**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-K/A**

**AmendmentNo. 2**

 

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

 

**Forthe fiscal year ended December 31, 2004**

**CommissionFile Number 000-21930**

 

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**BIOSOURCEINTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 
| ***Delaware***                                                     | *** *** | ***77-0340829***                        |
|--------------------------------------------------------------------|--------------|-----------------------------------------|
| *(State  or other jurisdiction of incorporation  or organization)* | * *     | *(I.R.S.  Employer Identification No.)* |

 

***542Flynn Road, Camarillo, California  93012***(Address of principalexecutive offices)

* *

Registrant’stelephone number, including area code: **(805) 987-0086**

 

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Securitiesregistered pursuant to Section 12(b) of the Exchange Act:

 

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:

 

**CommonStock, $0.001 par value**

**PreferredStock purchase rights**

 

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Indicate bycheck 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 periods that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes o No ý

 

Indicate bycheck mark if disclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or any amendment to thisForm 10-K . o

 

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

Yes o No ý.

 

The aggregatemarket value of the Registrant’s common stock (held by non-affiliates of theRegistrant based on the last sale price of such stock as reported by theNational Association of Securities Dealers Automated Quotation National MarketSystem) as of March 14, 2005 was $45,801,000.

 

The number ofshares of the Registrant’s common stock outstanding as of March 14, 2005was 9,729,282.

 

DocumentsIncorporated by Reference:  None.

 

 

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# **INDEX**

#  

**BIOSOURCEINTERNATIONAL, INC.**

 

**ANNUAL REPORT ON FORM 10-K/A (Amendment No.2)**

** **
| **EXPLANATORY  NOTE** |                                                                                        |
|-----------------------|---------------------------------------------------------------------------------------------|
|                  |                                                                                        |   |
| **PART II**      | ** **                                                                                  | ** ** |
| Item 6.               | Selected Consolidated  Financial Data                                                       |   |
|                  |                                                                                        |   |
| Item 7.               | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |   |
|                  |                                                                                        |   |
| Item 8.               | Financial Statements and  Supplementary Data                                                |   |
|                  |                                                                                        |   |
| **Part IV**           |                                                                                        |   |
| Item 15.              | Exhibits and Financial  Statement Schedules                                                 |   |

 

1

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**EXPLANATORY NOTE**

 

On May 27,2005, BioSource International, Inc. (the “Company”) announced that it wouldrestate its financial statements for the three years ended December 31,2004 and make relevant adjustments to financial information for fiscal 2000 and2001.  The restatement reflects adjustments due to changes to the Company’saccounting treatment of (1) manufactured antibody inventory reserves and (2)the modification of terms in its warrant agreements.  Subsequent to thefiling of our 2004 Form 10-K, we conducted additional analysis with respect toour manufactured antibody inventory loss experience and determined that ourprevious loss reserves were not appropriate. In addition, we reviewed the accounting treatment associated withamendments to the terms of the warrant agreements originally issued inconnection with a private placement in 2000 and determined that themodification of terms should be treated as a dividend.

 

This report isbeing filed to amend and restate the following items contained in our AnnualReport on Form 10-K originally filed with the Securities and ExchangeCommission (the “SEC”) on March 23, 2005 and amended on Form 10-K/A(Amendment No. 1) filed with the SEC on April 28, 2005 (collectively, the “OriginalFiling”):

 

•                  Item 6 (SelectedConsolidated Financial Data),

•                  Item 7 (Management’sDiscussion and Analysis of Financial Condition and Results of Operation),

•                  Item 8 (FinancialStatements and Supplementary Data).

 

Therestatement adjustments for the manufactured antibody inventory reservesincreased our net loss in the year ended December 31, 2004 by approximately$5,000 (no impact on diluted loss per share), increased the net loss anddiluted loss per share in the year ended December 31, 2003 byapproximately $75,000, or $0.01 per diluted share, and reduced the net loss inthe year ended December 31, 2002 by approximately $11,000 (no impact todiluted loss per share).

 

Therestatement adjustment for the amendment to the warrants increased the net lossavailable to common stockholders in the year ended December 31, 2004 by$1.1 million, or $0.11 per share.

 

The effect ofthe restatement adjustments to our consolidated balance sheet was to (1)decrease accumulated deficit at December 31, 2001 by $0.3 million and (2)increase net inventories and stockholders equity at December 31, 2004 and2003 by approximately $0.3 million and $0.2 million, respectively.  There was no impact to cash provided byoperating activities, cash used in investing activities and cash used infinancing activities for the three years ended December 31, 2004.

 

A descriptionof the restatement can be found in Note 12 to our consolidated financialstatements.

 

We have notamended and do not intend to amend our other previously filed annual reports onForm 10-K or our quarterly reports on Form 10-Q for the periods affected by therestatements or adjustments.  For thisreason, the consolidated financial statements and related financial informationcontained in such previously filed reports should no longer be relied upon.

 

No attempt hasbeen made in this Form 10-K/A to update other disclosures presented in theOriginal Filing. This Form 10-K/A (Amendment No. 2) does not reflect eventsoccurring after the filing of the Original Filing or modify or updatedisclosures, including the exhibits to the Original Filing, affected bysubsequent events.  Accordingly, thisForm 10-K/A should be read in conjunction with our filings made with the SECsubsequent to the Original Filing.

 

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**PART II**

 

**ITEM 6.****          SELECTEDCONSOLIDATED FINANCIAL DATA**

 

#### **The following tables show our selected consolidatedfinancial information for the past five fiscal years as revised to reflect therestatement. The selected consolidated statement of operations data for each ofthe three years ended December 31, 2004 and the balance sheet data as of December 31,2004 and 2003 are derived from our consolidated financial statements, asrevised to reflect the restatement more fully discussed in Note 12 to theconsolidated financial statements, that have been audited by KPMG LLP and areincluded in this Annual Report on Form 10-K/A (Amendment No. 2). The selectedconsolidated financial data as of December 31, 2002, 2001 and 2000 and forthe years ended December 31 2001 and 2000 have been derived from ourunaudited consolidated financial statements. The comparability of theinformation is affected by a variety of factors, including the adoption of anew accounting principle, a divestiture of one of our businesses and purchasesunder our stock repurchase programs.**

 

Effective January 1,2002, we adopted Statement of Financial Accounting Standards, or SFAS,No. 142, *“Goodwill and Other Intangible Assets,”*and stopped amortizing goodwill on that date.  We recognized in 2002 a $2.5 million charge, net of applicable incometaxes, representing the cumulative effect of a change in accounting principleresulting from the adoption of this standard. Financial statements for fiscalyears prior to 2002 reflect significant goodwill amortization charges.

 

In June 2004,we amended the terms of the warrant agreements originally issued in connectionwith a private placement in 2000. The amendment extended the expiration datefrom February 15, 2005 to February 15, 2007 and increased theexercise price per share underlying the warrants from $7.77 per share to $9.00per share. The modification of terms has been reflected as a dividend, similarto a dividend on a preferred equity security, in 2004 which was determined bycomparing the value of the warrants using the Black-Scholes model immediatelybefore and after the modification of terms.

