontains proteins, antibodies, hormones and other substances, with the NormalHuman Serum product also having the clotting factors removed. Basematrix, theCompany’s proprietary processed serum product that has been chemically convertedfrom plasma, is designed to be a highly-stable, lower cost substitute for mostnormal human serum and plasma applications. Characterized Disease State Serumand Plasma are collected from specific blood donors pre-selected because of thepresence or absence of a particular disease marker. Cultured virus, including anon-infectious strain of HIV, and isolates from all of the major HIV subtypes,are manufactured under current Good Manufacturing Practices (cGMP) andaccording to BBI or customer specifications. The Company often customizes itsDiagnostic Components by further processing the raw material to meet thespecifications of the test kit manufacturer. The Company’s DiagnosticComponents range in price from $0.25 to $3,000 per milliliter.

 

***Test Kits***

 

TheCompany’s first FDA-cleared test kit, the Boston Biomedica, Inc. *Borrelia burgdorferi*IgM and IgG WesternBlot Test Kit, was launched in January 2004. The test was originallydesigned at BBI Biotech and BBI Clinical Laboratories for manufacture at the formerand use at the latter.  In 2003, after amarket research study, a decision was made to commercialize the test, and itwas submitted to the FDA and cleared.

 

**Laboratory Instrumentation**

 

BBISource, the Laboratory (and Diagnostics) Instrumentation operating segment,designs, develops, manufactures and markets laboratory instruments and othersmall medical devices used in hospitals and clinics and in research,environmental and wine and food testing laboratories. These instruments aregenerally sold on a private-label or OEM basis for other companies utilizing acommon hardware technology platform. The instruments manufactured by theCompany use advanced optical detection methods (luminescence, fluorescence,reflectance, photometry), robotics, fluidics, and custom software, all of whichare desired by customers reselling or supplying state-of-the-artinstrumentation systems to laboratories worldwide in various applications.  This segment also manufactures the PCT BarocyclerTMand PULSETM tubes.

 

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Mostof the Laboratory Instrumentation products currently being offered have beencommercialized for a number of years and were primarily developed inconjunction with in vitro diagnostics test kit manufacturers prior to theacquisition of this segment in 1997. The BarocyclerTM represents theCompany’s first major instrument-based product launch for the PCT segment. BBISource also seeks to attract development partners for new prototype products.Management believes that these products address important market segments inbiomedical and clinical diagnostic testing and in environmental monitoring andfood testing research. The BBI Source product line currently includes thefollowing:

 

***MicroChem® andMicroChemII® Photometers.*** A compact, low-cost, single tube photometerdesigned for immunoassay and general chemistry applications, includinginfectious disease immunoassays, food and water safety testing.

 

***ChemStat® AutomatedPhotometer.*** Ahigh-speed, automated photometer with a sample capacity of 95 tubes and a readrate of one sample per second. This product is suited for high-volumeprocessing of immunoassay and general chemistry.

 

***E/LUMINA® II LuminescenceAnalyzer.*** Aflexible luminometer for both “flash” and “glow” luminescence methods, thisautomated system reads up to 114 samples and reports final results.

 

***EXECWASH® Washing System.*** An automated immunoassay washing system thatcan be quickly configured by the user to wash different solid-phase assayformats by proprietary manifold designs. The EXEC-WASH washing system is fullycompatible with a variety of other Company products, such as the ChemStatAutomated Photometer and the E/LUMINA II Luminescence Analyzer.

 

***Protocol Design Software System.***A development tool for researchers and assaymanufacturers, the program operates under Microsoft® Windows andserves as the master programming center for EXECWASH Washing systems to createfluid handling protocols.

 

***Verif-EYE®. ***A reflectancereader for fast, reliable results for use in research and development orprocess inspection and verification by rapid test kit manufacturers.

 

**PCT Products**

 

TheBBI Source facility manufactures the Company’s products for the PCT segment.The Company’s pressure cycling technology uses high pressure equipment torapidly, reversibly, and repeatedly modulate solid and liquid phases ofsolutions and the binding interactions of biomolecules. In September 2002,the Company released for sale the BarocyclerTM instrument anddisposable PULSETM tubes, the Company’s first products manufacturedby the Company which utilize the Company’s patented PCT. The PCT protocolsutilized in the BarocyclerTM and PULSETM tubes releasesnucleic acids and biologically active proteins from plant and animal tissues,as well as from other organisms, that are not easily disrupted by standardchemical methods.  The PCT segment,which includes both private and public (National Institutes of Health) fundingof segment research, continues to experience lower than expected product salessince September 2002 primarily associated with a longer than expectedselling cycle. The Company believes that sales of PCT products have beenadversely affected primarily as a result of the longer than anticipated salescycle associated with these products. Factors associated with this sales cycleinclude the initial selling price of the PCT BarocyclerTM and thelimited amount of research data presently available demonstrating itscapabilities and potential. Additional refinements in PCT instrumentationinclude the development of a less expensive and smaller, bench top version ofthe Barocycler which was just introduced in 2004.

 

**Services**

 

TheCompany seeks to focus its specialty laboratory services in the advancedbiomedical research area. The Company concentrates its services in those areasof infectious disease testing which are complementary to its quality controland diagnostic products businesses.

 

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***Contract Research and Services***

 

TheBBI Biotech operating segment offers a variety of research services inmolecular biology, cell biology, virology and immunology to governmentalagencies, diagnostic test kit manufacturers and biomedical researchers.Molecular biology services include DNA extractions and sequencing, genotyping,DNA library construction and screening and development of custom nucleic acidamplification assays. Cell biology and immunology services include sterilitytesting, virus infectivity assays, cultivations of virus or bacteria fromclinical specimens, preparation of viral or bacterial antigens and customwestern blot assays.

 

TheCompany currently provides contract research services under several contractsand grants. These services are primarily related to infectious disease diagnostics,in support of the products and services that the Company wishes to develop. In1998, the company was awarded a 7-year, $9.4 million contract for the supportof AIDS Vaccine development program by the National Institute of Allergy andInfectious Diseases (NIAID) branch of the National Institutes of Health(NIH).  In 2003, efforts were focused ondevelopment of an ELISpot assay for use in monitoring the efficacy of candidateHIV Vaccines and providing proficiency panels and reagents.  In 2003 also, BBI Biotech was re-awarded a5-year contract from the Food and Drug Administration for the production of lotrelease panels which the agency uses for evaluation of test kits for HIV, HBV,West Nile Virus and other viruses.   In2004, the Company also completed its Phase I studies under a Small BusinessTechnology Transfer Research (SBTTR) Grant from the NIH for the development ofan immuno-polymerase chain reaction (I-PCR) test for the detection of prionproteins in the blood of humans and animals. This collaborative effort with theUniversity of Maryland demonstrated performance of a prototype prion detectionsystem that was 10,000-fold more sensitive than the standard antigen capturetest.  A proposal to continue thesestudies under a Phase II Grant was submitted. Another Phase I Small Business Innovation Research Grant (SBIR) wasawarded for the development of a system which would significantly extend theviability and maintain the quality of frozen cells.

 

***Repository and Clinical TrialServices***

 

Since1983, BBI Biotech has provided blood processing and biological specimenrepository services for the National Cancer Institute (“NCI”), and otheragencies of the National Institutes of Health (“NIH”). The repository storesover 11,000,000 specimens and processes or ships up to several thousandspecimens per week in support of various NIH cancer and virus researchprograms. In 1998, BBI Biotech received a six-year $4.7 million repositorycontract (including five one-year extension options) with the National Heart,Lung and Blood Institute of the NIH. In 1999, it received a seven-year, $9.6million repository contract with the National Institute of Allergy andInfectious Disease.  In 2000, BBIBiotech was awarded a subcontract, currently valued at $2.2 million, by NewEngland Research Institutes, Inc. to provide repository and related specimenprocessing and testing services for the Hepatitis C Antiviral Long-termTreatment against Cirrhosis (HALT-C) Trial, a clinical trial funded by theNational Institutes of Diabetes and Digestive and Kidney Diseases (NIDDK), aninstitute of the NIH. Subsequent funding has continued. In 2001, BBI Biotechwas awarded a $10.3 million NCI five year repository contract. In 2002 BBIBiotech was awarded another subcontract, also valued at $2.2 million, by theUniversity of Pittsburgh to provide repository, specimen processing and testingservices on a NIDDK funded grant to study the viral resistance to antiviraltherapy of chronic Hepatitis-C (ViraHepC). In 2002 BBI Biotech also signed a contractwith the American Red Cross to provide repository services for their NationalTesting Laboratory.  In 2003 BBI Biotechsigned a contract with the Fred Hutchinson Cancer Research Center (FHCRC) toact as a central processing laboratory for the HIV Vaccine Trial Network.  Revenue from this project is expected toexceed $1,000,000 annually.  Also in2003, BBI Biotech signed a new three year contract with the New England ResearchInstitute to act as a repository and HCV testing center for the ThalassemiaClinical Research Network (TCRN) with a budget of $207,590.  BBI Biotech also signed a contract withBoston University to supply DNA inventory, storage, extraction and genotypingservices and was awarded a contract by the University of California San Franciscoto act as a central processing laboratory and repository for the Solid OrganTransplantation in HIV: Multi-Site Study. To date all renewal options under allthe above referenced contracts are continuing into 2004. BBI Biotech iscurrently focusing on expanding the Company’s repository customer base toinclude more industry clients.

 

***Other Services***

 

***Clinical Trials*****.** The Company from time to time conductsclinical trials for domestic and foreign test kit and devicemanufacturers.  Manufacturers must collectdata for submission to the United States FDA and other

 

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countries’regulatory agencies, and these manufacturers contract with organizations suchas the Company to perform this work. By providing this service, the Company isable to maintain close contact with test kit and device manufacturers andregulators, and is able to evaluate new technologies in various stages ofdevelopment. The Company believes that the reputation of its laboratory and scientificstaff, its large number of Quality Control Panels, and its inventory ofcharacterized serum and plasma specimens assist the Company in marketing itsclinical trial services to its customers. The Company has performed clinicaltrials for a number of United States and foreign test kit and devicemanufacturers seeking to obtain FDA approval for their infectious disease testkits and medical devices.

 

***Laboratory Instrumentation Services****.* BBI Source offers services to design,develop, manufacture and distribute laboratory instruments to companies seekingto market biomedical products manufactured under government-approvedmanufacturing practices. These services range in complexity from consulting tofull system development, technology transfer, and distribution.

 

***After-sales Service****.*  BBISource also provides after-sales service, including third party maintenance.Management believes that after-sales service provides a marketing advantage inmany of the Company’s markets, since many of the Company’s customers do notmaintain their own full service departments. The Company’s service department is located at BBI Source’s facility inGarden Grove, California. The Company utilizes an independent third partycontractor located in Giessen, Germany, to provide a fully functional Europeanservice and support center.

 

**Research and Development**

 

TheCompany’s research and development efforts are focused on (i) the ongoingdevelopment of PCT for nucleic acid extraction and pathogen inactivation, whichthe Company made available for sale in 2002; (ii) the development of new andimproved Quality Control Products (Panels and Accurun®) for theend-user market and the *in vitro*diagnostics market; (iii) the development of reagents for protein and nucleicacid-based tests, and of test kits themselves; and (iv) the design anddevelopment of new laboratory instruments and mechanical and optical detectiontechniques, as demonstrated in its Verif-EYE® reflectance reader.

 

TheCompany has approximately 16 full or part-time employees involved in itsresearch and development effort associated with continuing operations as ofDecember 31, 2003.  Since theCompany’s acquisition of BioSeq Inc. in 1998, the Company has investedsignificantly in research and development, both in whole dollars and as apercentage of revenue, and expects to continue to do so for the foreseeablefuture, as it seeks to develop new applications for PCT.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Results of Operations.” TheCompany’s research scientists also work closely with sales, marketing,manufacturing, regulatory and finance personnel to identify and prioritize thedevelopment of new products and services in areas of its core businesses.  Whenever it can, the Company seeks tosupplement its research and development funding from grants provided by variousagencies and departments of the United States government.  See also “Contract Research and Services.”

 

In2003, the Company developed and launched a series of West Nile Virus RNA panelsto help IVD manufacturers launch the West Nile Virus RNA screening of by USblood supply under IND, and is currently supplying WNV RNA controls used byblood banks.  Additional research effortshave been devoted to the development of Human Papilloma Virus (HPV) DNAcontrols which will be launched in 2004 for use with nucleic acid tests usedwith PAP screening for cervical cancer risk. Work was also resumed on the validation of BBI Biotech’s Western blotkit for Borrelia burgdorferi, the infectious agent of Lyme Disease, culminatingin the award of 510(k) clearance of this test by the Food and DrugAdministration.   This clearance willpermit the Company to market this test kit to clinical labs for supplementarytesting of EIA and IF positive patients in diagnosis of Lyme Disease.  Work in the PCT area was focused onoptimizing and extending the extraction of nucleic acids from a wide range ofmicrobial, plant, animal and human tissues. Excellent results were reported with obtaining RNA from frozen tumortissues, and from difficult to lyse bacillus spores.  Work under a Phase I SBIR grant demonstrated the use of PCT forpreferential killing of normal oral bacteria while maintaining viability ofmycobacteria tuberculosis, for faster and more sensitive testing of thisorganism in bronchial fluids. Additional refinements in PCT instrumentation include the development ofa less expensive and smaller, bench top version of the Barocycler which was justintroduced in 2004.

 

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TheCompany’s research and development expenses were approximately $1.8M, $2.6M,and $2.3M in each of the three years ended December 31, 2003, 2002 and2001, respectively.

 

***Quality Control Products*****.**  Inthe area of Quality Control Products, the Company’s product developmentactivities center on the identification and characterization of materials forthe manufacture of new products and the replacement of sold-out products.  During 2003, the Company introduced 7 newSeroconversion, Performance, and Sensitivity Panel products, and 7 new Accurun®external run controls. The Company is developing new Quality Control Productsfor use with tests for Human Papilloma Virus (HPV) and for HIV incidence tests.Additional controls are being developed for both immunological and moleculardiagnostic tests for subtypes and variants of HIV, HCV, HBV and West NileVirus, controls for HIV drug resistance assays, and a variety of controlstargeted to leading instrument platforms. The Company has increased the numberof Quality Control Products it offers from approximately 20 products in 1990 tomore than 200 by the end of 2003.

 

***Laboratory Instrumentation****.*  TheCompany’s product development activities in year 2003 related to laboratoryinstruments were centered on development of prototype, demonstration andpreproduction BarocyclerTM and PULSETM tubes, additionalconfigurations of a “reflectance” reader to produce objective results fromrapid *in vitro* diagnostic tests,and an updated version of the MicroChem®****** (the MicroChem® II).  In addition, the Company continues to workon applications for existing products to broaden their utilization and updatesand enhancements made to current OEM customers and to broaden target markets.

 

***Pressure Cycling Technology (“PCT”).*****The Company owns patented technology based onPCT.  PCT research was primarily focusedin two areas: (1) nucleic acid extraction and purification from targetpathogens in connection with sample preparation for PCR or other molecular testing;and (2) pathogen inactivation of blood plasma intended for transfusion or forfurther fractionation into transfusion products.  Both of these areas of research have been funded by Phase IISmall Business Innovative Research Grants, that provide $750,000 each, over atwo year period ending February 2004. The Company has developed a pressure cycling system utilizing a computercontrolled instrument, the BarocyclerTM NEP2017, and specializedPULSETM Tubes that are capable of releasing biologically activenucleic acids and proteins from plant and animal tissues, and other organisms,such as mycobacteria, that are not easily disrupted by standard chemicalmethods.  This pressure cycling systemwas made available for sale in September 2002. As of December 31,2003, three instruments have been sold or placed as reagent rentals, withrevenue generated by PULSE Tube sales. The PCT segment, which includes bothprivate and public (National Institutes of Health) funding of segment research,continues to experience lower than expected product sales since commerciallaunch in September 2002 associated with a longer than expected sellingcycle. Factors associated with this sales cycle include the initial sellingprice of the PCT BarocyclerTM and the limited amount of researchdata presently available demonstrating its capabilities and potential.Additional refinements in PCT instrumentation include the development of a lessexpensive and smaller, bench top version of the Barocycler which was justintroduced in 2004.

 

**Sales and Marketing**

 

TheCompany’s sales and marketing efforts are organized by business unit consistentwith the unit’s business objectives, and coordinated through frequent planningwith senior management. Overall, the Company employs approximately 25 people insales, marketing, and customer service functions associated with continuingoperations as of December 31, 2003. The Company’s overall marketing strategy is to focus on the needs of itscustomers in four areas: (*i*)quality control products to improve the quality and accuracy of test resultsand kit components for the *in vitro*diagnosticindustry, (*ii*) life scienceproducts and services in support of infectious disease manufacturers andresearchers, and (*iii*) theCompany’s first FDA-cleared test kit for the clinical laboratory market, and *(iv*) a sample preparation systemintroduced in 2002 based on PCT.

 

Thestrategy for Diagnostic Products is to focus on customer needs in theinfectious disease testing market throughout the entire test kit life-cycle,from initial research and development, through the regulatory approval processand test kit production, to training, troubleshooting and routine use byend-users such as clinical laboratories, hospitals and blood banks. Theend-user portion of this market is promoted under the marketing platform knownas “Total Quality System” (“TQS”).  TQSis a package of Quality Control Products, including the Company’s Accurun®External Run Controls, TQS Panels, and AccuChart Quality Control Software, thatis designed to provide test kit end-users with the products needed in anoverall quality assurance program. These products enable laboratories toevaluate each of the key elements involved in the testing process: the testkit, laboratory equipment, and laboratory

 

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personnel.The Company believes that TQS effectively addresses the need for end-users toensure the accuracy of their test results. The Company intends to continue toexpand its sales and marketing activities with respect to its Accurun®line of run control products. In addition, the Company continues to expand theAccurun® product line to support the high growth nucleic acidtesting market, and to capitalize on the worldwide implementation of newtechnology to improve the safety of blood products.

 

TheCompany’s Diagnostic Quality Control Products sales program is led by aDirector of Sales and Marketing and currently sold through a combination oftelephone, mail, third party distributors and direct sales efforts.Domestically, Quality Control Products are sold through two direct sales forcesled by a Group Sales Manager. The TQS domestic sales force consists of a FieldSales Manager and 7 direct sales representatives. The IVD Sales force consistsof 4 direct sales persons. Internationally, the Company distributes itsDiagnostic Products both directly and through independent distributors locatedin Japan, Australia, North and South America, Southeast Asia, Israel andEurope. The Company’s international sales manager and regional sales manageroversee the Company’s Ex-USA distributors.

 

TheCompany’s Laboratory Instruments are sold through BBI Source. BBI Source’smarketing strategy is to focus on new contract manufacturing, increase share ofbusiness of current contracted customers, and increase sales of Source brandinstruments and service through a direct domestic and international sales forceconsisting of one director and one sales manager.

 

TheCompany incurred significant marketing and promotion related costs in 2003 and2002 primarily associated with its introduction of the PCT BarocyclerTMat the Pittsburgh Conference industry trade show in year 2002 and subsequentrelated ongoing sales, marketing and promotion efforts associated with theSeptember 2002 commercial launch of the PCT BarocyclerTM.  As of February 2004, the Company hadone sales associate dedicated to the PCT segment of the business.

 

TheCompany emphasizes high quality products and services, technical knowledge, andresponsiveness to customer needs in its marketing activities for both productsand services. The Company educates its distributors, customers and prospectivecustomers about its products through a series of detailed marketing brochures,technical bulletins and pamphlets, poster presentations, news releases anddirect mail pieces. These materials are supplemented by occasional advertisingin industry publications, technical presentations, and exhibitions at local,national and international trade shows and expositions.  The Company utilizes a product informationlibrary on its web site (www.bbii.com) allowing customers, sales personnel andinternational distributors immediate access to detailed product information andmarketing literature.

 

**Seasonality**

 

Historically,the Company’s results of operations have been subject to quarterly fluctuationsdue to a variety of factors, primarily customer purchasing patterns (sometimesdriven by end-of-year expenditures), and seasonal demand.  In particular, the Company’s sales of itsoff-the-shelf Diagnostic Products typically have been highest in the fourthquarter and lowest in the first quarter of each fiscal year, whereas OEMproduct sales may peak in any quarter of the year, depending on the customer’sunderlying production cycle for their own product.  Research contracts are generally for large dollar amounts spreadover one to five-year periods, and upon completion, frequently do not haverenewal phases.  As a result, thesecontracts can cause large fluctuations in revenue and net income.  In addition to staff dedicated to internalresearch and development, certain of the Company’s technical staff work on bothContract Research for customers and Company sponsored research anddevelopment.  The allocation of certaintechnical staff to such projects depends on the volume of ContractResearch.  As a result, research anddevelopment expenditures fluctuate due to increases or decreases in contractresearch performed.

 

**Customers**

 

TheCompany’s customers for Diagnostic Products consist of four major groups: (1)international diagnostics and pharmaceutical manufacturing companies, such asAbbott Diagnostics, Bayer, bioMerieux, Biorad, Chiron, Dade-Behring, DiaSorin,Fujirebio, Hoffman LaRoche and Ortho Diagnostics (Johnson & Johnson); (2)regulatory agencies such as the United States FDA and CDC, the British PublicHealth Laboratory Service, the French Institut National de la TransfusionSanguine, and the German Paul Ehrlich Institute, (3) national and internationalproficiency providers such as the College of American Pathologists and theEuropean Union Concerted

 

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Actionfor Quality Control and (4) end-users of diagnostic test kits, such as hospitaland independent clinical laboratories, including Quest Diagnostics, SpecialtyLaboratories, public health laboratories and blood banks, including theAmerican Red Cross, Swiss Red Cross, and United Blood Services.

 

TheCompany’s customers for Laboratory Instruments consist of internationaldiagnostic and pharmaceutical manufacturing companies and are generally sold onan OEM basis, for use by hospitals, and clinical and research laboratories. Inaddition, Laboratory Instruments are sold directly to environmental and foodtesting laboratories, and wineries. Customers include Hitachi ChemicalDiagnostics, Beckman Coulter Inc., Vicam, Edwards Life Science, Nihon Kohdenand Vysis (Abbott).

 

TheCompany’s customers for contract research include various agencies of theNational Institutes of Health (NIH) such as the National Institute of Allergiesand Infectious Disease (“NIAIDS”), the National Cancer Institute (“NCI”), andthe National Heart Lung and Blood Institute (“NHLBI”).

 

TheCompany does not have long-term contracts with its customers for DiagnosticProducts, which are generally sold pursuant to purchase orders for specificpurchases. Laboratory Instruments are generally sold on an OEM basis undermedium-term contracts with monthly delivery dates. The Company believes thatits relationships with customers are satisfactory.

 

Duringthe fiscal years 2003, 2002 and 2001, the Company’s international sales were$4,671,000, $3,305,000 and $3,437,000, respectively. During those years, mostof the Company’s international sales were made in European countries. The Company’sConsolidated Financial Statements, including the Notes thereto, set forth inItem 8 of this report provide additional information relating to the Company’sforeign and domestic sales. The Company expects international sales torepresent a significant portion of revenue in the foreseeable future.  The Company cannot guarantee that revenuesby geographic region in the foreseeable future will be comparable to thoseachieved in recent years. The Company’s international operations expose it to anumber of difficulties in coordinating its activities abroad and in dealingwith multiple regulatory environments.

 

Duringthe fiscal years 2003, 2002, and 2001, sales (from continuing operations) tothe Company’s three largest customers (when each branch agency of the NationalInstitute of Health is counted as an individual customer) accounted for anaggregate of approximately 21%, 28% and 30%, respectively, of the Company’s netsales, although the customers were not identical in each period. The governmentcontract revenues are from United States government agencies, primarily variousbranches of the National Institutes of Health (NIH) and represent the onlycustomer with revenue in excess of 10% of consolidated revenue in each of theyears ended December 31, 2003, 2002 and 2001.  During the fiscal years 2003, 2002, and 2001, the combinedrevenues from all branches of the National Institutes of Health, a UnitedStates Government agency, accounted for approximately 25%, 31% and 31%,respectively, of total consolidated revenues from continuing operations of theCompany.  While these contracts containstandard terms and conditions relative to audits, and/or termination, in wholeor in part, without prior notice at the Government’s convenience, the Companyhas never had any contracts terminated. While the Company believes that theloss of any one of these customers would have an adverse effect on theCompany’s results, this risk is partially mitigated by the diversity of itscustomer base within the *in vitro*diagnostics industry and the different diseases and instrument platforms onwhich they focus.

 

**Manufacturing and Operations**

 

TheCompany manufactures and assembles Diagnostic Products at its facilities inWest Bridgewater, Massachusetts and in Gaithersburg Maryland. Raw materials(primarily plasma and serum) are acquired from a variety of vendors and througha program of donor recruitment, screening, management, and plasma/serumcollection and characterization. Laboratory and diagnostic instruments and PCTproducts are manufactured and assembled at the Company’s facility in GardenGrove, California.  All important rawmaterials and components acquired come from a variety of local and/or nationalsuppliers and distributors who have multiple sources of supply.  Both the West Bridgewater and the GardenGrove facilities are ISO 9001-2000 certified and both BBI Diagnostics (as ofDecember 12, 2002) and BBI Source are ISO 13485 certified manufacturers ofquality control, instrumentation and other diagnostic products. BBI Source isalso EN46001 certified. The Gaithersburg facility is in the final stages ofpreparation for ISO certification.

 

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TheCompany operates its research and development laboratory (including PCT) inGaithersburg, Maryland and a repository facility in Frederick, Maryland.  See “Item 2 — PROPERTIES.”

 

**Competition**

 

Themarket for the Company’s products and services is highly competitive. Many ofthe Company’s competitors are larger than the Company and have greaterfinancial, research, manufacturing, and marketing resources. Importantcompetitive factors for the Company’s products include product quality, price,ease of use, customer service and reputation. In a broader sense, industrycompetition is based upon scientific and technical capability, proprietaryknow-how, access to adequate capital, the ability to develop and marketproducts and processes, the ability to attract and retain qualified personnel,and the availability of patent protection. To the extent that the Company’sproducts and services do not reflect technological advances, the Company’sability to compete in its current and future markets could be adverselyaffected.

 

*Diagnostics*. In the area of Quality Control Products, the Company competes in theUnited States with Acrometrix,and BioClinical Partners in run controls andquality control panel products, with Ambion, Bio-Rad Laboratories, Inc.,Blackhawk Biosystems Inc. and MAS in run controls, and with some smaller,privately-held companies in quality control panels. In Europe, in addition tothe above, the Dutch Red Cross offers several run control and panel products.The Company believes that all of these competitors currently offer a lessdiverse line of panel and run control products than the Company, although theCompany cannot be certain that these companies will not expand their productlines.

 

Inthe area of commercial test kits, BBI’s first offering, the BBI *Borrelia burgdorferi* IgM and IgG WesternBlot Test Kit, faces one major competing test kit in the marketplace, theMarblot Western blot kit from Trinity Biotech. The Company believes, on the basis of comparison studies, that itsproduct is superior to the Marblot test in specificity, convenience andobjectivity of results interpretation.

 

Inthe Diagnostic Components area, the Company competes with integrated plasmacollection and processing companies such as Serologicals, Inc. and SeraCare, aswell as smaller, independent plasma collection centers and brokers of plasmaproducts. In the Diagnostic Components area, the Company competes on the basisof quality, breadth of product line, technical expertise and reputation.

 

*Laboratory Instrumentation*.  The laboratory instrumentmanufacturing industry is diverse and highly competitive. The Company believesits technology base, reputation for reliability, systems integration andservice capabilities provide it with a competitive advantage over itscompetitors which include: Dynatech Corp, Kollsman Manufacturing Company, Inc.,Bio-Tek Instruments Inc., Peak Industries, Inc., APW, and Plexus (SeaMed), aswell as numerous smaller companies, such as Awareness Technology Inc.

 

*PCT*.   The Company believes that there aresubstantial benefits of its PCT system over current methods of samplepreparation for “hard to lyse” cells. The Company believes the PCT system offers faster, safer and morereproducible results. The current products incorporating PCT for samplepreparation are substantially more expensive than competing offerings fromCoors, Qiagen, Fisher, Scientific Industries, Misonix, Biospec, Andwin, GlennMills, Branson, Ultrasonic Power Corp., Microfluidizer, American Instrument,French Press, IKA Sonicators,  and ISCInc. and to date sales of PCT products have been limited.  The Company believes that sales of PCTproducts have been adversely affected primarily as a result of the longer thananticipated sales cycle associated with these products. Factors associated withthis sales cycle include the initial selling price of the PCT BarocyclerTMand the limited amount of research data presently available demonstrating itscapabilities and potential. Additional refinements in PCT instrumentationinclude the development of a less expensive and smaller, bench top version ofthe BarocyclerTM which was just introduced in 2004.

 

*Biotech*.  BBI Biotech competes primarilyon the basis of price and reputation with BioReliance Corporation and severaluniversities for research and development contracts and with ATCC, Cyronix,Corielle and McKesson Bioservices, Inc., for repository services.

 

**Intellectual Property**

 

TheCompany holds as trade secrets current technology used to prepare Basematrixand other blood-based products. None of the Company’s Diagnostic Components hasbeen patented. The Company relies primarily on a combination of trade secretsand non-disclosure and confidentiality agreements to establish and protect itsproprietary rights in these products and related technology. The Company cannotbe certain that others will not independently develop or otherwise acquire thesame, similar or more advanced trade secrets and know-how.

 

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BBISource has also relied on trade secrets and proprietary know-how for itsLaboratory Instruments which it protects in part by entering intoconfidentiality agreements with persons or parties deemed appropriate bymanagement. In addition, the Company currently has six issued United Statespatents, covering significant aspects of the Company’s core instrumenttechnology and techniques, as well as several electronic and mechanical designsemployed in the Company’s products. These patents expire between 2006 and 2013.

 

TheCompany has eleven patents issued and several pending patent applications forits Pressure Cycling Technology. Several of these have been followed up with foreign applications, forwhich two patents were issued in Europe in 2002. The Company expects to fileadditional foreign applications in the future relating to PCT.  The patents which have been issued expirebetween 2015 and 2021.

 

TheCompany does not believe that its products and proprietary methods infringe theproprietary rights of any other party. However, the Company cannot be certainthat other parties will not assert infringement claims in the future.

 

BBI®, Accurun®, and Verif-EYE® are registered trademarks of the Company.

 

**Government Regulation**

 

Themanufacture and distribution of medical devices, including productsmanufactured by the Company that are intended for *in vitro* diagnostic use, are subject to extensive governmentregulation in the United States and in other countries.

 

Inthe United States, the Food, Drug, and Cosmetic Act (“FDCA”) prohibits themarketing of most *in vitro*diagnostic products until they have been cleared or approved by the FDA, aprocess that is time-consuming, expensive, and uncertain. *In vitro* diagnostic products must be thesubject of either a premarket notification clearance (a “510(k)”) or anapproved premarket approval application (“PMA”). With respect to devices reviewedthrough the 510(k) process, a company may not market a device for diagnosticuse until an order is issued by the FDA finding the product to be substantiallyequivalent to an existing FDA cleared and marketed device. A 510(k) submissionmay involve the presentation of a substantial volume of data, includingclinical data, and may require a substantial period of review. With respect todevices reviewed through the PMA process, a company may not market a deviceuntil the FDA has approved a PMA application, which must be supported byextensive data, including preclinical and clinical trial data, literature, andmanufacturing information to prove the safety and effectiveness of the device.

 

TheCompany’s Accurun® External Run Controls, when marketed for blooddonor screening or diagnostic use, have been classified by the FDA as medicaldevices that until 1998 required clearance under the 510(k) process.  In 1998, new rules took effect that exemptedunassayed controls intended for use in diagnostic testing from the requirementfor a 510(k) submission.  The Companymay now label these products “For *In Vitro*Diagnostic Use” if they are validated according to the Company’s protocols andmanufactured according to cGMP (current Good Manufacturing Practices, which is FDAguidance for manufacturing processes for medical devices). The FDA stillrequires 510(k) clearance for assayed controls, and controls intended for usein blood screening.  The FDA could, inaddition, require that some products be reviewed through the PMA process, whichgenerally involves a longer review period and the submission of moreinformation to the FDA. The Company cannot be certain that it will obtainregulatory approvals on a timely basis, if at all. Failure to obtain regulatoryapprovals in a timely fashion or at all could have a material adverse effect onthe Company.

 

Asof December 31, 2003, there were a total of 44 Accurun ®external run control products currently on the market that have either received510(k) clearance or have been validated according to the Company’s protocolsand are manufactured according to cGMP. Certain of the Company’s Accurun®external run controls are currently marketed “for research use only.”  The labeling of these products limits theiruse to research. It is possible, however, that some purchasers of theseproducts may use them for diagnostic purposes despite the Company’s intendeduse. In these circumstances, the FDA could allege that these products shouldhave been cleared or approved by the FDA, or validated prior to marketing, andinitiate enforcement action against the Company, which could have a materialadverse effect on the Company. The FDA has issued a Draft Policy ComplianceGuideline, which, if it takes effect as currently issued, will strictly limit thesale of products labeled “for research use only.” The Company is monitoringthis situation, and will adapt its policies as required.

 

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Asof December 31, 2003, a total of 30 Accurun ®  external run control products designedfor the European market have met the regulatory requirements to carry the CEMark under the European Union’s In Vitro Diagnostics (IVD) Directive. The IVDDirective describes criteria that must be met and steps that must be taken forIVD products to be qualified for sale in European Union countries beginning atthe end of 2003. In the IVD Directive, the European Union classifies productsaccording to the risks associated with their failure or misuse, and establishesa process leading to a CE Mark (approval to sell a product in EU countries) foreach category.

 

Testkits are required to be FDA cleared or approved by the 510(k) or PMA processesin order to be sold with labeling ‘For In Vitro Diagnostics Use’ in theU.S.  BBI’s first commercialized testkit, the Boston Biomedica Inc. *Borreliaburgdorferi* IgM and IgG Western Blot Test Kit, received 510(k)clearance in November, 2003.

 

BBISource generally obtains 510(k) and European CE approval for all laboratoryinstrumentation designed and manufactured in its Garden Grove, CA facility.

 

TheCompany is registered as a medical device manufacturer with the FDA for itsDiagnostic Products and Laboratory Instruments and files changes/listings ofits products semi-annually. The Company’s facilities in West Bridgewater,Massachusetts, and Gaithersburg, Maryland for Diagnostic Products and in GardenGrove, California for Laboratory Instruments are FDA Good ManufacturingPractices (FDA/GMP) facilities.  The Companymust maintain high standards of quality in manufacturing, testing anddocumentation, and implement strict cGMP/QSR requirement guidelines governingreagent and instrument manufacturing.

 

Oncecleared or approved, medical devices are subject to pervasive and continuingregulation by the FDA, including, but not limited to cGMP/QSR requirements,regulations governing testing, control, and documentation and reporting ofadverse experiences with the use of the device. The FDA monitors ongoingcompliance with cGMP/QSR requirements and other applicable regulatoryrequirements by conducting periodic inspections.  FDA regulations require FDA clearance or approval for certainchanges if they do or could affect the safety and effectiveness of the device,including, for example, new indications for use, labeling changes or changes indesign or manufacturing methods. In addition, both before and after clearanceor approval, medical devices are subject to certain export and importrequirements under the FDCA. Product labeling and promotional activities are subjectto scrutiny by the FDA and, in certain instances, by the Federal TradeCommission.  Products may be promoted bythe Company only for their approved use. Failure to comply with these and otherregulatory requirements can result, among other consequences, in failure toobtain pre-market approvals, withdrawal of approvals, total or partialsuspension of product distribution, injunctions, civil penalties, recall orseizures of products and criminal prosecution.

 

TheCompany believes that its Quality Control Panels are not regulated by the FDAbecause they are not intended for diagnostic purposes. The Company believesthat its Diagnostic Components, which are components of *in vitro* diagnostic products, may besubject to certain regulatory requirements under the FDCA and other lawsadministered by the FDA, but do not require that the Company obtain apre-market approval or clearance. The Company cannot be certain, however, thatthe FDA would agree or that the FDA will not adopt a different interpretation ofthe FDCA or other laws it administers, which could have a material adverseeffect on the Company.

 

Asof December 2002, the Company’s Diagnostic Products business unit in WestBridgewater, Massachusetts is ISO 13485 certified, with registration by G-MED.The Company’s Laboratory Instruments business unit is ISO9001 certified, withregistration by the British Standard Institute. The Laboratory Instrument groupis also certified to EN46001, a set of supplementary requirements applicable totheir products.  BBI Biotech’sGaithersburg facility is in the final stages of preparation for ISOcertification.

 

Lawsand regulations affecting some of the Company’s products are in effect in manyof the countries in which the Company markets or intends to market its products.These requirements vary from country to country. Member states of the EuropeanEconomic Area (which is composed of members of the European Union and theEuropean Free Trade Association) are in the process of adopting various productand service “Directives” to address essential health, safety, and environmentalrequirements associated with products and services. These “Directives” coverboth quality system requirements (ISO Series 9000 Standards, ISO 13485Standards, and the EN46001 Requirements) and product and marketing relatedrequirements. In addition, some jurisdictions have requirements related tomarketing of the Company’s products. The Company cannot be certain that it willbe able to obtain any

 

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regulatoryapprovals required to market its products on a timely basis, or at all. Delaysin receipt of, or failure to receive such approvals, or the failure to complywith regulatory requirements in these countries or states could lead tocompliance action, which could have a material adverse effect on the Company’sbusiness, financial condition, or results of operations.

 

TheCompany’s service-related business (clinical trials, repository operations,contract research, and instrumentation services) is subject to other nationaland local requirements. The Company’s facilities are subject to review,inspection, licensure or accreditation by some states, national professionalorganizations and other national regulatory agencies. Studies to evaluate the safetyor effectiveness of FDA regulated products (primarily human and animal drugs orbiologics) must also be conducted in conformance with relevant FDArequirements, including Good Laboratory Practice (“GLP”) and Good ManufacturingPractice (“GMP”) regulations, investigational new drug or device regulations,Institutional Review Board (“IRB”) regulations and informed consentregulations.

 

TheCompany currently holds permits issued by Centers for Disease Control andPrevention (Importation of Etiological Agents or Vectors of Human Diseases),the US Department of Agriculture (Importation and Transportation of ControlledMaterials and Organisms and Vectors) and the Maryland State and US NuclearRegulatory Commission (*in vitro*testing with by-product material under general license, covering the use ofcertain radioimmunoassay test methods and radioactive materials).

 

TheCompany is also subject to government regulation under the Clean Water Act, theToxic Substances Control Act, the Resource Conservation and Recovery Act, theAtomic Energy Act, and other national, state and local restrictions relating tothe use and disposal of biohazardous, radioactive and other hazardoussubstances and wastes. The Company is an exempt small quantity generator ofhazardous waste and has a US Environmental Protection Agency identificationnumber. The Company is also registered with the US Nuclear RegulatoryCommission for use of certain radioactive materials, and is subject to variousstate regulatory requirements governing the handling of and disposal ofbiohazardous, radioactive and hazardous wastes. The Company has never been aparty to any environmental proceeding.

 

Internationally,some of the Company’s products are subject to additional regulatoryrequirements, which vary significantly from country to country. Each country inwhich the Company’s products and services are offered must be evaluatedindependently to determine the country’s particular requirements. In foreigncountries, the Company’s distributors are generally responsible for obtainingany required government consents.

 

**Employees**

 

Asof December 31, 2003 the Company employed 203 persons, all of whom werelocated in the United States.  Of these,96 persons were employed at the West Bridgewater, Massachusetts facility, 87 atits two Maryland facilities, and 20 at the Garden Grove, Californiafacility.  None of the Company’semployees is covered by a collective bargaining agreement. The Company believesit has a satisfactory relationship with its employees.

 

**Backlog**

 

BBISource had an instrument manufacturing backlog of approximately $981,000 as ofDecember 31, 2003, as compared to approximately $1,124,000 as ofDecember 31, 2002.  Shipmentsexpected within the next twelve-month period, included in this backlog,amounted to approximately $870,000 as of December 31, 2003 as compared to$755,000 as of December 31, 2002. Backlog at the other BBI subsidiaries is not material.

 

**Available Information**

 

Ourinternet website address is http://www.bbii.com. Through our website, we makeavailable, free of charge, our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and any amendments to those reports, assoon as reasonably practicable after we electronically file such material with,or furnish it to, the SEC. These SEC reports can be accessed through theinvestor relations section of our website.  The information found on our website is not part of this or anyother report we file with or furnish to the SEC.

 

17

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**Executive Officers of the Registrant**

 

Thefollowing table sets forth the names, ages and positions of the executiveofficers of the Company as of February 2004:

 
| **Name**                    |   | **Age** |   | **Position**                                                   |
|-----------------------------|--------|---------|--------|----------------------------------------------------------------|
| Kevin  W. Quinlan           |   | 54      |   | President  and Chief Operating Officer, Treasurer and Director |
| Patricia  E. Garrett, Ph.D. |   | 60      |   | Senior  Vice President, Science and Technology                 |
| Mark  M. Manak, Ph.D.       |   | 54      |   | Senior  Vice President and General Manager of BBI Biotech      |
| David  F. Petersen          |   | 57      |   | Senior  Vice President and General Manager of BBI Source       |
| Kathleen  W. Benjamin       |   | 47      |   | Vice  President, Human Resources and Clerk                     |
| Richard  D’Allessandro |   | 57      |   | Vice  President, Information Technology                        |

 

*Mr. Quinlan*, a Director of the Company since 1986, has served as President andChief Operating Officer since August 1999, and Treasurer sinceJune 2001.  From January 1993to August 1999, he served as Senior Vice President, Finance, ChiefFinancial Officer and Treasurer.  From1990 to December 1992, he was the Chief Financial Officer of ParcTec,Inc., a New York-based leasing company. Mr. Quinlan served as Vice Presidentand Assistant Treasurer of American Finance Group, Inc. from 1981 to 1989 andwas employed by Coopers & Lybrand (now PricewaterhouseCoopers LLP) from1975 to 1981. Mr. Quinlan, a Certified Public Accountant, received a M.S. inaccounting from Northeastern University and a B.S. in resource economics fromthe University of New Hampshire.

 

*Dr. Garrett* has served as Senior Vice President, Science and Technology of theCompany since 2001, and served as Senior Vice President and General Manager ofBBI Clinical Laboratories from 1999 through 2001.  From 1988 to 1999, she served as Senior Vice President,Regulatory Affairs and Strategic Programs. From 1980 to 1988, Dr. Garrett served as the Technical Director of theChemistry Laboratory, Department of Laboratory Medicine at the Lahey ClinicMedical Center. Dr. Garrett earned her Ph.D. from the University of Coloradoand was a postdoctoral research associate at Harvard University, Oregon StateUniversity, Massachusetts Institute of Technology and the University of BritishColumbia.

 

*Dr. Manak* has served as Senior Vice President and General Manager of BBI Biotechsince August 1999.  From 1992 to1999 he served as Senior Vice President, Research and Development of BBIBiotech.  From 1980 to 1992, he servedas Director of Molecular Biology and Director of Contracts and Services ofBiotech Research Laboratories. Dr. Manak received his Ph.D. in biochemistryfrom the University of Connecticut and completed postdoctoral research work inbiochemistry/virology at Johns Hopkins University.

 

*Mr. Petersen* has served as Senior Vice President and General Manager of BBI Sourcesince August 1999.  FromMay 1998 to August 1999, he was Vice President, BBI Source Scientific.  Mr. Petersen has 25 years of experience inoperations management and materials planning including 10 years as SeniorDirector of Operations for Source Scientific. Before joining Source Scientific in 1988, he was the Manager ofManufacturing for Matrix Instruments from 1985 to 1988 and previously wasManager of Production and Inventory Control for Farr Company, Inc. from 1977 to1985.  He is certified in production andinventory management (CPIM) by the American Production and Inventory ControlSociety (APICS).  He was also anAssistant Professor at California State University Dominguez Hills, where forseventeen years he instructed upper division courses in manufacturingtechniques and material resource planning. He holds a B.S. in business management from the University of LaVerne inLaVerne, California.

 

*Ms. Benjamin*has served as Vice President, Human Resources of the Company sinceJanuary 1999 and has been Clerk of the Company since 2003.   Prior to her promotion to Vice President,Ms. Benjamin served as Director of Human Resources and Investor Relations from1997 to 1999 and was Assistant Clerk of the Company from 1997 to 2003.  Prior to joining the Company in 1997 she wasemployed from 1987 – 1996 by Shields Health Care Group, a provider of MagneticResonance Imaging and radiation oncology, serving as their Director ofOperations from 1992 to 1996. Prior to 1987, she was an educator.  Ms. Benjamin received her B.S., from theCollege of Life Sciences and Agriculture at the University of New Hampshire.

 

*Mr. D’Allessandro*has served as Vice President, Information Technology of the Companysince January 1999.  Mr.D’Allessandro joined the Company in 1993 as Director, Management InformationSystems and served in that capacity until his promotion to Vice President.  Mr. D’Allessandro has 30 years of experiencein data

 

18

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processing/informationsystems technology, with a focus on manufacturing and biotechnologyorganizations.  Mr. D’Allessandro isAPICS certified and received his B.S. in Management Information Systems fromNortheastern University.

 

Officersare nominated by the President and elected by the Board of Directors.

 

Foradditional information relative to the Company’s liquidity and debt covenants,and critical accounting policies and estimates, see item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”hereunder.

 

**ITEM 2.****                                                    ****PROPERTIES.**

** **

TheCompany owns its corporate offices and diagnostic products manufacturing facilityfor its BBI Diagnostics operating segment, which is located in a two-story,32,000 square foot building in West Bridgewater, Massachusetts. The Company hasdeferred renovation and expansion of this facility during recent years, butbelieves that any renovations to its facility in West Bridgewater, MA would besufficient to meet its needs for several years.  This building is subject to a $2,500,000 ten year mortgage datedMarch 31, 2000. During the first five years the note carries an interestrate of 9.75%; after five years the rate charged will be .75% greater than theCorporate Base Rate then in effect. Monthly payments on this mortgage are basedon a 20 year amortization schedule with a balloon payment representing theremaining balance due in full on March 10, 2010.

 

TheCompany leases 27,000 square feet of space in Garden Grove, California whereits BBI Source business unit manufactures laboratory instruments. The lease forthis facility expires January 31, 2005 and there is currently no extensionor renewal option. The Company also leases laboratory facilities inGaithersburg and Frederick, Maryland. The BBI Biotech segment’s Gaithersburgfacility contains 36,500 square feet of custom built laboratory and officespace, and is occupied under a ten-year lease that expires on October 31,2007. The Frederick facility contains 35,560 square feet of repository spaceunder a seven-year lease that expires on November 30, 2006. See also Note13 of Notes to Consolidated Financial Statements hereunder, included in PartII, Item 8 of this Form 10K.

 

BBIClinical Laboratories (“BBICL”), a discontinued operation, operated from a15,000 square foot facility in New Britain CT pursuant to a lease which expiresin July 2005. In connection with the sale of substantially all of theassets of BBICL in 2001,  the buyerreimbursed the Company for essentially all rental-related costs of thisfacility during the period February 21, 2001 through December 31,2001.  See also Note 13 of Notes toConsolidated Financial Statements hereunder, included in Part II, Item 8 ofthis Form 10K.

 

**ITEM 3.****                                                    ****LEGAL PROCEEDINGS.**

** **

TheCompany is not a party to any material pending legal proceedings.

 

**ITEM 4.****                                                    ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS.**

 

TheCompany held a Special Meeting in Lieu of Annual Meeting of Stockholders onOctober 2, 2003 (the “Meeting”).  Atotal of 6,071,106 shares, or 88.99%, of the Company’s Common Stock issued,outstanding and entitled to vote as of the record date, were represented inperson or by proxy, at the Meeting.  Atthe Meeting, one proposal was acted upon. The result of the proposal was as follows:

 

1.               Dr. Calvin A. Saravis and Mr. R. WayneFritzsche were elected as Class I Directors of the Company, to serve as suchuntil the 2006 Annual Meeting of Stockholders and until their successors havebeen duly elected and qualified, with 4,895,357 shares voting in favor and1,175,749 votes withheld for Dr. Saravis, and 4,896,907 shares voting in favorand 1,174,199 votes withheld for Mr. Fritzsche.

 

19

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**PART II**

 

**ITEM 5.****                                                    ****MARKET FOR REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

TheCompany’s common stock, par value $0.01 per share (the “Common Stock”), islisted on the Nasdaq National Market under the symbol “BBII”.

 

Thefollowing table sets forth, for the periods indicated, the high and low salesprice per share of Common Stock, as reported by the Nasdaq National Market:

 
|                                          |   | **Common Stock Price** |   |
|-----------------------------------------------|--------|------------------------|--------|
| **Fiscal Year Ended  December 31, 2002** |   | **High**               |   | **Low** |   |
| First Quarter                                 |   | $                      | 4.260  |   | $ | 2.790 |   |
| Second Quarter                                |   | $                      | 5.020  |   | $ | 3.500 |   |
| Third Quarter                                 |   | $                      | 4.650  |   | $ | 2.130 |   |
| Fourth Quarter                                |   | $                      | 3.010  |   | $ | 2.000 |   |
|                                          |   |                   |   |   |   |
| **Fiscal Year Ended  December 31, 2003** |   | **High**               |   | **Low** | ** ** |
| First Quarter                                 |   | $                      | 3.000  |   | $ | 1.69 |   |
| Second Quarter                                |   | $                      | 2.800  |   | $ | 2.020 |   |
| Third Quarter                                 |   | $                      | 3.160  |   | $ | 2.510 |   |
| Fourth Quarter                                |   | $                      | 3.040  |   | $ | 2.300 |   |

 

Asof January 31, 2004, there were 20,000,000 shares of Common Stockauthorized of which 6,827,592 shares were issued and outstanding, held ofrecord by approximately 2,900 stockholders. See also Note 11 of Notes to Consolidated Financial Statements includedin Part 2, Item 8 hereunder.

 

TheCompany has not declared or paid any dividends on its Common Stock.  In accordance with the terms of theCompany’s mortgage with a bank and the Company’s revolving line of credit,payment of dividends on Common Stock is not permitted.  The Company plans to reinvest future profitsto expand its business.

 

**Recent Sales of Unregistered Securities**

 

Duringthe fourth quarter of 2003, the Company did not sell any securities that werenot registered under the Securities Act of 1933, as amended.

 

**Repurchases by the Company**

 

Duringthe fourth quarter of 2003, the Company did not repurchase any shares of itsCommon Stock on its own behalf or any affiliated purchaser.

 

20

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**ITEM 6.****                                                    ****SELECTED FINANCIAL DATA**

 

Thestatement of operations data for each of the fiscal years in the five-yearperiod ended December 31, 2003, and the balance sheet data as ofDecember 31, 2003, 2002, 2001, 2000, and 1999, have been derived from theconsolidated financial statements of the Company. This data should be read inconjunction with Item 8-Consolidated Financial Statements and SupplementaryData, and Item 7-Management’s Discussion and Analysis of Financial Conditionand Results of Operations appearing elsewhere herein.

 
|                                                                                        |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Consolidated Statement of  Operations Data: in thousands, except per share data**         |   | **2003**                          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| REVENUE:                                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| Products                                                                                    |   | $                                 | 13,608 |   | $ | 12,697 |   | $ | 13,093 |   | $ | 12,387 |   | $ | 14,057 |   |
| Services                                                                                    |   | 9,688                             |   | 10,068 |   | 8,733 |   | 7,083 |   | 5,741 |   |
| Total revenue                                                                               |   | 23,296                            |   | 22,765 |   | 21,826 |   | 19,470 |   | 19,798 |   |
|                                                                                        |   |                              |   |   |   |   |   |   |   |   |   |
| COSTS AND EXPENSES:                                                                         |   |                              |   |   |   |   |   |   |   |   |   |
| Cost of products                                                                            |   | 7,263                             |   | 6,536 |   | 6,338 |   | 7,270 |   | 7,267 |   |
| Cost of services                                                                            |   | 7,602                             |   | 7,727 |   | 6,783 |   | 5,581 |   | 4,568 |   |
| Research and development                                                                    |   | 1,816                             |   | 2,611 |   | 2,303 |   | 2,444 |   | 3,132 |   |
| Selling and marketing                                                                       |   | 3,283                             |   | 3,286 |   | 2,916 |   | 2,660 |   | 2,831 |   |
| General and administrative                                                                  |   | 4,346                             |   | 4,109 |   | 3,977 |   | 4,919 |   | 3,451 |   |
| Impairment of intangible asset (1)                                                          |   | —                            |   | — |   | — |   | 1,464 |   | — |   |
| Total operating costs and expenses                                                          |   | 24,310                            |   | 24,269 |   | 22,317 |   | 24,338 |   | 21,249 |   |
| Loss from continuing operations                                                             |   | (1,014                            | )      | (1,504 | ) | (491 | ) | (4,868 | ) | (1,451 | ) |
| Interest (expense) income, net (2)                                                          |   | (272                              | )      | (206 | ) | (380 | ) | (1,594 | ) | (413 | ) |
| Loss from continuing operations before  income taxes                                        |   | (1,286                            | )      | (1,710 | ) | (871 | ) | (6,462 | ) | (1,864 | ) |
| (Provision for) benefit from income taxes  (3)                                              |   | (3                                | )      | (3 | ) | (16 | ) | (1,152 | ) | 744 |   |
| Loss from continuing operations before  cumulative effect of change in accounting principle |   | (1,289                            | )      | (1,713 | ) | (887 | ) | (7,614 | ) | (1,120 | ) |
| Cumulative effect of change in accounting  principle (2)                                    |   | —                            |   | — |   | — |   | (190 | ) | — |   |
| Loss from continuing operations                                                             |   | (1,289                            | )      | (1,713 | ) | (887 | ) | (7,804 | ) | (1,120 | ) |
| Income (loss) from discontinued operations                                                  |   | —                            |   | 225 |   | 4,334 |   | (197 | ) | 306 |   |
| Net income (loss)                                                                           |   | $                                 | (1,289 | ) | $ | (1,488 | ) | $ | 3,447 |   | $ | (8,001 | ) | $ | (814 | ) |
|                                                                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Loss per share from continuing operations,  basic and diluted                               |   | $                                 | (0.19  | ) | $ | (0.26 | ) | $ | (0.14 | ) | $ | (1.43 | ) | $ | (0.24 | ) |
| Net (loss) income per share, basic and  diluted                                             |   | (0.19                             | )      | (0.22 | ) | 0.56 |   | (1.46 | ) | (0.17 | ) |
|                                                                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Number of shares used to calculate net  (loss) income per share Basic and Diluted           |   | 6,811                             |   | 6,661 |   | 6,204 |   | 5,465 |   | 4,670 |   |

 
|                                    |   | **December 31,** |   |
|-----------------------------------------|--------|-----------------------|--------|
| **Consolidated Balance Sheet Data:**    |   | **2003**              |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Working capital                         |   | $                     | 7,659  |   | $ | 9,197 |   | $ | 9,407 |   | $ | 3,596 |   | $ | 8,615 |   |
| Net assets from discontinued operations |   | —                |   | — |   | — |   | 1,238 |   | 1,978 |   |
| Total assets                            |   | 16,842                |   | 19,843 |   | 21,414 |   | 22,549 |   | 24,934 |   |
| Long term debt, less current maturities |   | 2,271                 |   | 2,338 |   | 2,403 |   | 5,287 |   | 7,146 |   |
| Total stockholders’ equity         |   | 10,415                |   | 12,627 |   | 13,440 |   | 7,750 |   | 13,646 |   |
| Dividends                               |   | —                |   | — |   | — |   | — |   | — |   |
|                                         |        |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)               Consistsof a $1,464 write-down of goodwill associated with the acquisition of BBISource Scientific.

(2)               Includes$840 of interest expense in 2000 associated with the beneficial conversionfeature of the Company’s 3% Senior Subordinated Convertible Debentures; $190 ofthis amount is recorded as a cumulative effect of change in accountingprinciple in 2000.

(3)               Includes$1,135 in 2000 for establishment of a full valuation allowance on the Company’sdeferred tax assets.

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.** |
|-------------|--------------------------------------------------------------------------------------------------|

 

***Overview***

 

*Revenues*. The Company generates revenue from products and services providedprimarily to the *in vitro*diagnostic infectious disease industry. The Company currently has fouroperating segments: “Diagnostics,” “Biotech,” “Laboratory Instrumentation” and “Pressure Cycling Technology(“PCT”)”.   Two of these segments,“Diagnostics” and “Laboratory Instrumentation” primarily manufacture products.Commencing in 2002, PCT products are being manufactured at the LaboratoryInstrumentation segment. Within the Diagnostics segment, there are three majorproduct lines: Quality Control Panels, Accurun® External RunControls, and Diagnostic Components. The remaining two operating segments,Biotech and PCT, generate primarily service revenue. Within Biotech there arefour major product lines: Contract Research, Repository Services, SpecialtyReagents and Research Services. Revenue in the “PCT” segment consists primarilyof both private and National Institutes of Health (“NIH”) funded support forthe research activities associated with our pressure cycling technology. Therewas also NIH funding in 2000 for the Company’s former drug discovery operationswhich were spun-off as an independent company in November 2000.  See Note 6 of Notes to Financial Statementsfor a further discussion of the activities of these segments and Note 2 ofNotes to Financial Statements relative to the Company’s discontinued clinicallaboratory operations.

 

InFebruary 2001, BBI Clinical Laboratories, Inc. (“BBICL”), a wholly-ownedsubsidiary of the Company, sold the business and certain assets and liabilitiesto a third party for an adjusted purchase price of $8,958,000.  The Company wrote down all of the retainedassets to their estimated net realizable value.  The Company recorded an after-tax gain of $4,334,000 in 2001 andan additional after tax gain of $225,000 in 2002.  See also Notes 2 and 13 of Notes to Consolidated FinancialStatements hereunder, included in Part II, Item 8 of this Form 10K.

 

Theeconomics and cost structures of the Company’s business segments have certaindifferences.

 

•                  The Diagnostics segment has historically beenthe Company’s largest and most profitable segment, both in absolute dollars andin operating profit margin, as it operates primarily in a commercialenvironment with fewer competitors and relatively short product developmentcycles.

 

•                  The Laboratory Instrumentation segmentoperates in a highly competitive, low margin business: contract manufacturingof instruments and medical devices. Since the Company’s acquisition of SourceScientific in 1997, management has continued in its efforts to turn around thisbusiness.  At the current low annualrevenue level of less than $2.0 million, it operates significantly undercapacity with high fixed overhead costs, and should therefore significantlybenefit from relatively small revenue increases.

 

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•                  The BBI Biotech segment has been projectoriented with a high proportion of its revenue generated from governmentcontracts (for both research and service activities) and assisting the othersegments of the Company in their new product and service development. It hasthe highest level of inter-segment activity, and is structured around projecttracking of direct costs plus overhead, general and administrative costs and alow percentage fee. Its financial goal has been to breakeven while contributingto the development of future products and services for the Company.

 

•                  The PCT segment’s research and developmentoperation launched its first products for commercial sale in 2002. Revenue todate consists primarily of private and public (NIH) funding of segmentresearch. Most of the expenditures by this segment are for R&D expenses,patent costs and general management expenses. The Company continues to seek funding from both private and publicsources to minimize the impact of their development costs on the Company’soverall operating results.  Since itscommercial introduction in 2002, sales of PCT products have been limitedprimarily due to longer sales cycles than originally anticipated as discussedfurther hereunder. Factors associated with this sales cycle include the initialselling price of the PCT BarocyclerTM and the limited amount ofresearch data presently available demonstrating its capabilities and potential.Additional refinements in PCT instrumentation include the development of a lessexpensive and smaller, bench top version of the Barocycler which was justintroduced in 2004.

 

***QUARTERLY FLUCTUATIONS***

 

Historically,the Company’s results of operations have been subject to quarterly fluctuationsdue to a variety of factors, primarily customer purchasing patterns, driven byend-of-year expenditures. In particular, in the Diagnostics segment, theCompany’s sales of its off-the-shelf Quality Control Products and DiagnosticComponents typically have been highest in the fourth quarter and lowest in thefirst quarter of each fiscal year, whereas OEM product sales may peak in anyquarter of the year depending on the production cycle of a given project. Inthe Company’s Biotech segment, research contracts are generally for largedollar amounts spread over one to five year periods, and upon completion,frequently do not have renewal phases. As a result these contracts can causelarge fluctuations in revenue and net income. In addition to staff dedicated tointernal research and development, certain of the Company’s technical staffwork on both contract research for customers and Company sponsored research anddevelopment. The allocation of certain technical staff to such projects dependson the volume of contract research. As a result, research and developmentexpenditures fluctuate due to increases or decreases in contract researchperformed. Neither the Laboratory Instrumentation segment nor the PCT segmentis subject to material seasonal variations.

 

***RESEARCH AND DEVELOPMENT***

 

Sincethe acquisition of BioSeq, Inc. in 1998, the Company has expended significantamounts for ongoing research and development of new technologies, including inconnection with the development of PCT. In the past five years, the Company’s BioSeq research subsidiary hasincurred approximately $5.5M of research and development expenses substantiallyrelated to development of a unique instrument and disposable specimenprocessing tube in conjunction with PCT. As a result of its efforts, in September 2002, the Company was ableto release for sale its first products based on its patented PCT. The Companyis presently manufacturing the BarocyclerTM instrument anddisposable PULSETM tubes utilizing PCT at its BBI Source Scientificfacility, however, the sales cycle appears to be of longer duration thanexpected.  The Company has receivedeleven domestic and four foreign patents for this technology as of the end of2003. The Company has invested significantly in research and development, bothin whole dollars and as a percentage of revenue, and expects to continue to doso for the foreseeable future as it seeks to continue to develop newapplications for PCT.

 

***EXPORT SALES***

 

TheCompany has significant export sales in Europe, the Pacific Rim countries andCanada to agents under distribution agreements, as well as directly to test kitmanufacturers. All sales are denominated in US dollars. Export sales for theyears ended December 31, 2003, 2002, and 2001 were $4.7 million, $3.3million and $3.4 million, respectively. The Company expects that export saleswill continue to be a significant source of revenue and gross profit.

 

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***CHALLENGES AND OPPORTUNITIES***

 

TheCompany also continues to evaluate the performance of both the LaboratoryInstrumentation segment and the PCT segment, both of which continue toexperience significant operating losses. The PCT segment, which includes both private and public (NationalInstitutes of Health) funding of segment research, continues to experiencelower than expected product sales since its commercial introduction inSeptember 2002 primarily associated with a longer than expected sellingcycle for its PCT Products. Factors associated with this sales cycle includethe initial selling price of the PCT BarocyclerTM and the limitedamount of research data presently available demonstrating its capabilities andpotential. Additional refinements in PCT instrumentation include thedevelopment of a less expensive and smaller, bench top version of theBarocycler which was just introduced in 2004. While the Company believes strongly in the benefits of PCT’s noveltechnology, the market potential of the existing PCT BarocyclerTM  is uncertain. The manufacture of PCTproducts at the laboratory instrument segment of the business was part of theCompany’s plan to return BBI Source Scientific, Inc. to profitability in year2003.  The Company intends to evaluateother applications and products utilizing PCT, including expansion of the PCTproduct line, and to reexamine the core contract manufacturing business of BBISource Scientific, Inc.   If thesesegments do not become profitable, the Company may need to write off some orall of the current net book value of these assets in either or both of thesesegments.

 

Toadvise the Company with respect to the strategic direction of the Company’s PCTand BBI Source Scientific activities, and the Company’s remaining ownershipinterest in Panacos Pharmaceuticals, Inc., in July 2003, the Companyengaged Mr. Richard T. Schumacher, the Company’s former Chairman and ChiefExecutive Officer as an Executive Project Consultant.  As part of this engagement, Mr. Schumacher is expected toreevaluate the ongoing business prospects for both the Laboratory Instrumentationsegment and PCT activities.  On February 9,2004, the Company announced it has extended until December 31, 2004 theExecutive Consultant Agreement it has with Mr. Schumacher.   Under the terms of the ConsultingAgreement, Mr. Schumacher is serving in an advisory role directing theCompany’s PCT and BBI Source Scientific activities, the Company’s interest inPanacos Pharmaceuticals, Inc. and such other duties as the President or theBoard of Directors of the Company assigns to him. In addition to theseresponsibilities, Mr. Schumacher will also take the lead role in working withWilliam Blair & Co., the Chicago Illinois based investment banking firmretained by the Company in October 2002. In connection with his Consulting Agreement, Mr. Schumacher is beingpaid an annualized salary of $250,000. In addition to his salary, Mr. Schumacher may receive, in the discretionof the Company’s Board of Directors, a bonus in an amount to be determined bythe Board of Directors in recognition of the successful completion of hisduties and responsibilities under the agreement, and he is also eligible toparticipate in the Company’s health and medical insurance, disabilityinsurance, group life insurance and group travel insurance, and 401(k)retirement plans.

 

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***RESULTSOF OPERATIONS***

 

The following table sets forth for the periods indicated the percentageof total revenue represented by certain items reflected in the Company’sconsolidated statements of operations:

 
|                                                                              |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                              |   | **2003**                     |   | **2002** |   | **2001** |   |
| Revenue:                                                                          |   |                         |   |   |   |   |   |
| Products                                                                          |   | 58.4                         | %      | 55.8 | % | 60.0 | % |
| Services                                                                          |   | 41.6                         |   | 44.2 |   | 40.0 |   |
| Total revenue                                                                     |   | 100.0                        |   | 100.0 |   | 100.0 |   |
|                                                                              |   |                         |   |   |   |   |   |
| Gross profit                                                                      |   | 36.2                         |   | 37.3 |   | 39.9 |   |
| Operating expenses:                                                               |   |                         |   |   |   |   |   |
| Research and development                                                          |   | 7.8                          |   | 11.5 |   | 10.6 |   |
| Selling and marketing                                                             |   | 14.1                         |   | 14.4 |   | 13.4 |   |
| General and administrative                                                        |   | 18.6                         |   | 18.1 |   | 18.2 |   |
| Total operating expenses                                                          |   | 40.5                         |   | 44.0 |   | 42.2 |   |
| Operating loss from continuing operations                                         |   | (4.3                         | )      | (6.7 | ) | (2.3 | ) |
| Interest expense, net                                                             |   | (1.2                         | )      | (0.9 | ) | (1.7 | ) |
| Loss before income taxes and cumulative  effect of change in accounting principle |   | (5.5                         | )      | (7.6 | ) | (4.0 | ) |
| Provision for income taxes                                                        |   | —                       |   | — |   | (0.1 | ) |
| Income from discontinued operations                                               |   | —                       |   | 1.0 |   | 19.9 |   |
| Net income (loss)                                                                 |   | (5.5                         | )      | (6.6 | ) | 15.8 |   |
| Product gross profit                                                              |   | 46.6                         | %      | 48.5 | % | 51.6 | % |
| Services gross profit                                                             |   | 21.5                         | %      | 23.2 | % | 22.3 | % |

 

***Critical Accounting Policies and Estimates***

 

To prepare the financial statements in conformity with generallyaccepted accounting principles, management is required to make significant estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. In addition, significant estimates were made in determiningthe gain on disposition of the company’s discontinued operations includingpost-closing adjustments, in estimating future cash flows to quantifyimpairment of assets, in determining the ultimate cost of abandoning a lease(associated with discontinued operations) at a facility no longer beingutilized, in estimates regarding the collectability of accounts receivable,realizability of a receivable from a Director/former Chairman and ChiefExecutive Officer including sufficiency of collateral (see Note 12), deferredtax assets, the net realizable value of its inventory, third party audits, aswell as an estimate for other remaining liabilities associated withdiscontinued operations. On an on-going basis, the Company evaluates itsestimates.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from the estimates and assumptions used by management.

 

*Revenue Recognition*

 

The Companyrecognizes revenue in accordance with the Securities and Exchange Commission’sStaff Accounting Bulletin No. 103, *Update of Codification of Staff Accounting Bulletins*(“SAB 103”).  Revenue is recognized whenrealized or earned when all the following criteria have been met: persuasiveevidence of an arrangement exists; delivery has occurred and risk of loss haspassed; the seller’s price to the buyer is fixed or determinable andcollectibility is reasonably assured.

 

Productrevenue is generally recognized upon shipment of the products.  The Company will occasionally recognizerevenue on a bill and hold basis after completion of manufacture for specificorders at the request of the customer. Bill and hold sales transactions are entered into after consideration ofcustomer needs and capabilities

 

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relating tofreezer capability to store biological substances at required temperatures. Allbill and hold transactions meet specified revenue recognition criteria thatinclude:

 

•                  The risk ofownership has passed to the customer;

•                  The customer hasa fixed commitment to purchase the goods;

•                  The customer,not the Company, has requested the transaction to be on a bill and hold basis;

•                  There is a fixedschedule for delivery of the goods;

•                  The Company doesnot retain any specific performance obligations such that the earnings processis not complete;

•                  The orderedgoods are segregated from the Company’s inventory and not subject to being usedto fill other orders; and

•                  The goods arecomplete and ready for shipment.

 

The Companyalso considers the following prior to recognizing revenue:

 

•                  The transactionis subject to normal billing and credit terms for the specific customer;

•                  The Company’spast experience with the pattern of bill and hold transactions;

•                  Whether thecustomer has the expected risk of loss in the event of a decline in the marketvalue of the goods;

•                  Whether theCompany’s custodial risks are insurable and insured;

•                  Whether APB 21,pertaining to the need for discounting the related receivables, is applicable;and

•                  Whether extendedprocedures are necessary in order to assure that there are no exceptions to thecustomer’s commitment to accept and pay for the goods.

 

Total revenuerelated to bill and hold transactions was approximately $622,000, $380,000 and$610,000, for the years ended December 31, 2003, 2002, and 2001, respectively.

 

Revenue fromservice contracts is earned as the related services are performed.  Revenue arrangements where multiple productsor services are sold together under one contract are evaluated to determine ifeach element represents a separate earnings process.  In the event that an element of such multiple element arrangementdoes not represent a separate earnings process, revenue from this element isrecognized over the term of the related contract.  Services are recognized as revenue upon completion of tests forlaboratory services. Revenue from service contracts and research anddevelopment contracts for the Company’s laboratory instrumentation business isrecognized as the service and research and development activities are performedunder the terms of the contracts.

 

Revenue under long-term contracts, generally lasting from one to fiveyears, including funded research and development contracts, is recorded whencosts to perform such research and development activities are incurred.  Billings under long-term contracts aregenerally at cost plus a predetermined profit. Billings occur as costsassociated with time and materials are incurred.  Customers are obligated to pay for such services when billed andpayments are non-refundable.  Onoccasion, certain customers make advance payments that are deferred untilrevenue recognition is appropriate. Total revenue related to long-term contracts was approximately$5,855,000, $5,802,000, and $5,062,000, for the years ended December 31, 2003,2002, and 2001, respectively. Total contract costs associated with theseagreements were approximately $5,458,000, $5,610,000 and $4,911,000, for theyears ended December 31, 2003, 2002 and 2001, respectively.  Included in the revenue recognized underlong-term contracts are certain unbilled receivables representing additionalindirect costs, which are allowed under the terms of the respective contracts.  Unbilled receivables were $30,000 atDecember 31, 2003 and less than $62,000 for all other years presented.

 

During thefiscal years 2003, 2002 and 2001, the combined revenues from all branches ofthe National Institutes of Health, a United States Government agency, accountedfor approximately 25%, 31% and 31%, respectively, of total consolidatedrevenues from continuing operations of the Company.  Additional future revenues originating from various branches ofthe National Institutes of Health is subject to possible future changes ingovernment funding levels.

 

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## ***Accounts Receivable***

 

Managementperiodically reviews outstanding balances in accounts receivable to estimatefuture collections.  Based on theCompany’s historical experience, current business conditions and expectedfuture collections, management established an allowance for uncollectibleaccounts.  In the event circumstanceschange to affect the assumptions underlying this allowance, the Company mightbe required to take additional write-offs of its accounts receivable balances.

 

# ***Inventory***

 

Inventory isvalued at the lower of cost or market. Certain factors may impact the realizable value of the Company’sinventory including, but not limited to, technological changes, market demand,changes in product mix strategy, new product introductions and significantchanges to the Company’s cost structure. In addition, estimates of reserves are made for obsolescence based onthe current product mix on hand and its expected net realizability. If actualmarket conditions are less favorable or other factors arise that aresignificantly different than those anticipated by management, additionalinventory write-downs or increases in obsolescence reserves may be required.The Company treats lower of cost or market adjustments and inventory reservesas adjustments to the cost basis of the underlying inventory.  Accordingly, favorable changes in marketconditions are not recorded to inventory in subsequent periods.

 

# ***Long-livedAssets and Goodwill***

 

Intangibleassets primarily relate to the remaining value of acquired patents associatedwith PCT. The cost of these acquired patents is amortized on a straight-linebasis over the estimated life of the patent, which is generally four to sixteenyears.  The Company’s policy regardinglong-lived assets is to evaluate the recoverability or usefulness of theseassets when the facts and circumstances suggest that these assets may beimpaired.  This analysis relies on anumber of factors, including changes in strategic direction, business plans,regulatory developments, economic and budget projections, technologicalimprovements, and operating results. The test of recoverability or usefulness is a comparison of the assetvalue to the undiscounted cash flow of its expected cumulative net operatingcash flow over the asset’s remaining useful life.  Any write-downs would be treated as permanent reductions in thecarrying amount of the asset and an operating loss would be recognized. Todate, the Company has had recurring operating losses in the PCT segment and therecoverability of the Company’s long-lived assets is contingent upon itexecuting its business plan that includes expected revenues and cash flows tobe generated from sales of PCT products and services. The Company’s goodwillrelates to its acquisition of the Laboratory Instrumentation operatingsegment.  This segment is expected tocontinue to manufacture PCT related products and the realizability of thisgoodwill is dependant, among other factors, on the success of the Company’s PCTproduct line.  If the Company is unableto execute its business plans related to PCT, it may be required to write downthe remaining value of its long-lived assets and goodwill in future periods.

 

### ***Deferred Tax Valuation Allowance***

 

A valuation allowance is established if it is more likely than not thatall or a portion of a deferred tax asset will not be realized.  In 2000, the Company established a fullvaluation allowance for its deferred tax assets in accordance with Statement ofFinancial Accounting Standards No. 109 and in consideration of threeconsecutive years of losses.  TheCompany has not recognized an income tax benefit associated with the loss fromcontinuing operations in 2003, 2002, and 2001, as these tax assets have beenfully reserved for.   Accordingly, avaluation allowance has been established for the full amount of the deferredtax asset due to the uncertainty of realization.

 

### ***Discontinued Operations***

 

The Company periodically reviews the adequacy of its reserve fordiscontinued operations associated with the Company’s decision to exit theclinical laboratory testing segment of the business in 2000.  The Company has established reserves tocover expected future costs including those associated with an existing facilitylease expiring July 2005.  See also Note13 of Notes to Consolidated Financial Statements hereunder, included in PartII, Item 8 of this Form 10K.

 

### ***Loan Receivable from Director and Former Chairman and ChiefExecutive Officer***

 

As of December 31, 2003, the Company evaluated the recoverability of a$1,000,000 loan receivable from its former Chairman and Chief ExecutiveOfficer, which is reflected on its balance sheet in stockholders’ equity as aloan receivable as of December 31, 2003. The Company’s review includes anevaluation of the collateral

 

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associated with the loan. The Company maintains a junior interest inthis collateral.  As of December 31,2003, the remaining collateral consists of common stock of the Company.  When considering the adequacy of thecollateral for the Company’s $1,000,000 receivable, the Company considers thebalance of a loan outstanding ($500,000 as of December 31, 2003) between anentity controlled by its former Chairman and Chief Executive Officer with afinancial institution and the fact that the Company has a junior position inregards to the remaining collateral associated with that loan, as well as theliquidity and net realizable value of the remaining assets underlying thecollateral.   The ultimate value thatmay be recovered by the Company is dependant on numerous factors includingmarket conditions relative to the value of and ability to sell the Company’scommon stock, and the financial status of its former Chairman and ChiefExecutive Officer. At December 31, 2003, the Company performed a test forimpairment of its loan receivable by analyzing the value of the collateral, anddetermined that the loan receivable was not impaired. While the loan receivablewas not impaired as of December 31, 2003, the termination of the Company’s Chairman and Chief Executive Officerby the Board of Directors in February 2003, together with the fluctuations inthe quoted market value of the Company’s common stock, which comprises the remainingcollateral, are indicators of impairment. Based on the Company’s assessment asof and through February 2004, the Company estimates that the value of thecollateral approximates the amount of the Company’s recorded loan.  If actual market conditions are lessfavorable or other factors arise that are significantly different than thoseanticipated by management, a write-down of this asset might be required.