 

#### **In December 2004 we sold our custom antibodyand peptides business. We accounted for the sale of this business asdiscontinued operations and, accordingly, we have reclassified the selectedfinancial data for all periods prior to the sale to reflect the customantibodies and peptides business as discontinued operations. To betterunderstand the information in the tables, investors should read *“Management’s Discussion and Analysis of Financial Condition andResults of Operations”* and the Consolidated Financial Statements andrelated Notes included elsewhere in this Annual Report on Form 10-K/A(Amendment No. 2).**

 

3

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| ** **                                                                          | ** ** | **Years ended December 31,**         | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                          | ** ** | **(as restated)**                         | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| ** **                                                                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Net sales                                                                           |       | $                                         | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   | $ | 32,126 |   | $ | 29,399 |   |
| Cost of goods sold                                                                  |       | 20,330                                    |       | 19,177 |   | 15,306 |   | 11,790 |   | 11,371 |   |
| Gross profit                                                                        |       | 24,052                                    |       | 22,082 |   | 21,730 |   | 20,336 |   | 18,028 |   |
| Operating expenses:                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                 |       | 9,557                                     |       | 9,045 |   | 8,044 |   | 7,054 |   | 5,488 |   |
| General and administrative                                                          |       | 7,446                                     |       | 6,582 |   | 5,546 |   | 6,630 |   | 8,849 |   |
| Research and development                                                            |       | 5,786                                     |       | 7,002 |   | 6,187 |   | 3,986 |   | 3,575 |   |
| Long-lived asset impairment                                                         |       | —                                    |       | 341 |   | — |   | — |   | — |   |
| Amortization of intangibles                                                         |       | 555                                       |       | 575 |   | 641 |   | 1,098 |   | 1,093 |   |
| Total operating expenses                                                            |       | 23,344                                    |       | 23,545 |   | 20,418 |   | 18,768 |   | 19,005 |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                                            |       | 708                                       |       | (1,463 | ) | 1,312 |   | 1,568 |   | (977 | ) |
| Interest and other income (expense), net                                            |       | 77                                        |       | (76 | ) | 123 |   | 460 |   | 72 |   |
| Income (loss) from continuing operations before income taxes                        |       | 785                                       |       | (1,539 | ) | 1,435 |   | 2,028 |   | (905 | ) |
| Provision (benefit) for income taxes                                                |       | 394                                       |       | (714 | ) | 24 |   | 468 |   | (636 | ) |
| Income (loss) from continuing operations                                            |       | 391                                       |       | (825 | ) | 1,412 |   | 1,560 |   | (268 | ) |
| Discontinued operations, net                                                        |       | (811                                      | )          | (320 | ) | (6 | ) | (504 | ) | (131 | ) |
| Cumulative effect of accounting change, net                                         |       | —                                    |       | — |   | (2,447 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                   |       | (420                                      | )          | (1,145 | ) | (1,041 | ) | 1,056 |   | (399 | ) |
| Dividend on warrants                                                                |       | (1,061                                    | )          | — |   | — |   | — |   | — |   |
| Redeemable preferred stock dividend and accretion of beneficial  conversion feature |       | —                                    |       | — |   | — |   | — |   | (3,853 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders                                  |       | $                                         | (1,481     | ) | $ | (1,145 | ) | $ | (1,041 | ) | $ | 1,056 |   | $ | (4,252 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations including dividend                         |       | $                                         | (.07       | ) | $ | (.09 | ) | $ | 0.14 |   | $ | .15 |   | $ | (.48 | ) |
| Discontinued operations, net                                                        |       | (.09                                      | )          | (.03 | ) | — |   | (.05 | ) | (.02 | ) |
| Cumulative effect of accounting change, net                                         |       | —                                    |       | — |   | (0.25 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                                                     |       | $                                         | (.16       | ) | $ | (0.12 | ) | $ | (0.11 | ) | $ | .10 |   | $ | (.50 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations including dividends                        |       | $                                         | (.07       | ) | $ | (.09 | ) | $ | 0.14 |   | $ | .14 |   | $ | (.48 | ) |
| Discontinued operations, net                                                        |       | (.09                                      | )          | (.03 | ) | — |   | (.05 | ) | (.02 | ) |
| Cumulative effect of accounting change, net                                         |       | —                                    |       | — |   | (0.24 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share                                                   |       | $                                         | (.16       | ) | $ | (0.12 | ) | $ | (0.10 | ) | $ | .10 |   | $ | (.50 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Shares used to compute per share amounts:                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                               |       | 9,325                                     |       | 9,403 |   | 9,787 |   | 10,398 |   | 8,584 |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted                                                                             |       | 9,325                                     |       | 9,403 |   | 10,189 |   | 10,965 |   | 8,584 |   |

 

The amount ofredeemable preferred stock dividend and beneficial conversion of $3,853,000 inthe year ended December 31, 2000 has been reclassified from above netincome to below net income to conform to the 2004 statement of operationspresentation.

 

4

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| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                           | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| ** **                           | ** ** | ** **                  | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                           | ** ** | **(in thousands)**          | ** ** |
| **Consolidated Balance Sheet Data:** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                      |       | $                           | 15,418     |   | $ | 15,866 |   | $ | 16,874 |   | $ | 19,267 |   | $ | 20,054 |   |
| Total assets                         |       | 43,549                      |       | 44,536 |   | 46,784 |   | 50,108 |   | 50,316 |   |
| Current liabilities                  |       | 7,121                       |       | 6,031 |   | 6,793 |   | 5,963 |   | 6,318 |   |
| Long-term debt, less current portion |       | —                      |       | — |   | — |   | — |   | — |   |
| Total stockholders’ equity      |       | 36,428                      |       | 38,505 |   | 39,991 |   | 44,145 |   | 43,998 |   |
|                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.**            **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

 

We begin ourManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) with a discussion of the Critical Accounting Policiesthat we believe are important to understanding the assumptions and judgmentsunderlying our financial statements. This is followed by an overview of our business, a discussion of ourResults of Operations that begins with an overview followed by a more detaileddiscussion of our net sales and expenses. We then provide an analysis of our Liquidity and Capital Resources witha discussion of key aspects of our cash flows, changes in certain balance sheetitems and our financial commitments. You should also note that this MD&Adiscussion contains forward-looking statements that involve risks anduncertainties. Please see the section entitled *“CautionRegarding Forward-Looking Statements”*at the end of this Item 7for important information to consider when evaluating such statements.

 

You shouldread this MD&A in conjunction with the Consolidated Financial Statementsand related Notes. As discussed below, we sold our custom antibodies andpeptides business in 2004 and accounted for the sale of this business asdiscontinued operations. Accordingly, we have reclassified our financialstatements for all periods prior to the sale to reflect this business asdiscontinued operations. Unless otherwise noted, the following discussionpertains only to our continuing operations.

 

As describedin Note 12 to our Consolidated Financial Statements, we have restated ourConsolidated Financial Statements as of December 31, 2004 and 2003 and forthe three years ended December 31, 2004. This restatement reflected adjustments due to changes in our accountingtreatment of (1) manufactured antibody inventory reserves and (2) themodification of terms in our warrant agreements.  Subsequent to the filingof our 2004 Form 10-K, we conducted additional analysis with respect to ourmanufactured antibody inventory loss experience and determined that ourprevious loss reserves were not appropriate. In addition, we reviewed the accounting treatment associated withamendments to the terms of the warrant agreements originally issued inconnection with a private placement in 2000 and determined that themodification of terms should be treated as a dividend.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements and related disclosures in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make judgments, assumptions and estimates that affectthe amounts reported in the Consolidated Financial Statements and accompanyingnotes. Estimates are used for, but are not limited to, the accounting forrevenue recognition, allowance for doubtful accounts and inventories,long-lived asset impairments, loss contingencies and income taxes. Actualresults could differ substantially from these estimates. The following criticalaccounting policies are impacted significantly by judgments, assumptions andestimates used in the preparation of the Consolidated Financial Statements.

 

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*RevenueRecognition*

 

We apply theprovisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition (SABNo. 104), which codifies, revises and rescinds certain sections of SAB No. 101,Revenue Recognition, in order to make this interpretive guidance consistentwith current authoritative accounting and auditing guidance and SEC rules andregulations. In accordance with SAB No. 104 and 101, the Company recognizesrevenue related to product sales when (i) persuasive evidence of an arrangementexists, (ii) delivery has occurred, (iii) the price is fixed or determinable,and (iv) collectibility is reasonably assured.

 

*Allowancefor Doubtful Accounts*

 

We makeongoing assumptions relating to the collectibility of our accounts receivable.The accounts receivable amount on our balance sheet includes a reserve foraccounts that might not be paid. In determining the amount of the reserve, weconsider our historical level of credit losses and the aging of the accountsreceivable. We also make judgments about the collectibility of customeraccounts based on ongoing evaluations. Our reserves have generally beenadequate to cover our actual credit losses. Since we cannot reliably predictfuture changes in the financial stability of our customers, however, we cannotguarantee that our reserves will continue to be adequate. If actual creditlosses are significantly greater than the reserve we have established, thatwould increase our general and administrative expenses and reduce our reportednet income. Conversely, if actual credit losses are significantly less than ourreserve, this would eventually decrease our general and administrative expensesand increase our reported net income.