 

**YEARS ENDED DECEMBER 31, 2003 AND 2002**

 

*Revenue*

 

Totalrevenue increased 2.3%, or $531,000, to $23,296,000 in 2003 from $22,765,000in  2002. The increase in revenue wasthe result of an increase in product revenue of 7.2% or $911,000, to$13,608,000 in 2003 from $12,697,000 in 2002, partially offset by a 3.8% or$380,000 decrease in service revenue to $9,688,000 in 2003 as compared toservice revenue of $10,068,000 in  2002.

 

Product Revenue .  The increase in product revenue in 2003compared to 2002 occurred in the Diagnostics segment and was due primarily toincreased sales in year 2003 associated with newly released AccuRun productsand custom (OEM) panels, which included one large custom order from aninternational distributor. The increase in product revenues was partiallyoffset by a lower level of contract manufacturing work at the Laboratory Instrumentationsegment.  In 2003 the Company hadlimited revenue from sales of our PCT products.  Sales of the Company’s PCT products continues to be slower thanexpected due primarily to longer sales cycles than anticipated. Factors associated with this sales cycleinclude the initial selling price of the PCT BarocyclerTM and the limited amount of research datapresently available demonstrating its capabilities and potential. Additionalrefinements in PCT instrumentation include the development of a less expensiveand smaller, bench top version of the BarocyclerTM which was justintroduced in 2004.

 

Service Revenue.  The decrease in service revenue wasprimarily related to lower levels of contract research activities and a lowerlevel of PCT related grant revenues in 2003 compared to 2002, in which therewas strong activity in two service contracts related to HIV vaccine developmentand Hepatitis C work at the Biotech segment. These decreases were partially offset by higher revenues in year 2003associated with increased repository service work combined with an increasedlevel of billable hours associated with government contract reimbursable workat the Biotech segment.

 

G*rossProfit*

 

Overall gross profit decreased 0.8%, or $71,000 to $8,431,000 in 2003from $8,502,000 in 2002.  Product grossprofit increased 3.0%, or $184,000, to $6,345,000 in 2003 from $6,161,000 in2002; product gross margin decreased to 46.6% in 2003 from 48.5% in 2002.  Service gross profit decreased $255,000 or10.9% to $2,086,000 in 2003 from $2,341,000 in 2002;  service gross margin decreased to 21.5% in 2003 from 23.2% in2002.

 

Product Gross Margin.     The decline in product gross margin wasdue to a lower level of instrument sales in year 2003 at the LaboratoryInstrumentation segment over a relatively fixed cost structure, partiallyoffset by an increased level of product sales at the Diagnostics segment.

 

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Service Gross Margin.    The decrease in service gross margin wasprimarily due to less profitable research contracts at the Biotech segment,whereas year 2002 service revenues included increased activity associated withtwo service contracts related to HIV vaccine development and Hepatitis C workat the Biotech segment.

 

*Research andDevelopment*

 

Research and development expenditures declined 30.4%, or $795,000, to$1,816,000 in 2003 from $2,611,000 in 2002. The decreased level of expenditureswas associated primarily with a reduced level of activity on PCT relatedprojects following the commercial introduction of PCT products in lateSeptember 2002.  The Company expectsthat it will incur significant research and development expenses in connectionwith the further development of additional PCT products. In 2002, there was anincrease in development work in AccuChart Plus, a quality control datamanagement software program for analyzing, tracking and archiving daily runcontrol data for monitoring test kit performance.

 

*Selling andMarketing*

 

Selling and marketing expenses amounted to $3,283,000 in 2003relatively unchanged from $3,286,000 in 2002. The Companycontinued to incur marketing and promotion related costs in both 2003 and 2002associated with the commercial launch the PCT BarocyclerTM in September 2002.

 

*General and Administrative*

 

General and administrative costs increased 5.8%, or $237,000, to$4,346,000 in 2003 from $4,109,000 in 2002. In 2003, there were legal, auditand director fees incurred by the Special Oversight Committee of the Company’sBoard of Directors, formed in February 2003, in conjunction with thetermination of the Company’s Chairman and Chief Executive Officer, for thepurpose of overseeing the management of the affairs of the Company during thetransition period. The Company also incurred increased legal fees associatedwith the March 2003 adoption of a Shareholder Purchase Rights Plan.  In addition, the Company incurredapproximately $245,000 of costs in year 2003 associated with investment bankingactivities evaluating both strategic and financing opportunities for theCompany. These costs were partially offset by reduced compensation costsincurred in 2003 due to the elimination of the salary that would have been paidto the Company’s former Chairman and Chief Executive Officer who was terminatedin February 2003, and lower employee health care costs.

# *** ***

*Operating Loss fromContinuing Operations*

 

Operating loss from continuing operations amounted to $1,014,000 in2003 compared to an operating loss from continuing operations of $1,504,000 in2002. The operating loss in year 2003 included approximately $213,000 of costsincurred by the Special Oversight Committee of the Company’s Board of Directors(net of reduced compensation costs) combined with approximately $245,000 ofcosts associated with investment banking activities as discussed in furtherdetail above in the caption entitled *“Generaland Administrative.”* The Diagnostics segment’s operating incomeincreased to $1,704,000 in 2003 from $1,478,000 in  2002, due to an increase in product sales associated with newlyreleased Accurun® products and custom (OEM) panels.  The Biotech segment’s operating lossdecreased to $274,000 in 2003 from $319,000 in 2002, primarily due toadditional revenues generated by increased repository services combined with anincreased level of billable hours associated with government contractreimbursable work partially offset by higher wages, supplies and facilitiescosts.  The operating loss of the PCTsegment decreased to $1,552,000 in 2003 from $2,156,000 in 2002 primarily dueto reduced patents, trade show and research and development costs, partiallyoffset by a lower level of PCT related grant revenues.  The PCT segment, which includes both privateand public (National Institutes of Health) funding of segment research, continuesto experience lower than expected product sales since commercial launch inSeptember 2002 associated with a longer than expected selling cycle. TheLaboratory Instrumentation segment’s operating loss increased to $892,000 in2003 from $507,000 in 2002. This segment recorded an 18.8% decline in revenuedue to a lower level of contract manufacturing work coupled with increasedfacility related costs.

 

*Interest Expense*

 

Interest expense, incurred primarily on the Company’s outstandingmortgage on the Company’s headquarters located in West Bridgewater,Massachusetts, increased $43,000 in 2003 as compared to 2002.  The increase was a

 

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result of a mortgage covenant waiver fee as the Company failed to meet its debt service coverage and other covenantsfor the year ended December 31, 2002. The Company also failed to meet this debt service coverage covenant forthe year ended December 31, 2003, however the financial institution hasnotified the Company of its intent to waive this default.

 

*Income Taxes*

 

In 2000, the Company established a full valuation allowance for itsdeferred tax assets in accordance with Statement of Financial AccountingStandards No. 109 and in consideration of three consecutive years of losses.Accordingly, the Company has not recognized an income tax benefit associatedwith the loss from operations in the years 2003, 2002 and 2001.

 

*Loss from ContinuingOperations*

 

Loss from continuing operations amounted to $1,289,000 for the year endedDecember 31, 2003 as compared to a loss of $1,713,000 for the year endedDecember 31, 2002 as a result of the items discussed above.

 

#### *Discontinued Operations*

 

In the third quarter of 2002, the Company adjusted its estimate ofremaining accrued liabilities to exit the clinical laboratory testing businessbased upon new developments.   Theliability was reduced to $855,000 as of September 30, 2002.  The major component of the remaining accrualas of September 30, 2002 was estimated lease exit and facility related costs($532,000) with the remainder for health care claims, other regulatory auditadjustments, and for other miscellaneous costs associated with exiting thisbusiness segment. This resulted in recording an after tax gain of $225,000 inthe third quarter of 2002.     See alsoNote 13 of Notes to Consolidated Financial Statements hereunder, included inPart II, Item 8 of this Form 10K.

 

#### *Net Loss*

 

The Company had a net loss of $1,289,000 in 2003 as compared to a netloss of $1,488,000 in 2002.

 

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**YEARS ENDED DECEMBER 31, 2002 AND 2001**

 

*Revenue*

 

Totalrevenue from continuing operations increased 4.3%, or $939,000, to $22,765,000in year 2002 from $21,826,000 in year 2001. The increase in revenue was theresult of a 15.3% increase in service revenue or $1,334,000, to $10,068,000 in2002 from $8,733,000 in 2001, partially offset by a small decrease in productrevenue of 3.0%, or $396,000, to $12,697,000 in 2002 from $13,093,000 in 2001.

 

Product Revenue.  The decrease of $396,000 in product revenuewas due primarily to decreases of product sales at the Biotech segment and adecrease of $254,000 of product sales at the Laboratory Instrumentation segment(the latter segment experienced strong sales to existing customers in the firsthalf of 2001).

 

Service Revenue.  The $1,334,000 increase in service revenuewas primarily related to strong activity in two service contracts related toHIV vaccine development and Hepatitis C work at the Biotech segment (the formerresulting from increased revenue for the Biotech segment as the result ofincreased activity from a subcontractor), and increased grant revenue at theCompany’s PCT segment.

 

*Gross Profit*

 

Overall gross profit decreased 2.3%, or $203,000, to $8,502,000 in 2002from $8,705,000 in 2001.  Product grossprofit decreased 8.8%, or $594,000, to $6,161,000 in 2002 from $6,755,000 in2001; product gross margin declined to 48.5% in  2002 from 51.6% in 2001. Services gross profit increased 20.0% or $391,000 to $2,341,000 in 2002from $1,950,000 in 2001, while service gross margin increased to 23.2% in 2002from 22.3% in 2001.

 

Product Gross Margin.     A decrease in both product gross profitand margin was associated with increased sales of higher margin catalogproducts in 2001 at the Diagnostics segment and higher raw material costs in2002, a decrease in high margin product sales at the Biotech segment in 2002,and lower revenues from instrument sales in 2002 over a relatively fixed coststructure (which includes increased costs associated with a facility leaserenewal effective in February 2002 coupled with a facility sublease thatexpired in January 2002) at the Laboratory Instrumentation segment.

 

Service Gross Margin.*    *The increase in both service gross profitand margin was primarily due to increased activity associated with two servicecontracts related to HIV vaccine development and Hepatitis C work at theBiotech segment, partially offset increased wage expense and higher facilityoperating costs at the Biotech segment in 2002.

 

*Research and Development*

 

Research and development expenditures increased 13.3%, or $308,000, to$2,611,000 in 2002 from $2,303,000 in 2001. The increased level of expenditures was associated with ongoing PCTrelated projects including optimization protocols for various tissuetypes.  In addition, there was anincrease in development work on AccuChart Plusâ, a quality control data management softwareprogram for analyzing, tracking and archiving daily run control data for monitoringtest kit performance. Since the Company’s acquisition of BioSeq Inc. in1998, the Company has invested significantly in research and development, bothin whole dollars and as a percentage of revenue, and expects to continue to doso for the foreseeable future, as it seeks to develop new applications for PCT.

 

*Selling andMarketing*

 

Selling and marketing expenses increased by 12.7%, or $370,000, to$3,286,000 in 2002 from $2,916,000 in 2001. The Company incurred significant marketing and promotion related costsin 2002 primarily associated with its introduction of the PCT BarocyclerTMat the Pittsburgh Conference industry trade show and related ongoing sales,marketing and promotion efforts associated with the September 2002 commerciallaunch of the PCT BarocyclerTM, and expects these PCT relatedactivities to continue in 2003.

 

*General and Administrative*

 

General and administrative costs increased 3.3%, or $132,000, to$4,109,000 in 2002 from $3,977,000 in 2001, due to higher wage and facilitylease and utility costs incurred in 2002 partially offset by a one time $54,000

 

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credit associated with a telecommunications claim and the cessation,commencing January 2002, of amortization of goodwill associated with theLaboratory Instrumentation segment, compared to 2001, in which the Companybenefited from the reversal of an $80,000 legal expense accrual associated withthe June 2001 legal settlement reached with Paradigm Group, LLC.  In the second quarter of 2001, the Companyincreased its provision for doubtful accounts by $82,000 based on a significantdeterioration in the financial condition of a customer in its Diagnosticssegment.

 

*Operating Income(Loss) from Continuing Operations *

 

Operating (loss) from continuing operations amounted to $(1,504,000) in2002 compared to an operating (loss) of $(491,000) in 2001.  The Diagnostics segment’s operating incomedecreased to $1,478,000 in 2002 from $1,674,000 in 2001 due to a decline inproduct gross margin.  The Biotechsegment’s operating (loss) increased to $(319,000) in 2002 from $(212,000) in2001; a 14.3% increase in service revenues coupled with an increase in servicegross margin was more than offset by increased sales and marketing expenses andincreased general and administrative expenses. The operating loss of the PCT segment increased to $(2,156,000) in 2002from $(1,493,000) in 2001 due to increased research and development costsassociated with the final phases of product development and advanced prototypemanufacture and increased sales, promotion and marketing costs associated withthe commercial launch, in late September of 2002, of the PCT BarocyclerTM.

 

The Company continues evaluate the market for the PCT BarocyclerTM,as the sales cycle appears to be longer in duration than originallyenvisioned.  While the Company believesstrongly in the benefits of PCT’s novel technology, the market potential of theexisting PCT BarocyclerTM appears uncertain. The manufacture of PCTproducts at the laboratory instrument segment of the business was part of theCompany’s plan to return BBI Source Scientific, Inc. to profitability in year2003.  The Company intends to evaluateother applications and products utilizing PCT , including expansion of the PCTproduct line, and to reexamine the core contract manufacturing business of BBISource Scientific, Inc.    If theCompany is unable to execute its business plans related to PCT, we may berequired to write down the value of our intangible long-lived assets andgoodwill in future periods.

 

*Interest Expense*

 

Interest expense decreased to $248,000 in 2002 from $438,000 in2001.  The Company redeemed theremaining $2,040,000 (face value) of outstanding 3% Senior SubordinatedConvertible Debentures (“Debentures”), which were originally issued in August2000, plus accrued interest and a premium of $190,000 (which was charged tointerest expense) in early 2001. Interest expense in  2001 alsoincluded interest on the Company’s line of credit, which was terminated by theCompany in February 2001.  Both years’include interest expense associated with the Company’s outstanding mortgage.

 

*Income Taxes*

 

In 2000, the Company established a full valuation allowance for itsdeferred tax assets in accordance with Statement of Financial AccountingStandards No. 109 and in consideration of three consecutive years of losses;accordingly, the Company has not recognized an income tax benefit associatedwith the loss from continuing operations in 2002 and 2001, as these tax assetshave been fully reserved for.  TheCompany incurred state income and franchise tax expense of approximately $3,000and $16,000 in 2002 and 2001, respectively. 

 

*Loss from ContinuingOperations*

 

Loss from continuing operations amounted to $1,713,000 for the yearended December 31, 2002 as compared to a loss of $887,000 for the year endedDecember 31, 2001 as a result of the items discussed above.

 

#### *Discontinued Operations*

 

On February 20, 2001, the Company sold the business and certain assetsand liabilities of its wholly-owned subsidiary BBICL to a third party.  The Company retained certain other assetsand liabilities of BBICL, primarily property, plant and equipment, togetherwith the facility lease subsequent to the closing date;  see also Note 13 of Notes to ConsolidatedFinancial Statements hereunder, included in Part II, Item 8 of this Form 10K.The Company

 

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wrote down all of the retained assets not otherwise redistributed toother business units to their estimated net realizable value.

 

The Company accrued $710,000 as of December 31, 2002 for its estimateof remaining liabilities to exit the clinical laboratory testing business. Themajor component of this remaining accrual is estimated lease exit and facilityrelated costs ($504,000) with the remainder for health care claims, other regulatory audit adjustments, and forother miscellaneous costs associated with exiting this business segment. TheCompany adjusted its estimated remaining liability in the third quarter andrecorded an after tax gain of $225,000.

 

Revenues from discontinued operations, net of intercompanyeliminations, were $973,000, in the period January 1, 2001 to February 20,2001.  Operating (losses) fromdiscontinued operations was $0 for the year ended December 31, 2002 and were $0and $(136,000) for the years ended December 31, 2002 and 2001, respectively.The Company recorded a gain of $4,334,000, net of taxes of $969,000, in2001.  Income (loss) from discontinuedoperations was $225,000 for the year ended December 31, 2002 as discussedabove, and $4,334,000 for the year ended December 31, 2001. The Company utilizedprior period net operating loss carryforwards, previously reserved for by theCompany in 2000, to partially offset the tax effect of this gain.  Additionally, the Company took a tax benefitof $364,000 related to stock option exercises that was not previously recordedas the Company was in a loss position; this tax benefit was recorded as acredit to additional paid-in capital in the first quarter of 2001.

 

In accordance with a transition services agreement, the Companyoperated the clinical laboratory business on behalf of the buyer during theperiod February 20, 2001 through December 2001 although most operations ceasedactivity by the end of June 2001. All of the revenues generated by, andsubstantially all costs associated with operating the business subsequent tothe closing date of the transaction were the responsibility of the purchaser. Aportion of the proceeds from this sale were used to redeem all outstandingDebentures and to retire the Company’s line of credit in the first quarter of2001**.**

 

#### *Net Income (Loss)*

 

The Company had a net (loss) of ($1,488,000) in 2002 as compared to netincome of $3,448,000 in 2001.  The 2002net (loss) included an after-tax gain of $225,000 from discontinued operations,whereas in 2001, the Company recorded an after-tax gain of $4,334,000associated with discontinued operations.

 

# ***LIQUIDITY AND FINANCIALCONDITION***

 

As of December 31, 2003, the Company had approximately $7.7 million inworking capital.   The Company had cashof $967,185 at December 31, 2003 compared to cash of $975,649 at December 31,2002.  The Company experienced operatinglosses from continuing operations of $1,014,000 and $1,504,000 for the yearsended December 2003 and 2002, respectively. It is anticipated there may be additional working capital requirementsin year 2004 associated with ongoing PCT BarocyclerTM sales andmarketing activities, together with additional research and developmentactivities in order to expand the PCT product line; the existing PCT productline has experienced lower than expected sales since commercial launch inSeptember 2002 associated with a longer than expected selling cycle. Management has met its recent historical cash flow needs by managing itsworking capital, which includes steps to minimize and/or defer capitalexpenditures, and utilizing proceeds from the February 2001 sale of one of itsbusiness segments.  It plans to manage its future liquidity needs throughcost reductions, additional selling initiatives, and utilization of a line ofcredit as discussed further hereunder.

 

The Company provided $454,000 of net cash from operations in the yearended December 31, 2003, as compared to net cash (used) in operations of($200,000) for the year ended December 31, 2002.  In year 2003, the Company incurred a lower operating loss,increased collections of accounts receivable and reduced its level of inventoryas compared to year 2002.   Theoperational use of cash during 2002 was primarily the result of a largeroperating loss incurred coupled with the buildup of PCT raw materialsinventory, partially offset by an increase in trade accounts payable and anincreased level of cash collections on outstanding accounts receivable.

 

Cash used in investing activities for theyear ended December 31, 2003 was $110,000 compared to $625,000 during year2002. The decline in cash used for investing in 2003 was due to managements’decision to reduce and/or defer capital expenditures, whereas in year 2002,capital expenditures included the purchase of a DNA Sequencer at the Company’sBiotech segment and the construction of several preproduction PCT BarocyclersTM   as demonstration units.

 

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Cash used in financing activities for theyear ended December 31, 2003 was $64,000 compared to cash used of $392,000during 2002.  In early 2002, the Companypledged $1,000,000 via a deposit in an interest bearing escrow account at afinancial institution; this was partially offset by repayment to the Company ofa loan to Richard T. Schumacher as discussed further below.

 

In February 2004, the Company entered into athree year, $2,500,000 line of credit agreement with a private lender.  The line of credit bears interest at thebase rate plus 3%, carries commercially standard unused line and collateralmanagement fees (payable monthly), and is collateralized by trade accountsreceivable and inventory of the Company. Borrowings under the line are limited to commercially standard terms andpercentages of accounts receivable at present. The line of credit containscovenants regarding maintenance of minimum debt service coverage ratios, andprovides certain restrictions on the payments of dividends and incurringadditional debt.

 

Based on current forecasts and the February 2004 establishment of aline of credit as discussed above, management believes the Company hassufficient liquidity to finance operations for the next twelve months. Management’s forecasts involve assumptions that could prove to beincorrect. If the Company continues to incur operating losses or incursnegative cash flows from operations,  itmay need to raise additional funds.  There can be no assurance that thesefunds will be available when required on terms acceptable to the Company, if atall.  If adequate funds are not available when needed, the Company may berequired to further reduce certain of its costs and delay, scale back, oreliminate certain of its activities, any of which could have a material adverselong term effect on its business, financial condition and results ofoperations.  The Company is considering various sources of additionalfinancing, including but not limited to, sale of business segments, strategicalliances and private placements of debt or equity securities, which couldresult in dilution to the Company’s stockholders.  On October 25, 2002, theCompany retained an investment banking firm to advise the Company in theevaluation of strategic opportunities aimed at increasing shareholder value andliquidity by increasing the capital needed for growth; their engagementcontinues at this time.

 

**Contractual Obligations**

The followingis a summary of the Company’s future contractual obligations as of December 31,2003:

 
|                                                 |   | **Payments  Due by Period** |          |
|------------------------------------------------------|--------|-----------------------------|---------------|
| **Contractual Obligations**                          |   | **Total**                   |          | **Less than  1 year** |   | **1-3  years** |   | **4 - 5  years** |   | **More  than  5  years** |   |
|                                                 |   |                        |          |   |   |   |   |   |   |   |   |
| Mortgage payments*                                   |   | $                           | 3,654,000     |   | $ | 287,000 |   | $ | 575,000 |   | $ | 575,000 |   | $ | 2,217,000 |   |
| Operating Lease Obligations                          |   | 56,000                      |          | 21,000 |   | 35,000 |   | — |   | — |   |
| Note Payable                                         |   | 16,000                      |          | 5,000 |   | 11,000 |   |   |   |   |   |
| Real Estate Facility Leases **                       |   | 3,607,000                   |          | 1,208,000 |   | 1,858,000 |   | 541,000 |   | -0- |   |
| Minimum future royalty payments***                   |   | —                      |          | — |   | — |   | — |   | — |   |
| Obligations relating to Discontinued  Operations**** |   | 408,000                     |          | 193,000 |   | 115,000 |   | 20,000 |   | 80,000 |   |
| **Total Contractual  Obligations*******              |   | **$**                       | **7,741,000** | ** ** | **$** | **1,714,000** | ** ** | **$** | **2,594,000** | ** ** | **$** | **1,136,000** | ** ** | **$** | **2,297,000** | ** ** |

 

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* Future monthly payments on this mortgage include principal andinterest, based on a 20-year amortization schedule with a balloon paymentrepresenting the remaining balance due in full on March 10, 2010.  During the first five years, the notecarries an interest rate of 9.75%; after five years the rate charged will be..75% greater than the Corporate BaseRate then in effect. The information presented in the table above is presentedusing an assumed annual mortgage interest rate of 9.75% for all periodspresented.

 

** The Company leases certain office space, repository,research and manufacturing facilities under operating leases with various termsthrough October 2007. The real estate leases for facilities located in Marylandinclude renewal options at either market or increasing levels of rent. TheCompany leases 27,000 square feet of space in Garden Grove, California whereits BBI Source business unit manufactures laboratory instruments. The lease forthis facility expires January 31, 2005 and there is currently no extension orrenewal option.   In March 2004, the Companyentered into an eleven year lease agreement with an existing landlord for

 

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approximately 65,160 sq ft of new repository space located inFrederick, MD;  this lease is scheduledto take effect in two stages, August 1, 2004 and August 1, 2005.  Assuming occupancy of the new facility bythe Company on August 1, 2004, the landlord has agreed to terminate in full theCompany’s remaining obligations pursuant to an existing facility lease inFrederick, MD which was scheduled to terminate in November 2006.   Incremental minimum lease payments pursuantto the new lease (which are net of savings associated with the concurrenttermination of the existing lease) would amount to $55,900 in year 2004,$885,000 in years 2005-2006, $1,755,000 in years 2007-2008, and $6,563,000thereafter; these amounts are not included in the table above as this lease issubject to cancellation at the sole option of the Company on or before April30, 2004 without penalty.

 

***The Company acquired in 1998 all the remainingoutstanding common stock of BioSeq, Inc., a development stage company involvedwith PCT. In accordance with the provisions of a technology transfer agreementassumed in the transaction, the Company is obligated to pay a 5% royalty on netsales (until March 2016) of future sales by any entity of the Company utilizingPCT, with required minimum royalty payments having ended in 2003. The Companyannounced the availability of its PCT products for commercial sale in thelatter part of year 2002.

 

**** In December 2000, the Company made a decision toexit the clinical laboratory testing services segment and in February 2001, BBIClinical Laboratories, Inc., a wholly-owned subsidiary of the Company.  The Company’s estimate of remaining shortand long term accrued liabilities to exit the clinical laboratory testingbusiness is $408,000 as of December 31, 2003.  See also Note 13 of Notes to Consolidated Financial Statementshereunder, included in Part II, Item 8 of this Form 10K; future reductions inamounts due pursuant to the Lease Termination Agreement are not reflected inthe above table .

 

*****In February 2004, the Company entered into a three year,$2,500,000 line of credit agreement with a private lender; any amounts duepursuant to this agreement are not included in the table.

 

*Related Party Transaction*

 

As of December 31, 2001, the Company had entered into a one year loanof $525,000 to Richard T. Schumacher, the Company’s former Chairman and ChiefExecutive Officer and a current Director of the Company,  renewable at the Company’s option, andcollateralized by 90,000 of Mr. Schumacher’s shares of the Company’s common stock.This loan constituted an increase from the $350,000 that had been loaned as ofSeptember 30, 2001.  Interest on theloan was payable at the annual rate of 7%, of which $8,216 was remitted to theCompany in the spring of 2003; in February 2004, the Company’s Board ofDirectors determined this payment constituted the full amount owed and that theCompany and Mr. Schumacher no longer have any further dispute over thisobligation.  As of December 31, 2001,the loan was shown on the balance sheet as a decrease to stockholdersequity.  In January 2002, the principalof these loans was repaid in full with a portion of the proceeds of the loansdescribed in the following sentence. The Company’s loans were replaced by the Company’spledge of a $1,000,000 interest bearing deposit at a financial institution tosecure the Company’s limited guaranty of loans in the aggregate amount of$2,418,000 from the financial institution to an entity controlled by Mr.Schumacher.  The loans are personallyguaranteed by Mr. Schumacher.  TheCompany’s pledge is secured by a junior subordinated interest in the collateralprovided by Mr. Schumacher to the financial institution. The remainingcollateral as of December 31, 2003 includes substantially all of his commonstock holdings in the Company.  TheCompany’s original loan and subsequent pledge of $1,000,000 were made to assistMr. Schumacher in refinancing indebtedness related to, among other things, hisdivorce settlement and to enable him to avoid the need to sell his common stockholdings in the Company on the open market to satisfy his debts.  The Company’s Board of Directors and, withrespect to the decision to pledge the $1,000,000 cash collateral, a specialcommittee of the independent directors, evaluated a number of options andconcluded that the original loan to Mr. Schumacher and the subsequent pledgewere the best option and in the best interests of the Company’s stockholders inthe belief that it would, among other things, avoid selling pressure on theCompany’s common stock and relieve the financial pressures on Mr. Schumacherthat could otherwise divert his attention from the Company.    In January 2003, the $1,000,000 accountwas used to satisfy the Company’s limited guaranty obligation. The Company hasnow satisfied its obligation under the limited guaranty and pledge with thefinancial institution.  The Companycontinues to maintain its junior interest in collateral pledged by Mr.Schumacher to the financial institution. The remaining collateral includescertain of Mr. Schumacher’s common stockholdings in the Company. The Companyreflected the $1,000,000 pledge as restricted cash on its balance sheet untilthe cash was used to satisfy the Company’s limited guaranty in January 2003 andsince then has reflected a $1,000,000 loan receivable on its balance sheet instockholder’s equity.

 

On February 14, 2003, the Company announced that its Board of Directorsterminated Mr. Schumacher as Chairman and Chief Executive Officer, effectiveimmediately.  Mr. Schumacher remains aDirector of the Company. Kevin W. Quinlan, President and Chief OperatingOfficer, continued to lead day-to-day operations.  A special committee of the Board of Directors was appointed tooversee the management of the affairs of the Company until such time as a newChief Executive Officer is employed.

 

On July 9, 2003, the Company announced that Mr. Schumacher agreed toaccept an engagement with the Company as an Executive Project Consultant toadvise the Company with respect to the strategic direction of the Company’s PCTand BBI Source

 

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Scientific activities and the Company’s ownership interest in PanacosPharmaceuticals, Inc.  BBI SourceScientific, Inc. is the Company’s California-based instrument subsidiary, whichdeveloped and manufactures the PCT BarocyclerTM instrument.  As part of this engagement, Mr. Schumacherhas continued to reevaluate the ongoing business prospects for both theCompany’s Laboratory Instrumentation segment and PCT activities. On February 9,2004, the Company announced it had extended until December 31, 2004 theExecutive Consultant Agreement it has with Mr. Schumacher.  Under the terms of the Consulting Agreement,Mr. Schumacher is serving in an advisory role directing the Company’s PCT andBBI Source Scientific activities, the Company’s interest in PanacosPharmaceuticals, Inc. and such other duties as the President or the Board ofDirectors of the Company assigns to him.  In connection with his Consulting Agreement, Mr. Schumacher is beingpaid an annualized salary of $250,000. In addition to his salary, Mr. Schumacher may receive, in the discretionof the Company’s Board of Directors, a bonus in an amount to be determined bythe Board of Directors in recognition of the successful completion of hisduties and responsibilities under the agreement, and he is also eligible toparticipate in the Company’s health and medical insurance, disabilityinsurance, group life insurance and group travel insurance, and 401(k)retirement plans.

 

**Recent AccountingStandards**

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.” This Statement amendsand clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  This Standard is effectivefor contracts entered into or modified after June 30, 2003. The application ofSFAS No. 149 has not had a material effect on the Company’s consolidatedfinancial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.”This Statement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  This Standard is effective forfinancial instruments entered into or modified after May 31, 2003. Theapplication of SFAS No. 150 has not had a material effect on the Company’sconsolidated financial statements.

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of VariableInterest Entities, an Interpretation of ARB 51.” The primary objectives of FINNo. 46 are to provide guidance on the identification of entities for whichcontrol is achieved through means other than through voting rights (“variableinterest entities” or “VIEs”) and how to determine when and which businessenterprise should consolidate the VIE. This new model for consolidation appliesto an entity for which either: (a) the equity investors (if any) do not have acontrolling financial interest; or (b) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties. In addition, FIN No. 46requires that both the primary beneficiary and all other enterprises with asignificant variable interest in a VIE make additional disclosures. The Companyis required to apply FIN No. 46 to all new variable interest entities createdor acquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the Company is required to apply FIN No. 46on July 1, 2003. The application of FIN 46 has not had a material effect on theCompany’s consolidated financial statements.

 

**Forward - LookingInformation**

 

ThisAnnual Report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Thesestatements include, but are not limited to statements regarding:

 

•                  thetiming of new product introductions;

 

•                  theCompany’s goal to expand its product lines;

 

•                  marketacceptance and the commercial success of the Company’s PCT products;

 

•                  theCompany’s inventory;

 

•                  businessstrategies;

 

•                  approvalsand clearances from government agencies for the Company’s products;

 

•                  dependenceon significant customers and contracts;

 

•                  increasedresearch and development expenses relating to PCT;

 

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•                  expectationsof international sales;

 

•                  therecoverability of the loan receivable from the former Chairman and ChiefExecutive Officer;

 

•                  availabilityof debt and equity financing;

 

•                  generaleconomic conditions; and

 

•                  the Company’s financial performance andbusiness operations.

 

In some cases, forward-looking statements areidentified by terms such as “may,” “will,” “should,” “could,” “would,”“expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,”“predicts,” “potential” and similar expressions intended to identifyforward-looking statements. These statements are only predictions and involveknown and unknown risks, uncertainties, and other factors that may cause theCompany’s actual results, levels of activity, performance, or achievements tobe materially different from any future results, levels of activity,performance, or achievements expressed or implied by such forward-lookingstatements. Also, these forward-looking statements represent the Company’sestimates and assumptions only as of the date of this report. Except asotherwise required by law, the Company expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward-looking statement contained in this report to reflect any change in theCompany’s expectations or any change in events, conditions or circumstances onwhich any of the Company’s forward-looking statements are based. Factors thatcould cause or contribute to differences in the Company’s future financialresults include those discussed in the risk factors set forth in Item 7 of thisreport as well as those discussed elsewhere in this report. The Company qualifies all of our forward-lookingstatements by these cautionary statements.

 

RISK FACTORS

 

This report contains forward-looking statements that involve risks anduncertainties, such as statements of our objectives, expectations andintentions.  The cautionary statementsmade in this report should be read as applicable to all forward-lookingstatements wherever they appear in this report.  Our actual results could differ materially from those discussedherein.  Factors that could cause orcontribute to such differences include those discussed below, as well as thosediscussed elsewhere in this report.

 

WE RELY ON PURCHASE ORDERS AND CONTRACTS FROM A SMALL NUMBER OFCUSTOMERS FOR A LARGE PORTION OF OUR REVENUES; THE LOSS OF BUSINESS FROM THESECUSTOMERS COULD MATERIALLY REDUCE OUR REVENUES AND HARM OUR BUSINESS.

 

Purchase orders account for the majority of our orders; none of ourcustomers have contractually committed to make future product purchases fromus. In 2003, our three largest commercial customers, Kyowa, American Red Crossand Quest, together accounted for approximately 9.7% of our revenues. Inaddition, the various agencies of the National Institutes of Health, includingthe National Institutes of Allergies and Infectious Disease, the NationalCancer Institute and the National Heart Lung and Blood Institute, in theaggregate, accounted for approximately 25% of our revenues in 2003. Each agencywithin the National Institutes of Health, however, makes independent purchasingdecisions. The loss of any major customer, including any agency within theNational Institutes of Health, the failure of any agency of the NationalInstitutes of Health to fully fund any contract or renew any contract with us,or a material reduction in any major customer’s purchases would materiallyreduce our revenues and our operating results.

 

IF WE ARE UNABLE TO INCREASE OUR SALES OF QUALITY CONTROL PRODUCTS TOEND-USERS OF INFECTIOUS DISEASE TEST KITS, THEN OUR FUTURE REVENUES COULD BEIMPACTED.

 

Currently, we sell most of our quality control products for infectiousdisease test kits to test kit manufacturers and regulators, which is arelatively small market. However, we also sell our quality control products toend-users of infectious disease test kits, including hospital laboratories,blood donor testing centers, public health laboratories and commerciallaboratories. This end-user market is a larger market which has not yet becomeaccustomed to using quality control products to monitor test results, but whichwe believe is a growing market. Currently, we expect an increase in both thefrequency of use and the number of products used by our current end-usercustomers. However, these end-users of infectious disease test kits may notincrease their use of our products. Further, large manufacturers anddistributors of quality control products that have historically sold to thenon-infectious disease market and that have greater financial, manufacturingand marketing resources than we have could begin selling their products to theend-users of infectious disease test kits. This would increase competition foran adequate supply of the rare specimens of plasma and serum necessary forcertain of our quality control and run control products. If the end-user marketfor quality control products for infectious disease testing

 

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does not develop further, or if we are unable to increase sales of ourproducts to this market, our future revenues could be substantially less thanwe have projected.

 

IF OUR BBI BIOSEQ, INC. AND BBI SOURCE SCIENTIFIC, INC. SUBSIDIARIESCONTINUE TO HAVE SUBSTANTIAL OPERATING LOSSES, THEN WE MAY NOT BE ABLE TOREALIZE THE BOOK VALUE OF THEIR ASSETS.

 

Our BBI BioSeq subsidiary has incurred significant operating losses,since our acquisition of that company in September 1998. This subsidiary maynot be successful in marketing and further developing its technology, and itstechnology may never achieve commercial viability. Accordingly, our BBI BioSeqsubsidiary may never become profitable and it may be necessary to write offsome or all of the current net book value of its intangible assets related toits patents.

 

As a result of our July 1997 acquisition of Source Scientific, Inc., werecorded approximately $2,200,000 of goodwill. Since this acquisition, our BBISource Scientific subsidiary has also incurred significant cumulative operatinglosses   That subsidiary may continue tohave operating losses and may never become profitable. If operating lossescontinue, it may be necessary to write off some or all of the remaininggoodwill associated with BBI Source Scientific .

 

IF WE ARE UNABLE TO OBTAIN BOTH THE NECESSARY REGULATORY APPROVALS ANDSUBSTANTIAL FUNDS FOR OUR BBI BIOSEQ SUBSIDIARY’S PRODUCTS, OR IF DEMAND FORNEW PRODUCTS AND SERVICES FAILS TO MATERIALIZE, OUR FUTURE REVENUES AND INCOMEWILL BE LESS THAN WE HAVE PROJECTED.

 

Our BBI BioSeq subsidiary, in conjunction with our other subsidiarieshas developed products that involved significant development, preclinical andclinical testing,  regulatory approvalsand investment of substantial funds prior to their commercialization. Our BBIBioSeq subsidiary and BBI Source Scientific subsidiary have developed apressure cycling technology process into a working laboratory instrument nowavailable for commercial sale. We first introduced our BarocyclerTM instrumentand related disposable PULSETM tubes based upon pressure cycling technology forcommercial sale in September 2002. Demand for these commercial applications of pressure cycling technologymay not materialize as expected. As a result, we may not be successful inselling the BarocyclerTM instrument and disposable PULSETM tubes in sufficientnumbers to be commercially viable.

 

In addition, we may not be successful in further developing pressurecycling technology into other commercially viable products and services, orsuch activities may take longer than currently expected; and if successful insuch development activities, demand for such products and services may notdevelop as we anticipate.

 

While we have eleven issued U.S. patents and four foreign patents as ofDecember 31, 2003 relating to pressure cycling technology, certain pressurecycling technology applications may not fall within the claims of those issuedpatents.  Further, individuals andgroups utilizing pressure cycling technology may not be required to licensesuch technology from us. Further, our future revenues and income could be lessthan we have projected.

 

BECAUSE OF THE LENGTHY SALES CYCLES OF OUR PCT PRODUCTS, WE MAY INCURSIGNIFICANT EXPENSES BEFORE WE GENERATE ANY REVENUES RELATED TO THOSE PRODUCTS.

 

Our customers have required several months to test and evaluate our PCTrelated products. This increases the possibility that a customer may decide tocancel or change plans, which could reduce or eliminate our sales to thatcustomer. As a result of this lengthy sales cycle, we have incurred and maycontinue to incur significant research and development expenses, and selling,general and administrative expenses, before we generate the related revenuesfor these products, and we may never generate the anticipated revenues if acustomer cancels or changes its plans. Factorsassociated with this sales cycle include the initial selling price of thePCT BarocyclerTM and thelimited amount of research data presently available demonstrating itscapabilities and potential. Additional refinements in PCTinstrumentation include the development of a less expensive and smaller, benchtop version of the Barocycler which was just introduced in 2004; however, therecan be no assurance that this bench top model will be successful.

 

IF THE FDA REQUIRES CLEARANCE OR APPROVAL FOR OUR PRODUCTS THAT AREDESIGNATED ONLY FOR RESEARCH AND NOT FOR DIAGNOSTIC PROCEDURES OR OUR PRODUCTSTHAT WE BELIEVE ARE EXEMPT FROM FDA CLEARANCE AND INITIATES ENFORCEMENT ACTIONFOR OUR FAILURE TO DO SO, WE WILL LIKELY EXPEND SIGNIFICANT RESOURCES TORESOLVE THE MATTER WHICH COULD HARM OUR BUSINESS.

 

In the United States, the Food, Drug, and Cosmetic Act prohibits themarketing of most IN VITRO diagnostic products until the Food and DrugAdministration either clears or approves the products through processes thatare time-consuming, expensive and uncertain. Some IN VITRO diagnostic products maybe exempt from FDA clearance or approval if they have undergone validationstudies. As of December 31, 2003, 44 of our Accurun ®   products currently on the market have met the FDA’s regulatoryrequirements.

 

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During 2003, our Accurun®   External Run Controls products accounted forapproximately 13.43% of our revenue. It is possible that the FDA may not agreethat some of these products are entitled to an exemption and may adopt adifferent interpretation of the Food, Drug, and Cosmetic Act or other laws itadministers. We believe that products which are used only for research and notin diagnostic procedures are not subject to FDA clearance or approval. Wecurrently label some of our products “for research use only” because they arenot intended for use in diagnostic procedures, and have not been cleared orapproved by the FDA. It is possible, however, that some purchasers of theseproducts may use them for diagnostic purposes rather than for research, despiteour labeling. Under any of these circumstances, the FDA could allege that someor all of these products should have been cleared or approved, or otherwisevalidated prior to marketing, and could initiate enforcement action against us.If the FDA initiates enforcement action against us, we will likely expend alarge amount of time, money, resources and management attention to resolve thematter. In addition, if we cannot obtain or are delayed in obtaining FDAclearances or approvals for our products, we may encounter delays or be unableto ever sell those products.

 

IF WE FAIL TO COMPLY WITH GOOD MANUFACTURING PRACTICES IN CONNECTIONWITH THE MANUFACTURE OF OUR MEDICAL DEVICE PRODUCTS, WE MAY NOT BE ABLE TODISTRIBUTE OUR PRODUCTS AND MAY NOT GENERATE PRODUCT REVENUES.

 

We are also subject to strict FDA good manufacturing practiceregulations which govern testing, control and documentation practices, andother post-marketing restrictions on the manufacture of our medical deviceproducts. Our IN VITRO diagnostic products and our laboratory instrumentationproducts are considered “medical device products,” as defined by the FDA.Regulatory authorities monitor our ongoing compliance with good manufacturingpractices and other applicable regulatory requirements through periodicinspections. If we fail to comply with good manufacturing practices or otherregulatory requirements, we may not be able to obtain future pre-marketclearances or approvals, or the FDA or other regulatory agencies may imposecorrective action requirements, including total or partial suspension ofproduct distribution, injunctions, civil penalties, recall or seizure ofproducts, and criminal prosecution. Any of these events would lead to increasedcosts and a drain on resources and could reduce our revenues and operatingresults.

 

BECAUSE WE CONDUCT OUR BUSINESS WORLDWIDE, CHANGES IN INTERNATIONALREGULATORY REQUIREMENTS MAY MATERIALLY REDUCE OUR TOTAL REVENUES.

 

Our international sales accounted for approximately 20% of our totalrevenues for the year ended December 31, 2003. Our Accurun®  External Run Controls products are subject toCE Marking requirements in the European Union.

 

As of December 31, 2003, a total of 30 Accurun ®  external run control products designedfor the European market have met the regulatory requirements to carry the CEMark under the European Union’s In Vitro Diagnostics (IVD) Directive. The IVDDirective describes criteria that must be met and steps that must be taken forIVD products to be qualified for sale in European Union countries beginning atthe end of 2003. In the IVD Directive, the European Union classifies productsaccording to the risks associated with their failure or misuse, and establishesa process leading to a CE Mark (approval to sell a product in EU countries) foreach category. Changes in international regulatory requirements and policies,including both changes in existing restrictions and future restrictions onimportation of blood and blood derivatives, could result in reducedinternational sales, which may materially reduce our total revenues and income.

 

IF WE ARE UNABLE TO OBTAIN A STEADY AND ADEQUATE SUPPLY OF RARESPECIMENS OF PLASMA AND SERUM, THEN WE MAY BE UNABLE TO PRODUCE OUR QUALITYCONTROL PANEL PRODUCTS AND OUR ACCURUN®  EXTERNAL RUN CONTROLSPRODUCTS WHICH WOULD HARM OUR BUSINESS.

 

We manufacture our diagnostic products, including our quality controlpanel products and Accurun®   External Run Controls products, from humanplasma and serum which we obtain from nonprofit and commercial blood centers inthe United States and from similar sources throughout the world. Our BBIDiagnostics business unit, which manufactures and sells these diagnosticproducts, accounts for approximately 52% of our revenues. Our quality controlpanel products and Accurun®   External Run Controls products contain rareplasma specimens that we collect from individuals who have been infected withparticular diseases. The specimens are rare because we can collect them onlyduring the brief period of time when the markers for a particular disease in aninfected individual are converting from negative to positive. It is difficultto identify such infected individuals and to collect specimens from them duringthe brief period of time when the markers for a particular disease areconverting from negative to positive. As a result, quantities of thesespecimens are limited. As we sell our quality control panel products andAccurun® External Run Controls products, we must find replacement specimensthat are equally rare. We may also face competition to obtain these specimenswhich could further limit our ability to obtain the specimens and to produceour quality control panel products and Accurun® External Run Controls products.A limit in our ability to produce our products would reduce our future revenuesand operating results.

 

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IF WE ARE NOT ABLE TO REACT QUICKLY TO TECHNOLOGICAL CHANGE, WE MAY NOTBE ABLE TO COMPETE EFFECTIVELY.

 

The infectious disease test kit industry is characterized by rapid andsignificant technological change, and changes in customer requirements. As aresult, our ability to continue to compete effectively in this industry dependsupon our ability to enhance our existing products and to develop or acquire,and introduce in a timely manner, new products that take advantage oftechnological advances and respond to customer requirements. We may not besuccessful in developing and marketing such new products or enhancements to ourexisting products on a timely basis, if at all, and such products may notadequately address the changing needs of the marketplace. Furthermore, rapidtechnological development may result in our products or services becomingobsolete or noncompetitive before we recover our investment in research,development and commercialization.

 

IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TOCOMPETE EFFECTIVELY.

 

Our ability to compete effectively with other companies depends in parton our ability to maintain the proprietary nature of our technologies andproducts. We rely primarily on a combination of trade secrets andnon-disclosure and confidentiality agreements to establish and protect ourproprietary rights in our technology and products. For the pressure cyclingtechnology developed by our BBI BioSeq subsidiary, we have eleven U.S. and fourforeign patents issued as of December 31, 2003. If we have not adequatelyprotected our technology, or if our competitors misappropriate our intellectualproperty, we could lose market share and our future revenues and operatingincome could be significantly less than projected.

 

WE MAY BESUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS,OR DEMANDS THAT WE LICENSE THIRD-PARTY TECHNOLOGY, WHICH COULD RESULT INSIGNIFICANT EXPENSE AND PREVENT US FROM SELLING ONE OR MORE OF OUR PRODUCTS.

 

We have in the past been, and may in the future be, notified that wemay be infringing intellectual property rights possessed by other thirdparties. We cannot guarantee that infringement claims by third parties or otherclaims for indemnification resulting from infringement claims will not beasserted in the future or that such assertions, if proven to be true, will notmaterially and adversely affect our business, financial condition and resultsof operations.  We cannot predict the extent to which we might be requiredto seek licenses, pay royalties or alter our products so that they nolonger infringe the rights of others. We also cannot guarantee that the terms ofany licenses we may be required to seek or royalties we may be required topay will be reasonable. Similarly, changing our products or processes to avoidinfringing the rights of others may be costly or impractical and could detractfrom the value of our products. If a judgment of infringement were obtainedagainst us, we could be required to pay substantial damages and a court couldissue an order preventing us from selling one or more of our products. Furtherthe cost and diversion of management attention brought about by such litigationcould be substantial, even if we were to prevail. Any of these events couldresult in significant expense to us and may materially harm our business andour prospects.

 

IF WE ARE UNABLE TO ATTRACT AND RETAIN A NEW CHIEF EXECUTIVE OFFICER,THEN WE MAY NOT BE SUCCESSFUL IN FULLY EXECUTING OUR BUSINESS PLAN.

 

On February 14, 2003, we announced the termination of our Chairman andChief Executive Officer; he remains a Director of the Company.  A special committee of our Board ofDirectors was appointed to oversee management of the affairs of the Companyuntil such time as a new Chief Executive Officer is employed.   There are a limited number of qualifiedcandidates for the position with the necessary technical background and managementexperience.  We are competing for thosecandidates with companies that are larger and have greater financial resourcesthan we.  If we are not able to attractand retain a new, suitably qualified, Chief Executive Officer within areasonable period of time, we may not be able to properly evaluate ourstrategic choices, our existing management may not be able to focus theirattention on all necessary management matters and we may not be successful infully executing our business plan.

 

IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED SCIENTIFIC ANDMANAGEMENT PERSONNEL, THEN WE MAY NOT BE ABLE TO DEVELOP AND REFINE OURPRODUCTS AND SERVICES.

 

Our products and services are highly technical and our key personnelmust have specialized training or advanced degrees in order to develop andrefine these products and services. There are a limited number of qualifiedscientific and management personnel who possess the technical backgroundnecessary to adequately understand and improve our products and services. Wecompete for these personnel with other companies, academic institutions,government entities and other organizations engaged in research and developmentof products similar to ours. If we are unable to attract and retain scientificand management personnel with the appropriate credentials who are capable ofdeveloping and refining our products and services, then our products andservices could become inaccurate or unreliable, or could fail to obtain FDAapproval and we may be unable to deliver new products.

 

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WE MAY NOT BE ABLE TO FULLY COLLECT THE PRINCIPAL AND INTEREST DUE ON A$1,000,000 RECEIVABLE FROM OUR FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICERWHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.

 

As of January 2003, we recorded a $1,000,000 receivable from our formerChairman and Chief Executive Officer, Richard T. Schumacher. We continue tomaintain a junior security interest in collateral pledged by Mr. Schumacher toa financial institution. The remaining collateral as of December 31, 2003includes certain of Mr. Schumacher’s shares of our common stock. The collateraland personal assets of Mr. Schumacher may not be sufficient to permit us tofully recover the principal, interest and other costs associated with thisreceivable. If the value of the collateral decreases, we may have to write downor write off the receivable. Therefore, we cannot be certain that we willcollect the full amount of the receivable. Our failure to collect all or a portion of this receivable could harmour business and financial condition.

 

A FEW STOCKHOLDERS CONTROL A SIGNIFICANT PERCENTAGE OF VOTING POWER ANDMAY EXERCISE THEIR VOTING POWER IN A MANNER ADVERSE TO OTHER STOCKHOLDERS’INTERESTS.

 

Our former Chairman and Chief Executive Officer, Mr. Richard T.Schumacher, and our other existing officers and directors collectively havevoting control over approximately 15% of the outstanding shares of our commonstock as of December 31, 2003. In addition, approximately 22.60% of theoutstanding shares of our common stock as of December 31, 2003 were controlledby Mr. Richard Kiphart, an unaffiliated investor.   Accordingly, these stockholders, should they choose to act in concert,are in a position to exercise a significant degree of control and tosignificantly influence stockholder votes on the election of directors,increasing the authorized capital stock, and authorizing mergers and sales ofassets. These stockholders may act in a manner that is adverse to your personalinterests.

 

PROVISIONS IN OUR CHARTER AND BY-LAWS AND OUR SHAREHOLDER RIGHTS PLANMAY DISCOURAGE OR FRUSTRATE STOCKHOLDERS’ ATTEMPTS TO REMOVE OR REPLACE OURCURRENT MANAGEMENT.

 

Our amended and restated articles of organization and restated bylawscontain provisions that may make more difficult or discourage changes in ourmanagement that our stockholders may consider to be favorable. These provisionsinclude:

 

  **•**  a classified board of directors;

  •  advance notice for stockholder nominations tothe board of directors;

  •  limitations on the ability of shareholders to remove directors;and

  •  a provision that allows a majority of the directors to fillvacancies on the board of directors.

 

These provisions could prevent or frustrate stockholders’ attempts tomake changes in our management that our stockholders consider to be beneficial.

 

On February 27, 2003, our Board of Directors adopted a ShareholderPurchase Rights Plan.  This Plan mayhave the effect of discouraging or preventing a change in control.

 

All of these provisions could limit the price that our stockholdersmight receive in the future for shares of our common stock.

 

THE EXERCISE OF ALL OUTSTANDING OPTIONS AND THE CONVERSION OF ALLOUTSTANDING WARRANTS COULD HAVE AN ADVERSE EFFECT ON THE PRICE OF OUR COMMONSTOCK.

 

We have 1,245,825 options outstanding as of December 31, 2003 which areexercisable at various prices.  Inaddition, we have outstanding warrants, with various strike prices, which areexercisable for a total of 135,556 shares of our common stock as of December31, 2003. The options and warrants exercisable as of December 31, 2003represent approximately 20.2% of our issued and outstanding common stock basedon the number of shares issued and outstanding as of December 31, 2003 on afully diluted basis. The exercise of our outstanding options and warrants couldplace downward pressure on the price of our common stock.

 

WE ARE INCURRING SIGNIFICANT LOSSES AND CANNOT ASSURE THAT WE WILLBECOME PROFITABLE.

 

We incurred net losses in five out of the last six years.  For the year ended December 31, 2003, weincurred a net loss of $1,289,000.  Forthe year ended December 31, 2001 we had net income of $3,447,000, but theresults for that year included $4,334,000 from discontinued operations.  We cannot assure that we will becomeprofitable or that we can maintain profitability if we attain it.

 

41

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It is anticipated that we may need additional future working capitalrequirements in connection with PCT BarocyclerTM sales and marketingactivities as this segment of the business continues to experience lower thanexpected product sales since commercial launch in September 2002 associatedwith a longer than expected selling cycle. Management has met its recent historical cash flow needs by managing itsworking capital and utilizing proceeds from the February 2001 sale of one ofits business segments.  We plan to manage its future liquidity needsthrough cost reductions and additional selling initiatives.  If revenues are lower than anticipated orexpenses are higher than anticipated or if we continue to incur operatinglosses, we may require additional capital sooner than expected and there can beno assurance that we will be able to obtain additional financing or capital onacceptable terms or that we will be successful in eliminating or scaling backcertain of our activities. We may also need additional capital to grow both theDiagnostics and Biotech segments of the business. If adequate funds are notavailable when needed, the Company may be required to further reduce its fixedcosts and delay, scale back, or eliminate certain of its activities, any ofwhich could have a material adverse long term effect on its business, financialcondition and results of operations.  Weare considering various sources of additional financing, including but notlimited to, sale of business segments, strategic alliances and privateplacements of debt or equity securities.

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company is subject to interest rate risk in connection with itslong-term debt. The aggregate hypothetical loss in earnings for one year ofthose financial instruments held by the Company at December 31, 2003, that aresubject to interest rate risk resulting from a hypothetical increase ininterest rates of10 percent is less than $100,000, after-tax. The hypothetical loss wasdetermined by calculating the aggregate impact of a 10 percent increase in theinterest rate of each variable rate financial instrument held by the Company atDecember 31, 2003, that is subject to interest rate risk. Fixed rate financialinstruments were not evaluated, as the Company believes the risk exposure isnot material.

 

TheCompany is exposed to concentrations of credit risk in cash and cashequivalents and trade receivables. Cash and cash equivalents are placed withmajor financial institutions with high quality credit ratings. Tradereceivables credit risk exposure is significant as the Company derives asignificant portion of its revenues from a small number of customers.  However, this risk is mitigated by thedispersion across different industries and geographies in which the customersoperate; in addition to this, approximately 25% of 2003 consolidated revenuewas from all branches of the National Institutes of Health, a U.S. Governmentagency. The Company is exposed to credit-related risks associated with itstrade accounts receivable from foreign customers but they are denominated inU.S. dollars mitigating the currency risk.

 

42

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**ITEM 8.                      **             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

**BOSTONBIOMEDICA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCESHEETS**

** **
|                                                                                                                                                     |   | **December  31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                                     |   | **2003**          |       | **2002** |   |
|                                                                                                                                                     |   |              |       |   |   |
| ASSETS                                                                                                                                                   |   |              |       |   |   |
| CURRENT ASSETS:                                                                                                                                          |   |              |       |   |   |
| Cash and cash equivalents                                                                                                                                |   | $                 | 967,185    |   | $ | 975,649 |   |
| Marketable securities                                                                                                                                    |   | 4,071             |       | — |   |
| Accounts receivable, less allowances of  $124,283 in 2003 and $117,671 in 2002                                                                           |   | 3,495,839         |       | 3,701,105 |   |
| Inventories                                                                                                                                              |   | 6,525,018         |       | 7,094,053 |   |
| Prepaid expenses and other current assets                                                                                                                |   | 200,695           |       | 303,396 |   |
| Restricted cash (Note 12)                                                                                                                                |   | —            |       | 1,000,000 |   |
| Total current assets                                                                                                                                     |   | 11,192,808        |       | 13,074,203 |   |
|                                                                                                                                                     |   |              |       |   |   |
| Property and equipment, net                                                                                                                              |   | 4,725,523         |       | 5,826,817 |   |
|                                                                                                                                                     |   |              |       |   |   |
| OTHER ASSETS:                                                                                                                                            |   |              |       |   |   |
| Goodwill and other intangible assets, net                                                                                                                |   | 749,907           |       | 798,542 |   |
| Other long-term assets                                                                                                                                   |   | 174,208           |       | 143,807 |   |
| Total other assets                                                                                                                                       |   | 924,115           |       | 942,349 |   |
| TOTAL ASSETS                                                                                                                                             |   | $                 | 16,842,446 |   | $ | 19,843,369 |   |
|                                                                                                                                                     |   |              |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                |   |              |       |   |   |
|                                                                                                                                                     |   |              |       |   |   |
| CURRENT LIABILITIES:                                                                                                                                     |   |              |       |   |   |
| Accounts payable                                                                                                                                         |   | $                 | 1,633,263  |   | $ | 1,970,517 |   |
| Accrued employee compensation                                                                                                                            |   | 1,010,512         |       | 898,449 |   |
| Other accrued expenses                                                                                                                                   |   | 541,857           |       | 506,823 |   |
| Liabilities from discontinued operations  (Note 2)                                                                                                       |   | 192,801           |       | 302,436 |   |
| Current maturities of long term debt                                                                                                                     |   | 58,180            |       | 79,875 |   |
| Deferred revenue and other current  liabilities                                                                                                          |   | 97,508            |       | 118,609 |   |
| Total current liabilities                                                                                                                                |   | 3,534,121         |       | 3,876,709 |   |
|                                                                                                                                                     |   |              |       |   |   |
| LONG-TERM LIABILITIES:                                                                                                                                   |   |              |       |   |   |
| Long term debt, less current maturities                                                                                                                  |   | 2,271,299         |       | 2,337,874 |   |
| Liabilities from discontinued operations  (Note 2)                                                                                                       |   | 215,040           |       | 408,005 |   |
| Other liabilities                                                                                                                                        |   | 406,777           |       | 593,735 |   |
| Total Liabilities                                                                                                                                        |   | 6,427,237         |       | 7,216,323 |   |
| COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                                                  |   |              |       |   |   |
|                                                                                                                                                     |   |              |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                               |   |              |       |   |   |
| Common stock, $.01 par value; 20,000,000  shares authorized; 6,827,592 and 6,786,335 issued and outstanding at December  31, 2003 and 2002, respectively |   | 68,276            |       | 67,863 |   |
| Additional paid-in capital                                                                                                                               |   | 21,888,234        |       | 21,811,262 |   |
| Loan receivable from Director and former  CEO (Note 12)                                                                                                  |   | (1,000,000        | )          | — |   |
| Accumulated deficit                                                                                                                                      |   | (10,541,301       | )          | (9,252,079 | ) |
| Total stockholders’ equity                                                                                                                          |   | 10,415,209        |       | 12,627,046 |   |
| TOTAL LIABILITIES & STOCKHOLDERS’  EQUITY                                                                                                       |   | $                 | 16,842,446 |   | $ | 19,843,369 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

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**BOSTONBIOMEDICA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

** **
|                                                                                                                                                  |   | **Years Ended  December 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                                                                  |   | **2003**                      |       | **2002** |   | **2001** |   |
|                                                                                                                                                  |   |                          |       |   |   |   |   |
| REVENUE:                                                                                                                                              |   |                          |       |   |   |   |   |
| Products                                                                                                                                              |   | $                             | 13,607,808 |   | $ | 12,696,830 |   | $ | 13,092,771 |   |
| Services                                                                                                                                              |   | 9,687,882                     |       | 10,067,807 |   | 8,733,336 |   |
| Total revenue                                                                                                                                         |   | 23,295,690                    |       | 22,764,637 |   | 21,826,107 |   |
|                                                                                                                                                  |   |                          |       |   |   |   |   |
| COSTS AND EXPENSES:                                                                                                                                   |   |                          |       |   |   |   |   |
| Cost of products                                                                                                                                      |   | 7,262,815                     |       | 6,535,429 |   | 6,337,437 |   |
| Cost of services                                                                                                                                      |   | 7,602,321                     |       | 7,727,137 |   | 6,783,329 |   |
| Research and development                                                                                                                              |   | 1,816,273                     |       | 2,611,060 |   | 2,303,350 |   |
| Selling and marketing                                                                                                                                 |   | 3,282,538                     |       | 3,286,183 |   | 2,916,013 |   |
| General and administrative                                                                                                                            |   | 4,345,643                     |       | 4,108,734 |   | 3,976,568 |   |
| Total operating costs and expenses                                                                                                                    |   | 24,309,590                    |       | 24,268,543 |   | 22,316,697 |   |
|                                                                                                                                                  |   |                          |       |   |   |   |   |
| Operating loss from continuing operations                                                                                                             |   | (1,013,900                    | )          | (1,503,906 | ) | (490,590 | ) |
|                                                                                                                                                  |   |                          |       |   |   |   |   |
| Interest income                                                                                                                                       |   | 19,391                        |       | 41,809 |   | 57,515 |   |
| Interest expense, including beneficial  conversion feature (Note 7)                                                                                   |   | (291,283                      | )          | (247,971 | ) | (438,008 | ) |
| Loss from continuing operations before  income taxes                                                                                                  |   | (1,285,792                    | )          | (1,710,068 | ) | (871,083 | ) |
|                                                                                                                                                  |   |                          |       |   |   |   |   |
| Provision for income taxes                                                                                                                            |   | (3,430                        | )          | (2,936 | ) | (15,678 | ) |
| Loss from continuing operations                                                                                                                       |   | (1,289,222                    | )          | (1,713,004 | ) | (886,761 | ) |
| Discontinued operations (Note 2)                                                                                                                      |   |                          |       |   |   |   |   |
| Income from discontinued operations of  Clinical Laboratory segment (less income taxes of $0, $0, and $969,000 in 2003,  2002 and 2001, respectively) |   | —                        |       | 225,000 |   | 4,334,498 |   |
| Net (loss) income                                                                                                                                     |   | $                             | (1,289,222 | ) | $ | (1,488,004 | ) | $ | 3,447,737 |   |
| Loss from continuing operations per share,  basic & diluted                                                                                       |   | $                             | (0.19      | ) | $ | (0.26 | ) | $ | (0.14 | ) |
| Income per share from discontinued operations,  basic & diluted                                                                                   |   | $                             | —     |   | $ | 0.03 |   | $ | 0.70 |   |
| Net (loss) income per share, basic &  diluted                                                                                                     |   | $                             | (0.19      | ) | $ | (0.22 | ) | $ | 0.56 |   |
| Number of shares used to calculate net  (loss) income per share, basic and diluted                                                                    |   | 6,810,660                     |       | 6,660,662 |   | 6,204,384 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

44

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**BOSTON BIOMEDICA, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

 

**FORTHE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                                                                            |   | **Common  Stock**   |   | **Additional  Paid-In  Capital** |   | **Prepaid  Common Stock  Subscription** |   | **Loan to  former CEO  & Director** |   | **Accumulated  Deficit** |      | **Total  Stockholders’  Equity** |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|--------|----------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|--------------------------|-----------|---------------------------------------|--------|
| **Shares**                                                                                      |   | **$.01 Par  Value** |
|                                                                                            |   |                |   |                             |   |                                    |   |                                    |   |                     |      |                                  |   |   |   |
| BALANCE, December 31, 2000                                                                      |   | 5,652,516           |   | $                                | 56,525 |                                    | $      | 18,904,862                              |   | $                        |      |                                  | $      |   |   | $ | (11,211,812 | ) | $ | 7,749,575 |   |
| Common stock issued in connection with Employee  Stock Purchase Plan                            |   | 15,292              |   | 153                              |   | 26,210                                  |   | —                                  |   | —                   |      | —                                |   | 26,363 |   |
| Conversion of 3% Senior Subordinated Convertible  Debentures                                    |   | 801,325             |   | 8,013                            |   | 970,876                                 |   | —                                  |   | —                   |      | —                                |   | 978,889 |   |
| Beneficial conversion feature in connection with  3% Senior Subordinated Convertible Debentures |   | —              |   | —                           |   | (527,519                                | )      | —                                  |   | —                   |      | —                                |   | (527,519 | ) |
| Stock based compensation                                                                        |   | —              |   | —                           |   | 30,000                                  |   | —                                  |   | —                   |      | —                                |   | 30,000 |   |
| Stock options and other warrants exercised                                                      |   | 163,585             |   | 1,636                            |   | 397,063                                 |   | —                                  |   | —                   |      | —                                |   | 398,699 |   |
| Cancelled Exercise of Paradigm warrants                                                         |   | (500,000            | )      | (5,000                           | )      | 5,000                                   |   | —                                  |   | —                   |      | —                                |   | — |   |
| Tax benefit of stock options exercised                                                          |   | —              |   | —                           |   | 364,000                                 |   | —                                  |   | —                   |      | —                                |   | 364,000 |   |
| Loan to Officer / Director                                                                      |   | —              |   | —                           |   | —                                  |   | —                                  |   | (525,000                 | )         | —                                |   | (525,000 | ) |
| Prepaid Common Stock Subscription, net                                                          |   | —              |   | —                           |   | —                                  |   | 1,497,568                               |   | —                   |      | —                                |   | 1,497,568 |   |
| Net Income                                                                                      |   | —              |   | —                           |   | —                                  |   | —                                  |   | —                   |      | 3,447,737                             |   | 3,447,737 |   |
| BALANCE, December 31, 2001                                                                      |   | 6,132,718           |   | $                                | 61,327 |                                    | $      | 20,170,492                              |   | $                        | 1,497,568 |                                  | $      | (525,000 | ) | $ | (7,764,075 | ) | $ | 13,440,312 |   |
| Common stock issued in connection with Employee  Stock Purchase Plan                            |   | 9,749               |   | 98                               |   | 25,343                                  |   | —                                  |   | —                   |      | —                                |   | 25,441 |   |
| Issuance of Common Stock, net                                                                   |   | 600,000             |   | 6,000                            |   | 1,491,568                               |   | (1,497,568                              | )      | —                   |      | —                                |   | — |   |
| Stock options and other warrants exercised                                                      |   | 43,868              |   | 438                              |   | 123,859                                 |   | —                                  |   | —                   |      | —                                |   | 124,297 |   |
| Repayment of Loan to Officer / Director                                                         |   | —              |   | —                           |   | —                                  |   | —                                  |   | 525,000                  |      | —                                |   | 525,000 |   |
| Net Loss                                                                                        |   | —              |   | —                           |   | —                                  |   | —                                  |   | —                   |      | (1,488,004                            | )      | (1,488,004 | ) |
| BALANCE, December 31, 2002                                                                      |   | 6,786,335           |   | $                                | 67,863 |                                    | $      | 21,811,262                              |   | $                        | —    |                                  | $      | — |   | $ | (9,252,079 | ) | $ | 12,627,046 |   |
| Common stock issued in connection with Employee  Stock Purchase Plan                            |   | 12,102              |   | 121                              |   | 24,176                                  |   | —                                  |   | —                   |      | —                                |   | 24,297 |   |
| Issuance of Common Stock                                                                        |   | 29,155              |   | 292                              |   | (292                                    | )      | —                                  |   | —                   |      | —                                |   | — |   |
| Tax benefit of stock options exercised                                                          |   | —              |   | —                           |   | 53,088                                  |   | —                                  |   | —                   |      | —                                |   | 53,088 |   |
| Loan receivable from Director/former CEO                                                        |   | —              |   | —                           |   | —                                  |   | —                                  |   | (1,000,000               | )         | —                                |   | (1,000,000 | ) |
| Net Loss                                                                                        |   | —              |   | —                           |   | —                                  |   | —                                  |   | —                   |      | (1,289,222                            | )      | (1,289,222 | ) |
| BALANCE, December 31, 2003                                                                      |   | 6,827,592           |   | $                                | 68,276 |                                    | $      | 21,888,234                              |   | $                        | —    |                                  | $      | (1,000,000 | ) | $ | (10,541,301 | ) | $ | 10,415,209 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

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**BOSTONBIOMEDICA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

** **
|                                                                                                                                             |   | **Years  Ended December 31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                                                             |   | **2003**                      |    | **2002** |   | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                            |   |                          |    |   |   |   |   |
| Net (loss) income                                                                                                                                |   | (1,289,222                    | )       | $ | (1,488,004 | ) | $ | 3,447,737 |   |
| Less income from discontinued operations                                                                                                         |   | —                        |    | 225,000 |   | 4,334,498 |   |
| Loss from continuing operations                                                                                                                  |   | (1,289,222                    | )       | (1,713,004 | ) | (886,761 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities:                                                            |   |                          |    |   |   |   |   |
| Depreciation and amortization                                                                                                                    |   | 1,246,672                     |    | 1,302,106 |   | 1,415,253 |   |
| Non-cash interest expense on convertible  debentures                                                                                             |   | —                        |    | — |   | (508,906 | ) |
| Stock-based compensation                                                                                                                         |   | —                        |    | — |   | 30,000 |   |
| Provision for doubtful accounts                                                                                                                  |   | 8,000                         |    | — |   | 55,808 |   |
| (Gain) on disposal of property and  equipment                                                                                                    |   | (548                          | )       | — |   | — |   |
| Changes in operating assets and  liabilities:                                                                                                    |   |                          |    |   |   |   |   |
| Accounts receivable                                                                                                                              |   | 197,266                       |    | 380,354 |   | (247,378 | ) |
| Inventories                                                                                                                                      |   | 569,035                       |    | (330,908 | ) | (297,596 | ) |
| Marketable Securities                                                                                                                            |   | (4,071                        | )       | — |   | — |   |
| Prepaid expenses and other current assets                                                                                                        |   | 102,701                       |    | (127,121 | ) | 60,456 |   |
| Receivable for income taxes                                                                                                                      |   | —                        |    | — |   | 212,762 |   |
| Tax benefit of stock option exercises                                                                                                            |   | 53,088                        |    | — |   | — |   |
| Other long-term assets                                                                                                                           |   | (30,402                       | )       | 3,119 |   | (19,294 | ) |
| Accounts payable                                                                                                                                 |   | (337,254                      | )       | 303,746 |   | 434,074 |   |
| Accrued employee compensation                                                                                                                    |   | 112,064                       |    | (8,977 | ) | 70,622 |   |
| Other accrued expenses                                                                                                                           |   | 35,035                        |    | (100,181 | ) | (367,602 | ) |
| Deferred revenue                                                                                                                                 |   | (21,101                       | )       | 66,211 |   | 22,237 |   |
| Deferred rent and other liabilities                                                                                                              |   | (186,959                      | )       | 24,828 |   | (29,262 | ) |
| Net cash provided by (used in) operating  activities                                                                                             |   | 454,304                       |    | (199,827 | ) | (55,587 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                            |   |                          |    |   |   |   |   |
| Payments for additions to property and  equipment                                                                                                |   | (110,195                      | )       | (624,581 | ) | (416,202 | ) |
| Proceeds from sale of property and  equipment                                                                                                    |   | 14,000                        |    | 85,651 |   | 35,509 |   |
| Net cash used in investing activities                                                                                                            |   | (96,195                       | )       | (538,930 | ) | (380,693 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                            |   |                          |    |   |   |   |   |
| (Repayments) of convertible debentures                                                                                                           |   | —                        |    | — |   | (1,663,352 | ) |
| Proceeds from issuance of common stock                                                                                                           |   | 24,297                        |    | 149,738 |   | 425,062 |   |
| Proceeds from prepaid common stock  subscription, net of issuance costs                                                                          |   | —                        |    | — |   | 1,497,568 |   |
| Loan to officer/director                                                                                                                         |   | —                        |    | 525,000 |   | (525,000 | ) |
| Pledge of restricted cash as security for  loan from bank to Director and former CEO                                                             |   | 1,000,000                     |    | (1,000,000 | ) | — |   |
| Conversion of Pledge of Restricted Cash as  Security for Loan from Bank to Director to a Loan Receivable from Director  and former CEO (Note 12) |   | (1,000,000                    | )       |   |   |   |   |
| Repayments on line of credit                                                                                                                     |   |                          |    | — |   | (5,762,635 | ) |
| Repayments of long-term debt                                                                                                                     |   | (88,270                       | )       | (67,140 | ) | (82,127 | ) |
| Net cash used in financing activities                                                                                                            |   | (63,973                       | )       | (392,402 | ) | (6,110,484 | ) |
| INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS:                                                                                               |   | 294,136                       |    | (1,131,159 | ) | (6,546,764 | ) |
| Change in cash and cash equivalents  provided by (used in) discontinued operations                                                               |   | (302,600                      | )       | (751,108 | ) | 7,622,580 |   |
| Cash and cash equivalents, beginning of  year                                                                                                    |   | 975,649                       |    | 2,857,916 |   | 1,782,100 |   |
| Cash and cash equivalents, end of year                                                                                                           |   | $                             | 967,185 |   | $ | 975,649 |   | $ | 2,857,916 |   |
| SUPPLEMENTAL INFORMATION:                                                                                                                        |   |                          |    |   |   |   |   |
| Income taxes paid                                                                                                                                |   | $                             | 3,430   |   | $ | 1,112 |   | $ | 29,801 |   |
| Interest paid                                                                                                                                    |   | 251,396                       |    | 244,407 |   | 370,149 |   |
| NON-CASH INVESTING AND FINANCING  ACTIVITIES:                                                                                                    |   |                          |    |   |   |   |   |
| Capital lease obligations incurred                                                                                                               |   | $                             | —  |   | $ | — |   | $ | 21,242 |   |
| Conversion of Debentures to equity                                                                                                               |   | —                        |    | — |   | 978,889 |   |
| Issuance of 29,155 and 600,000 shares  associated with prepaid stock subscriptions                                                               |   | —                        |    | 1,497,568 |   | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

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**BOSTONBIOMEDICA, INC. AND SUBSIDIARIES**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(1)****      Business and SignificantAccounting Policies**

 

Boston Biomedica, Inc. (“BBI”) and Subsidiaries (together, the“Company”) provide infectious disease diagnostic products, laboratoryinstrumentation, contract research and specialty infectious disease testingservices to the *in-vitro*diagnostic industry, government agencies, blood banks, hospitals and otherhealth care providers worldwide as of December 31, 2003.  The Company also invests in new technologiesrelated to infectious diseases.  TheCompany is subject to risks common to companies in the biotechnology, medicaldevice and diagnostic industries, including but not limited to, development bythe Company or its competitors of new technological innovations, dependence onkey personnel, protection of proprietary technology, and compliance withgovernmental regulations.

 

As of December 31, 2003, the Company had approximately $7,659,000 inworking capital, and had cash and cash equivalents of $967,185 as of December31, 2003, compared to cash and cash equivalents of $975,649, excludingrestricted cash of $1,000,000 at December 31, 2002.  In January 2003, the $1,000,000 of restricted cash pledged to afinancial institution to secure the Company’s limited guaranty of a loan fromthe financial institution to an entity controlled by Richard T. Schumacher, theCompany’s former Chairman and Chief Executive Officer, was used to satisfy theCompany’s guaranty obligation to the financial institution as discussed furtherbelow.  The Company has experiencedoperating losses from continuing operations of $1,014,000 and $1,504,000 forthe years ended December 31, 2003 and 2002 respectively, while the Companyexperienced negative cash flows from operations of $200,000 for the year endedDecember 31, 2002, the Company experienced positive cash flow from operationstotaling $454,000 for the year ended December 31, 2003.  It is anticipated there may be additionalfuture working capital requirements in connection with PCT BarocyclerTMsales and marketing activities as this segment of the business continues toexperience lower than expected product sales since commercial launch inSeptember 2002 associated with a longer than expected selling cycle.  Management has met its recent historicalcash flow needs by managing its working capital and utilizing proceeds from theFebruary 2001 sale of one of its business segments.  It plans to manageits future liquidity needs through cost reductions and additional sellinginitiatives; see also Note 13 of Notes to Consolidated Financial Statementshereunder for additional information relative to a line of credit agreemententered into by the Company in February 2004.