 

*Allowances for Inventory*

 

Inventoriesare stated at the lower of cost (determined by the first-in, first-out method)or market (net realizable value).  At each balance sheet date, we evaluateending inventories for excess quantities and obsolescence. This evaluationincludes analyses of sales levels by product, projections of future demand andage of inventory. If inventories on hand are in excess of forecasted demand, weprovide appropriate reserves for such excess inventory. If the determination ismade that inventory is obsolete, these inventories are reserved for the periodthe determination is made. Inventories are shown net of reserves of $6.6million and $7.3 million at December 31, 2004 and 2003, respectively.

 

*Impairmentof Long-lived Assets*

 

Weassess the impairment of long-lived assets, which include equipment andleasehold improvements and identifiable intangible assets, whenever events andcircumstances indicate that such assets might be impaired.  In the event the expected undiscounted futurecash flow attributable to the asset is less than the carrying amount of theasset, an impairment loss equal to the excess of the asset’s carrying valueover its fair value is recorded.

 

*Accounting for Stock-BasedIncentive Programs*

 

Wecurrently measure compensation expense for our stock-based incentive programsusing the intrinsic value method prescribed by Accounting Principles Board, orAPB, Opinion No. 25, *“Accounting for StockIssued to Employees.”*Under this method, we do not recordcompensation expense when stock options are granted to eligible participants aslong as the exercise price is not less than the fair market value of the stockwhen the option is granted.  Inaccordance with SFAS 123, *“Accounting forStock-Based Compensation,”*and SFAS 148, *“Accountingfor Stock-Based Compensation – Transition and Disclosure,”*wedisclose our pro forma net income or loss and net income or loss per share asif the fair value-based method had been applied in measuring compensationexpense for our stock-based incentive programs.

 

*Income Taxes – Estimatesof Effective Tax Rates, Deferred Taxes and Valuation Allowance*

 

When weprepare our consolidated financial statements, we estimate our income taxesbased on the various jurisdictions where we conduct business. Significantjudgment is required in determining our worldwide income tax provision. Werecognize liabilities for anticipated tax audit issues in the United States andother tax jurisdictions based on our estimate of whether, and the extent towhich, additional taxes will be due. We record

 

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an additionalamount in our provision for income taxes in the period in which we determinethat our recorded tax liability is less than we expect the ultimate taxassessment to be. If in a later period we determine that payment of thisadditional amount is unnecessary, we reverse the liability and recognize a taxbenefit in that later period. As a result, our ongoing assessments of theprobable outcomes of the audit issues and related tax positions requirejudgment and can materially increase or decrease our effective tax rate as wellas impact our operating results. This also requires us to estimate our currenttax exposure and to assess temporary differences that result from differingtreatments of certain items for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which we show on ourconsolidated balance sheet. We must then assess the likelihood that ourdeferred tax assets will be realized. To the extent we believe that realizationis not likely, we establish a valuation allowance. When we establish avaluation allowance or increase this allowance in an accounting period, werecord a corresponding tax expense on our statement of operations.

 

Our netdeferred tax asset at December 31, 2004 was $11.7 million, net of thevaluation allowance of $0.1 million. We recorded the valuation allowanceto reflect uncertainties about whether we will be able to utilize some of ourdeferred tax assets (consisting primarily of certain capital losscarryforwards) before they expire. The valuation allowance is based on ourestimates of taxable income for the jurisdictions in which we operate and theperiod over which our deferred tax assets will be realizable. While we haveconsidered future taxable income in assessing the need for the valuationallowance, we could be required to increase the valuation allowance to takeinto account additional deferred tax assets that we may be unable to realize.An increase in the valuation allowance would have an adverse impact, whichcould be material, on our income tax provision and net income in the period inwhich we make the increase.

 

*Loss Contingencies*

 

Werecord liabilities related to pending litigation when an unfavorable outcome isprobable and we can reasonably estimate the amount of the loss.  We aresubject to various legal proceedings and claims, either asserted or unasserted,that arise in the ordinary course of business. We evaluate, among otherfactors, the degree of probability of an unfavorable outcome and an estimate ofthe amount of the loss. Significant judgment is required in both thedetermination of the probability and as to whether an exposure can bereasonably estimated. When we determine that it is probable that a loss hasbeen incurred and the amount can be reasonably estimated, the effect is recordedpromptly in our consolidated financial statements. Although the outcome ofthese claims cannot be predicted with certainty, we do not believe that anyexisting legal proceedings or claims will have a material adverse effect on ourfinancial condition or results of operations.

 

**BusinessOverview**

 

We manufacture, market and distribute products usedworldwide for understanding disease and developing new drug therapies andmedical diagnostics. Our products enable biomedical researchers to betterunderstand disease processes as well as the biochemistry, immunology and cellbiology of the human body. We offer a wide variety of products that are groupedinto the following three categories: Assays (test kits); Biologicals(antibodies and bioactive proteins) and Other (serum, media, oligonucleotidesand clinical diagnostics).

 

Theprincipal markets for our products include the life sciences research marketand the biopharmaceutical production market. The life sciences research market consists of laboratories generallyassociated with universities, medical research centers and governmentinstitutions as well as biotechnology and pharmaceutical companies.  Life sciences researchers use our products toperform a broad range of experiments in the laboratory.

 

Our strategyfocuses on our core strengths of producing assay products.  These assay products generally are highermargin products and are focused on increasing scientific understanding of bothintra and extra-cellular pathways and the impact on those pathways of drugs ordisease.  We believe the strong marketposition of our assay products allows us to more effectively market ourcomplimentary product lines to our existing customers.

 

Weanticipate that our results of operations may fluctuate on a quarterly and annualbasis and will be difficult to predict. The timing and degree of fluctuation will depend upon several factors,including those discussed under “Risk Factors Related to Our Business.”  In addition, our results of operations couldbe affected by the timing of orders from distributors and the mix of salesbetween distributors and our direct sales force.  Although we have

 

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experiencedrevenue growth in recent years, there is no assurance that we will be able tosustain such growth or report profits on a quarterly basis.

 

**Resultsof Operations**

 

**Net Sales**

** **

**The table below and thediscussion that follows are based upon the way we analyze our product groups.Prior to the second quarter of 2004, we analyzed our business based on threestrategic business units, Cytokines, Signal Transduction and Custom. In thesecond quarter of 2004, we revised our internal management reporting systems tobe consistent with our strategy of focusing on assays, biologicals and otherproduct lines.  See Note 10 to thefinancial statements for additional information about business segments.**

** **
| **(Dollars in millions)** | ** ** | **2002** | ** ** | **% of  Net  Sales** | ** ** | **2003** | ** ** | **% of  Net  Sales** | ** ** | **2004** | ** ** | **% of  Net  Sales** | ** ** | **2002-2003  % Change** | ** ** | **2003-2004  % Change** | ** ** |
|---------------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|-------------------------|------------|-------------------------|------------|
| Assays                    |       | $        | 14.7       |                 | 39.7%      |     | $          | 17.6                 |       | 42.6%    |       | $                    | 19.7       |                    | 44.4%      |                    | 19.7       | % | 12.0 | % |
| Biologicals               |       | 9.8      |       | 26.5%                |       | 10.6     |       | 25.7%                |       | 11.1     |       | 25.0%                |       | 8.2                     | %          | 4.7                     | %          |
| Other                     |       | 12.5     |       | 33.8%                |       | 13.1     |       | 31.7%                |       | 13.6     |       | 30.6%                |       | 4.8                     | %          | 3.8                     | %          |
| Total Sales               |       | $        | 37.0       |                 |       |     | $          | 41.3                 |       |     |       | $                    | 44.4       |                    |       |                    | 11.6       | % | 7.5 | % |

 

*2004 compared with 2003*.  Net sales increased $3.1million, or 8%, to $44.4 million for the year ended December 31, 2004 from$41.3 million for the year ended December 31, 2003.  Changes in foreign currency exchange ratesincreased U.S. dollar-denominated net sales by $1.6 million when comparing theyear ended December 31, 2004 with the corresponding period in 2003.  The remainder of the increase was dueprimarily to growth in our assay product sales, which is consistent with ourstrategy of increasing assay sales as a percentage of our total sales.  Biologicals and other products salesincreased at a more modest rate.