 

Based on current forecasts and the February 2004 establishment of aline of credit as discussed further in Note 13 of Notes to ConsolidatedFinancial Statements hereunder, management believes the Company has sufficientliquidity to finance operations for the next twelve months.  Management’s forecasts involve assumptionsthat could prove to be incorrect. If the Company continues to incur operatinglosses or resumes incurring negative cash flows, it may need to raiseadditional funds.  There can be noassurance that these funds will be available when required on terms acceptableto the Company, if at all.  If adequatefunds are not available when needed, the Company may be required to furtherreduce its fixed costs and delay, scale back, or eliminate certain of itsactivities, any of which could have a material adverse long term effect on itsbusiness, financial condition and results of operations.  The Company is considering various sourcesof additional financing, including but not limited to, sale of businesssegments, strategic alliances and private placements of debt or equitysecurities.  On October 25, 2002, theCompany retained an investment banking firm to advise the Company in theevaluation of strategic opportunities aimed at increasing shareholder value andliquidity by increasing the capital needed for growth; their engagementcontinues at this date.

 

Significantaccounting policies followed in the preparation of these consolidated financialstatements are as follows:

 

***(i) Principles ofConsolidation***

 

The consolidated financial statements include the accounts of BBI(which includes BBI Diagnostics) and its wholly-owned subsidiaries, BBI BiotechResearch Laboratories, Inc. (“BBI Biotech”), BBI Source Scientific, Inc. (“BBISource”), and BBI BioSeq, Inc. (“BBI BioSeq”). BBI consists primarily of theDiagnostic Products segment as well as the executive corporate office.  Effective January 2000, all of the Company’s technology related to itsdrug discovery and vaccine programs, consisting primarily of patents andrelated sponsored research agreements, was transferred to PanacosPharmaceuticals, Inc. (“Panacos”), a former wholly-owned subsidiary that theCompany formed in October 1999.  InNovember 2000 and in February 2002, Panacos sold equity to third partyinvestors, reducing the Company’s ownership to approximately 16%, which is heldin non-voting preferred stock.  As aresult, the Company no longer consolidates the results of Panacos.  As of November 14, 2000, theCompany’s investment in

 

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Panacos was zero and the Company is no longer required to fundPanacos’s operations.  Therefore, nofurther losses of Panacos will be recorded by the Company

 

In February 2001, the Company sold the business and certain assets andliabilities of BBI Clinical Laboratories, Inc. (“BBICL”) to a third party inconjunction with its decision to exit the clinical laboratory businesssegment.  In accordance with theprovisions of APB No. 30, concerning the reporting of the effects of disposalof a segment of a business, the Company classified the results of BBICL asdiscontinued operations in the accompanying consolidated statements ofoperations.

 

***(ii) Use ofEstimates***

 

To prepare thefinancial statements in conformity with generally accepted accountingprinciples, management is required to make significant estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. In addition, significant estimates were made in determiningthe gain on the disposition of the Company’s discontinued operations includingpost-closing adjustments, in estimating future cash flows to quantify impairmentof assets, in determining the ultimate cost of abandoning a lease (associatedwith discontinued operations) at a facility no longer being utilized, inestimates regarding the collectability of accounts receivable, realizability ofloans made to employees including sufficiency of collateral, deferred taxassets, the net realizable value of its inventory, as well as an estimate forremaining liabilities associated with discontinued operations.

 

On an on-going basis, we evaluate our estimates.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results could differ from the estimates andassumptions used by management.

 

***(iii) RevenueRecognition***

 

We recognizerevenue in accordance with the Securities and Exchange Commission’s StaffAccounting Bulletin No. 103, *Update of Codification of Staff Accounting Bulletins*(“SAB103”)*.*Revenue is recognized when realized or earned when all the following criteriahave been met: persuasive evidence of an arrangement exists; delivery hasoccurred and risk of loss has passed; the seller’s price to the buyer is fixedor determinable and collectibility is reasonably assured.

 

Productrevenue is generally recognized upon shipment of the products.  The Company will occasionally recognizerevenue on a bill and hold basis after completion of manufacture for specificorders at the request of the customer. Bill and hold sales transactions are entered into after consideration ofcustomer needs and capabilities relating to freezer capability to storebiological substances at required temperatures. All bill and hold transactionsmeet specified revenue recognition criteria that include:

 

•                  The risk ofownership has passed to the customer;

•                  The customer hasa fixed commitment to purchase the goods;

•                  The customer,not the Company, has requested the transaction to be on a bill and hold basis;

•                  There is a fixedschedule for delivery of the goods;

•                  We do not retainany specific performance obligations such that the earnings process is notcomplete;

•                  The orderedgoods are segregated from our inventory and not subject to being used to fillother orders; and

•                  The goods mustbe complete and ready for shipment.

 

The Companyalso considers the following prior to recognizing revenue:

 

•                  The transactionis subject to normal billing and credit terms for the specific customer;

•                  The Company’spast experience with the pattern of bill and hold transactions;

 

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•                  Whether thecustomer has the expected risk of loss in the event of a decline in the marketvalue of the goods;

•                  Whether ourcustodial risks are insurable and insured;

•                  Whether APB 21,pertaining to the need for discounting the related receivables, is applicable;and

•                  Whether extendedprocedures are necessary in order to ensure that there are no exceptions to thecustomer’s commitment to accept and pay for the goods.

 

Total revenuerelated to bill and hold transactions was approximately $622,000, $380,000 and$610,000 for the years ended December 31, 2003, 2002, and 2001,respectively.  Revenue from servicecontracts is earned as the related services are performed.  Revenue arrangements where multiple productsor services are sold together under one contract are evaluated to determine ifeach element represents a separate earnings process.  In the event that an element of such multiple element arrangementdoes not represent a separate earnings process, revenue from this element isrecognized over the term of the related contract in accordance with EITF IssueNo. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.”  Services are recognizedas revenue upon completion of tests for laboratory services. Revenue fromservice contracts and research and development contracts for the Company’slaboratory instrumentation business is recognized as the service and researchand development activities are performed under the terms of the contracts.

 

Revenue underlong-term contracts, generally lasting from one to five years, including fundedresearch and development contracts, is recorded when costs to perform suchresearch and development activities are incurred.  Billings under long-term contracts are generally at cost plus apredetermined profit. Billings occur as costs associated with time andmaterials are incurred.  Customers areobligated to pay for such services, when billed, and payments arenon-refundable.  On occasion, certaincustomers make advance payments that are deferred until revenue recognition isappropriate.  Total revenue related tolong-term contracts was approximately $5,855,000, $5,802,000, and $5,062,000,for the years ended December 31, 2003, 2002, and 2001, respectively. Totalcontract costs associated with these agreements were approximately $5,458,000,$5,610,000 and $4,911,000, for the years ended December 31, 2003,  2002 and 2001, respectively.  Included in the revenue recognized underlong-term contracts are certain unbilled receivables representing additionalindirect costs, which are allowed under the terms of the respectivecontracts.  Unbilled receivables were$30,000 at December 31, 2003 and less than $62,000 for all other yearspresented.

 

During thefiscal years 2003, 2002, and 2001, the combined revenues from all branches ofthe National Institutes of Health, a United States Government agency, accountedfor approximately 25%, 31% and 31%, respectively, of total consolidatedrevenues from continuing operations of the Company.  Additional future revenues originating from various branches ofthe National Institutes of Health is subject to possible future changes ingovernment funding levels.

 

***(iv) Cash and cashequivalents***

The Company’spolicy 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 initialmaturities of three months or less are valued at cost plus accrued interest,which approximates fair market value, and are classified as cash equivalents.  At December 31, 2003, the Company had cash andcash equivalents of $967,185.

 

***(v) Research andDevelopment Costs***

Research anddevelopment costs, which are comprised of costs incurred in performing researchand development activities including wages and associated employee benefits,facilities and overhead costs, are expensed as incurred.

 

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***(vi) Inventories***

 

Inventory isvalued at the lower of cost or market. Certain factors may impact the realizable value of our inventoryincluding, but not limited to, technological changes, market demand, changes inproduct mix strategy, new product introductions and significant changes to ourcost structure.  In addition, estimatesof reserves are made for obsolescence based on the current product mix on handand its expected net realizability.  Ifactual market conditions are less favorable or other factors arise that aresignificantly different than those anticipated by management, additionalinventory write-downs or increases in obsolescence reserves may berequired.  We treat lower of cost ormarket adjustments and inventory reserves as an adjustment to the cost basis ofthe underlying inventory.  Accordingly,favorable changes in market conditions are not recorded to inventory insubsequent periods.

 

***(vii) Property andEquipment***

 

Property andequipment are stated at cost, less accumulated depreciation and amortization.For financial reporting purposes, depreciation is recognized using thestraight-line method, allocating the cost of the assets over their estimateduseful lives ranging from five to ten years for certain manufacturing andlaboratory equipment, from three to five years for management informationsystems and office equipment, three years for automobiles and thirty years forthe building. Leasehold improvements are amortized over the shorter of the lifeof the improvement or the remaining life of the leases, which range from fourto ten years. Upon retirement or sale, the cost and related accumulateddepreciation of the asset are removed from the accounting records. Anyresulting gain or loss is credited or charged to income.  Depreciation on PCT demonstration units isallocated over the expected useful life of two years.

 

***(viii) Goodwill andIntangible Assets***

 

The Companyhas classified as intangible assets, costs associated with the fair value ofcertain assets of the businesses acquired. Intangible assets such as patents, licenses, and intellectual propertyrights, are being amortized on a straight-line basis over four to sixteenyears. Goodwill was amortized through December 31, 2001, using thestraight-line method over periods ranging up to fifteen years; accumulatedamortization was $510,500 as of December 31, 2001.  In June 2001, the FASB issued Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.  The Company adopted SFAS No. 142 effectiveJanuary 1, 2002.  Under SFAS No. 142,amortization of goodwill ceased and the Company assesses the realizability ofthese assets annually and whenever events or changes in circumstances indicateit may be impaired.  Such events orcircumstances generally include the occurrence of operating losses or asignificant decline in earnings associated with one or more of the Company’sreporting units.  The Company estimatesthe fair value of its reporting units by using forecasts of discounted cashflows.  When impairment is indicated,any excess of carrying value over fair value is recorded as a loss. Animpairment analysis of remaining goodwill performed as of December 31, 2003pursuant to the requirements of that accounting pronouncement concluded noimpairment had occurred; see Note 5.

 

***(ix) Long-LivedAssets and Deferred Costs***

 

In accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”, if indicators of impairment exist, the Company assesses therecoverability of the affected long-lived assets by determining whether thecarrying value of such assets can be recovered through the undiscounted futureoperating cash flows. If impairment is indicated, the Company measures theamount of such impairment by comparing the carrying value of the asset to thefair value of the asset and records the impairment as a reduction in thecarrying value of the related asset and a charge to operating results. Whilethe Company’s current and historical operating losses and cash flow areindicators of impairment, the Company completed an annual test for impairmentat December 31, 2003 and determined that such long-lived assets was notimpaired.

 

Deferred costsinclude primarily external legal costs associated with the Company’s efforts inobtaining long term financings, such as a mortgage and a line of credit. Thesecosts are amortized to expense on a straight line basis over the life of therelated financing agreements.

 

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*(**x)******Income Taxes***

 

The Company utilizes the assetsand liability method of accounting for income taxes. Under this method,deferred taxes arise from temporary differences between the financial statementand tax bases of assets and liabilities using enacted tax rates in effect inthe years in which the differences are expected to reverse. A valuationallowance is provided for net deferred tax assets if, based on the weightedavailable evidence, it is more likely than not that some or all of the deferredtax assets will not be realized. Tax credits are recognized when realized usingthe flow through method of accounting. In the year ended December 31, 2000, the Company established a fullvaluation allowance for all of its deferred tax assets based on applicableaccounting standards and in consideration of incurring three consecutive yearsof losses (see Note 9).

 

***(xi) Concentrationof Credit Risk***

 

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, are principally cash and cash equivalents, and accounts receivable. TheCompany places its cash and cash equivalents with high credit quality financialinstitutions.  The Company’s total cashand cash equivalents at December 31, 2003, are deposited in financialinstitutions in which deposits are insured under the Federal Deposit InsuranceCorporation (up to the level required by law of $100,000 per depositor); inaddition, one financial institution provides additional insurance for all fundson deposit via the Depositors Insurance Fund, the latter being a private,industry-sponsored deposit insurance company. The Company limits credit risk incash equivalents by investing only in short-term,  money market accounts. Concentration of credit risk with respectto accounts receivable is limited to certain customers to whom the Companymakes substantial sales (see Note 6). The Company does not require collateralfrom its customers. To reduce risk, the Company routinely assesses thefinancial strength of its customers and, as a consequence, believes that itstrade accounts receivable credit risk exposure is limited.

 

**(*xii)**Deferred Revenue***

 

Deferred revenue consists of payments received from customers inadvance of services performed.

 

**(*xiii) Computation of Earnings (Loss) per Share***

 

Basic earnings(loss) per share is computed by dividing income (loss) available to commonshareholders by the weighted average number of common shares outstanding.Diluted earnings (loss) per share is computed by dividing income (loss)available to common shareholders by the weighted average common sharesoutstanding plus additional common shares that would have been outstanding ifdilutive potential common shares had been issued. For purposes of thiscalculation, stock options are considered common stock equivalents in periodsin which they have a dilutive effect. Options and warrants that areantidilutive are excluded from the calculation.

 

Potentiallydilutive securities having a net effect of 6,692, 164,002 and 9,531 commonshares were not included in the computation of diluted loss per share becauseto do so would have been antidilutive for the years ended December 31, 2003,2002 and 2001, respectively.  For theyears ended December 31, 2003, 2002 and 2001, options outstanding havingexercise prices greater than the average fair market price of common sharestotaled 902,125, 181,000, and 1,087,287, respectively.

 

***(xiv) SegmentReporting***

 

SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,”establishes standards for the way that public business enterprises reportinformation about operating segments in annual financial statements andrequires selected information about operating segments in interim financialreports.  It also establishes standardsfor related disclosures about products and services, geographic areas and majorcustomers. Disclosures required by this new standard are included in Note 6 ofNotes to Consolidated Financial Statements hereunder.

 

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(*xv**) RecentAccounting Standards***

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.” This Statement amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  This Standard is effective for contractsentered into or modified after June 30, 2003. The application of SFAS No. 149has not had a material effect on the Company’s consolidated financialstatements.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.” This Statementestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  This Standard is effective for financialinstruments entered into or modified after May 31, 2003. The application ofSFAS No. 150 has not had a material effect on the Company’s consolidatedfinancial statements.

 

In January2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,an Interpretation of ARB 51.” The primary objectives of FIN No. 46 are toprovide guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interestentities” or “VIEs”) and how to determine when and which business enterpriseshould consolidate the VIE. This new model for consolidation applies to anentity for which either: (a) the equity investors (if any) do not have acontrolling financial interest; or (b) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties. In addition, FIN No. 46requires that both the primary beneficiary and all other enterprises with asignificant variable interest in a VIE make additional disclosures. The Companyis required to apply FIN No. 46 to all new variable interest entities createdor acquired after January 31, 2003. For variable interest entities created oracquired prior to February 1, 2003, the Company is required to apply FIN No. 46on July 1, 2003. The adoption of this pronouncement in year 2003 did not have amaterial impact on the accompanying consolidated financial statements.

 

(***xvi) Stock-BasedCompensation***

 

Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (SFAS 123), requires thatcompanies either recognize compensation expense for grants of stock options andother equity instruments based on fair value or provide pro forma disclosure ofnet income (loss) and net income (loss) per share in the notes to the financialstatements. At December 31, 2003, the Company has six stock-based compensationplans, which are described more fully in Note 12. The Company accounts forthose plans under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. Accordingly, no compensation cost has been recognized under SFAS 123 forthe Company’s employee stock option plans. Had compensation cost for awardsunder those plans been determined based on the grant date fair values,consistent with the method required under SFAS 123, the Company’s net income(loss) and net income (loss) per share would have been reduced to the pro formaamounts indicated below:

 
|                                                                                                                                    |   | **2003** |       | **2002**   |   | **2001**   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|------------|--------|------------|--------|
| Net (loss) income - as reported                                                                                                         |   | $        | (1,289,222 | )          | $      | (1,488,004 | )      | $ | 3,447,737 |   |
| Add back: Stock-based compensation in net (loss) income, as reported                                                                    |   | —   |       | —     |   | —     |   |
| Deduct: Stock-based employee compensation expense determined under  fair value based methods for all awards, net of related tax effects |   | (496,040 | )          | (1,017,123 | )      | 63,754     |   |
| Net (Loss) Income - pro forma                                                                                                           |   | $        | (1,785,262 | )          | $      | (2,505,127 | )      | $ | 3,511,491 |   |
|                                                                                                                                    |   |     |       |       |   |       |   |
| Basic and Diluted net income (loss) per share - as reported                                                                             |   | $        | (0.19      | )          | $      | (0.22      | )      | $ | 0.56 |   |
| Basic and Diluted net income (loss) per share - pro forma                                                                               |   | $        | (0.26      | )          | $      | (0.38      | )      | $ | 0.57 |   |

 

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The Companyhas elected to follow Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB 25) and related interpretations inaccounting for its employee stock options. Under APB 25, because the exerciseprice of employee stock options equals the market price of the underlying stockon the date of grant, no compensation expense is recorded. The Company hasadopted the disclosure-only provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).

 

Pro formainformation regarding net income and earnings per share is required by SFAS 123and has been determined as if the Company had accounted for its employee stockoptions under the fair value method of that statement. The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option pricingmodel with the following weighted average assumptions for 2003, 2002 and 2001.

 
|                           |   | **2003** |   | **2002** |   | **2001**  |   |
|--------------------------------|--------|----------|--------|----------|--------|-----------|--------|
| Risk-free interest rate        |   | 2.96%    |   | 2.74%    |   | 4.12%     |   |
| Volatility factor              |   | 78.42%   |   | 90.88%   |   | 99.17%    |   |
| Weighted average expected life |   | 5.72     |   | 4.2      |   | 4.0 years |   |
| Expected dividend yield        |   | —   |   | —   |   | —    |   |

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.  For purposes of pro forma disclosures, theestimated fair value of the options is amortized to expense over the options’vesting period.

 

**(2) Disposition ofAssets**

 

In December2000, the Company made a decision to exit the clinical laboratory testingservices segment and in February 2001, BBI Clinical Laboratories, Inc., awholly-owned subsidiary of the Company, sold the business and certain assetsand liabilities of its clinical laboratory business to a third party for anadjusted purchase price of $8,958,000. The escrow account was terminated in December 2001 by mutual agreementbetween the buyer and the Company, resulting in approximately $358,000 beingreceived by the Company from the escrow account. The Company retained certain other assets and liabilities of BBICL,primarily property, plant and equipment, together with the facility leasesubsequent to the closing date; see also Note 13 of Notes to ConsolidatedFinancial Statements hereunder.  TheCompany wrote down all of the retained assets not otherwise redistributed toother business units to their estimated net realizable value.  In accordance with a transition servicesagreement, the Company operated the business until December 2001; substantiallyall costs associated with operating the business subsequent to the closing datewere borne by the purchaser.

 

The Company’sestimate of remaining short and long term accrued liabilities to exit theclinical laboratory testing business is $408,000 as of December 31, 2003.  The major component of this accrual is theestimated lease exit and facility related costs ($308,000), with the remainderfor other miscellaneous costs associated with exiting this business segment;see also Note 13 of Notes to Consolidated Financial Statements hereunder. TheCompany recorded an after-tax gain of $4,334,000 in 2001, and an additional$225,000 gain in 2002; the gain may be subject to future adjustments as theCompany completes the process of exiting this business and permanently closingthe facility.  The remaining closingcosts include an estimate to dispose of any remaining assets and retire allexisting liabilities including the facility lease as of December 31, 2003.  The Company utilized in 2001 certain priorperiod net operating loss carryforwards, previously reserved for by theCompany, to partially offset the income tax effect of this gain.  All financial data presented in theaccompanying consolidated financial statements has been reclassified to reflectdiscontinued operations of this segment of the business for all periodspresented.  Revenues from discontinuedoperations, net of intercompany eliminations of $0, were $973,000 in the periodJanuary 1, 2001 to February 20, 2001 (date of sale).

 

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A summary ofthe change in total short term and long term net liabilities from discontinuedoperations is as follows:

 
| Total short term and long term net  liabilities from discontinued operations, 12/31/02: |   | $        | 710,441 |   |
|-----------------------------------------------------------------------------------------|--------|----------|---------|--------|
| State income taxes, net                                                                 |   | (7,051   | )       |
| Third party audits                                                                      |   | (81,344  | )       |
| Facility Lease and associated costs                                                     |   | (196,123 | )       |
| Other expenses, net                                                                     |   | (18,082  | )       |
| Total short term and long term net  liabilities from discontinued operations, 12/31/03: |   | $        | 407,841 |   |

 

**(3) Inventories**

 

The Companypurchases human plasma and serum from various private and commercial bloodbanks. Upon receipt, such purchases generally undergo comprehensive testing,and associated costs are included in the value of raw materials. Most plasma ismanufactured into Basematrix and other diagnostic components to customerspecifications. Plasma and serum with the desired antibodies or antigens aresold or manufactured into Quality Control Panels, Accurun® ExternalRun Controls, and reagents (“Finished Goods”). Panels and reagents are unique to specific donors and/or collectionperiods, and require substantial time to characterize and manufacture due tostringent technical specifications. Panels play an important role in diagnostic test kit development,licensure and quality control. Panels are manufactured in quantities sufficientto meet expected user demand, which may exceed one year. Inventory alsoincludes component parts used in the manufacture of laboratory instrumentationand commencing in 2002, PCT products. Inventory balances at December 31, 2003 and 2002 consisted of thefollowing:

 
|            |   | **2003**  |      | **2002**  |   |
|-----------------|--------|-----------|-----------|-----------|--------|
|            |   |      |      |      |   |
| Raw materials   |   | $         | 3,549,826 |      | $      | 3,170,988 |   |
| Work-in-process |   | 1,124,883 |      | 1,988,585 |   |
| Finished goods  |   | 1,850,309 |      | 1,934,480 |   |
|            |   | $         | 6,525,018 |      | $      | 7,094,053 |   |

 

**(4) Property andEquipment**

 

Property andequipment at December 31, 2003 and 2002 consisted of the following:

 
|                                            |   | **2003**   |      | **2002**   |   |
|-------------------------------------------------|--------|------------|-----------|------------|--------|
| Laboratory and manufacturing equipment          |   | $          | 3,415,224 |       | $      | 3,399,055 |   |
| Management information systems                  |   | 3,587,432  |      | 3,594,295  |   |
| Office equipment                                |   | 937,336    |      | 929,328    |   |
| Automobiles                                     |   | 145,520    |      | 166,761    |   |
| PCT demonstration equipment                     |   | 210,536    |      | 157,573    |   |
| Leasehold improvements                          |   | 2,896,731  |      | 2,881,090  |   |
| Land, building and improvements (1)             |   | 2,690,913  |      | 2,687,661  |   |
|                                            |   | 13,883,692 |      | 13,815,763 |   |
| Less accumulated depreciation and  amortization |   | 9,158,169  |      | 7,988,946  |   |
| Net book value                                  |   | $          | 4,725,523 |       | $      | 5,826,817 |   |

 

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(1) includes the Company’s West Bridgewater, MA facility, which servesas collateral to an existing mortgage; see Note 7 “Debt”.

 

Depreciation and amortization expense for the years ended December 31,2003, 2002 and 2001 was approximately $1,197,000, $1,246,000 and $1,327,000, respectively.

 

At December 31, 2003, BBI Source, BBI Biotech and BBI Diagnostics hadapproximately $374,000, $1,338,000 and $2,560,000 in fully depreciated assetsstill in use, respectively.

 

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In accordancewith Statement of Position (“SOP”) 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use”, the Company capitalizedapproximately $448,000 of internal labor and related costs, in 1999, inconnection with its ERP System Implementation. These costs are included in theManagement Information Systems line item and are being depreciated over thesame life as the system, 5 years. Annual depreciation expense related to these capitalized costs wasapproximately $90,000 for each of the three years ended December 31, 2003, 2002and 2001.

 

**(5) Goodwill andOther Intangible Assets**

 

Otherintangible assets consist of specifically identified intangible assets.Goodwill is the excess of any purchase price over the estimated fair marketvalue of net tangible assets acquired not allocated to specific intangibleassets. Goodwill and other intangible assets at December 31, 2003 and 2002consisted of the following:

 
|                                                   |   | **2003** |    | **2002** |   |
|--------------------------------------------------------|--------|----------|---------|----------|--------|
| Patents, Licenses and Other Intangibles                |   | $        | 778,156 |     | $      | 884,902 |   |
| Less accumulated amortization                          |   | (255,333 | )       | (313,444 | )      |
| subtotal - other intangible assets  excluding goodwill |   | 522,823  |    | 571,458  |   |
| Goodwill                                               |   | 737,584  |    | 737,584  |   |
| Less accumulated amortization                          |   | (510,500 | )       | (510,500 | )      |
| subtotal - net goodwill                                |   | 227,084  |    | 227,084  |   |
| Total net goodwill and other intangible  assets        |   | $        | 749,907 |     | $      | 798,542 |   |

 

Included in intangible assets as of December 31, 2003 is $227,084 ofgoodwill associated with BBI Source Scientific, Inc.  Amortization expense of other intangible assets for the yearsended December 31, 2003, 2002, and 2001 was approximately $49,000, $56,000 and$79,000, respectively.  The net bookvalue of the remaining other intangible assets excluding goodwill, as ofDecember 31, 2003 is comprised of approximately $523,000 of acquired PCTpatents which is being amortized to expense on a straight line basis at therate of $48,635 per year over the remaining useful life.  The estimated annual future amortizationexpense of other intangible assets excluding goodwill is as follows:

 
| 2004                |   | $ | 48,635  |   |
|---------------------|--------|---|---------|--------|
| 2005                |   | $ | 48,635  |   |
| 2006                |   | $ | 48,635  |   |
| 2007                |   | $ | 48,635  |   |
| 2008                |   | $ | 48,635  |   |
| 2009 and thereafter |   | $ | 279,648 |   |

 

On July 9,2003, the Company announced that Mr. Schumacher, the Company’s former Chairman and Chief Executive Officer, agreedto accept an engagement with the Company as an Executive Project Consultant toadvise the Company with respect to the strategic direction of the Company’s PCTand BBI Source Scientific activities, and the Company’s ownership interest inPanacos Pharmaceuticals, Inc.  As partof this engagement, Mr. Schumacher is expected to reevaluate the ongoingbusiness prospects for both the Laboratory Instrumentation segment and PCTactivities.  On February 9, 2004, theCompany announced it has extended until December 31, 2004 the ExecutiveConsultant Agreement it has with Mr. Schumacher.  Under the terms of the Agreement, Mr. Schumacher will continue inan advisory role directing the Company’s Pressure Cycling Technology (PCT) andBBI Source Scientific activities.  PCTis the Company’s novel and patent protected technology that uses cycles ofhydrostatic pressure to control biomolecular interactions; BBI SourceScientific, Inc. is the Company’s laboratory instrumentation subsidiary, whichdeveloped and manufactures the PCT BarocyclerTM instrument.  Using the assumptions associated withrevised business plans, the Company has estimated future net undiscounted cashinflows and cash outflows.  In 2002, theCompany adopted SFAS 142; the Company performed an initial test for impairmentupon the adoption of SFAS No. 142 at June 30, 2002, and determined thatgoodwill was not impaired. The Company completed an annual test for impairmentat December 31, 2003 and December 31, 2002 and has determined that goodwill has not been impaired.

 

55

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The following pro forma adjusted net income has been prepared as ifSFAS. No. 142 had been applied retroactively:

 
|                                          |   | **Year Ended  December 31,2001** |      |
|-----------------------------------------------|--------|----------------------------------|-----------|
| Net income                                    |   | $                                | 3,447,737 |   |
| Add back: Goodwill amortization               |   | 21,627                           |      |
| Adjusted net income                           |   | $                                | 3,469,364 |   |
| Amounts per common share, basic and  diluted: |   |                             |      |
| Adjusted net income                           |   | $                                | 0.56      |   |

 

**(6) Segment Reportingand Related Information (all dollar amounts in thousands)**

 

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

 

TheCompany had four operating segments as of December 31, 2003 and 2002 as aresult of its decision in late 2000 to exit the clinical laboratory segment ofthe business.  The Diagnostics segmentserves the worldwide in vitro diagnostics industry, including users andregulators of their test kits, with quality control products, and test kitcomponents. The Biotech segment pursues third party contracts to help fund thedevelopment of products and services for the other segments, primarily withagencies of the United States Government. The Laboratory Instrumentation segment (BBI Source Scientific, Inc.)sells diagnostic instruments primarily to the worldwide in vitro diagnosticindustry on an OEM basis, and also performs in-house instrument servicing. ThePCT segment consists of research and development primarily in pressure cyclingtechnology (“PCT”). The Company performs research in the development of PCT,with particular focus in the areas of nucleic acid purification and pathogeninactivation.  The Company announced theavailability for commercial sale of its PCT products in late September of2002.  PCT Revenue to date consistsprimarily of both private and public (NIH) funding of segment research and,commencing in late 2002, from the sale of PCT products.  Most of the expenditures incurred by thissegment are for research and development expenses, and general management expensesincluding patent costs.

 

The Company’sunderlying accounting records are maintained on a legal entity basis forgovernment and public reporting requirements, as well as for segmentperformance and internal management reporting. Inter-segment sales are recordedon a “third party best price” basis and are significant in measuring segmentoperating results. The following segment information has been prepared inaccordance with the internal accounting policies of the Company, as describedabove.  Prior year data has beenrestated, where feasible, to conform to the current year presentation format.

 

Operatingsegment revenues for the years ended December 31, 2003, 2002 and 2001 were asfollows:

 
|                       |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Diagnostics                |   | $        | 12,097 |     | $      | 11,611   |   | $ | 11,489 |   |
| Biotech                    |   | 9,667    |   | 10,162   |   | 9,181    |   |
| Laboratory Instrumentation |   | 1,799    |   | 2,374    |   | 2,365    |   |
| PCT                        |   | 674      |   | 717      |   | 392      |   |
| Eliminations               |   | (941     | )      | (2,099   | )      | (1,601   | )      |
| Total revenue              |   | $        | 23,296 |     | $      | 22,765   |   | $ | 21,826 |   |

 

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Operatingsegment income (loss) for the years ended December 31, 2003, 2002 and 2001 wereas follows:

 
|                       |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Diagnostics                |   | $        | 1,704  |     | $      | 1,478    |   | $ | 1,674 |   |
| Biotech                    |   | (274     | )      | (319     | )      | (212     | )      |
| Laboratory Instrumentation |   | (892     | )      | (507     | )      | (460     | )      |
| PCT                        |   | (1,552   | )      | (2,156   | )      | (1,493   | )      |
| Total loss from operations |   | $        | (1,014 | )        | $      | (1,504   | )      | $ | (491 | ) |

 

Operating segment depreciation and amortization expense for the yearsended December 31, 2003, 2002 and 2001 were as follows:

 
|                                |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Diagnostics                         |   | $        | 500    |     | $      | 538      |   | $ | 598 |   |
| Biotech                             |   | 538      |   | 573      |   | 593      |   |
| Laboratory Instrumentation          |   | 71       |   | 107      |   | 140      |   |
| PCT                                 |   | 138      |   | 84       |   | 84       |   |
| Total depreciation and amortization |   | $        | 1,247  |     | $      | 1,302    |   | $ | 1,415 |   |

 

Identifiableoperating segment assets are all located in the United States, and as ofDecember 31, 2003 and 2002 were as follows:

 
|                       |   | **2003** |   | **2002** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Corporate                  |   | $        | 1,277  |     | $      | 2,141 |   |
| Diagnostics                |   | 9,447    |   | 10,281   |   |
| Biotech                    |   | 3,903    |   | 4,844    |   |
| Laboratory Instrumentation |   | 1,234    |   | 1,826    |   |
| PCT                        |   | 981      |   | 751      |   |
| Total assets               |   | $        | 16,842 |     | $      | 19,843 |   |

 

Operatingsegment capital expenditures for the years ended December 31, 2003, 2002 and2001 were as follows:

 
|                       |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Diagnostics                |   | $        | 35     |     | $      | 139      |   | $ | 205 |   |
| Biotech                    |   | 45       |   | 322      |   | 207      |   |
| Laboratory Instrumentation |   | —   |   | 5        |   | 4        |   |
| PCT                        |   | 30       |   | 158      |   | 21       |   |
| Total capital expenditures |   | $        | 110    |     | $      | 624      |   | $ | 437 |   |

 

Revenues by geographic area for the years ended December 31, 2003, 2002and 2001 were as follows:

 
|             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------|--------|----------|--------|----------|--------|----------|--------|
| United States    |   | $        | 18,624 |     | $      | 19,460   |   | $ | 18,389 |   |
| Europe           |   | 2,680    |   | 2,209    |   | 2,397    |   |
| Pacific Rim      |   | 1,225    |   | 620      |   | 624      |   |
| Total all others |   | 767      |   | 476      |   | 416      |   |
| Total            |   | $        | 23,296 |     | $      | 22,765   |   | $ | 21,826 |   |

 

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Revenues of Product and Service classes in excess of 10% ofconsolidated revenues from continuing operations  (excluding inter-segment sales) for the years ended December 31,2003, 2002 and 2001 were as follows:

 
|                           |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Quality Control Products       |   | $        | 10,055 |     | $      | 7,909    |   | $ | 8,343 |   |
| Government Contracts           |   | 8,667    |   | 7,370    |   | 7,617    |   |
| Diagnostic Components          |   | 1,898    |   | 3,182    |   | 2,629    |   |
| Laboratory Instrument Products |   | 1,524    |   | 1,654    |   | 1,895    |   |
|                                |        |          |        |          |        |          |        |  |  |  |

 

The governmentcontract revenues are from United States government agencies, primarily variousbranches of the National Institutes of Health (NIH) and represent the onlycustomer with revenue in excess of 10% of consolidated revenue in each of theyears ended December 31, 2003, 2002 and 2001. During the fiscal years 2003,2002, and 2001, the combined revenues from all branches of the NIH accountedfor approximately 25%, 31% and 31%, respectively, of total consolidated revenues from continuing operationsof the Company.

 

**(7) Debt**

 

Effective June 30, 1999, the Company entered into an amended revolvingline of credit agreement (the “Amended Line”) with its bank, increasing thefacility to $10 million from $7.5 million. The interest rate of the Amended Line at the Company’s option was basedon either the base rate plus 1⁄4% or LIBOR plus 2.75%; carries a facility fee of1⁄4% per annum, payable quarterly; and was collateralized by substantially all ofthe assets of the Company, excluding real property.  Borrowings under the Amended Line were limited to commerciallystandard percentages of accounts receivable, inventory and equipment.  The Amended Line contains covenantsregarding the Company’s total liabilities to tangible net worth ratio, minimumdebt service coverage ratio, and maximum net loss.  The Amended Line further provided for restrictions on the paymentof dividends, incurring additional debt, and the amount of capitalexpenditures.  In February 2001, theCompany utilized a portion of the proceeds from the sale of BBICL to pay off infull the outstanding balance (together with accrued interest) on this line ofcredit, at which time the bank released all liens associated with this line ofcredit and terminated the line of credit. There were no payment defaults at any time associated with this line ofcredit.   See also Note 13 hereunder.

 

On August 25, 2000, the Company entered into Securities PurchaseAgreements providing for the issuance of $3,250,000  (face value) 3% Senior Subordinated Convertible Debentures dueAugust 25, 2003 (the “Debentures”). Proceeds to the Company, net of a 5% original issue discount and debtissuance costs, amounted to $2,858,000, of which $327,000 has been allocated tothe relative fair value of the associated common stock purchase warrants. Thefair value of the warrants was determined using the Black Scholesoption-pricing model and the following assumptions:  a risk free interest rate of 6.02%, a volatility factor of91.17%, a contractual life of 5 years and no expected dividend yield. TheCompany then allocated the proceeds of the Debentures, net of the originalissue discount ($3,087,500), on a pro-rata basis using the calculated fairvalue of the warrants ($318,000) and the fair value of the Debentures  ($2,685,000).  This resulted in proceeds of approximately $327,000 and$2,761,000 being allocated to the relative fair value of the warrants and theDebentures, respectively.  TheDebentures are convertible into the Company’s common stock commencing November24, 2000, at a conversion price equal to the lesser of (i) $3.36 per share or(ii) 90% of the average of the five lowest volume weighted average sales pricesof Common Stock as reported by Bloomberg L.P. during the twenty-five businessdays immediately preceding the date on which the Debenture holders notify theCompany of their intention to convert all or part of the Debenture into CommonStock. In connection with this transaction, the Company issued warrants,expiring August 2005, to purchase up to 135,556 shares of the Company’s commonstock at an exercise price of $3.60 per share. Interest on the Debentures was payable quarterly in arrears commencingSeptember 30, 2000.  The Debentures aresubordinate to both the Company’s line of credit (which was terminated inFebruary 2001) and mortgage on its West Bridgewater, MA facility.  The Company may elect at any time to redeemall or any portion of the remaining unpaid principal amount of the Debenturesfor cash. In addition, upon receipt of a notice of conversion from a holder ofthe Debentures, the Company may elect to redeem that portion being convertedfor cash in lieu of common stock of the Company. In both cases, the redemptionprice equals the number of shares of common stock into which the Debenturebeing redeemed is convertible, times the average closing bid price of theCompany’s common stock for the five preceding trading days.

 

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The Securities Purchase Agreements and related documents place certainrestrictions on the Company’s ability to incur additional indebtedness, to makecertain payments, investments, loans, guarantees and/or transactions withaffiliates, to sell or otherwise dispose of a substantial portion of assets,and/or to merge or consolidate with an unaffiliated entity.

 

Original issue discount and associated debt issuance costs of $162,500and $230,000, respectively, are being amortized ratably over the three-yearlife of the underlying debt as additional interest expense.  Also, in accordance with Emerging IssuesTask Force Issues 98-5 and 00-27, proceeds of $840,000 have been allocated tothe beneficial conversion feature of the Debentures by decreasing the value ofthe debt and increasing additional paid in capital.  Of this, $351,000 was originally calculated in the third quarterof 2000 when the Debentures were issued. The additional amount of $489,000 was calculated in the fourth quarterof 2000 using the accounting conversion method preferred by the SEC pursuant toEITF 00-27 which clarified the method of calculating the beneficial conversionfeature.  The amount allocated to thebeneficial conversion feature was valued using conversion method (ii) fromabove as of the date of the transaction as it was determined to be the mostbeneficial to the holders of the Debentures. This amount was expensed over the initial 90-day non-convertible period.  For the year ended December 31, 2000, theCompany recorded a charge of $898,000 (including $190,223 for the cumulativeeffect of a change in accounting principle noted above) due to amortization ofthe beneficial conversion feature, warrant costs and original issuediscount/debt issuance costs associated with the Company’s August 2000 issuanceof $3,250,000 3% Senior Subordinated Convertible Debentures.

 

In the first quarter of 2001, certain holders of the Company’soutstanding 3% Senior Convertible Debentures (the “Debentures”) exercised theirrights to convert $1,210,000 of such Debentures into shares of the Company’scommon stock, in accordance with the conversion formula.  These conversions resulted in the issuanceof 801,325 additional shares of common stock in 2001.  In addition, the Company redeemed the remaining $2,040,000 ofDebentures at face plus a $190,000 premium and accrued interest.  Unamortized debt discount, debt issuancecosts and warrant-related costs associated with the converted Debentures, approximating$231,000 was debited to additional paid-in capital, with the remaining $377,000of such costs associated with the redeemed Debentures being included in theloss on extinguishment of the Debentures.In addition, the Company reversedapproximately $528,000 of expense previously recorded in 2000 associated withthe Debentures beneficial conversion feature. Accordingly, the Company recorded a net loss of approximately $39,000relative to this early extinguishment of debt in the first quarter of 2001.  As a result of both the conversions andredemptions, which occurred in the first quarter of 2001, none of the 3%,Senior Subordinated Convertible Debentures remain outstanding subsequent toFebruary 27, 2001.

 

On April 5, 2000, the Company borrowed $2,447,000, net of relatedcosts, under a mortgage agreement on its West Bridgewater, MA facility, ofwhich approximately $2,315,000 remains outstanding as of December 31, 2003. TheCompany used the funds to reduce the outstanding balance of its existing lineof credit. The principal amount of the note issued in connection with themortgage is due on March 31, 2010. During the first five years the note carriesan interest rate of 9.75%; after five years the rate charged will be .75%greater than the Corporate Base Ratethen in effect. The mortgage precludes the payment of dividends on theCompany’s common stock and contains certain other restrictive covenants.  Under this mortgage agreement the Company issubject to certain financial covenants. The Company failed to meet its debtservice coverage covenant for the prior year ended December 31, 2002, but inearly 2003 the financial institution waived that default and the Company’sother defaults relating to reports and the termination of the Company’s formerchairman and chief executive officer. The Company also failed to meet this debt service coverage covenant forthe year ended December 31, 2003, however the financial institution hasnotified the Company of its intent to waive this default.  Monthly payments on this mortgage are basedon a 20 year amortization schedule with a balloon payment representing theremaining balance due in full on March 10, 2010.  The mortgage is collateralized by the Company’s West Bridgewater,MA facility, which has a net book value of $2,045,000 at December 31, 2003.Future principal payments due on the Company’s mortgage agreement areapproximately $54,000, 62,000, $69,000, $76,000 and $84,000 for each of theyears ended December 31, 2004, 2005, 2006, 2007, and 2008, respectively.

 

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**(8) Retirement Plan**

 

In January 1993, the Company adopted a retirement savings plan for itsemployees, which has been qualified under Section 401(k) of the InternalRevenue Code. Eligible employees are permitted to contribute to the planthrough payroll deductions within statutory limitations and subject to anylimitations included in the plan. Company contributions are made at thediscretion of management. As of December 31, 2001, no such contributions hadbeen made, however, commencing in 2002, the Company formally adopted andimplemented a limited matching contribution program. During 2003, 2002 and 2001the Company recognized administrative expense of approximately $21,000,$22,000, and $23,000, respectively, in connection with the plan.

 

**(9) Income Taxes**

 

The componentsof the (benefit) provision for income taxes from continuing operations are asfollows:

 
|                                                         |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current (benefit) provision: federal                         |   | $        | — |     | $      | —   |   | $ | — |   |
| Current provision: state                                     |   | 3,430    |   | 2,936    |   | 15,678   |   |
| Total current provision                                      |   | 3,430    |   | 2,936    |   | 15,678   |   |
|                                                         |   |     |   |     |   |     |   |
| Deferred provision: federal                                  |   | —   |   | —   |   | —   |   |
| Deferred provision: state                                    |   | —   |   | —   |   | —   |   |
| Total deferred provision                                     |   | —   |   | —   |   | —   |   |
| Total provision for income taxes from  continuing operations |   | $        | 3,430  |     | $      | 2,936    |   | $ | 15,678 |   |

 

Significant items making up deferred tax liabilities and deferred taxassets were as follows:

 
|                                                    |   | **2003**   |    | **2002**   |   |
|---------------------------------------------------------|--------|------------|---------|------------|--------|
| Current deferred taxes:                                 |   |       |    |       |   |
| Inventory                                               |   | $          | 311,889 |       | $      | 391,563 |   |
| Accounts receivable allowance                           |   | 49,639     |    | 46,998     |   |
| Technology licensed                                     |   | 209,352    |    | 231,984    |   |
| Other accruals                                          |   | 234,218    |    | 365,960    |   |
| Less: valuation allowance                               |   | (805,098   | )       | (1,036,505 | )      |
| Total current deferred tax assets                       |   | —     |    | —     |   |
| Long term deferred taxes:                               |   |       |    |       |   |
| Accelerated tax depreciation                            |   | 239,156    |    | 53,868     |   |
| Goodwill and intangibles                                |   | 418,372    |    | 479,200    |   |
| Tax credits                                             |   | 450,960    |    | 484,103    |   |
| Operating loss carryforwards                            |   | 2,562,139  |    | 1,844,460  |   |
| Less: valuation allowance                               |   | (3,670,627 | )       | (2,861,631 | )      |
| Total long term deferred tax assets  (liabilities), net |   | —     |    | —     |   |
| Total net deferred tax assets                           |   | $          | —  |       | $      | — |   |

 

A valuation allowance is established if it is more likely than not thatall or a portion of the deferred tax assets will not be realized.  Accordingly, a valuation allowance has beenestablished for the full amount of the deferred tax assets due to theuncertainty of realization.

 

The Company had net operating loss carryforwards for federal income taxpurposes of approximately $5,400,000 and $3,500,000 at December 31, 2003 and2002, respectively.  These net operatingloss carryforwards expire at various dates from 2011 through 2023.  Included in this number are remaining losscarryforwards of approximately $1,350,000 that were obtained through theacquisition of BioSeq, Inc.  Thesecarryforwards expire from 2011 through 2018.  The Company had net operating loss carryforwards for state incometax purposes of approximately $11,700,000 and $10,500,000 at December 31, 2003and 2002, respectively.  These netoperating loss carryforwards expire at various dates from 2004 through 2023.  Included in this number are losscarryforwards of

 

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approximately $2,000,000 that were obtained through the acquisition ofBioSeq, Inc.  These carryforwards expirefrom 2011 through 2018.

 

As of December31, 2003, the Company had approximately $78,000 of alternative minimum taxcredits, which do not expire, and $372,000 of federal research credits, whichexpire from 2010 to 2023. Included in the net operating loss and creditcarryforwards discussed above is a deferred tax asset of approximately $265,000reflecting the benefit of deductions from the exercise of stock options($53,088 was utilized in year 2003 in conjunction with the filing of prior yearstate income tax returns and was recorded to additional paid-in capital).  Any future benefits from this deferred taxasset will be recorded to additional paid-in capital when realized.

 

The Company’seffective income tax rate from continuing operations for the years endedDecember 31, 2003, 2002 and 2001  differsfrom the statutory federal income tax rate as follows:

 
|                                                                      |   | **2003**   |   | **2002**   |   | **2001**   |   |
|---------------------------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| Federal tax(benefit) provision rate                                       |   | (34)%      |   | (34)%      |   | (34)%      |   |
| State tax(benefit) provision, net of  federal benefit                     |   |  (4)% |   |  (4)% |   |  (4)% |   |
| Non-cash deductions and other permanent  items, net                       |   |  1%   |   |  2%   |   | (10)%      |   |
| Valuation allowance                                                       |   | 37%        |   | 36%        |   | 50%        |   |
|                                                                      |   |       |   |       |   |       |   |
| Effective income tax (benefit) provision  rate from continuing operations |   |  0%   |   |  0%   |   |  2%   |   |

 

The Company’sfederal income tax returns for fiscal years 1997 and 1998 were examined by theInternal Revenue Service.  The Companyagreed to a settlement of the audit covering these years.  The final computation of the assessment due,including the effect on the associated state income tax returns for thoseyears,  did not have an adverse effecton the accompanying consolidated financial statements as the Company utilizedcertain net operating loss carryforwards and carrybacks to offset the federalincome tax assessment.

 

**(10) Commitments andContingencies**

 

*Leases*

 

The Company leases certain office space, repository, research andmanufacturing facilities under operating leases with various terms throughOctober 2007. The real estate leases for facilities located in Maryland includerenewal options at either market or increasing levels of rent;  see also Note 13 of Notes to ConsolidatedFinancial Statements hereunder. The Company leases 27,000 square feet of spacein Garden Grove, California where its BBI Source business unit manufactureslaboratory instruments. The lease for this facility expires January 31, 2005and there is currently no extension or renewal option.  In May 2000, the Company acquired laboratoryequipment pursuant to a three-year capital lease at 12% financing, resulting intotal payments of approximately $115,000 over the life of the lease agreement;this lease expired in June 2003.

 

At December 31, 2003, future minimum lease payments undernon-cancelable leases, excluding discontinued operations, is as follows:

 
| **Year Ended**               |   | **Operating  Leases** |      |
|------------------------------|--------|-----------------------|-----------|
| 2004                         |   | $                     | 1,229,000 |   |
| 2005                         |   | 961,000               |      |
| 2006                         |   | 933,000               |      |
| 2007                         |   | 541,000               |      |
| 2008 and thereafter          |   | —                |      |
| Total minimum lease payments |   | $                     | 3,664,000 |   |

 

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The Company entered into a non-cancelable sublease agreement with athird party that expired January 2002. Rent expense, net of sublease income consisted of the following:

 
|              |   | **2003** |      | **2002** |   | **2001**  |   |
|-------------------|--------|----------|-----------|----------|--------|-----------|--------|
| Basic expense     |   | $        | 1,179,000 |     | $      | 1,111,000 |   | $ | 1,274,000 |   |
| Sublease income   |   | —   |      | (14,000  | )      | (169,000  | )      |
| Rent expense, net |   | $        | 1,179,000 |     | $      | 1,097,000 |   | $ | 1,105,000 |   |

 

In addition,as discussed further in Note 2, as of December 31, 2003, the Company wassubject to future minimum facility lease payments in connection with thediscontinued operations of its clinical laboratory segment of $161,000 and$94,000 in 2004 and 2005, respectively. The Company included an estimate of this remaining lease commitment in2001 as part of the calculation of the gain on the sale of certain assets fromthe clinical laboratory segment;  seealso Note 13 of Notes to Consolidated Financial Statements.

 

The Company’sCalifornia and Maryland facility leases include scheduled base rent increasesover the term of the lease. The amount of base rent payments is charged toexpense using the straight-line method over the term of the lease. As ofDecember 31, 2003 and 2002, the Company has recorded a long-term liability of$306,000 and $357,000,  ($330,000 and$356,000 including the current portion), respectively to reflect the excess ofrent expense over cash payments since inception of the lease.  In addition to base rent, the Company pays amonthly allocation of the operating expenses and real estate taxes for theCalifornia and Maryland facilities. See also Note 13 of Notes to ConsolidatedFinancial Statements hereunder.

 

*Royalty Commitments*

 

The Companyacquired in 1998 all the remaining common stock outstanding of BioSeq Inc., adevelopment stage company involved with PCT. In accordance with the provisionsof a technology transfer agreement assumed in the transaction, the Company isobligated to pay a 5% royalty on net sales until March 2016 of future sales bythe Company utilizing PCT. The Company announced the availability of its PCTproducts for commercial sale in the latter part of year 2002.  Included in long-term liabilities at December31, 2003 and 2002 are future minimum royalty payments of approximately $0 and$0, respectively, payable to the former owners of BioSeq, Inc.  Minimum royalty payment requirements ceasedin the fourth quarter of 2003 in accordance with contractual provisions.

 

*Guarantees*

 

See Note 12hereunder for further discussion of the Company’s limited guaranty and pledgeagreement of a $1,000,000 interest bearing deposit at a financial institutionto provide additional security for loans in the aggregate original amount of$2,418,000 from the financial institution to an entity controlled by the formerChief Executive Officer of the Company; this guarantee was met in January2003.  In addition, BBI ClinicalLaboratories, Inc., a discontinued operation, operated from a 15,000 squarefoot facility in New Britain CT pursuant to a lease which expires in July 2005and which was guaranteed by the Company. In connection with the Company’s decision to exit this business segment,the Company has assumed the obligation to make the remaining lease payments,which is included in the Company’s estimate of remaining liabilities associatedwith discontinued operations.  See Notes2 and 13 of Notes to Consolidated Financial Statements.

 

*Indemnifications*

 

In conjunctionwith certain transactions, the Company has agreed to indemnify the otherparties with respect to certain liabilities related to the operation of thebusiness. The scope and duration of such indemnity obligations vary fromtransaction to transaction. Where appropriate, an obligation for suchindemnifications is recorded as a liability. Generally, a maximum obligationcannot be reasonably estimated. Other than obligations recorded as liabilitiesat the time of divestiture, historically the Company has not made significantpayments for these indemnifications. The Company believes the estimated fair value of these agreements isminimal. Any indemnification agreements are

 

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grandfathered under theprovisions of FIN No. 45 as they were in effect prior to December 31, 2002. TheCompany has no liabilities recorded for these agreements as of December 31,2003 and 2002.

 

*Other Contingencies*

 

Various claimshave been or may be asserted against the Company in the ordinary course ofbusiness.  In certain instances, theamounts claimed or alleged may be significant. While it is possible that the Company’s results of operations and/orliquidity could be materially affected by these contingent liabilities, basedupon information currently available, management believes that resolution ofany of the following outstanding claims will not have a material adverse impacton the financial position of the Company.

 

*Licensing Agreements/Customer Claims*

 

Subsequent toDecember 31, 2003, the Company has received unrelated communications from threeparties relative to licensing, royalty and product performance issues.  One party has requested additionalinformation to determine whether the Company may owe additional royalties onproducts sold under a patent license agreement; the Company believes it hasmade all required royalty payments under its patent license agreement with thisentity.  Another party has alleged thatcertain products sold by the Company used component materials patented by thatthird party.  A customer has allegedthat the Company supplied defective products that were subsequentlyincorporated into the customer’s end user products that were recalled.  The Company is in the process ofinvestigating and gathering additional information in order to respond to theseinquiries.  While the Company cannotestimate the amount of a loss, if any, associated with the resolution of theseallegations, the Company disputes all of these allegations and intends tovigorously pursue all defenses available to the Company.

 

*EnvironmentalMatters*

 

The Company has received correspondence addressed to Source Scientific,Inc. originating from the U.S. Environmental Protection Agency (“EPA”).  In 1997, the Company acquired certain assetsand liabilities of Source Scientific, Inc. The correspondence identifies SourceScientific, Inc. as having a potential liability for waste disposal by apurported predecessor entity. The Company has not yet determined if it actuallyhas liability for this matter, however should the Company and the EPA agree onresolution of this matter, it is estimated that such costs could range from aminimal amount up to $42,000.

 

**(11)Stockholders’ Equity**

 

***Preferred Stock***

 

In 1996, the Company authorized the issuance of 1,000,000 shares ofpreferred stock having a par value of $0.01. None of theses shares have been issued to date.

 

***Common Stock***

 

In December 2001, 600,000 shares of common stock were subscribed to andpaid for by a group of investors for $1,500,000.  These shares were issued in the first quarter of 2002 andtherefore were not included in the total shares outstanding as well as in thecalculation of earnings (loss) per share for the year ended December 31, 2001.

 

*ShareholdersPurchase Rights Plan*

 

On March 3,2003, the Company’s Board of Directors adopted a shareholder purchase rightsplan (“the Rights Plan”) and declared a distribution of one Right for eachoutstanding share of the Company’s Common Stock to shareholders of record atthe close of business on March 21, 2003. Initially, the Rights will tradeautomatically with the Common Stock and separate Right Certificates will not beissued.  The Rights Plan is designed todeter coercive or unfair takeover tactics and to ensure that all of theCompany’s shareholders receive fair and equal treatment in the event of anunsolicited attempt to acquire the Company. The Rights Plan was not adopted inresponse to any effort to acquire the Company, and the Board is not aware ofany such effort. The Rights will expire on February 27, 2013 unless earlierredeemed or exchanged.  Each Rightentitles the registered holder, subject to the terms of a Rights Agreement, topurchase from the Company one one-thousandth of a share of the Company’s SeriesA Junior Participating Preferred Stock at a purchase price of $45.00 per oneone-thousandth of a share, subject to adjustment. In general, the Rights willnot be exercisable until a subsequent distribution date which will only occurif a person or group acquires beneficial ownership of 15% or more of theCompany’s Common Stock or announces a tender or exchange offer that wouldresult in such person or group owning 15% or more of the Common Stock. Withrespect to any person or group who currently beneficially owns 15% or more ofthe Company’s Common Stock, the Rights will not become exercisable unless anduntil such person or group acquires beneficial ownership of additional sharesof Common Stock.

 

Subject to certain limited exceptions, if a person or group acquiresbeneficial ownership of 15% or more of the Company’s outstanding Common Stockor if a current 15% beneficial owner acquires additional shares of CommonStock, each holder of a Right (other than the 15% holder whose Rights becomevoid once such holder reaches the 15% threshold) will thereafter have a rightto purchase, upon payment of the purchase price of the Right, that number ofshares of the Company’s Common Stock which at the time of such transaction willhave a market value equal to two times the purchase price of the Right In the eventthat, at any time after a person or group acquires 15% or more of the Company’sCommon Stock, the Company is acquired in a merger or other business combinationtransaction or 50% or more of its consolidated assets or earning power aresold, each holder of a Right will thereafter have the right to purchase, uponpayment of the purchase price of the Right, that number of shares of commonstock

 

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of the acquiring company which at the time of such transaction willhave a market value of two times the purchase price of the Right.

 

The Board of Directors of the Company may exchange the Rights (otherthan Rights owned by such person or group which have become void), in whole orin part, at an exchange ratio of one share of Common Stock per Right (subjectto adjustment).  At any time prior tothe time any person or group acquires 15% or more of the Company’s CommonStock, the Board of Directors of the Company may redeem the Rights in whole,but not in part, at a price of $0.001 per Right.

 

***Employee StockPurchase Plan***

 

In July 1999,the Company’s Board of Directors and shareholders approved the 1999 EmployeeStock Purchase Plan.  The Companyadopted this plan, which allows eligible employees to purchase shares of theCompany’s stock at 85% of market value as determined at the beginning and theend of the offering period.  A total of250,000 shares have been reserved for this plan. As of December 31, 2003,45,601 shares had been issued under this plan.

 

*Options and Warrants*

 

In 1987, theCompany’s Board of Directors adopted the 1987 Non-Qualified Stock Option Plan.The purpose of the 1987 Non-Qualified Stock Option Plan was to provide anopportunity for employees, officers, directors and consultants employed by or affiliatedwith the Company or any of its subsidiaries to acquire stock in the Company, toprovide increased incentives to such persons to promote the success of theCompany’s business and to encourage such persons to become affiliated with theCompany through the granting of options to acquire its capital stock. A totalof 897,600 shares of common stock had been reserved for issuance under the 1987Non-Qualified Stock Option Plan. The 1987 Non-Qualified Stock Option Planterminated on December 16, 1997.  As ofDecember 31, 2003, a total of 2,250 options granted remained outstanding underthe 1987 Non-Qualified Stock Option Plan.

 

In 1994, theCompany’s Board of Directors and shareholders approved the adoption of theEmployee Stock Option Plan (referred to herein as the “Employee Stock OptionPlan”). The purpose of the Employee Stock Option Plan is to provide increasedincentives to employees of the Company to remain affiliated with the Company,to promote the success of the Company’s business and to associate more closelythe interests of such persons with those of the Company through the granting ofoptions to acquire the capital stock of the Company. Under the Employee StockOption Plan, as amended in July 1999, an aggregate of 2,000,000 shares ofcommon stock have been authorized for issuance upon exercise of non-qualifiedand incentive stock options granted under the Plan. Options may be granted tothose employees of the Company who are employed a minimum of 20 hours per week.

 

In 1999, the Board of Directors and shareholders approved the adoptionof the 1999 Non-Qualified Stock Option Plan which authorizes the issuance of upto 500,000 shares of common stock upon exercise of non-qualified stock options.The purpose of the 1999 Non-Qualified Stock Option Plan is to attract andretain employees, directors, advisors and consultants and provide an incentivefor them to assist the Company to achieve long-range performance goals, and toenable them to participate in the long-term growth of the Company. Options underthe 1999 Non-Qualified Stock Option Plan may be granted to employees,directors, advisers and consultants of the Company, capable of contributingsignificantly to the successful performance of the Company.

 

The Employee Stock Option Plan and the 1999 Non-Qualified Stock OptionPlan are administered by a committee of the Board of Directors. The exerciseprice of options granted under these plans generally equals the fair marketvalue of the stock at grant date. Generally, options become exercisable at therate of 25% at the end of each of the four years following the anniversary ofthe grant. Options expire ten years from the date of grant, or 30 days from thedate the grantee’s affiliation with the Company terminates.

 

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At December 31, 2003, 1,764,163 shares were reserved for incentivestock options under the Employee Stock Option Plan, of which 967,788 areavailable for future grants; this plan terminates on June 29, 2004.  At December 31, 2003, there were 487,250shares reserved under both the 1987 Non-Qualified Stock Option Plan, whichterminated in 1997, and the 1999 Non-Qualified Stock Option Plan of which44,800 are available for future grants.

 

In August1999, the Company sold 500,000 warrants to purchase the Company’s stock toParadigm Group, a private investment company. The private placement consisted of warrants to purchase 400,000 sharesof common stock at a purchase price of $4.25 and 100,000 shares of common stockat a purchase price of $5.25.  ParadigmGroup paid the Company $50,000 for the warrants.  In addition, National Securities received warrants to purchase40,000 shares of common stock with a purchase price of $4.25, warrants topurchase 10,000 shares of common stock with a purchase price of $5.25, andwarrants to purchase 25,000 shares of common stock with a purchase price of$8.00, as a transaction fee.  InFebruary 2000, the Company received notice that Paradigm Group, LLC exercisedall of their warrants to purchase the Company’s common stock. The holders ofthe warrants were required to pay the purchase price when the registration ofthe underlying shares became effective, which was in December 2000.  In August 2000, the Company received a summonsand complaint from Paradigm Group, LLC naming the Company as a defendant.  The suit, filed in the Circuit Court of CookCounty, Illinois, alleged breach of contract claims and fraud against theCompany in connection with the sale by the Company to the Paradigm Group, LLCof the above warrants, the exercise of those warrants by Paradigm Group, LLCand a delay in the registration of those shares with the U. S. Securities andExchange Commission.  In December 2000,Paradigm Group, LLC withdrew this lawsuit. In the fourth quarter of 2000, the Company expensed approximately$265,000 of costs related to these warrants and the registration of theunderlying shares.  On June 15, 2001,the Company and Paradigm Group, LLC entered into an agreement to permanentlysettle their disputes.  Under the terms ofthe agreement, Paradigm Group, LLC rescinded their exercise of the common stockpurchase warrants, which have since expired, and the Company retained the500,000 shares associated with the warrants issued in that private placement.These shares were included in the total shares outstanding as well as in thecalculation of earnings (loss) per share from February 17, 2000 (the date ofexercise) through June 15, 2001 (the date of the agreement).  As of September 30, 2001, these shares werecancelled by the Company.

 

In November 1999, the Company sold 29,155 equity units to MDBio, Inc. aMaryland not-for profit corporation. Each equity unit consisted of one share ofcommon stock and a warrant to purchase one share of common stock with anexercise price of $10.00 per share. The common stock was issued during 2003.MDBio paid the Company $175,000 for the equity units in 1999.  The associated shares were issued to MDBioin 2003, however, the related warrants expired unexercised at the close ofbusiness September 30, 2003.

 

On September30, 1998 the Company acquired the remaining outstanding common stock(approximately 81%) of BioSeq, Inc., a development stage company with patentpending technology based on pressure cycling technology for $879,000 in cash(net of cash acquired of $121,000). In connection with the Company’sacquisition of BioSeq, Inc., the Company issued warrants to purchase 100,000shares of the Company’s common stock at a purchase exercise price of $2.50 pershare (subject to annual increases).  Noneof these warrants remain outstanding as of December 31, 2003.

 

On August 25, 2000, the Company entered into Securities PurchaseAgreements providing for the issuance of $3,250,000 (face value) 3% SeniorSubordinated Convertible Debentures due August 25, 2003. As of December 31,2003, none of the 3% Senior Subordinated Convertible Debentures wereoutstanding. In connection with this transaction, the Company issued warrants,to purchase up to 135,556 shares of the Company’s common stock at an exerciseprice of $3.60 per share.  As ofDecember 31, 2003, warrants to purchase 135,556 shares of common stock remainedoutstanding.  These warrants expire inAugust 2005.

 

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The average fair value of options granted during 2003, 2002 and 2001 isestimated as $1.81, $1.97 and $1.75, respectively.

 

The Companyhas reserved shares of its authorized but unissued common stock for thefollowing:

 
|                             |   | **Stock  Options** |   | **Warrants**                         |   |       |    |                                 |   |
|----------------------------------|--------|--------------------|--------|--------------------------------------|--------|------------|---------|--------------------------------------|--------|
|                             |   | **Shares**         |   | **WeightedAverage price  per share** |   | **Shares** |    | **WeightedAverage price  per share** |   |   |   |   |   |
| **Total**                        |
| **Shares**                       |   | **Exercisable**    |
| Balance outstanding, 12/31/2000: |   | 1,245,178          |   | $                                    | 3.06   |       | 457,730 |                                 | $      | 6.81 |   | 1,702,908 |   | 1,068,403 |   |
| Granted                          |   | 341,900            |   | 2.57                                 |   | —     |    | —                               |   | 341,900 |   |   |   |
| Exercised                        |   | (162,750           | )      | 2.43                                 |   | (829       | )       | 2.75                                 |   | (163,579 | ) |   |   |
| Cancelled                        |   | (337,041           | )      | 2.94                                 |   | (210,000   | )       | 9.80                                 |   | (547,041 | ) |   |   |
| Balance outstanding, 12/31/2001: |   | 1,087,287          |   | 3.02                                 |   | 246,901    |    | 4.13                                 |   | 1,334,188 |   | 857,574 |   |
| Granted                          |   | 608,650            |   | 2.89                                 |   | —     |    | —                               |   | 608,650 |   |   |   |
| Exercised                        |   | (42,944            | )      | 2.89                                 |   | (5,000     | )*      | 2.74                                 |   | (47,944 | ) |   |   |
| Cancelled                        |   | (257,306           | )      | 2.76                                 |   | (10,000    | )       | 4.25                                 |   | (267,306 | ) |   |   |
| Balance outstanding, 12/31/2002: |   | 1,395,687          |   | 3.01                                 |   | 231,901    |    | 4.40                                 |   | 1,627,588 |   | 789,623 |   |
| Granted                          |   | 91,700             |   | 2.73                                 |   | —     |    | —                               |   | 91,700 |   |   |   |
| Exercised                        |   | —             |   | 0.00                                 |   | 0          |    | 0.00                                 |   | — |   |   |   |
| Cancelled                        |   | (241,562           | )      | 3.25                                 |   | (96,345    | )       | 5.58                                 |   | (337,907 | ) |   |   |
| Balance outstanding, 12/31/2003: |   | 1,245,825          |   | $                                    | 2.94   |       | 135,556 |                                 | $      | 3.60 |   | 1,381,381 |   | 844,970 |   |

 

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* Includes a net exercise of 5,000 warrants for which 924 shares of theCompany's common stock were issued.

 

The following table summarizes informationconcerning options outstanding and exercisable as of December 31, 2003:

 
|                           |   |                                  |   | **Options  Outstanding** |   | **Options  Exercisable**              |   |
|--------------------------------|--------|---------------------------------------|--------|--------------------------|--------|---------------------------------------|--------|
| **Range of  Exercise  Prices** |   | **Weighted  Average  Remaining Life** |   | **Number of  Options**   |   | **Weighted  Average  Exercise Price** |   | **Number of  Options** |   | **Weighted  Average  Exercise Price** |   |
| $                              | — | -                                     | $      | 2.50                     |   | 7.0                                   |   | 239,450 |   | $ | 2.50 |   | 154,225 |   | $ |  2.50 |   |
| 2.51                           | -      | 3.00                                  |   | 8.6                      |   | 478,100                               |   | 2.68 |   | 195,513 |   | 2.67 |   |
| 3.01                           | -      | 3.50                                  |   | 6.1                      |   | 424,875                               |   | 3.18 |   | 266,001 |   | 3.22 |   |
| 3.51                           | -      | 4.00                                  |   | 6.1                      |   | 22,400                                |   | 4.00 |   | 17,300 |   | 4.00 |   |
| 4.01                           | -      | 4.50                                  |   | 5.6                      |   | 81,000                                |   | 4.31 |   | 76,375 |   | 4.30 |   |
| 0.00                           | -      | 4.50                                  |   | 7.2                      |   | 1,245,825                             |   | 2.94 |   | 709,414 |   | 3.05 |   |
|                                |        |                                       |        |                          |        |                                       |        |  |  |  |  |  |  |  |  |  |  |

 

The total number of options exercisable as of December 31, 2003, 2002and 2001 was 709,414, 557,722 and 610,673, respectively. The weighted averageexercise prices of options exercisable as of December 31, 2003, 2002 and 2001were $3.05, $3.25 and $3.13 respectively.

 

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**(12) Related Party Transaction**

 

As of December 31, 2001, the Company had entered into a one year loanof $525,000 to Richard T. Schumacher, the Company’s former Chairman and ChiefExecutive Officer and a current Director of the Company,  renewable at the Company’s option, andcollateralized by 90,000 of Mr. Schumacher’s shares of Boston Biomedica commonstock. This loan constituted an increase from the $350,000 that had been loanedas of September 30, 2001. Interest on the loan was payable at the annual rateof 7%, of which $8,216 was remitted to the Company in the spring of 2003; inFebruary 2004, the Company’s Board of Directors determined this paymentconstituted the full amount owed and that the Company and Mr. Schumacher nolonger have any further dispute over this obligation. As of December 31, 2001,the loan was shown on the balance sheet as a decrease to stockholdersequity.  In January 2002, the principalof the loan was repaid in full with a portion of the proceeds of the loansdescribed in the next sentence. The Company’s loan was replaced by theCompany’s limited guaranty and pledge of a $1,000,000 interest bearing depositat a financial institution to secure the Company’s limited guaranty of loans inthe aggregate amount of $2,418,000 from the financial institution to an entitycontrolled by Mr. Schumacher.  The loansare personally guaranteed by Mr. Schumacher. The Company’s pledge is secured by a junior subordinated interest in thecollateral provided by Mr. Schumacher to the financial institution. Suchcollateral originally included certain of his real property and all of hisCompany common stock.  The Company’soriginal loan and subsequent pledge of $1,000,000 were made to assist Mr.Schumacher in refinancing indebtedness related to, among other things, hisdivorce settlement and to enable him to avoid the need to sell his Companycommon stock on the open market to satisfy his debts.  The Company’s Board of Directors and, with respect to thedecision to pledge the $1,000,000 cash collateral, a special committee of theindependent directors, evaluated a number of options and concluded that theoriginal loan to Mr. Schumacher and the subsequent pledge were the best optionand in the best interests of the Company’s stockholders in the belief that itwould, among other things, avoid selling pressure on the Company’s common stockand relieve the financial pressures on Mr. Schumacher that could otherwisedivert his attention from the Company.

 

In January 2003, the $1,000,000 held in an interest bearing depositaccount pledged to a financial institution to secure the Company’s limitedguaranty of loans in the aggregate amount of $2,418,000 from the financialinstitution to an entity controlled by Mr. Richard T. Schumacher, the Company’sformer Chairman and Chief Executive Officer and a current Director of theCompany, was used to satisfy the Company’s limited guaranty obligation to thefinancial institution. The Company has no further obligations to the financialinstitution and has a loan receivable in the amount for $1,000,000 from Mr.Schumacher. The Company continues to maintain its junior interest in collateralpledged by Mr. Schumacher to the financial institution. As of December 31,2003, the remaining collateral includes certain of Mr. Schumacher’s Companycommon stock. The Company reflected the $1,000,000 pledge as restricted cash onits balance sheet as of December 31, 2002 until the cash was used to satisfythe Company’s limited guaranty in January 2003 and since then has reflected a$1,000,000 loan receivable on its balance sheet in stockholders’ equity.

 

As of December 31, 2003, the Company evaluated the recoverability ofthe $1,000,000 loan receivable from its former Chairman and Chief ExecutiveOfficer. The Company’s review includes an evaluation of the remainingcollateral associated with the loan. The Company maintains a junior interest inthis collateral.  The remainingcollateral consists of common stock of the Company.  When considering the adequacy of the collateral, the Companyconsiders the balance of a loan outstanding ($500,000 as of December 31, 2003)between an entity controlled by its former Chairman and Chief Executive Officerwith a financial institution and the fact that the Company has a juniorposition in regards to the remaining collateral associated with that loan, aswell as the liquidity and net realizable value of the remaining assetsunderlying the collateral.

 

The ultimate value that may be recovered by the Company is dependant onnumerous factors including market conditions relative to the value of andability to sell the Company’s common stock, and the financial status of itsformer Chairman and Chief Executive Officer. At December 31, 2003, the Companyperformed a test for impairment of the loan receivable by analyzing the valueof the collateral, and determined that the loan receivable was not impaired.While the loan receivable was not impaired as of December 31, 2003, the termination of the Company’s

 

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Chairman and Chief Executive Officerby the Board of Directors in February 2003, together with the fluctuations inthe quoted market value of the Company’s common stock, which comprises theremaining collateral, are indicators of impairment. Based on the Company’s assessmentas of and through February 2004, the Company estimates that the value of thecollateral approximates the amount of the Company’s recorded loan.  If actual market conditions are lessfavorable or other factors arise that are significantly different than thoseanticipated by management, a write-down of this asset might be required.

 

**(13) SubsequentEvents**

 

On February 5, 2004, the Company entered intoa three year, $2,500,000 line of credit agreement with a private lender.  The line of credit bears interest at thebase rate plus 3%, carries commercially standard unused line and collateralmanagement fees (payable monthly), and is collateralized by trade accountsreceivable and inventory of the Company. Borrowings under the line are limited to commercially standard terms andpercentages of accounts receivable at present. The line of credit contains acovenant regarding a minimum debt service coverage ratio, and provides certainrestrictions on the payments of dividends and incurring additional debt.

 

On February 9, 2004, the Company announced it has extended untilDecember 31, 2004 the Executive Consultant Agreement it has with Mr.Schumacher.  Under the terms of theAgreement, Mr. Schumacher will continue in an advisory role directing theCompany’s Pressure Cycling Technology (PCT) and BBI Source Scientificactivities, and the Company’s interest in Panacos Pharmaceuticals, Inc.  PCT is the Company’s novel and patentprotected technology that uses cycles of hydrostatic pressure to controlbiomolecular interactions; BBI Source Scientific, Inc. is the Company’slaboratory instrument subsidiary, which developed and manufactures the PCTBarocycler instrument; and Panacos is a privately-held, anti-viral drugdiscovery company spun off from BBI in 2000. In addition to these responsibilities, Mr. Schumacher will also take thelead role in working with William Blair & Co. the Chicago,  Illinois based investment banking firmretained by the Company in October 2002.

 

On March 1, 2004, the Company entered into aneleven year lease agreement with an existing landlord for approximately 65,160sq ft of new repository space located in Frederick, MD; this lease is scheduledto take effect in two stages, August 1, 2004 and August 1, 2005.  Assuming occupancy of the new facility bythe Company on August 1, 2004, the landlord has agreed to terminate in full theCompany’s remaining obligations pursuant to an existing facility lease whichwas scheduled to terminate in November 2006. Incremental minimum lease payments pursuant to the newlease (which are net of savings associated with the concurrent termination ofthe existing lease) would amount to $55,900 in year 2004, $885,000 in years2005-2006, $1,755,000 in years 2007-2008, and $6,563,000 thereafter. This leaseis subject to cancellation at the sole option of the Company on or before April30, 2004 without penalty.

 

On March 4, 2004, the Company entered into alease termination agreement with an existing landlord relative to a facilitypreviously occupied by BBI Clinical Laboratories, Inc., a discontinuedoperation of the Company and formerly a wholly-owned subsidiary of theCompany.  The agreement calls for aseries of reduced payments over the next nine months in return for the Companyvacating the facility on or before May 31, 2004.