 

*2003 compared with 2002*.  Net sales increased $4.3million, or 12%, to $41.3 million for the year ended December 31, 2003 from$37.0 million for the year ended December 31, 2002.  Changes in foreign currency exchange ratesincreased U.S. dollar-denominated net sales by $2.1 million when comparing theyear ended December 31, 2003 with the corresponding period in 2002.  The remainder of the increase was dueprimarily to growth in our assay and biologicals sales, which was consistentwith our strategy of increasing cellular pathways sales as a percentage of ourtotal sales.  Other products salesincreased at a more modest rate.

 

**GrossProfit**

 

*2004 compared with 2003.* Gross profit increased $2.0 million, or 9%, to $24.1 million forthe year ended December 31, 2004 from $22.1 million for the year ended December31, 2003.  Our gross profit as a percentof sales, or gross margin, of 54% in 2004 was consistent with that of 2003.

 

*2003 compared with 2002*.  Our gross margin was 54%for the year ended December 31, 2003 compared to 59% for the year endedDecember 31, 2002.  This decrease wasprimarily due to lower margins in certain ancillary product lines.  With our focus increasingly directed on assaykits and related biological product lines, over 400 non-strategic products werediscontinued in 2003 and, as a result, we recorded an inventory write-down ofapproximately $1.3 million in the fourth quarter of 2003.

 

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**OperatingExpenses**

 
| **(Dollars in millions)**         | ** ** | **2002** | ** ** | **% of  Net  Sales** | ** ** | **2003** | ** ** | **% of  Net  Sales** | ** ** | **2004** | ** ** | **% of  Net  Sales** | ** ** | **2002-2003  % Change** | ** ** | **2003-2004  % Change** | ** ** |
|-----------------------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|----------|------------|----------------------|------------|-------------------------|------------|-------------------------|------------|
| Sales and marketing               |       | $        | 8.0        |                 | 21.7%      |     | $          | 9.0                  |       | 21.9%    |       | $                    | 9.5        |                    | 21.5%      |                    | 12.4       | % | 5.7 | % |
| General and administrative        |       | 5.6      |       | 15.0%                |       | 6.6      |       | 16.0%                |       | 7.4      |       | 16.8%                |       | 18.7                    | %          | 13.1                    | %          |
| Research and development          |       | 6.2      |       | 16.7%                |       | 7.0      |       | 17.0%                |       | 5.8      |       | 13.0%                |       | 13.2                    | %          | (17.4                   | )%         |
| Long lived asset impairment       |       | —   |       | —               |       | 0.3      |       | 0.8%                 |       | —   |       | —               |       | —                  |       | —                  |       |
| Amortization of intangible assets |       | 0.6      |       | 1.7%                 |       | 0.6      |       | 1.4%                 |       | 0.6      |       | 1.3%                 |       | —                  |       | —                  |       |
| Total operating expenses          |       | $        | 20.4       |                 | 55.1%      |     | $          | 23.5                 |       | 57.1%    |       | $                    | 23.3       |                    | 52.6%      |                    | 15.3       | % | (0.9 | )% |

 

**Salesand Marketing. **Sales and marketing expensesas a percentage of sales was relatively consistent in 2004 compared with 2003and in 2003 compared with 2002.  Theincrease in dollars was primarily attributable to increased personnel costsassociated with additional headcount and associated travel costs.

 

**Generaland Administrative Expenses.**  General andadministrative expenses increased modestly as a percentage of net sales in 2004compared with 2003 and in 2003 compared with 2002.

 

*2004 compared with 2003. *The $0.8million increase is primarily attributable to increased personnel costs andprofessional fees.

 

***2003 compared with 2002.***  The $1.0 million increase is primarily due to$0.6 million of severance and hiring expenses related to the resignation of ourprevious CEO in September 2003 and the hiring of our new CEO in November 2003and to increases in our reserve for doubtful accounts, travel expenses,consulting fees, other severance costs and accounting fees, which werepartially offset by a decrease in certain benefit and incentive costs.

** **

**Research and Development**.  Research and development (“R&D”)expenses decreased $1.2 million, or 4% of sales, in 2004 compared to 2003.  The decrease in R&D spending is primarilyrelated to headcount reductions, which is consistent with management’s effortsto align our R&D investments with our core strength of assaydevelopment.  R&D as a percentage ofsales was consistent in 2003 with 2002.

 

**Long Lived Asset Impairment.   **Werecorded a long-lived asset impairment charge of $0.3 million in 2003associated with the disposition of certain fixed assets in our oligonucleotidebusiness.

 

**Amortizationof Intangible Assets.  **Amortization of intangibleassets was $0.6 million for the year ended December 31, 2004, which wasconsistent with the comparable 2003 and 2002 periods.

 

*Non-Operating Income andExpenses*

 

**IncomeTaxes.** Income tax expense related to continuingoperations in 2004 was $0.4 million.  In2003, the income tax benefit was $0.7 million on a pre-tax loss from continuingoperations of $(1.5) million.

 

**Discontinued Operations. **InDecember 2004, we sold our wholly-owned subsidiaries that owned and operatedour custom antibodies and peptides business, Quality Controlled Biochemicals,Inc. and Javelle, Inc., and accounted for the sale as discontinued operations.In accordance with SFAS 144, we have segregated the operating results of thisbusiness from continuing operations on our statement of operations for allperiods prior to the sale. We recorded a net loss from discontinued operationsof $0.8 million in the fourth quarter of fiscal 2004. See Note 3 to theconsolidated financial statements.

 

**Cumulative Effect ofAccounting Change.**  In July 2001, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”)FAS No. 142, “Accounting For Goodwill and Other Intangible Assets.”   FAS No. 142 required that goodwill andintangible assets with indefinite useful lives no longer be amortized, butinstead be reviewed for impairment in accordance with FAS No. 142.  Effective January 1, 2002, we adoptedFAS No. 142 and as such we recognized in 2002 a $2.5 million charge, net ofapplicable income taxes, representing the cumulative effect of a change inaccounting principle resulting from the

 

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adoption ofthis standard.

 

**Dividend**. In June 2004, we amended the terms of the warrant agreementsoriginally issued in connection with a private placement in 2000. The amendmentextended the expiration date from February 15, 2005 to February 15,2007 and increased the exercise price per share underlying the warrants from$7.77 per share to $9.00 per share. The modification of warrant terms has beenreflected as a dividend, similar to a dividend on a preferred equity security,in 2004 which was determined by comparing the value of the warrants using theBlack-Scholes model immediately before and after the modification of terms.