 

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**(14) SelectedQuarterly Financial Data (Unaudited) (Amounts in thousands, except for per share data)**

 
| **2003**                                                                 |   | **1st Qtr** |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|--------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Total revenue                                                            |   | $           | 5,643  |        | $      | 6,023       |   | $           | 5,829  |   | $ | 5,801 |   |
| Gross profit                                                             |   | 2,186       |   | 2,146       |   | 2,022       |   | 2,077       |   |
| (Loss) from continuing operations                                        |   | (254        | )      | (225        | )      | (356        | )      | (454        | )      |
| (Loss) income from discontinued operations                               |   | —      |   | —      |   | —      |   | —      |   |
| Net income (loss)                                                        |   | $           | (254   | )           | $      | (225        | )      | $           | (356   | ) | $ | (454 | ) |
| (Loss) income per share from continuing  operations, basic & diluted |   | (0.04       | )      | (0.03       | )      | (0.05       | )      | (0.07       | )      |
| Income per share from discontinued  operations,  basic & diluted     |   | —      |   | —      |   | —      |   | —      |   |
| Net income (loss) per share, basic &  diluted                        |   | $           | (0.04  | )           | $      | (0.03       | )      | $           | (0.05  | ) | $ | (0.07 | ) |

 
| **2002**                                                                 |   | **1st Qtr** |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   |
|--------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Total revenue                                                            |   | $           | 4,953  |        | $      | 5,856       |   | $           | 5,876  |   | $ | 6,080 |   |
| Gross profit                                                             |   | 1,885       |   | 2,378       |   | 2,018       |   | 2,221       |   |
| (Loss) income from continuing operations                                 |   | (887        | )      | (294        | )      | (567        | )      | 35          |   |
| Income from discontinued operations                                      |   | —      |   | —      |   | 225         |   | —      |   |
| Net income (loss)                                                        |   | $           | (887   | )           | $      | (294        | )      | $           | (342   | ) | $ | 35 |   |
| Income (loss) per share from continuing  operations, basic & diluted |   | (0.14       | )      | (0.04       | )      | (0.08       | )      | 0.01        |   |
| Income per share from discontinued  operations, basic & diluted      |   | —      |   | —      |   | 0.03        |   | —      |   |
| Net income (loss) per share, basic &  diluted                        |   | $           | (0.14  | )           | $      | (0.04       | )      | $           | (0.05  | ) | $ | 0.01 |   |

 

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INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors of

Boston Biomedica, Inc. and Subsidiaries:

 

We have audited the accompanying consolidatedbalance sheet of Boston Biomedica, Inc. and Subsidiaries (the “Company”), as ofDecember 31, 2003 and the related consolidated statements of operations,changes in stockholders’ equity and cash flows and the financial statementschedule listed in Item 15(a)2 for the year then ended.  These consolidated financial statements andfinancial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements and financialstatement schedule based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatements.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of BostonBiomedica, Inc. and Subsidiaries as of December 31, 2003, and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States of America.****Inaddition, in our opinion, the financial statement schedule referred to abovewhen considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationrequired to be included therein.

 

 
| WEINBERG & COMPANY, P.A. |
|------------------------------|
|                         |
| Boca Raton, Florida          |
| March 4, 2004                |

 

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**Report of Independent Auditors**

 

*To the Board of Directors and Stockholders of*

Boston Biomedica, Inc.:

 

In our opinion, the consolidated financialstatements listed in the index appearing under Item 15 (a) (1) of this Form 10-K,present fairly, in all material respects, the financial position of BostonBiomedica, Inc. and its subsidiaries at December 31, 2002, and the results oftheir operations and their****cash flows for each of the two years inthe period ended December 31, 2002 in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financial statement schedulelisted in the index appearing under Item 15 (a) (1) presents fairly, in allmaterial respects, the information set forth therein for each of the two yearsin the period ended December 31, 2002 when read in conjunction with the relatedconsolidated****financial statements. These financial statements and the financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted in theUnited States of America, which require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 of Notes toConsolidated Financial Statements, in 2002 the Company adopted FinancialAccounting Standards Board Statement of Financial Accounting Standards No. 142,“Goodwill and Intangible Assets.”

 

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
|                            |
| Boston,  Massachusetts          |
| March  27, 2003            |

 

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**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On August 22, 2003, PricewaterhouseCoopers LLP resigned as theindependent accountants of the Company, effective August 22, 2003. Thereports of PricewaterhouseCoopers LLP on the Company’s consolidated financialstatements for each of the fiscal years ended December 31, 2001 andDecember 31, 2002 did not contain an adverse opinion or disclaimer ofopinion nor were they qualified or modified as to uncertainty, audit scope oraccounting principles. During the fiscal years ended December 31, 2001 andDecember 31, 2002 and through August 22, 2003, there were nodisagreements with PricewaterhouseCoopers LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, which disagreements, if not resolved to the satisfaction ofPricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP tomake reference to the subject matter of the disagreement in connection withtheir report on the financial statements for such years. In addition, duringthe fiscal years ended December 31, 2001 and December 31, 2002 andthrough August 22, 2003, there were no reportable events as defined inItem 304(a)(1)(v) of Regulation S-K.

 

On November 5, 2003, the Audit Committee of the Board of Directorsof the Company, engaged Weinberg & Company P.A. (“Weinberg & Company”)to act as the Company’s independent accountants for the remainder of fiscal2003, effective immediately.  During the fiscal yearsended December 31, 2001 and December 31, 2002 and through the datehereof, neither the Company nor anyone on its behalf consulted with Weinberg& Company with respect to any matters or events, including any matters orevents set forth and described in Items 304(a)(2)(i) and (ii) of RegulationS-K.

 

**ITEM 9A.****                                            CONTROLSAND PROCEDURES.**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Securities Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our President (Principal ExecutiveOfficer and Principal Financial Officer), as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as ours aredesigned to do, and management necessarily was required to apply its judgmentin evaluating the cost-benefit relationship of possible controls andprocedures.

 

Asof December 31, 2003, we carried out an evaluation, under the supervisionand with the participation of our management, including our President(Principal Executive Officer and Principal Financial Officer)  of the effectiveness of the design andoperation of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.Based upon that evaluation, our President (Principal Executive Officer andPrincipal Financial Officer) concluded that our disclosure controls andprocedures are effective in enabling us to record, process, summarize andreport information required to be included in our periodic SEC filings withinthe required time period.

 

There have been no changes in our internal control over financialreporting that occurred during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PARTIII**

 

**ITEM10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT.**

 

Information regarding the Company’s executiveofficers appears in Part I, Item 1-Business under the heading “ExecutiveOfficers of the Registrant” at page 18 of this report.     Set forth below is certain informationwith respect to the Company’s Directors as of February 2004.

 
| **Name**                     |   | **Age** |   | **Position**                                                   |
|------------------------------|--------|---------|--------|----------------------------------------------------------------|
| R.  Wayne Fritzsche (1)(2)   |   | 54      |   | Chairman of the Board                                          |
| Calvin  A. Saravis (1)(2)(3) |   | 74      |   | Director                                                       |
| J.  Donald Payne (1)         |   | 48      |   | Director                                                       |
| P.  Thomas Vogel (1) (2)     |   | 64      |   | Director                                                       |
| Kevin  W. Quinlan            |   | 54      |   | President  and Chief Operating Officer, Treasurer and Director |
| Richard  T. Schumacher       |   | 53      |   | Director  and Executive Project Consultant                     |

 

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(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Oversight Committee.

 

Mr. R. Wayne Fritzsche has served as Chairmanof the Board of Directors since October 2, 2003, subsequent to beingelected as a Class I Director of the Company on October 2, 2003.  Mr. Fritzsche has served as a member of theCompany’s Scientific Advisory Board since 1999.  Mr. Fritzsche is the founder of Fritzsche & Associates, Inc.,a consulting firm which provides strategic, financial, and scientific consultingto medical companies in the life sciences/healthcare arena, and has served asPresident since 1991. Since 2003, Mr. Fritzsche has also served as interimPresident of PGBP Pharmaceuticals, a small molecule discovery company, UltraImaging, Inc., a handheld imaging device company, and Immune Cell Therapy,Inc., a thrombolytic therapy company. Since 2001, Mr. Fritzsche has served as a board member of OpexaPharmaceuticals, a multiple sclerosis/cell immunology therapy company, andVascular Sciences, Inc., an extracorporeal/macular degeneration company.  He was also a board member of IntelligentMedical Imaging, an automated microscopic imaging company, from 1994 to 1997,Clarion Pharmaceuticals, a drug development company using novel esters, from1994 to 1996, Nobex Pharmaceuticals, a drug delivery firm, from 1996 to 2001,Cardio Command, Inc., a transesophageal cardiac monitoring and pacing firm,from 1999 to 2001, and Hesed BioMed, an antisense oligonucleotide and catalyticantibody company from 2000 to 2002. Mr. Fritzsche holds a BA from Rowan University,and an MBA from the University of San Diego.

 

Dr. Calvin A. Saravis has served as aDirector of the Company since 1986. Dr. Saravis also serves as Chairman of theCompany’s Scientific Advisory Board. Since 1984, he has been an AssociateProfessor of Surgery (Biochemistry) at Harvard Medical School (presentlyemeritus) and an Associate Research Professor of Pathology at Boston UniversitySchool of Medicine (presently emeritus). From 1971 to 1997, Dr. Saravis was a Senior Research Associate at theMallory Institute of Pathology and from 1979 to 1997, he was a Senior ResearchAssociate at the Cancer Research Institute-New England Deaconess Hospital.  Dr. Saravis received his Ph.D. in immunologyand serology from Rutgers University.

 

Mr. J. Donald Payne was appointed as a Director ofthe Company effective December 30, 2003 to fill the Class II Board vacancycreated by the resignation of Mr. William A. Wilson as a Director of theCompany.    Mr. Wilson, a Board membersince June 2001 and Chairman of the Board from February 2003 toOctober 2003, resigned on October 3, 2003 to pursue otheractivities.  Mr. Payne will serve theremainder of Mr. Wilson’s Board term, which is set to expire at the 2004 AnnualMeeting of Stockholders, and has been appointed to  serve as Chairman of the Audit Committee of the Board ofDirectors.  Since September 2001,Mr. Payne has been President and Director of Nanospectra Biosciences, Inc., anearly-stage, privately-held medical device company developing products forcancer, ophthalmology, and bio-defense diagnostics. From September 1998 toMay 2001, Mr. Payne served as Senior VP and CFO of Sensus Drug DevelopmentCorporation, a bio-pharmaceutical company sold to Pharmacia in 2001. Prior toSensus, from March 1997 to September 1998, Mr. Payne served as VP andCFO of LifeCell Corporation, a publicly held bio-engineering company. From May1992 to February 1997, Mr. Payne was VP Finance and CFO of Aprogenex, abiotech company engaged in the development, manufacturing, and marketing of

 

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medical device products using aproprietary DNA probe technology. Mr. Payne also worked for 10 years at UMCPetroleum Corporation and its predecessor entities, where he was CFO of itsprivate and public entities. Prior to UMC, Mr. Payne worked for Arthur Andersenin audits of public and private companies. Mr. Payne graduated summa cum laude from Texas A&M University in May1976 with a Bachelor’s Degree in Business Administration. Mr. Payne also graduatedsumma cum laude from the Jesse H. Jones Graduate School of Administration atRice University in May 1992 with a Master’s Degree in Business Administration(MBA). He is a Certified Public Accountant in Texas, and a member of the AICPAand Financial Executives Institute.

 

Mr. P. Thomas Vogel was appointed to theCompany’s Board of Directors effective January 9, 2004. In addition, Mr.Vogel was appointed to  serve on theBoard of Director’s Audit and Compensation Committees. Mr. Vogel will fill thenew Class II vacancy created by the unanimous decision by the Company’s Boardof Directors to expand its size from five to six members. The term for Class IImembers is set to expire at the 2004 Annual Meeting of Stockholders.   Mr. Vogel is the President and CEO ofAdipoGenix, Inc, an early-stage drug discovery company focusing on obesity andmetabolic diseases, with a unique approach to directly targeting the fat cellitself. From 1996 to 2000, Mr. Vogel was CEO and Director of MosaicTechnologies, Inc., an early-stage molecular biology company. In 1995, Mr.Vogel founded the Charlestown Group, a venture capital firm with a mission ofinvesting in early-stage companies in medical and information technologies. Mr.Vogel worked with the Charlestown Group until 2000. From 1992 to 1995, Mr.Vogel was President of Fisher Scientific Company, a $1billion laboratory supplydistribution business. Mr. Vogel served as President of PB Diagnostics from1991 to 1992, as President of Instrumentation Laboratory from 1990 to 1991, andas President of Serono Diagnostics from 1988 to 1990. Mr. Vogel was in theventure capital arena from 1982 to 1987. Prior to that, from 1974 to 1982, Mr.Vogel was at the Diagnostics Division of Abbott Laboratories, Inc., where heserved as Divisional Vice President and General Manager of Diagnostic Products.Mr. Vogel began his professional career at Texas Instruments, Inc., where heheld a number of key positions from 1964 to 1973, including plant management inGermany, Italy and Singapore.   Mr. Vogelgraduated from the Georgia Institute of Technology with a Bachelor’s Degree inElectrical Engineering and from The Wharton Business School with a Master’sDegree in Business Administration.

 

Mr. Kevin W. Quinlan, a Director of theCompany since 1986, has served as President and Chief Operating Officer sinceAugust 1999 and Treasurer since June 2001.  From January 1993 to August 1999, he served as SeniorVice President, Finance, Chief Financial Officer and Treasurer.  From 1990 to December 1992, he was theChief Financial Officer of ParcTec, Inc., a New York-based leasingcompany.  Mr. Quinlan served as VicePresident and Assistant Treasurer of American Finance Group, Inc. from 1981 to1989 and was employed by Coopers & Lybrand (now PricewaterhouseCoopers LLP)from 1975 to 1981.  Mr. Quinlan is aCertified Public Accountant and received a M.S. in accounting from NortheasternUniversity and a B.S. in resource economics from the University of NewHampshire.

 

Mr. Richard T. Schumacher, the Founder of theCompany, has served as a Director since 1978, and since July 9, 2003, hehas served as an Executive Project Consultant to the Company pursuant to aconsulting agreement with the Company, as described in Item 13 entitled“Certain Relationships and Related Transactions” below. He was Chief ExecutiveOfficer and Chairman of the Board from 1992 to February 2003, and servedas President from 1986 to August 1999. Mr. Schumacher served as the Director of Infectious Disease Services forClinical Sciences 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 nonprofitmedical research institute associated with Harvard Medical School.  Mr. Schumacher received a B.S. in Zoologyfrom the University of New Hampshire.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Securities ExchangeAct of 1934, as amended, requires the Company’s  officers and directors, and persons who own more than 10% of theCompany’s Common Stock, to file reports of ownership and changes in ownershipon Forms 3, 4 and 5 with the Securities and Exchange Commission and  Nasdaq. Officers, directors and greater than 10% stockholders are required bySEC regulations to furnish the Company with copies of all Forms 3, 4 and 5 theyfile.

 

Based solely on the Company’s review of thecopies of such filings it has received and written representations from certainreporting persons, the Company believes that all of its officers, directors andgreater than 10% stockholders complied with all Section 16(a) filingrequirements applicable to them during the Company’s fiscal year endedDecember 31, 2003.

 

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**Code ofEthics**

 

Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, we haveadopted a Code of Ethics for Senior Financial Officers that applies to ourprincipal executive officer and our principal financial officer, principalaccounting officer and controller, and other persons performing similarfunctions.  The company willprovide a copy of its code of ethics to any person without charge uponrequest.    If wemake any substantive amendments to this Code of Ethics or grant any waiver,including any implicit waiver, from a provision of this Code of Ethics to ourprincipal executive officer, principal financial officer, principal accountingofficer, controller or other persons performing similar functions, we willdisclose the nature of such amendment or waiver, the name of the person to whomthe waiver was granted and the date of waiver in a report on Form 8-K.

 

**AuditCommittee**

 

We have an Audit Committee, which consists of Mr. R. Wayne Fritzsche,Dr. Calvin A. Saravis, Mr. J. Donald Payne and Mr. P. Thomas Vogel. The Boardof Directors has reviewed the qualifications of each member of the AuditCommittee and has determined that each member of the Audit Committee is“independent” under the current listing standards of the Nasdaq National Marketapplicable to Audit Committee members. Our Board of Directors has alsodetermined that Mr. J. Donald Payne qualifies as an Audit Committee FinancialExpert, as defined in Item 401(h) of Regulation S-K and Section 407 of theSarbanes-Oxley Act of 2002, and is independent in accordance with applicableNasdaq listing standards.  Otherinformation regarding the Audit Committee of our Board of Directors isincorporated by reference to the Proxy Statement under the caption “*Report of the Audit Committee of the Board ofDirectors*.”

 

**ITEM 11.****                                              EXECUTIVECOMPENSATION**

 

The followingSummary Compensation Table sets forth the compensation during the last threefiscal years of (i) each person who served as Chief Executive Officer duringfiscal year 2003, and (ii) the four other most highly compensated ExecutiveOfficers of the Company who were serving as Executive Officers at the end offiscal 2003 and whose total annual salary and bonus, if any, exceeded $100,000for services in all capacities to the Company during the fiscal year endedDecember 31, 2003 (collectively, the “Named Executive Officers”).

 

SummaryCompensation Table

 
|                             |   |                    |   | **Annual  Compensation** |    | **Long Term  Compensation** |         |                            |         |
|----------------------------------|--------|-------------------------|--------|--------------------------|---------|-----------------------------|--------------|---------------------------------|--------------|
| **Name and  Principal Position** |   | **Fiscal  Year  Ended** |   | **Salary  ($)**          |    | **Bonus  ($)**              |         | **Other  Annual  Compensation** |         | **Securities  Underlying  Stock Options (#)** |   | **All Other  Compensation  ($ ) (6)** |   |
| Richard T. Schumacher,           |   | 12/31/03                |   | $                        | 30,769  | (2)                         | —       |                            | $            | 123 | (5) | -0- |   | $ | 5,731 | (3)(4) |
| Former Chief Executive           |   | 12/31/02                |   | 245,866                  |    | —                      |         | 1,019                           | (5)          | 90,000 |   | 6,616 | (3)(4) |
| Officer and Chairman             |   | 12/31/01                |   | 237,500                  |    | —                      |         | 1,163                           | (5)          | 40,000 |   | 7,703 | (3)(4) |
| of the Board (1) (2)             |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
|                             |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
| Kevin W. Quinlan,                |   | 12/31/03                |   | $                        | 194,250 |                        | —       |                            | $            | 3,513 | (5) | -0- |   | $ | 2,909 | (3)(4) |
| President and Chief              |   | 12/31/02                |   | 191,769                  |    | —                      |         | 2,973                           | (5)          | 107,000 |   | 2,909 | (3)(4) |
| Operating Officer,               |   | 12/31/01                |   | 185,000                  |    | —                      |         | 3,575                           | (5)          | 24,000 |   | 2,854 | (3)(4) |
| Treasurer and Director           |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
|                             |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
| Mark M. Manak, Ph.D.             |   | 12/31/03                |   | $                        | 147,000 |                        | —       |                            | —       |   | -0- |   | $ | 676 | (4) |
| Senior Vice President and        |   | 12/31/02                |   | 147,000                  |    | —                      |         | —                          |         | 46,500 |   | 675 | (4) |
| General Manager, BBI             |   | 12/31/01                |   | 141,346                  |    | —                      |         | —                          |         | — |   | 638 | (4) |
| Biotech                          |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
|                             |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
| Kathleen W. Benjamin             |   | 12/31/03                |   | $                        | 119,538 |                        |  — |                            |  — |   | -0- |   | $ | 342 | (4) |
| Vice President,                  |   | 12/31/02                |   | 115,508                  |    | —                      |         | —                          |         | 10,000 |   | 342 | (4) |
| Human Resources and              |   | 12/31/01                |   | 102,754                  |    | —                      |         | —                          |         | 6,000 |   | 212 | (4) |
| Clerk                            |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
|                             |   |                    |   |                     |    |                        |         |                            |         |   |   |   |   |
| Richard J. D’Allessandro,   |   | 12/31/03                |   | $                        | 124,917 |                        | —       |                            | —       |   | -0- |   | $ | 1,037 | (4) |
| Vice President, Information      |   | 12/31/02                |   | 121,964                  |    | —                      |         | —                          |         | 10,000 |   | 1,037 | (4) |
| Technology                       |   | 12/31/01                |   | 117,046                  |    | —                      |         | —                          |         | 6,000 |   | 853 | (4) |
|                                  |        |                         |        |                          |         |                             |              |                                 |              |  |  |  |  |  |  |  |  |

 

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(1) In 2001, the Company’s Board of Directorsauthorized loans from the Company to Mr. Schumacher totaling $450,000.  Mr. Schumacher borrowed an additional$75,000 from the Company late in 2001. In January 2002, the principal of these loans were repaid infull.  The loans were replaced by theCompany’s pledge of a $1,000,000 interest bearing deposit at a financialinstitution to provide additional security for loans in the aggregate amount of$2,418,000 from the financial institution to an entity controlled by Mr.Schumacher. In January 2003, the $1,000,000 pledged to the financialinstitution was used to satisfy the Company’s guaranty obligation to thefinancial institution.  For a detaileddescription of the terms of these transactions, please see “CertainRelationships and Related Transactions” in Item 13 of this report below.

(2) On February 14, 2003, the Companyannounced that it had terminated Mr. Schumacher as Chairman of the Board andChief Executive Officer.   Mr.Schumacher remains a Director of the Company. The salary data presented in thischart for Mr. Schumacher covers the period January 1, 2003 through andincluding February 13, 2003, and excludes $41,353 of accrued vacationearned and paid subsequent to February 13, 2003. On July 9, 2003, theCompany announced Mr. Schumacher agreed to accept an engagement with theCompany as an Executive Project Consultant to advise the Company with respectto the strategic direction of the Company’s PCT and BBI Source Scientificactivities and the Company’s ownership interest in Panacos Pharmaceuticals,Inc.  In February 2004, thisagreement was extended through December 31, 2004.  For a description of the terms of theCompany’s consulting agreement with Mr. Schumacher including compensationarrangements and director fees, please see “Compensation of Directors” and  “Boardof Directors Report on Executive Compensation” hereunder and ** **Item13 “Certain Relationships and Related Transactions” below.

(3) Includes the value of premiums paid forterm life and disability insurance policies. Included in the year 2003 amountsare the value of premiums for term life and disability insurance, respectively,for Mr. Schumacher ($4,450  and $498,respectively), and  for Mr. Quinlan ($0and $1,970, respectively).  Included inthe year 2002 amounts are the value of premiums for term life and disabilityinsurance, respectively, for Mr. Schumacher ($3,382  and $1,992, respectively), and for Mr. Quinlan ($0 and $1,970, respectively).

(4) Includes the value of imputed income fromgroup life insurance.

(5) Consists of personal use of a Companyvehicle.

(6) Year 2003 compensation excludes thefollowing amounts pursuant to Company matching contributions associated withyear 2003 participation in the Company’s 401K plan:  Mr. Schumacher - $1,921; Mr. Quinlan - $2,062; Mr. Manak — $1,526;  Ms. Benjamin - $1,237; and Mr. D’Allessandro - $928.

 

The following tables set forth certain information with respect to thestock options granted to and exercised by the Named Executive Officers duringfiscal 2003 and the aggregate number and value of options exercisable andunexercisable held by the Named Executive Officers during fiscal 2003.

 

### **OptionGrants in Fiscal Year 2003**

 

There were no options grantedby Boston Biomedica, Inc. to any of the Named Executive Officers in fiscal year2003.

 

AggregatedOption Exercises in LastFiscal Year and Fiscal Year End Option Values

 
| **Name**                      |   | **Shares  Acquired  on  Exercise (#)** |            | **Value****Realized  ($ ) (1)** |                 | **Number of  Securities  Underlying Unexercised  Options at Year End (#) (2)** |   | **Value of  Unexercised  In-the-Money Options  at Year End ($ ) (3)** |   |
|-------------------------------|--------|----------------------------------------|-----------------|---------------------------------|----------------------|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Exercisable**               |   | **Un-exercisable**                     | **Exercisable** |                            | **Un-  exercisable** |
| Richard T. Schumacher         |   | —                                 |            | —                          |                 | 42,500                                                                         |   | 87,500                                                                |   | $ | 600 |   | $ | 600 |   |
| Kevin W. Quinlan              |   | —                                 |            | —                          |                 | 85,000                                                                         |   | 78,500                                                                |   | 360 |   | 360 |   |
| Mark M. Manak, Ph.D.          |   | —                                 |            | —                          |                 | 32,625                                                                         |   | 27,375                                                                |   | -0- |   | -0- |   |
| Kathleen W. Benjamin          |   | —                                 |            | —                          |                 | 19,500                                                                         |   | 10,500                                                                |   | 390 |   | 390 |   |
| Richard J. D’Allessandro |   | —                                 |            | —                          |                 | 13,500                                                                         |   | 10,500                                                                |   | 390 |   | 390 |   |
|                               |        |                                        |                 |                                 |                      |                                                                                |        |                                                                       |        |  |  |  |  |  |  |

 

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(1)   The “value realized” represents the excess ofthe fair market value over the purchase price at the time of purchase basedupon the closing price of the Common Stock on the Nasdaq National Market on thedate of exercise, minus the respective option exercise price. There were noBoston Biomedica, Inc. stock options exercised by the Named Executive Officersin fiscal year 2003.

(2)   Includes the number of shares underlying both“exercisable” (i.e., vested) and “un-exercisable” (i.e., unvested) stockoptions as of December 31, 2003.

(3)   Thevalues of “in-the-money” options reflect the positive spread between theexercise price of any such existing stock options and the closing year-end pershare price of the Common Stock of $2.63, as quoted on the Nasdaq NationalMarket on December 31, 2003.

 

**Compensation of Directors**

 

Non-employeeDirectors of the Company received a quarterly stipend of $2,500, for a yearlytotal of $10,000 for their services in 2003. In addition, in 2003, each non-employee Director who is a member of theAudit Committee received an additional $500 per quarter for a yearly total of$2,000 and each non-employee Director who is a member of the CompensationCommittee received an additional $500 per quarter for a yearly total of$2,000.  As additional Directorcompensation in recognition of the significant additional effort and time theywere required to devote to their responsibilities on the Oversight Committee,Mr. Wilson was paid $94,044, Dr. Saravis was paid $20,095 and Mr. Capitanio (aDirector of the Company until October 2, 2003) was paid $3,986 for timespent (and expenses incurred) in year 2003 discharging their responsibilitiesfor the Oversight Committee. No further payments are anticipated to members ofthe Oversight Committee.   Each Directoris eligible to receive options to purchase Common Stock under the Company’s1999 Non-Qualified Stock Option Plan. Non-employee Directors of the Company aregranted a minimum of 10,000 non-qualified stock options at the start of theirterm of service, which generally vest over a three year period and have anexercise price equal to the fair market value of the underlying shares on thedate of the grant.  During the periodFebruary 13, 2003 to June 30, 2003, Mr. Schumacher received $3,777 ofcompensation from the Company in his role as a member of the Board of Directorsduring that time frame.

 

EffectiveJanuary 1, 2004, compensation for independent members of the Board ofDirectors will be set at a monthly stipend of $2,000, of which $1,000 will becompensation for attending full Board meetings (whether telephonic orin-person) and $1,000 will be compensation for attending committee meetings.There will be no limit to the number of either full Board or committee meetingscalled, nor will any independent member receive more than $2,000 per monthregardless of the number of meetings attended. It is furthermore expected that each independent Board member who is notChairman of the Board will be Chairman of the Audit, Compensation or ScientificAdvisory Board Committees. It is also expected that each independent Boardmember will also serve on at least one committee that they do not Chair.  In addition to cash compensation, each independentmember of the BBI Board of Directors will also receive a one-time grant of10,000 fully vested, non-qualified stock options, as well as an annual grant of5,000 fully vested, nonqualified stock options. The initial set of options willbe granted as soon as feasible upon joining the Board; the annual set ofoptions will be granted on the first business day of March each year. Cashcompensation will be paid in the first payroll of each fiscal quarter.

 

**Compensation Committee Interlocks andInsider Participation**

 

For the fiscal year endedDecember 31, 2003, the Board of Directors made decisions regardingexecutive compensation based on the recommendations of those members of theBoard of Directors who also serve on the Compensation Committee.  The individuals who served on theCompensation Committee in fiscal year 2003 and who made recommendations to thefull Board of Directors consisted of Richard T. Schumacher, Dr. Calvin A.Saravis, William A. Wilson, and Francis E. Capitanio each of whom has receivedoptions to purchase Common Stock.  Mr.Schumacher served as the Chief Executive Officer and Chairman of the Board of the Company in fiscal year2002 and through February 13, 2003. Effective February 13, 2003, Mr. Capitanio replaced Mr. Schumacheras a member of the Compensation Committee; Mr. Capitanio did not standfor reelection as a member of the Board of Directors and accordingly, his termof office expired on October 2,, 2003.  Mr. Wilson resigned as a Director of theCompany on October 3, 2003.   NeitherDr. Saravis, Mr. Capitanio nor Mr. Wilson is or was a former nor currentofficer nor employee of the Company.

 

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In fiscal 2003, the membersof the Compensation Committee did not meet formally as a committee, but rathermade recommendations regarding executive compensation at meetings of the fullBoard of Directors.  The full Board ofDirectors then made final decisions regarding executive compensation.  Neither Mr. Schumacher nor Mr. Quinlanparticipated in any voteor deliberations establishing their own compensation.

 

**Board of Directors Report on Executive Compensation**

 

As described above under theheading “Compensation Committee Interlocks and Insider Participation”, for thefiscal year ended December 31, 2003, the full Board of Directors madedecisions regarding executive compensation based on the recommendations ofthose members of the Board of Directors who serve on the CompensationCommittee.  These recommendations weremade at meetings of the full Board of Directors. The Compensation Committee didnot hold any formal meetings during fiscal year 2003. These individuals maderecommendations and presentations to the full Board of Directors oncompensation levels, including salaries, incentive plans, benefits and overallcompensation for officers and Directors and issuance of stock options toofficers, Directors and employees. Subsequent to the recommendation of these individuals, the Board ofDirectors then voted on these proposals.

 

The primary objective indetermining the type and amount of Executive Officer compensation is to providea level of base compensation which allows the Company to attract and retainsuperior talent.  The Board of Directorsendeavors to align the Executive Officer’s interests with the success of theCompany through participation in the Company’s employee stock option plan,which provides the Executive Officer with the opportunity to build asubstantial ownership interest in the Company.

 

The compensation ofExecutive Officers includes cash compensation, the grant of stock options, andparticipation in benefit plans generally available to employees.  In determining base salary, consideration isgiven to executive compensation for comparably sized companies as well as theindividual experience and performance of each Executive Officer and theperformance of the Company generally. Base salary recommendations are at a level believed to be comparable tocash compensation of officers with similar responsibilities in similarly situatedcorporations.

 

Each of the ExecutiveOfficers, including Mr. Schumacher through February 13, 2003,,and allfull-time employees are eligible to receive grants of options under theCompany’s employee stock option plans. The employee stock option plans are used to provide incentives toofficers and employees and to associate more closely the interests of suchpersons with stockholders’ interests and the long-term success of theCompany.  In determining the number ofoptions to be granted to each Executive Officer or employee, a subjectivedetermination is based on factors such as the individual’s level ofresponsibility, performance, and number of options held. During fiscal 2003, nooptions were granted to the Named Executive Officers under the employee stockoption plans.

 

In 2002, the Company’s Board of Directors established a target bonusprogram for Mr. Schumacher and Mr. Quinlan. There were no bonuses accrued norpaid in year 2003 pursuant to this program. During the period January 1, 2003 through February 13, 2003,Mr. Schumacher, the Company’s Chief Executive Officer during that period,received salary of $30,769 which excluded accrued vacation earned to andincluding February 13, 2003 in the amount of $41,353.  The Board of Directors believes that hisannualized base compensation ($250,000) was comparable to the cash compensationof Chief Executive Officers of comparable companies.  Mr. Schumacher was not granted any stock options in fiscal year2003 by the Company.

 

OnJuly 9, 2003, the Company announced that Mr. Schumacher, a Director of theCompany, agreed to accept an engagement with the Company as an ExecutiveProject Consultant to advise the Company with respect to the strategicdirection of the Company’s PCT and BBI Source Scientific activities and theCompany’s ownership interest in Panacos Pharmaceuticals, Inc.  BBI Source Scientific, Inc. is the Company’sCalifornia-based instrument subsidiary, which developed and manufactures thePCT Barocycler instrument.  As part ofthis engagement, Mr. Schumacher has continued to reevaluate the ongoingbusiness prospects for both the Company’s Laboratory Instrumentation segmentand PCT activities. On February 9, 2004, the Company announced it hadextended until December 31, 2004 the Executive Consultant Agreement it haswith Mr. Schumacher.  Under the terms ofthe Consulting Agreement, Mr. Schumacher is serving in an advisory roledirecting the Company’s PCT and BBI Source

 

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Scientific activities, the Company’sinterest in Panacos Pharmaceuticals, Inc. and such other duties as thePresident or the Board of Directors of the Company assigns to him.   In connection with his ConsultingAgreement, Mr. Schumacher is being paid an annualized salary of $250,000.  In addition to his salary, Mr. Schumachermay receive, in the discretion of the Company’s Board of Directors, a bonus inan amount to be determined by the Board of Directors in recognition of thesuccessful completion of his duties and responsibilities under the agreement,and he is also eligible to participate in the Company’s health andmedical insurance, disability insurance, group life insurance and group travelinsurance, and 401(k) retirement plans.

 

During theperiod January 1, 2003 through February 13, 2003, Mr. Schumacher, theCompany’s Chief Executive Officer during that period, received a baseannualized salary of $250,000 plus $41,353 of accrued vacation pay remitted toMr. Schumacher in late February 2003 subsequent to his termination asChairman and Chief Executive Officer on February 13, 2003. The  Board of Directors believes this annualizedcompensation was comparable to the cash compensation of Chief ExecutiveOfficers of comparable companies.

 

The Compensation Committee,in determining the CEO’s and the President’s compensation, reviews compensation for CEOs and Presidents ofpublicly-held companies of similar size, including thosein business of detection and treatment of infectiousdiseases and similar businesses, their individual performance againstquantitative and qualitative goals, and our Company’s performance.

 

Section 162(m)of the Internal Revenue Code generally disallows a tax deduction forcompensation over $1,000,000 paid by a public company to its chief executiveofficer and its four other most highly compensated executive officers.Qualifying “performance-based” compensation is not subject to the deductionlimit if specified requirements are met. The Board of Directors generallyintends to structure stock options granted to its executive officers in amanner to qualify as performance-based compensation under Section 162(m).While the Board of Directors does not currently intend to qualify cashcompensation as performance-based compensation for purposes of Section 162(m),it will continue to monitor the impact of Section 162(m) on the Company.

 
|   | Board of Directors    |
|--------|-----------------------|
|   |                  |
|   | R. Wayne Fritzsche    |
|   | Dr. Calvin A. Saravis |
|   | J. Donald Payne       |
|   | P. Thomas Vogel       |
|   | Richard T. Schumacher |
|   | Kevin W. Quinlan      |

 

79

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**Performance Graph**

 

The followinggraph compares the change in the Company’s cumulative total stockholder returnfrom December 31, 1998 to December 31, 2003, which includes the lasttrading day of fiscal 2003, with the cumulative total return on the NasdaqStock Market Index (Composite) and the Nasdaq Stock Market Index  (Biotechnology) (SIC 2830-2839 U.S. andForeign) for that period.

 

 

Legend

 
| **Symbol**                    |   | **Index  Description**              |   | **12/31/98** |   | **12/31/99** |   | **12/31/00** |   | **12/31/01** |   | **12/31/02** |   | **12/31/03** |   |
|-------------------------------|--------|-------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|
| - —  ̈-  — |   | Boston Biomedica, Inc.              |   | 100.00       |   | 96.83        |   | 54.73        |   | 98.35        |   | 101.04       |   | 88.58        |   |
| ____o___                      |   | Nasdaq Stock Market (Biotechnology) |   | 100.00       |   | 201.64       |   | 248.00       |   | 207.81       |   | 113.62       |   | 165.59       |   |
| —D—                 |   | Nasdaq Stock Market (Composite)     |   | 100.00       |   | 185.59       |   | 112.67       |   | 88.95        |   | 60.91        |   | 91.37        |   |

 

Assumes $100 invested onDecember 31, 1998 in the Company’s Common Stock, the Nasdaq Stock MarketIndex (Biotechnology) and the Nasdaq Stock Market Index (Composite), and thereinvestment of any and all dividends.

 

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**ITEM 12.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

 

The followingtable sets forth certain information as of December 31, 2003 concerningbeneficial ownership of Common Stock by each Director and each Named ExecutiveOfficer in the Summary Compensation Table under “Executive Compensation” below,all Executive Officers and Directors as a group, and each person known by theCompany to be the beneficial owner of 5% or more of the Company’s CommonStock.  Unless otherwise noted, eachperson identified below possesses sole voting power and investment power withrespect to the shares listed. This information is based upon informationreceived from or on behalf of the named individuals.

 
| **Name ***                                                                                                            |   | **Number of  Shares of Common Stock Beneficially Owned** |   | **Percent of  Class** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------|--------|
| Richard T. Schumacher (1) (5) *  65 Black Pond Road  Taunton, MA 02780                                                |   | 737,797                                                  |   | 10.68                 | %      |
| Kevin W. Quinlan (1)                                                                                                  |   | 129,744                                                  |   | 1.87                  | %      |
| Mark M. Manak, Ph.D. (1)(2)                                                                                           |   | 65,257                                                   |   | **                    |   |
| Kathleen W. Benjamin (1)                                                                                              |   | 22,416                                                   |   | **                    |   |
| Richard J. D’Allessandro (1)                                                                                     |   | 15,750                                                   |   | **                    |   |
| Calvin A. Saravis, Ph.D. (1)                                                                                          |   | 39,290                                                   |   | **                    |   |
| R. Wayne Fritzsche (1)                                                                                                |   | 3,000                                                    |   | **                    |   |
| J. Donald Payne (1)                                                                                                   |   | -0-                                                      |   | **                    |   |
| P. Thomas Vogel (1)                                                                                                   |   | -0-                                                      |   | **                    |   |
| All Executive Officers and Directors as a  group  (11 Persons)(1)(2)                                                  |   | 1,092,653                                                |   | 15.25                 | %      |
| Richard P. Kiphart (3) *  c/o William Blair & Company, L.L.C.  222 West Adams Street  Chicago IL 60606            |   | 1,542,989                                                | (3)(4) | 22.60                 | %      |
| Shoreline Micro-Cap Fund I LP (4)*  c/o William Blair & Company, L.L.C.  222 West Adams Street  Chicago, IL 60606 |   | 365,613                                                  | (4)    | 5.35                  | %      |

 

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*                             Addressprovided for beneficial owners of more than 5% of the Common Stock.