 

**Quarterly Results**

** **

The following table sets forth summarized quarterlyfinancial data for the years ended December 31, 2003 and 2004 and, inmanagement’s opinion, includes all normal recurring adjustments necessary topresent fairly the information for each of the interim periods below.

 
| ** **                                                   | ** ** | **(As  previously reported)** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                   | ** ** | **2003**                      | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **Q1**                        | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                   | ** ** | **(in  thousands)**           | ** ** |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                    |       | $                             | 10,177     |   | $ | 10,999 |   | $ | 10,043 |   | $ | 10,039 |   | $ | 11,532 |   | $ | 11,241 |   | $ | 10,660 |   | $ | 10,947 |   |
| Gross profit                                                 |       | 6,136                         |       | 6,306 |   | 5,710 |   | 4,049 |   | 6,730 |   | 6,296 |   | 5,663 |   | 5,377 |   |
| Income (loss) from continuing operations                     |       | 154                           |       | 381 |   | 25 |   | (1,310 | ) | 746 |   | 489 |   | 107 |   | (946 | ) |
| Discontinued operations, net                                 |       | (51                           | )          | (56 | ) | (106 | ) | (107 | ) | (38 | ) | (44 | ) | (69 | ) | (660 | ) |
| Net income (loss)                                            |       | 103                           |       | 325 |   | (81 | ) | (1,417 | ) | 708 |   | 445 |   | 38 |   | (1,606 | ) |
| Net income (loss) available to stockholders                  |       | $                             | 103        |   | $ | 325 |   | $ | (81 | ) | $ | (1,417 | ) | $ | 708 |   | $ | 445 |   | $ | 38 |   | $ | (1,606 | ) |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share from continuing operations   |       | $                             | .02        |   | $ | .04 |   | $ | .00 |   | $ | (.14 | ) | $ | .08 |   | $ | .05 |   | $ | .01 |   | $ | (.10 | ) |
| Basic earnings (loss) per share                              |       | $                             | .01        |   | $ | .03 |   | $ | (.01 | ) | $ | (.15 | ) | $ | .08 |   | $ | .05 |   | $ | .00 |   | $ | (.18 | ) |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share from continuing operations |       | $                             | .02        |   | $ | .04 |   | $ | .00 |   | $ | (.14 | ) | $ | .08 |   | $ | .05 |   | $ | .01 |   | $ | (.10 | ) |
| Diluted earnings (loss) per share                            |       | $                             | .01        |   | $ | .03 |   | $ | (.01 | ) | $ | (.15 | ) | $ | .07 |   | $ | .05 |   | $ | .00 |   | $ | (.18 | ) |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                   | ** ** | **(As  restated)**            | ** ** |
| ** **                                                   | ** ** | **2003**                      | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **Q1**                        | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                   | ** ** | **(in  thousands)**           | ** ** |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                    |       | $                             | 10,177     |   | $ | 10,999 |   | $ | 10,043 |   | $ | 10,039 |   | $ | 11,532 |   | $ | 11,241 |   | $ | 10,660 |   | $ | 10,947 |   |
| Gross profit                                                 |       | 5,946                         |       | 6,407 |   | 5,548 |   | 4,181 |   | 6,644 |   | 6,480 |   | 5,540 |   | 5,388 |   |
| Income (loss) from continuing operations                     |       | 33                            |       | 444 |   | (75 | ) | (1,227 | ) | 693 |   | 603 |   | 33 |   | (937 | ) |
| Discontinued operations, net                                 |       | (51                           | )          | (56 | ) | (106 | ) | (107 | ) | (38 | ) | (44 | ) | (69 | ) | (660 | ) |
| Net income (loss)                                            |       | (18                           | )          | 388 |   | (181 | ) | (1,334 | ) | 655 |   | 558 |   | (36 | ) | (1,597 | ) |
| Net income (loss) available to stockholders                  |       | $                             | (18        | ) | $ | 388 |   | $ | (181 | ) | $ | (1,334 | ) | $ | 655 |   | $ | (503 | ) | $ | (36 | ) | $ | (1,597 | ) |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share from continuing operations   |       | $                             | .00        |   | $ | .05 |   | $ | (.01 | ) | $ | (.13 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.10 | ) |
| Basic earnings (loss) per share                              |       | $                             | .00        |   | $ | .04 |   | $ | (.02 | ) | $ | (.14 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.17 | ) |
|                                                         |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share from continuing operations |       | $                             | .00        |   | $ | .04 |   | $ | (.01 | ) | $ | (.13 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.10 | ) |
| Diluted earnings (loss) per share                            |       | $                             | .00        |   | $ | .04 |   | $ | (.02 | ) | $ | (.14 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.17 | ) |

 

**Liquidityand Capital Resources**

 

Todate, our short-term liquidity needs have generally consisted of operatingcapital to finance growth in inventories, trade accounts receivable, newproduct research and development, capital expenditures, stock repurchases,acquisitions and investments in strategic licensing.  We have satisfiedthese needs primarily through a combination of cash generated by operations andfrom private placements of our common stock.

 

Thefollowing sections discuss the effects of changes in our cash flows.

 

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***Operatingactivities***.  Cash flows from operating activities canfluctuate significantly from period to period, as net income (loss), tax timingdifferences and other items can significantly impact cash flows. In 2004 cashprovided by operating activities was $4.7 million, an increase of $3.8 millionfrom cash provided by operating activities in 2003.  The $3.8 million increase was primarily dueto an increase in net income from continuing operations of $1.2 millionprimarily associated with increased sales, a $1.1 million net change inoperating assets and liabilities and an increase in non-cash operating items of$1.5 million.  The increase in non-cashoperating items was principally related to the effect of deferred taxes.   The increase in our cash flows from changesin our operating assets and liabilities was primarily due to improvement inworking capital management driven by management’s continued efforts to reducenet inventory. In addition, cash flows increased as accounts payable and accruedexpenses increased $1.0 million due to the timing of payments to vendors.  This was partially offset by an increase inaccounts receivable of $0.8 million which was primarily associated withincreases in sales between 2003 and 2004 and the issuance of $0.5 million ofnotes receivable in connection with the sale of our custom antibodies andpeptides business.

 

In 2003 cashprovided by operating activities was $0.8 million, a decrease of$2.4 million from 2002.  This change was primarily due to lower non-cashoperating items of $3.4 million, which was partially offset by a lower 2003loss from continuing operations of $0.2 million and a positive net change toour operating assets and liabilities of $0.8 million.  The increase in ourcash flows from changes in operating assets and liabilities was primarilydriven by improvement in working capital management driven by management’sefforts to reduce net inventory.  Inaddition, cash flow from income taxes improved $0.4 million in 2003 as a resultof the realization of certain income tax receivables during the year. This was partially offset by a decrease in accounts payable of $1.2 million,which was primarily due to the timing of payments to vendors.

 

***Investing activities. ***Theincrease in net cash used in investing activities of $0.5 million in 2004compared to 2003 resulted partially from a $0.2 million increase in ourinvestments in production equipment to support the growth of the business.  In addition, in 2003 we generated proceedsfrom the sale of equipment of $0.3 million, which reduced the 2003 net cashused in investing activities.

 

The decrease in net cash used in investing activitiesof $1.6 million in 2003 as compared to 2002 resulted primarily from a reductionin 2003 in capital expenditures of $1.3 million as well as the receipt of $0.3million in proceeds in 2003 from the sale of equipment. The decrease in 2003capital expenditures was primarily attributable to the build-out of a new labin 2002 related to our custom oligonucleotide operations, which involvedsignificant expenditures.

 

***Financingactivities.***Net cash used in financingactivities increased $0.2 million in 2004 compared to 2003.  Our financingactivities consisted of purchases of our common stock under our stockrepurchase program, which were partially offset by proceeds received from theexercise of stock options and the purchase of shares under our employee stockpurchase plan.  As we generated increased operating cash flow in 2004compared to 2003, we increased the amount of our stock repurchases by $0.6million.  This was partially offset by an increase of $0.4 million fromcash received from stock option exercises and purchases under the employeestock purchase plan.  In 2003, net cash used in financing activities decreased$1.9 million from 2002.  The reduced netfinancing outflows were primarily due to a decrease in stock repurchases of$1.1 million as well as an increase from cash received from stock optionexercises and purchases under the employee stock purchase plan of $0.8 million.  The modification of terms of the warrantagreement that resulted in a dividend, similar to a dividend on a preferredequity security, is a non-cash transaction and as such has no impact on thebalance sheet, statement of stockholders’ equity or cash flows.

 

**StockRepurchase Program**

 

In July 2004, we adopted a new stock repurchaseprogram under which we can repurchase up to $10 million of our common stock inopen market purchases.  Our previousstock repurchase program expired in June 2004. During the six months ended June 30, 2004, we did not repurchase anyshares of our common stock.  Under thenew program, we repurchased approximately 635,000 shares for an aggregatepurchase price of $4.0 million during the second half of 2004.

 

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**Other**

 

We havenever paid cash dividends on our common stock and have no plans to do so in theforeseeable future.

 

Weexpect to be able to meet our future cash and working capital requirements foroperations and capital expenditures through currently available funds and cashgenerated from operations.  Our futurecapital requirements and the adequacy of available funds will depend on manyfactors, including future business acquisitions, stock repurchases and levelsof research and development expenditures.