**                      Lessthan 1% of the outstanding Common Stock.

(1)                      Includesthe following shares issuable upon exercise of options exercisable within 60days after December 31, 2003:  Mr.Schumacher — 57,500; Mr. Quinlan — 98,000; Dr. Manak —36,750; Ms. Benjamin —20,750; Mr. D’Allessandro —14,750; Dr. Saravis — 28,334; Mr. Fritzsche —3,000;Mr. Payne — 0; Mr. Vogel  — 0;  all other Executive Officers —56,750.  629,957 of Mr. Schumacher’s shares of stockhave been pledged to a financial institution. Please see Item 13, CertainRelationships and Related Transactions.

(2)                      Includes4,000 shares held of record by  Dr.  Manak’s daughter and 24,507 shares held inDr.  Manak’s name.

(3)                      Includes90,000 shares held by Rebecca Kiphart (Mr. Kiphart’s daughter), and alsocurrently exercisable warrants (expiring August 2005) to purchase 27,734shares of common stock.  This amountalso includes 365,613 shares beneficially owned by Shoreline Micro-Cap Fund ILP described in Note 4 below.

(4)                      Includes357,791 shares, and also currently exercisable warrants (expiringAugust 2005) to purchase 7,822 shares of common stock, held by ShorelineMicro-Cap Fund I LP, a fund of which Mr. Kiphart serves as general partner andhas the sole power to vote and dispose or direct the disposition of shares heldby Shoreline Micro-Cap Fund I LP.

(5)                      Includes20,473 shares and 21,917 options held by Mr. Schumacher’s spouse.

 

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We maintain a number of equitycompensation plans for employees, officers, directors and other entities andindividuals whose efforts contribute to our success.  The table below sets forth certain information as of our fiscalyear ended December 31, 2003 regarding the shares of our common stockavailable for grant or granted under the Company’s equity compensation plans.

 

Equity Compensation Plan Information

 
| **Plan category**                                               |   | **Number of  securities to be  be issued upon  exercise of  outstanding  options,  warrants  and  rights  (a)** |   | **Weighted-  average  exercise  price of  outstanding  options,  warrants  and rights  (b)** |   | **Number of  securities  remaining  available for  future issuance  under equity  compensation  plans  (excluding  securities  reflected in  column (a))  (c)** |      |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                            |   |                                                                                                            |   |                                                                                         |   |                                                                                                                                                            |      |
| Equity compensation plans approved by  security holders (1)     |   | 1,238,825                                                                                                       |   | $                                                                                            | 2.94   |                                                                                                                                                            | 1,216,987 |   |
|                                                            |   |                                                                                                            |   |                                                                                         |   |                                                                                                                                                            |      |
| Equity compensation plans not approved by  security holders (2) |   | 142,556                                                                                                         |   | $                                                                                            | 3.58   |                                                                                                                                                            | 0         |   |
|                                                            |   |                                                                                                            |   |                                                                                         |   |                                                                                                                                                            |      |
| Total                                                           |   | 1,381,381                                                                                                       |   | $                                                                                            | 3.00   |                                                                                                                                                            | 1,216,987 |   |

 

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(1)   Includesthe following plans: 1987 Non-Qualified Stock Option Plan, 1999 Non-QualifiedStock Option Plan, Employee Stock Option Plan, and 1999 Employee Stock PurchasePlan.

 

(2)   Includesthe following plans: (i) options to purchase 7,000 shares of common stockgranted to a former employee upon hiring him: and (ii) warrants to purchase135,556 shares of common stock issued to the purchasers of convertibledebentures issued in August 2000. A description of each of these plans is as follows:

 

a)              InJanuary 1999, the Company granted non-qualified options to purchase 40,000shares of common stock to a former officer of the Company at an exercise priceof $3.25 per share upon the hiring of such officer. These options expire inJanuary 2009. As of December 31, 2003, options to purchase 7,000shares of common stock remained outstanding.

 

b)           On August 25, 2000, the Company entered into Securities PurchaseAgreements providing for the issuance of $3,250,000 (face value) 3% SeniorSubordinated Convertible Debentures due August 25, 2003. As ofDecember 31, 2003, none of the 3% Senior Subordinated ConvertibleDebentures were outstanding. In connection with this transaction, the Companyissued warrants, to purchase up to 135,556 shares of the Company’s common stockat an exercise price of $3.60 per share. As of December 31, 2003, warrants to purchase 135,556 shares ofcommon stock remained outstanding. These warrants expire in August 2005.

 

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**ITEM 13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

 

In August 2000, the Company issued $3,250,000 of 3% SeniorSubordinated Convertible Debentures (“the Debentures”) to investors, of which$780,000 were issued to Mr. Richard P. Kiphart and $220,000 were issued toShoreline Micro-Cap Fund I L.P.  InJanuary 2001, Mr. Kiphart and Shoreline Micro-Cap Fund I L.P. exercisedtheir conversion rights associated with these Debentures, thereby receiving662,685 shares of Common Stock of the Company. In December 2001, the Company sold an additional 600,000 shares ofCommon Stock of the Company for an aggregate purchase price of $1,500,000 in aprivate placement to five accredited investors including 430,000 shares whichwere purchased by Mr. Kiphart.  Theshares were issued in the first quarter of fiscal 2002.    As part of this transaction, Mr. Kiphartand Shoreline Micro-Cap Fund I L.P received warrants to purchase 27,734 and7,822 additional shares of common stock of the Company at an exercise price of$3.60; these warrants remain outstanding as of December 31, 2003 andexpire in August 2005.

 

In 2001, the Company’s Board of Directorsauthorized loans from the Company to Richard T. Schumacher, the Company’sformer Chairman and Chief Executive Officer and a current Director of theCompany, totaling $450,000. Mr. Schumacher borrowed an additional $75,000 fromthe Company late in 2001.* * The one year loan was renewable at theCompany’s option, and collateralized by 90,000 of Mr. Schumacher’s shares ofthe Company’s common stock. This loan constituted an increase from the $350,000that had been loaned to Mr. Schumacher as of September 30, 2001. Intereston the loan was payable at the annual rate of 7%, of which $8,216 was remitted tothe Company in the spring of 2003; in February 2004, the Company’s Boardof Directors determined this payment constituted the full amount owed and thatthe Company and Mr. Schumacher no longer have any further dispute over thisobligation.

 

In January 2002, the principal of the loan was repaid in full witha portion of the proceeds of the loans described in the followingsentence.   The Company’s loan wasreplaced by the Company’s limited guaranty and pledge of a $1,000,000 interestbearing deposit at a financial institution to secure the Company’s limitedguaranty of loans in the aggregate amount of $2,418,000 from the financialinstitution to an entity controlled by Mr. Schumacher.  The loans are personally guaranteed by Mr.Schumacher.  The Company’s pledge issecured by a junior subordinated interest in the collateral provided by Mr.Schumacher to the financial institution. Such collateral includes certain ofhis real property and all of his Company common stock.

 

The Company’s original loan and subsequent pledge of $1,000,000 weremade to assist Mr. Schumacher in refinancing indebtedness related to, amongother things, his divorce settlement and to enable him to avoid the need tosell his Company common stock on the open market to satisfy his debts.  The Company’s Board of Directors and, withrespect to the decision to pledge the $1,000,000 cash collateral, a specialcommittee of the independent directors, evaluated a number of options andconcluded that the original loan to Mr. Schumacher and the subsequent pledgewere the best option and in the best interests of the Company’s stockholders inthe belief that it would, among other things, avoid selling pressure on theCompany’s common stock and relieve the financial pressures on Mr. Schumacherthat could otherwise divert his attention from the Company.

 

In January 2003, the $1,000,000 held in an interest bearingdeposit account pledged to a financial institution to secure the Company’slimited guaranty of loans in the aggregate amount of $2,418,000 from thefinancial institution to an entity controlled by Mr. Richard T. Schumacher, theCompany’s former Chairman and Chief Executive Officer and a current Director ofthe Company, was used to satisfy the Company’s limited guaranty obligation tothe financial institution. The Company has no further obligations to thefinancial institution and has a loan receivable in the amount for $1,000,000from Mr. Schumacher.  The Companymaintains a junior security interest in the collateral pledged by Mr.Schumacher to the financial institution. As of December 31, 2003, the remaining collateral includes certainof Mr. Schumacher’s common stockholdings in the Company.

 

On February 14, 2003, the Company announced that its Board ofDirectors terminated Mr. Schumacher as Chairman and Chief Executive Officer,effective immediately.  Mr. Schumacherremains a Director of the Company. Kevin W. Quinlan, President and ChiefOperating Officer, continued to lead day-to-day operations.  A special committee of the Board ofDirectors was appointed to oversee the management of the affairs of the Companyuntil such time as a new Chief Executive Officer is employed.

 

On July 9, 2003, the Company announced that Mr. Schumacher agreedto accept an engagement with the Company as an Executive Project Consultant toadvise the Company with respect to the strategic direction of the Company’s PCTand BBI Source Scientific activities and the Company’s ownership interest inPanacos

 

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Pharmaceuticals, Inc., effective June 30, 2003.   BBI Source Scientific, Inc. is theCompany’s California-based instrument subsidiary, which developed andmanufactures the PCT Barocycler instrument. As part of this engagement, Mr. Schumacher has continued to reevaluatethe ongoing business prospects for both the Company’s LaboratoryInstrumentation segment and PCT activities. During the period February 13, 2003 to June 30, 2003, Mr.Schumacher received $3,777 of compensation from the Company in his role as amember of the Board of Directors during that time frame.

 

On February 9, 2004, the Company announced it had extended untilDecember 31, 2004 the Executive Consultant Agreement it has with Mr.Schumacher.  Under the terms of theConsulting Agreement, Mr. Schumacher is serving in an advisory role directingthe Company’s PCT and BBI Source Scientific activities, the Company’s interestin Panacos Pharmaceuticals, Inc. and such other duties as the President or theBoard of Directors of the Company assigns to him.   In connection with his Consulting Agreement, Mr. Schumacher isbeing paid an annualized salary of $250,000. In addition to his salary and reimbursement for business related travelexpenses, Mr. Schumacher may receive, in the discretion of the Company’s Boardof Directors, a bonus in an amount to be determined by the Board of Directorsin recognition of the successful completion of his duties and responsibilitiesunder the agreement, and he is also eligible to participate in the Company’shealth and medical insurance, disability insurance, group life insurance andgroup travel insurance, and 401(k) retirement plans.

 

On October 25, 2002, the Company retained the investment bankingfirm of William Blair and Company to advise the Company in the evaluation ofstrategic opportunities aimed at increasing shareholder value and liquidity byincreasing the capital needed for growth.  Mr. Richard P. Kiphart, an investor who owns or controls approximately22.60% of the common stock of the Company as of December 31, 2003,  is a Principal and Head of the CorporateFinance Department of William Blair and Company.  Their engagement remains ongoing at this time.

 

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**ITEM 14.   ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**IndependentAuditor Fees**

 

Thefollowing is a summary of the fees billed to us by PricewaterhouseCoopers LLP(“PwC”) prior to its resignation on August 22, 2003 and fees billed to usby Weinberg & Co. (“Weinberg”) since its appointment on November 5,2003 for professional services rendered for the fiscal years endedDecember 31, 2003 and December 31, 2002:

 
| **Fee Category**   |   | **Fiscal 2003 Fees** |    | **Fiscal 2002 Fees** |   |
|--------------------|--------|--------------------------------|---------|--------------------------------|--------|
|               |   | **Weinberg**                   |    | **PwC**                        |   | **Weinberg** |   | **PwC** |   |
| Audit Fees         |   | $                              | 137,500 |                           | $      | 71,325 |   | $ | 0 |   | $ | 170,000 |   |
| Audit-Related Fees |   | 0                              |    | 20,000                         |   | 0 |   | 0 |   |
| Tax Fees           |   | 0                              |    | 16,600                         |   | 0 |   | 49,000 |   |
| All Other Fees     |   | 0                              |    | 3,000                          |   | 0 |   | 0 |   |
| Total Fees         |   | $                              | 137,500 |                           | $      | 110,925 |   | $ | 0 |   | $ | 219,000 |   |

 

*Audit Fees.*    Consists of aggregate fees billed forprofessional services rendered for the audit of our consolidated financialstatements and review of the interim consolidated financial statements includedin quarterly reports and services that are normally provided by  PwC and Weinberg in connection withstatutory and regulatory filings or engagements. Fiscal year 2003 PwC feesinclude two quarterly reviews, issuance of a year 2003 consent and a finalbilling on fiscal year 2002 services provided. Fiscal year 2003 fees from Weinberg are estimates based on the 3rdquarter of 2003 review and the year end audit.

 

*Audit-Related Fees.*    Consists of aggregatefees billed for assurance and related services that are reasonably related tothe performance of the audit or review of our consolidated financial statementsand are not reported under “Audit Fees.” Fees billed by PricewaterhouseCoopersin 2003 included $20,000 for services requested by the Special OversightCommittee of the Board of Directors.

 

*Tax Fees*.    Consists of aggregate fees billed forprofessional services for tax compliance, tax advice and tax planning. Theseservices included assistance regarding federal, state tax compliance and taxaudit defense.

 

*All Other Fees.*  In fiscal 2003, services providedby PwC included communications with the successor  auditing firm.

 

The Audit Committee considers whether the provision of these servicesis compatible with maintaining the auditor’s independence, and has determinedsuch services for fiscal 2003 and 2002 were compatible.

 

**Audit Committee Policy onPre-Approval of Services of Independent Auditors**

 

The Audit Committee’s policy is to pre-approve all audit andpermissible non-audit services provided by the independent auditors. Theseservices may include audit services, audit-related services, tax services andother services. Pre-approval is generally provided for up to one year. TheAudit Committee may also pre-approve particular services on a case-by-casebasis.

 

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**PARTIV.**

 

**ITEM15.****                                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.**

 
| **(a) 1.** | **Index to Financial  Statements**                                                                                 |   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|       | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                  |   |
|       | Consolidated Statements of Operations for  the three years ended December 31, 2003                            |   |
|       | Consolidated Statements of Changes in  Stockholders’ Equity for the three years ended  December 31, 2003 |   |
|       | Consolidated Statements of Cash Flows for  the three years ended December 31, 2003                            |   |
|       | Notes to Consolidated Financial Statements                                                                         |   |
|       | Reports of Independent Auditors                                                                                    |   |
|       |                                                                                                               |   |
| **(a) 2.** | **Financial Statement  Schedule:**                                                                                 |   |
|       | Schedule II-Valuation  and Qualifying Accounts                                                                |   |

 

All supplemental schedules other than as setforth above are omitted as inapplicable or because the required information isincluded in the Consolidated Financial Statements or the Notes to ConsolidatedFinancial Statements.

 

**(a)3. Exhibits:**

**EXHIBITINDEX**

 
| **Exhibit No.** |   |                                                                                                                                                                                                  |   | **Reference** |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
|            |   |                                                                                                                                                                                                  |   |          |
| 3.1             |   | Amended and Restated Articles of Organization of the Company                                                                                                                                          |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 3.2             |   | Amended and Restated Bylaws of the Company                                                                                                                                                            |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 3.3             |   | Amendment to Amended and Restated Bylaws of the Company                                                                                                                                               |   | C**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.1             |   | Specimen Certificate for Shares of the Company’s Common Stock                                                                                                                                    |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.2             |   | Description of Capital Stock (contained in the Restated Articles of  Organization of the Company filed as Exhibit 3.1)                                                                                |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.3             |   | Form of warrants issued in connection with Paradigm Group                                                                                                                                             |   | H**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.4             |   | 3% Senior Subordinated Convertible Debenture issued to GCA Strategic  Investment Fund Limited                                                                                                         |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.5             |   | Warrant issued to GCA Strategic Investment Fund Limited                                                                                                                                               |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.6             |   | Warrant issued to Wharton Capital Partners, Ltd.                                                                                                                                                      |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.7             |   | Warrant issued to DP Securities, Inc.                                                                                                                                                                 |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.8             |   | Registration Rights Agreement, dated as of August 25, 2000, by  and among Boston Biomedica, Inc., Wharton Capital Partners, Ltd., DP  Securities, Inc. and GCA Strategic Investment Fund Limited |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.9             |   | 3% Senior Subordinated Convertible Debenture issued to Richard P.  Kiphart                                                                                                                            |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.10            |   | 3% Senior Subordinated Convertible Debenture issued to Shoreline  Micro-Cap Fund, L.P.                                                                                                                |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.11            |   | Warrant issued to Richard P. Kiphart                                                                                                                                                                  |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.12            |   | Warrant issued to Shoreline Micro-Cap Fund, L.P.                                                                                                                                                      |   | K**           |

 

86

----

 
| 4.13   |   | Registration Rights Agreement dated as of August 25, 2000, by  and among Boston Biomedica, Inc., Richard P. Kiphart and Shoreline Micro-Cap  Fund, L.P.  L.P.                                                                                                                         |   | K**    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 4.14   |   | Rights Agreement dated as of February 27, 2003 between Boston  Biomedica, Inc., and Computershare Trust Company, Inc.                                                                                                                                                                      |   | P**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.1   |   | Lease Agreement, dated July 28, 1995, for New Britain,  Connecticut Facility between MB Associates and the Company                                                                                                                                                                         |   | A**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.2   |   | 1987 Non-Qualified Stock Option Plan*                                                                                                                                                                                                                                                           |   | A**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.3   |   | Employee Stock Option Plan*                                                                                                                                                                                                                                                                     |   | A**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.4   |   | 1999 Non-Qualified Stock Option Plan*                                                                                                                                                                                                                                                           |   | I**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.5   |   | 1999 Employee Stock Purchase Plan*                                                                                                                                                                                                                                                              |   | I**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.6   |   | Underwriters Warrants, each dated November 4, 1996, between the  Company and each of Oscar Gruss & Son Incorporated and Kaufman Bros.,  L.P.                                                                                                                                           |   | B**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.7   |   | Loan Agreement dated March 31, 2000                                                                                                                                                                                                                                                        |   | C**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.8   |   | First Amendment to lease dated as of December 12, 2001 by and  between Cabot Industrial Properties, L. P. and BBI Source Scientific, Inc.                                                                                                                                                  |   | D**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.9   |   | Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland  facility between B.F. Saul Real Estate Investment Trust and the Company                                                                                                                                                        |   | E**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.10  |   | 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, Inc. and BBI Source Scientific |   | F**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.11  |   | Contract, dated July 1, 1998, between the National Institutes of  Health and the Company (NO1-A1-85341)                                                                                                                                                                                    |   | G**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.12  |   | Contract, dated July 1, 1998, between the National Heart Lung  and Blood Institute and the Company (NO1-HB-87144)                                                                                                                                                                          |   | G**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.13  |   | Agreement with Paradigm Group for the purchase of warrants dated  August 18, 1999                                                                                                                                                                                                          |   | H**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.14  |   | Agreement with MDBio for the purchase of common stock and common  stock warrants, dated September 30, 1999                                                                                                                                                                                 |   | J**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.15. |   | Lease Agreement dated September 30, 1999, for Frederick,  Maryland facility, between MIE Properties, Inc., and the Company                                                                                                                                                                 |   | J**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.16  |   | Repository Contract with National Institute of Allergy and Infectious  Disease, Division of AIDS (NO1-A1-95381), dated August 16, 1999.                                                                                                                                                    |   | J**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.17  |   | Securities Purchase Agreement dated as of August 25, 2000, by  and among Boston Biomedica, Inc., and GCA Strategic Investment Fund Limited.                                                                                                                                                |   | K**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.18  |   | Securities Purchase Agreement dated as of August 25, 2000, by  and among Boston Biomedica, Inc., Richard P. Kiphart and Shoreline Micro-Cap  Fund, L.P.                                                                                                                                    |   | K**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.19  |   | Mortgage and Security Agreement dated March 31, 2000                                                                                                                                                                                                                                       |   | L**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.20  |   | Asset Purchase Agreement dated February 20, 2001, by and between  BBI Clinical Laboratories, Inc., Boston Biomedica, Inc., and Specialty  Laboratories, Inc.                                                                                                                               |   | M**    |
|   |   |                                                                                                                                                                                                                                                                                            |   |   |
| 10.21  |   | Promissory Note dated July 10, 2001, as amended on  October 4, 2001, by and among Boston Biomedica, Inc. and Richard T.  Schumacher.                                                                                                                                                  |   | N**    |

 

87

----

 
| 10.22  |   | Subscription Agreement dated as of December 6, 2001 by and  between Boston Biomedica, Inc., Richard P. Kiphart, Andrew Gluck, David  Valentine, Rebecca Kiphart and Arthur Hill.                                  |   | O**            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.23  |   | Junior Participation Agreement dated as of January 15, 2002, by  and between Commerce Bank and Trust Company, Resorts Accommodations  International, LLC,  Richard T.  Schumacher and Boston Biomedica, Inc. |   | O**            |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.24  |   | Pledge and Security Agreement dated as of January 15, 2002, by  and between Richard T. Schumacher, Boston Biomedica, Inc., and Commerce Bank  and Trust Company.                                                  |   | O**            |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.25  |   | Pledge Agreement effective as of January 15, 2002, by and  between Boston Biomedica, Inc. and Commerce Bank and Trust Company.                                                                                    |   | O**            |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.26  |   | Limited Guaranty dated as of January 15, 2002, by and between  Boston Biomedica, Inc. and Commerce Bank and Trust Company.                                                                                        |   | O**            |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.27  |   | Description of Compensation for Certain Directors*                                                                                                                                                                     |   | D**            |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.28  |   | Consultant Agreement between Boston Biomedica, Inc. and Richard T.  Schumacher                                                                                                                                         |   | Q*             |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.29  |   | Agreement between Boston Biomedica, Inc. and Richard T. Schumacher                                                                                                                                                     |   | Q*             |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.30  |   | Revolving Credit and Security Agreement dated as of February 5,  2004                                                                                                                                             |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.31  |   | Consultant Agreement between Boston Biomedica, Inc. and Richard T.  Schumacher entered into as of December 31, 2003                                                                                               |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 10.32  |   | Contract effective 06/01/2001, between the National Cancer Institute  and the Company (NO2-CP-11001)                                                                                                                   |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 21.1   |   | Subsidiaries of the registrant                                                                                                                                                                                         |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 23.1   |   | Consent of PricewaterhouseCoopers LLP, independent accountants                                                                                                                                                         |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 23.2   |   | Consent of Weinberg & Company, P.A.,  independent accountants                                                                                                                                                 |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 31.1   |   | Principal Executive Officer Certification Pursuant to Item 601(b)(31)  of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                   |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 31.2   |   | Principal Financial and Accounting Officer Certification Pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                         |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 32.1   |   | Principal Executive Officer Certification Pursuant to Item 601(b)(32)  of Regulation S-K, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                   |   | Filed herewith |
|   |   |                                                                                                                                                                                                                   |   |           |
| 32.2   |   | Principal Financial and Accounting Officer Certification Pursuant to  Item 601(b)(32) of Regulation S-K, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                         |   | Filed herewith |

 

----

A                                      Incorporatedby reference to the registrant’s Registration Statement on Form S-1(Registration No. 333-10759) (the “Registration Statement”). The number setforth herein is the number of the Exhibit in said Registration Statement.

B                                        Incorporatedby reference to Exhibit No. 10.17 of the Registration Statement.

C                                        Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 2002.

D                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended March 31, 2002.

E                                         Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 1997.

F                                         Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 1997.

G                                        Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 1998.

H                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 1999.

I                                            Incorporatedby reference to the registrant’s proxy statement, filed with the Securities andExchange Commission on June 14, 1999.

J                                           Incorporatedby reference to the registrant’s Annual Report on Form 10-K/A for the fiscalyear ended December 31, 1999.

 

88

----

 

K                                       Incorporatedby reference to the registrant’s Report on Form 8-K filed September 8,2000.

L                                         Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2000.

M                                    Incorporatedby reference to the registrant’s Report on Form 8-K filed March 8, 2001.

N                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2001.

O                                       Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 2001.

P                                         Incorporatedby reference to Exhibit 4 of the registrant’s Current Report on Form 8-K filedMarch 12, 2003.

Q                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2003.

 

 

*                                         Managementcontract or compensatory plan or arrangement.

**                                  Inaccordance with Rule 12b-32 under the Securities Exchange Act of 1934, asamended, reference is made to the documents previously filed with theSecurities and Exchange Commission, which documents are hereby incorporated byreference.

 

**(b)REPORTS ON FORM 8-K.**

 

The Company filed a Form 8-K dated October 2, 2003 announcing thatMr. R. Wayne Fritzsche and Dr. Calvin A. Saravis were elected as directors ofthe Company at the Company’s Special Meeting in Lieu of Annual Meeting ofStockholders held on October 2, 2003.  The Company also announcedthat William A. Wilson resigned from the Board of Directors on October 3,2003 to pursue other activities.

 

The Company filed a Form8-K dated November 5, 2003 announcing that the Audit Committee of theBoard of Directors of the Company engaged Weinberg & Company P.A.(“Weinberg & Company”) to act as the Company’s independent accountants forthe remainder of fiscal 2003, effective immediately.

 

89

----

 

**SIGNATURES**

 

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

 
| Date:  March 26, 2004 |   | Boston Biomedica, Inc.                               |
|----------------------------|--------|------------------------------------------------------|
|                       |   |                                                 |
|                       | By:    | */s/ Kevin W. Quinlan*                               |   |
|                       |   | Kevin W. Quinlan                                     |
|                       |   | President and Chief Operating Officer  and Treasurer |

 

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

 
| **SIGNATURES**                     |   | **TITLES**                                   |   | **DATE** |
|------------------------------------|--------|----------------------------------------------|--------|----------|
|                               |   |                                         |   |     |
| */s/ R. Wayne Fritzsche*           |   | Director and Chairman                        |   |     | March 26, 2004 |
| R. Wayne Fritzsche                 |   | of the Board                                 |   |     |
|                               |   |                                         |   |     |
| */s/ Kevin W. Quinlan*             |   | Director, President                          |   |     | March 26, 2004 |
| Kevin W. Quinlan                   |   | Chief Operating Officer and Treasurer        |   |     |
|                               |   | (Principal Executive Officer)                |   |     |
|                               |   |                                         |   |     |
| */s/ Michael N. Avallone*          |   | Vice President, Finance and                  |   |     | March 26, 2004 |
| Michael N. Avallone                |   | Chief Financial Officer                      |   |     |
|                               |   | (Principal Financial and Accounting Officer) |   |     |
|                               |   |                                         |   |     |
| */s/* *J. Donald Payne*       |   | Director                                     |   |     | March 26, 2004 |
| J. Donald Payne                    |   |                                         |   |     |
|                               |   |                                         |   |     |
| */s/* *Richard T. Schumacher* |   | Director                                     |   |     | March 26, 2004 |
| Richard T. Schumacher              |   |                                         |   |     |
|                               |   |                                         |   |     |
| */s/ Calvin A. Saravis, Ph.D.*     |   | Director                                     |   |     | March 26, 2004 |
| Calvin A. Saravis, Ph. D.          |   |                                         |   |     |
|                               |   |                                         |   |     |
| */s/ P. Thomas Vogel*              |   | Director                                     |   |     | March 26,  2004 |
| P. Thomas Vogel                    |   |                                         |   |     |
|                                    |        |                                              |        |          |  |  |

 

90

----

 

**SCHEDULE II**

 

**BOSTONBIOMEDICA, INC. AND SUBSIDIARIES**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

 
| **Allowance for Doubtful Accounts** |   | **Balance at  Beginning of  Period** |    | **Additions** |   | **Recoveries** |   | **Deductions** |   | **Balance at  End  of Period** |   |
|-------------------------------------|--------|--------------------------------------|---------|---------------|--------|----------------|--------|----------------|--------|--------------------------------|--------|
| 2003                                |   | $                                    | 117,671 |          | $      | 8,000          |   | $              | — |                           | $      | (1,388 | ) | $ | 124,283 |   |
| 2002                                |   | $                                    | 125,617 |          | $      | 177            |   | $              | — |                           | $      | (8,123 | ) | $ | 117,671 |   |
| 2001                                |   | $                                    | 88,981  |          | $      | 55,808         |   | $              | 11,310 |                           | $      | (30,482 | ) | $ | 125,617 |   |
| **Inventory Reserve**               |   |                                 |    |          |   |           |   |           |   |                           |   |
| 2003                                |   | $                                    | 886,766 |          | $      | 78,000         |   | $              | — |                           | $      | (114,489 | ) | $ | 850,277 |   |
| 2002                                |   | $                                    | 796,064 |          | $      | 106,372        |   | $              | — |                           | $      | (15,670 | ) | $ | 886,766 |   |
| 2001                                |   | $                                    | 765,700 |          | $      | 64,891         |   | $              | — |                           | $      | (34,527 | ) | $ | 796,064 |   |

 

91

----

 

**EXHIBITINDEX **

 

 
| **Exhibit No.** |   |                                                                                                                                                                                                  |   | **Reference** |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
| 3.1             |   | Amended and Restated Articles of Organization of the Company                                                                                                                                          |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 3.2             |   | Amended and Restated Bylaws of the Company                                                                                                                                                            |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 3.3             |   | Amendment to Amended and Restated Bylaws of the Company                                                                                                                                               |   | C**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.1             |   | Specimen Certificate for Shares of the Company’s Common Stock                                                                                                                                    |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.2             |   | Description of Capital Stock (contained in the Restated Articles of  Organization of the Company filed as Exhibit 3.1)                                                                                |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.3             |   | Form of warrants issued in connection with Paradigm Group                                                                                                                                             |   | H**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.4             |   | 3% Senior Subordinated Convertible Debenture issued to GCA Strategic  Investment Fund Limited                                                                                                         |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.5             |   | Warrant issued to GCA Strategic Investment Fund Limited                                                                                                                                               |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.6             |   | Warrant issued to Wharton Capital Partners, Ltd.                                                                                                                                                      |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.7             |   | Warrant issued to DP Securities, Inc.                                                                                                                                                                 |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.8             |   | Registration Rights Agreement, dated as of August 25, 2000, by  and among Boston Biomedica, Inc., Wharton Capital Partners, Ltd., DP  Securities, Inc. and GCA Strategic Investment Fund Limited |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.9             |   | 3% Senior Subordinated Convertible Debenture issued to Richard P.  Kiphart                                                                                                                            |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.10            |   | 3% Senior Subordinated Convertible Debenture issued to Shoreline  Micro-Cap Fund, L.P.                                                                                                                |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.11            |   | Warrant issued to Richard P. Kiphart                                                                                                                                                                  |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.12            |   | Warrant issued to Shoreline Micro-Cap Fund, L.P.                                                                                                                                                      |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.13            |   | Registration Rights Agreement dated as of August 25, 2000, by  and among  Boston Biomedica, Inc.,  Richard P. Kiphart and Shoreline Micro-Cap Fund, L.P.  L.P.                         |   | K**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 4.15            |   | Rights Agreement dated as of February 27, 2003 between Boston  Biomedica,  Inc., and Computershare  Trust Company, Inc.                                                                     |   | P**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.1            |   | Lease Agreement, dated July 28, 1995, for New Britain,  Connecticut Facility between MB Associates and the Company                                                                               |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.2            |   | 1987 Non-Qualified Stock Option Plan*                                                                                                                                                                 |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.3            |   | Employee Stock Option Plan*                                                                                                                                                                           |   | A**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.4            |   | 1999 Non-Qualified Stock Option Plan*                                                                                                                                                                 |   | I**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.5            |   | 1999 Employee Stock Purchase Plan*                                                                                                                                                                    |   | I**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.6            |   | Underwriters Warrants, each dated November 4, 1996, between the  Company and each of Oscar Gruss & Son Incorporated and Kaufman Bros.,  L.P.                                                 |   | B**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.7            |   | Loan Agreement dated March 31, 2000                                                                                                                                                              |   | C**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.8            |   | First Amendment to lease dated as of December 12, 2001 by and  between Cabot Industrial Properties, L. P. and BBI Source Scientific, Inc.                                                        |   | D**           |
|            |   |                                                                                                                                                                                                  |   |          |
| 10.9            |   | Lease Agreement, dated May 16, 1997, for Gaithersburg, Maryland  facility between B.F. Saul Real Estate Investment Trust and the Company                                                              |   | E**           |

 

92

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| 10.10  |   | 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, Inc. and BBI Source Scientific |   | F**            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.11  |   | Contract, dated July 1, 1998, between the National Institutes of  Health and the Company (NO1-A1-85341)                                                                                                                                                                                    |   | G**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.12  |   | Contract, dated July 1, 1998, between the National Heart Lung  and Blood Institute and the Company (NO1-HB-87144)                                                                                                                                                                          |   | G**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.13  |   | Agreement with Paradigm Group for the purchase of warrants dated  August 18, 1999                                                                                                                                                                                                          |   | H**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.14  |   | Agreement with MDBio for the purchase of common stock and common  stock warrants, dated September 30, 1999                                                                                                                                                                                 |   | J**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.15  |   | Lease Agreement dated September 30, 1999, for Frederick,  Maryland facility, between MIE Properties, Inc., and the Company.                                                                                                                                                                |   | J**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.16  |   | Repository Contract with National Institute of Allergy and Infectious  Disease, Division of AIDS (NO1-A1-95381), dated August 16, 1999.                                                                                                                                                    |   | J**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.17  |   | Securities Purchase Agreement dated as of August 25, 2000, by  and among Boston Biomedica, Inc., and GCA Strategic Investment Fund Limited.                                                                                                                                                |   | K**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.18  |   | Securities Purchase Agreement dated as of August 25, 2000, by  and among Boston Biomedica, Inc., Richard P. Kiphart and Shoreline Micro-Cap  Fund, L.P.                                                                                                                                    |   | K**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.19  |   | Mortgage and Security Agreement dated March 31, 2000                                                                                                                                                                                                                                       |   | L**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.20  |   | Asset Purchase Agreement dated February 20, 2001, by and  between  BBI Clinical Laboratories, Inc.,  Boston Biomedica, Inc., and  Specialty  Laboratories, Inc.                                                                                                                  |   | M**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.21  |   | Promissory Note dated July 10, 2001, as amended on  October 4, 2001, by and among Boston Biomedica, Inc. and Richard T.  Schumacher.                                                                                                                                                  |   | N**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.22. |   | Subscription Agreement dated as of December 6, 2001 by and  between  Boston Biomedica, Inc.,  Richard P. Kiphart, Andrew Gluck, David Valentine,  Rebecca Kiphart and Arthur Hill                                                                                                |   | O**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.23  |   | Junior Participation Agreement dated as of January 15, 2002, by  and between  Commerce Bank and Trust  Company, Resorts Accommodations International,  LLC,  Richard T.  Schumacher and Boston Biomedica, Inc.                                                              |   | O**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.26  |   | Pledge and Security Agreement dated as of January 15, 2002, by  and betweenRichard T. Schumacher, Boston Biomedica, Inc., and Commerce Bank  and Trust Company.                                                                                                                            |   | O**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.27  |   | Pledge Agreement effective as of January 15, 2002, by and  between BostonBiomedica, Inc. and Commerce Bank and Trust Company.                                                                                                                                                              |   | O**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.26  |   | Limited Guaranty dated as of January 15, 2002, by and between  Boston Biomedica, Inc. and Commerce Bank and Trust Company.                                                                                                                                                                 |   | O**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.27  |   | Description of Compensation for Certain Directors*                                                                                                                                                                                                                                              |   | D**            |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.28  |   | Consultant Agreement between Boston Biomedica, Inc. and Richard T.  Schumacher                                                                                                                                                                                                                  |   | Q*             |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.29  |   | Agreement between Boston Biomedica, Inc. and Richard T. Schumacher                                                                                                                                                                                                                              |   | Q*             |
|   |   |                                                                                                                                                                                                                                                                                            |   |           |
| 10.30  |   | Revolving Credit and Security Agreement dated as of February 5,  2004                                                                                                                                                                                                                      |   | Filed herewith |

 

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| 10.31  |   | Consultant Agreement between Boston Biomedica, Inc. and Richard T.  Schumacher entered into as of December 31, 2003                                                       |   | Filed herewith |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|   |   |                                                                                                                                                                           |   |           |
| 10.32  |   | Contract effective 06/01/2001, between the National Cancer Institute  and the Company (NO2-CP-11001)                                                                           |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 21.1   |   | Subsidiaries of the registrant                                                                                                                                                 |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 23.1   |   | Consent of PricewaterhouseCoopers LLP, independent accountants                                                                                                                 |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 23.2   |   | Consent of Weinberg & Company, P.A.,  independent accountants                                                                                                         |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 31.1   |   | Principal Executive Officer Certification Pursuant to Item 601(b)(31)  of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002           |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 31.2   |   | Principal Financial and Accounting Officer Certification Pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 32.1   |   | Principal Executive Officer Certification Pursuant to Item 601(b)(32)  of Regulation S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                |   | Filed herewith |
|   |   |                                                                                                                                                                           |   |           |
| 32.2   |   | Principal Financial and Accounting Officer Certification Pursuant to  Item 601(b)(32) of Regulation S-K, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |   | Filed herewith |

 

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A                                      Incorporatedby reference to the registrant’s Registration Statement on Form S-1(Registration No. 333-10759) (the “Registration Statement”). The number setforth herein is the number of the Exhibit in said Registration Statement.

B                                        Incorporatedby reference to Exhibit No. 10.17 of the Registration Statement.

C                                        Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 2002.

D                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended March 31, 2002.

E                                         Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 1997.

F                                         Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 1997.

G                                        Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 1998.

H                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 1999.

I                                            Incorporatedby reference to the registrant’s proxy statement, filed with the Securities andExchange Commission on June 14, 1999.

J                                           Incorporatedby reference to the registrant’s Annual Report on Form 10-K/A for the fiscalyear ended December 31, 1999.

K                                       Incorporatedby reference to the registrant’s Report on Form 8-K filed September 8,2000.

L                                         Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended June 30, 2000.

M                                    Incorporatedby reference to the registrant’s Report on Form 8-K filed March 8, 2001.

N                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2001.

O                                       Incorporatedby reference to the registrant’s Annual Report on Form 10-K for the fiscal yearended December 31, 2001.

P                                         Incorporatedby reference to Exhibit 4 of the registrant’s Current Report on Form 8-K filedMarch 12, 2003.

Q                                       Incorporatedby reference to the registrant’s Quarterly Report on Form 10-Q for the fiscalquarter ended September 30, 2003.

 

 

*                                         Managementcontract or compensatory plan or arrangement.

**                                  Inaccordance with Rule 12b-32 under the Securities Exchange Act of 1934, asamended, reference is made to the documents previously filed with theSecurities and Exchange Commission, which documents are hereby incorporated byreference.

 

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