 

**ContractualObligations**

 

We haveoperating lease obligations for facilities and equipment under non-cancelableoperating lease agreements. Future minimum lease payments are subject to annualadjustment for increases in the Consumer Price Index.  As of December 31, 2004, the paymentsdue by period are as follows:

 
| ** **       | ** ** | **Payments Due By Period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|             |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases |       | $                          | 2,746,000  |   | $ | 1,258,000 |   | $ | 1,381,000 |   | $ | 107,000 |   | $ | — |   |
|                  |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In the fourth quarter of 2004, we sold ourwholly-owned subsidiaries that owned and operated our custom antibodies andpeptides business, Quality Controlled Biochemicals, Inc. and Javelle, Inc.  In connection with the sale of thesesubsidiaries, we guaranteed the real estate lease obligations of thesesubsidiaries through the lease expiration in May 2006.

 

***RecentAccounting Pronouncements***

 

In December 2004the FASB issued SFAS 123 (revised 2004), *“Share-Based Payment,”*whichis a revision of SFAS 123, *“Accounting forStock-Based Compensation.”*Statement 123(R) supercedes APB 25, *“Accounting for Stock Issued to Employees.” *Generally, the approach in SFAS123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R)requires all share-based payments to employees, including grants of employeestock options to be recognized in the statement of operations based on theirfair values. Pro forma disclosure of fair value recognition will no longer bean alternative. SFAS 123(R) must be adopted no later than January 1, 2006,with earlier adoption permitted.  Weexpect to adopt this new standard on January 1, 2006. We have not yetdetermined which fair-value method and transitional provision we will follow.

 

As permittedby SFAS 123, the Company currently accounts for share-based payments toemployees using APB 25’s intrinsic value method. As a consequence, nocompensation cost is recognized for employee stock options. Although theadoption of SFAS 123(R)’s fair value method will have no adverse impact on thebalance sheet or net cash flows, it is expected to have a significant adverseimpact on net income and earnings per share. The pro forma effects on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123 to share-based payments to employees inprior periods are disclosed in Note 1 under *“Stock Option Plans.”*Althoughthe pro forma effects of applying SFAS 123 may be indicative of the effects ofapplying SFAS 123(R), the provisions of these two statements differ in someimportant respects. The actual effects of adopting SFAS 123(R) will depend onnumerous factors including the valuation model used to value future share-basedpayments to employees, estimated forfeiture rates and the accounting policiesadopted concerning the method of recognizing the fair value of awards over therequisite service period.

 

In November 2004, FASB issued SFAS No.151, “InventoryCosts, an amendment of ARB 43, Chapter 4,” (SFAS 151) which amends the guidancein ARB No. 43, Chapter 4, “Inventory Pricing.” This accounting pronouncement is the result of a broader effort by theFASB working with the International Accounting Standards Board to reduce differencesbetween U.S. and international accounting standards.  SFAS151 eliminates the “so abnormal”criterion in ARB No. 43 and companies will no longer be permitted to capitalizeinventory costs on their balance sheets when the production defect rate variessignificantly from the expected rate.  Italso makes clear that fixed overhead should be allocated based on “normalcapacity.”  The provisions of

 

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thisaccounting pronouncement will be effective with respect to inventory costsincurred during our fiscal year 2006.  Weare currently analyzing this statement and have not yet determined itsexpectant impact on our future consolidated financial statements.

 

**ForeignCurrency**

 

Changes inforeign currency exchange rates can affect our reported results of operations,which are reported in U.S. dollars. Based on the foreign currency rate in effect at the time of thetranslation of our non-U.S. results of operations into U.S. dollars, reportedresults could be different from prior periods even if the same amount and mixof our products were sold at the same local prices during the two periods.  This has affected our reported results ofoperations and also makes the comparison of our business performance indifferent periods more difficult.  Forexample, our sales for the year ended December 31, 2004 were $44.4 millionusing applicable foreign currency exchange rates for that period.  However, applying the foreign currencyexchange rates in effect during the year ended December 31, 2003 to ournon-U.S. sales for the same period in 2004 would result in $1.6 million lessrevenue for the 2004 period.  Thesechanges in currency exchange rate have affected, and will continue to affect,our reported results, including our reported sales, sales growth rates, grossmargins and income or losses, as well as our assets and liabilities.

 

**Risk Factors**

 

You shouldcarefully consider the following risk factors and all other informationcontained in this report before purchasing shares of our common stock.  Investing in our common stock involves a highdegree of risk.  If any of the following events or outcomes occurs, ourbusiness, operating results and financial condition could suffer.  Therisks described below are not the only ones we face.  Additional risks notprecisely known to us or that we currently deem immaterial may also adverselyaffect our business.

 

**Risks Related to OurBusiness**

 

**Failure to execute on ourlong-term strategic plan could impair our business.**

 

Wehistorically have sought to increase our sales and profitability primarilythrough the acquisition or internal development of new product lines,additional customers and new businesses.  Our historical sales growth isprimarily attributable to our acquisitions and new product development and, toa lesser extent, to increased sales from our existing products.  In thefourth quarter ended December 31, 2003, we adopted a fundamental shift instrategy to focus our time, effort and financial resources on our corestrengths producing assay products.  We have built a strategic plan tocontinue to penetrate and increase our market share in the assay market. This strategy focuses our energies on these high margin products and allows usto simultaneously cross-market our complimentary product lines.  However,by focusing heavily on the assay products, we may lose the benefits of adiversified business including the ability to offset or reduce the effect onthe Company of adverse changes specific to the assay products market.

 

Our ability toachieve our strategic objectives depends upon a variety of factors, including:

 

•                  the market’scontinuing acceptance of our assay products;

•                  our ability tointernally develop new products;

•                  our ability toacquire products or licenses to necessary technologies;

•                  our ability to facilitatetransactions with strategic partners;

•                  establishment of newrelationships or expansion of existing relationships with customers andsuppliers; and

•                  availability ofcapital.

 

Additionally,our shift in strategy caused us to evaluate other non-strategic products and todiscontinue certain products we offered in the past. We expect to review ourproducts on an ongoing basis.  While the impact to our financial resultsfrom our continuing evaluation of products is unknown at this time, future productdiscontinuances would likely adversely affect our operating results.

 

If we areunable to manage this strategic shift effectively, our operating results couldbe adversely affected.

 

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Moreover,there can be no assurance that our historic rate of growth will continuethrough this strategic shift, that we will continue to successfully expand orthat growth or expansion will result in profitability.

 

**Reduction or delays inresearch and development budgets and in government funding may negativelyimpact our sales.  Industry consolidation also could adversely affect ourbusiness.**

 

Our customersinclude researchers at pharmaceutical and biotechnology companies, academicinstitutions and government and private laboratories.  Fluctuations in theresearch and development budgets of these researchers and their organizationscould have a significant effect on the demand for our products.  Researchand development budgets fluctuate due to numerous factors that are outside ofour control and are difficult to predict, including changes in availableresources, spending priorities and institutional budgetary policies.  Ourbusiness could be seriously damaged by any significant decrease in lifesciences research and development expenditures by pharmaceutical andbiotechnology companies, academic institutions or government and privatelaboratories.

 

A significantportion of our sales has been to researchers, universities, governmentlaboratories and private foundations whose funding is dependent upon grantsfrom government agencies such as the U.S. National Institutes of Health (NIH)and similar domestic and international agencies. Government funding of researchand development is subject to the political process, which is inherently fluidand unpredictable.  Our sales may be adversely affected if our customersdelay purchases as a result of uncertainties surrounding the approval ofgovernment budget proposals.  Also, government proposals to reduce oreliminate budgetary deficits have sometimes included reduced allocations to theNIH and other government agencies that fund research and developmentactivities.  A reduction in government funding for the NIH or othergovernment research agencies could seriously damage our business.

 

Many of ourcustomers receive funds from approved grants at particular times of the year,as determined by the federal government.  Grants have, in the past, beenfrozen for extended periods or have otherwise become unavailable to variousinstitutions without advance notice.  The timing of the receipt of grantfunds affects the timing of purchase decisions by our customers and, as aresult, can cause fluctuations in our sales and operating results.

 

In recentyears, the pharmaceutical industry has undergone substantial downsizing andconsolidation.  This could have an adverse effect on the ability of someof our existing customers to compete with larger companies in part becausecompetition for funding may become more centralized and fierce because higherstakes are involved.  Additional mergers or corporate consolidations inthe pharmaceutical industry could cause us to lose existing customers andpotential future customers, which could have a harmful effect on our business,financial condition and results of operations.

 

**We rely on raw materialsand specialized equipment for our manufacturing, which we may not always beable to obtain on favorable terms.**

 

Ourmanufacturing process relies on the continued availability of high-quality rawmaterials, including biological materials, and specialized equipment.  Itis possible that a change in vendors, or in the quality or price of the rawmaterials supplied to us, could have an adverse impact on our manufacturingprocess and, ultimately, on the sale of our finished products.  We havefrom time to time experienced a disruption in the quality or availability ofkey raw materials, which has created delays in our ability to fill orders forspecific test kits.  This could occur again in the future and could have adetrimental impact on the sale of our products and our results ofoperations.  For example, the supply of raw fetal bovine serum (“FBS”) issometimes limited because serum collection tends to be cyclical.  Thesefactors can cause the price of raw FBS to fluctuate.  The profit marginswe achieve on finished FBS, one of our major products, have been unstable inthe past because of the fluctuations in the price of raw FBS, and any increasein the price could adversely affect those profit margins.  In addition, ifwe are unable to obtain an adequate supply of FBS, we may lose market share.The availability and price of certain raw materials may be affected by scaresor outbreaks of disease or similar health concerns, or perceptions about thematerials’ safety, governmental regulation and trade restrictions.  Inaddition, we rely on highly specialized manufacturing equipment that if damagedor disabled could adversely affect our ability to manufacture our products andtherefore negatively impact our business.

 

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

 

We incursignificant research and development expenses to develop new products andtechnologies in an effort to maintain our competitive position in a marketcharacterized by rapid rates of technological advancement.  There can beno assurance that any of these products or technologies will be successfullydeveloped or that, if developed, will be commercially successful.  In the eventthat we are unable to develop commercialized products from our research anddevelopment efforts or we are unable or unwilling to allocate amounts beyondour currently anticipated research and development investment, we could loseour entire investment in these new products and technologies.  Any failureto translate research and development expenditures into successful new productintroductions could have an adverse effect on our business.

 

**Our loss of existinglicenses or failure to license new technologies could impair our new productdevelopment.**

 

Our businessmodel of providing products to researchers working on a variety of scientificdisciplines requires us to develop a wide spectrum of products.  Togenerate broad product lines it is advantageous to sometimes licensetechnologies from others rather than relying exclusively on our own internaldevelopment efforts.  As a result, we believe our ability to license newtechnologies from third parties is and will continue to be important to ourability to offer new products.

 

In addition,from time to time we are notified or become aware of patents held by thirdparties that are related to technologies we are selling or may sell in thefuture.  After a review of these patents, we may decide to obtain alicense for these technologies from these third parties or discontinue theproducts.  There can be no assurance that we will be able to continue tosuccessfully identify new technologies developed by others.  Even if weare able to identify new technologies of interest, we may not be able tonegotiate a license on favorable terms, or at all.  If we lose the rightsto patented technology or fail to license technologies important to our newproduct development, we may need to discontinue selling certain products orredesign our products, and we may lose a competitive advantage. Competitors could in-license technologies that we fail to license andpotentially erode our market share for certain products.  Our licensestypically subject us to various commercialization, sublicensing, minimumpayment, and other obligations.  If we fail to comply with theserequirements, we could lose important rights under a license, such as the rightto exclusivity in a certain market, or we could lose all rights under alicense.  In addition, certain rights granted under the license could belost for reasons outside of our control.  For example, the licensor couldlose patent protection for a number of reasons, including invalidity of thelicensed patent.  We do not always receive significant indemnificationfrom a licensor against third party claims of intellectual propertyinfringement.

 

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

 

Rapidtechnological change and frequent new product introductions are typical for themarkets we serve.  Our future success will depend in part on continuous,timely development and introduction of new products that address evolvingmarket requirements.  To the extent we fail to introduce new andinnovative products, we may lose market share to our competitors, which will bedifficult or impossible to regain.  Any inability, for technological orother reasons, to successfully develop and introduce new products could reduceour growth rate or damage our business.

 

In the past wehave experienced, and are likely to experience in the future, delays in thedevelopment and introduction of products.  We cannot assure that we willkeep pace with the rapid rate of change in life sciences research or that ournew products will adequately meet the requirements of the marketplace orachieve market acceptance.  Some of the factors affecting marketacceptance of new products include:

 

•                  availability,quality and price relative to competitive products;

•                  the timing ofintroduction of the product relative to competitive products;

•                  customers’ opinionof the product’s utility;

•                  ease of use;

•                  consistency withprior practices;

 

15

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•                  citation of theproduct in published research; and

•                  general trends inlife sciences research.

 

Thedevelopment, introduction and marketing of innovative products in our rapidlyevolving markets will require significant sustained investment.  We cannotassure you that cash from operations or other sources will be sufficient tomeet these ongoing requirements.

 

The expensesor losses associated with unsuccessful product development activities or lackof market acceptance of our new products could materially and adversely affectour business, operating results and financial condition.

 

**Failure to attract andretain qualified scientific or production personnel or loss of key managementor key personnel could adversely affect our business.**

 

Recruiting andretaining qualified scientific and production personnel to perform research anddevelopment work and product manufacturing are critical to our success. We are in a very competitive industry and face significant challengesattracting and retaining this qualified personnel base.  Although webelieve we have been and will be able to attract and retain these personnel,there can be no assurance that we will be able to continue to successfullyattract and retain qualified personnel.  In addition, our growth andexpansion into areas and activities requiring additional expertise may requirethe addition of new scientific and production management and the development ofadditional expertise within existing management.  Additionally, somemeasures that we implement during the course of integrating acquired companiesand businesses into our operations may be disruptive to some of our keypersonnel, including those in research and development, and cause them to leaveus.  The failure to attract and retain these personnel or, alternatively,to develop this expertise internally could adversely affect our business.

 

Our successalso will continue to depend to a significant extent on the members of oursenior management team and other key personnel.  We do not maintain “keyman” insurance policies regarding any of these individuals.  We may not beable to retain the services of our executive officers and key personnel orattract additional qualified members to management in the future.  Theloss of services of our key management or employees could have a materialadverse effect upon our business.

 

**Some of our customers areobtaining products through alternative distribution channels and methods thatmay adversely impact our results of operations and financial condition.**

 

Certain of ourcustomers have developed purchasing initiatives to reduce their number ofvendors and to lower their supply costs.  In some cases, these customershave established agreements with large distributors who provide volumediscounts and in-house purchasing processes and personnel.  Theseagreements may limit the prices we can charge for our products, which couldadversely impact our business, financial condition and results ofoperations.  In addition, although we accept and process some ordersthrough our internet website, we also implement sales through third partyinternet vendors.  Internet sales through third parties will negativelyimpact our operating income because we pay commission on these sales. However, if we do not enter into arrangements with third party e-commerce providers,we may lose customers who prefer to purchase using that method.  Ourbusiness may be harmed as a result of these web sites or other sales methodswhich may be developed in the future.

 

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**We rely on rapid transportto ship product.**

 

We rely on thetimely transport of raw materials and finished products.  Any disruptionin rapid transportation systems could have an adverse impact on our ability tomanufacture and supply products and could accordingly have an adverse effect onour business.

 

**We rely on internationalsales, which are subject to additional risks, including foreign currency risk.**

 

Internationalsales accounted for approximately 51% and 49% of our net sales in 2004 and2003, respectively.  International sales can be subject to many inherentrisks that are difficult or impossible for us to predict or control, including:

 

•                  unexpected changesin regulatory requirements and tariffs;

•                  difficulties andcosts associated with staffing and managing foreign operations, includingforeign distributor relationships;

•                  longer accountsreceivable collection cycles in certain foreign countries;

•                  adverse economic orpolitical changes;

•                  limited protectionfor intellectual property in some countries;

•                  foreign currencieswe receive for sales outside the U.S. could be subject to unfavorable exchangerates with the U.S. dollar and reduce the amount of revenue we recognize;

•                  potential traderestrictions, exchange controls and import and export licensing requirements;

•                  problems incollecting accounts receivable; and

•                  potentially adversetax consequences of overlapping tax structures.

 

**Our ability to distributegoods internationally could be impaired by governmental regulation and loss ofkey distributors of our products.**

 

We generatesignificant revenues from sales outside the United States.  Internationaldistribution may be subject to greater governmental regulation in thefuture.  These regulations, which include requirements for approvals or clearanceto market, additional time required for regulatory review and sanctions imposedfor violations, as well as the other risks indicated in the items listed in theabove paragraph, vary by country.  We may not be able to obtain regulatoryapprovals in the countries in which we currently sell our products or incountries where we may sell our products in the future.  In addition, wemay be required to incur significant costs in obtaining necessary regulatoryapprovals.  Failure to obtain necessary regulatory approvals or any otherfailure to comply with regulatory requirements could result in a materialreduction in our revenues and earnings.

 

We also dependon third-party distributors for a significant portion of our internationalsales.  If we suffer a significant reduction in sales to certaindistributors, our business could be materially adversely affected.

 

**Our ability to raise thecapital necessary to expand our business or otherwise achieve our long-termobjectives is uncertain.**

 

In the future,in order to expand our business through internal development or acquisitions orto otherwise achieve our long-term objectives, we may need to raise substantialadditional funds through equity or debt financings, research and developmentfinancings or collaborative relationships.  This additional funding maynot be available or, if available, may not be available on economicallyreasonable terms. Further, any additional funding may result in significantdilution to existing stockholders.  If adequate funds are not available,we may be required to curtail our operations or obtain funds throughcollaborative partners that may require us to release material rights to ourproducts.  To the extent that additional capital is raised through thesale of equity, or securities convertible into equity, you may experiencedilution of your proportionate ownership of us.

 

17

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**We cannot guarantee thatfuture acquisitions will be successful**.

 

We compete foracquisition and expansion opportunities with companies which have significantlygreater financial and management resources than us.  There can be noassurance that suitable acquisition or investment opportunities will beidentified, that any of these transactions can be consummated, or that, ifacquired, these new businesses can be integrated successfully and profitablyinto our operations.  These acquisitions and investments also may requirea significant allocation of resources, which will reduce our ability to focuson the other portions of our business, including many of the factors listed inthe prior risk factor.  Even if we are able to integrate our acquiredoperations, we cannot assure you that we will achieve synergies.  Ourfailure to achieve synergies could have a material adverse effect on ourbusiness, results of operations and financial condition.

 

**Our operating results mayfluctuate in future periods.**

 

Our operatingresults may vary significantly from quarter to quarter and from year to year asa result of a variety of factors.  These factors include, but are notlimited to:

 

•                  level of demand forour products;

•                  changes in ourcustomer and product mix;

•                  timing ofacquisitions and investments in infrastructure;

•                  changes in customerresearch budgets;

•                  our ability tocontrol or adjust expenses in response to changes in revenue;

•                  competitiveconditions;

•                  intellectualproperty litigation;

•                  currency exchangerate fluctuations; and

•                  general economic andpolitical conditions.

 

We believethat quarterly comparisons of our financial results may not necessarily bemeaningful and should not be relied upon as an indication of futureperformance.  Additionally, if our operating results in one or morequarters do not meet the expectations of securities analysts or others, theprice of our common stock could be adversely affected.

 

Our continuedinvestment in product development and sales and marketing are significantongoing expenses.  If sales in a particular period falls short ofexpectations, we may not be able to proportionately reduce our expenses forthat period, which could materially and adversely affect the operating resultsfor that period.

 

**We may be unable toprotect our trademarks, trade secrets and other intellectual property rightsthat are important to our business.**

 

We regard ourtrademarks, trade secrets and other intellectual property as a significantcomponent of our success.  We have only one registered trademark and relyon common law trademarks and trade secret protection.  Our common lawtrademark rights may not be recognized in all countries and the use by thirdparties of similar trademarks could be confusing and interfere with our rightsto use these trademarks.  We also rely upon confidentiality and licenseagreements with employees, customers, partners and others to protect ourintellectual property.  Effective trademark and trade secret protectionmay not be available in every country in which our products are available. Wecannot be certain that we have taken adequate steps to protect our intellectualproperty, especially in countries where the laws may not protect our rights ina manner comparable to that in the United States.  In addition, ourthird-party confidentiality agreements might be breached and, if they are,there may not be an adequate remedy available to us.  If our trade secretsbecome known, our competitive position could be materially and adverselyimpacted.

 

**Intellectual propertylitigation and other litigation could harm our business.**

 

Litigationregarding patents and other intellectual property rights is extensive in thebiotechnology industry.  We are aware that patents have been applied forby, and in some cases issued to, third parties, claiming technologies that areclosely related to ours.  As a result, and in part due to the ambiguitiesand evolving nature of intellectual property law, we periodically receivenotices of potential infringement of patents held by others.  Although to

 

18

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date we havesuccessfully resolved these types of claims, we may not be able to do so in thefuture.

 

Anintellectual property dispute might result in litigation.  This litigationcould involve proceedings declared by the U.S. Patent and Trademark Office orthe International Trade Commission, as well as proceedings brought directly byaffected third parties.  Intellectual property litigation can be extremelyexpensive, and these expenses, as well as the consequences should we notprevail, could seriously harm our business.

 

If a thirdparty were to claim an intellectual property right to technology we use, wemight need to discontinue an important product or product line, alter ourproducts and processes, pay license fees or cease our affected businessactivities.  Additionally, if our products are found to infringe a thirdparty’s intellectual property, we may be required to pay damages. Although we might under these circumstances attempt to obtain a license to thisintellectual property, we may not be able to do so on favorable terms, or atall.

 

In addition tointellectual property litigation, other substantial, complex or extendedlitigation could result in large expenditures by us and distraction of ourmanagement.  For example, lawsuits by employees, stockholders,collaborators or distributors could be very costly and substantially disruptour business.  Disputes from time to time with companies or individualsare not uncommon in our industry, and we cannot assure you that we will alwaysbe able to resolve them out of court.  Unexpected results could cause ourfinancial exposure in these matters to exceed stated reserves and insurance,requiring us to allocate additional funds and other resources to address theseliabilities.  In addition, the negative press generated by litigationagainst us could adversely affect our business.

 

**Accidents related tohazardous materials could adversely affect our business.**

 

Portions ofour operations require the controlled use of hazardous and radioactivematerials.  Although we believe our safety procedures comply with thestandards prescribed by federal, state, local and foreign regulations, the riskof accidental contamination of property or injury to individuals from thesematerials cannot be completely eliminated.  In the event of an accident,we could be liable for any damages that result, which could seriously damageour business, results of operations and reputation.

 

**Our sales are subject toseasonality.**

 

We experiencea slowing of sales in Europe during the summer months and worldwide during theChristmas holidays.  Generally, our first half revenues are stronger thanour second half revenues.  We believe that period to period comparisons ofour operating results may not necessarily be reliable indicators of our futureperformance.

 

**Potential productliability claims could affect our earnings and financial condition.**

 

We face apotential risk of liability claims based on our past, present and futureproducts and services, and we have faced such claims in the past.  Wecarry product liability insurance which is limited in scope and amount butwhich we believe to be adequate.  We cannot assure you, however, that wewill be able to maintain this insurance at a reasonable cost and on reasonableterms.  We also cannot assure you that this insurance will be adequate toprotect us against a product liability claim, should one arise.  If we donot or cannot maintain sufficient liability insurance, our ability to marketour products may be significantly impaired.  In addition, productliability claims, as well as negative publicity arising out of such claims,could have a material adverse effect on our business, operating results andfinancial condition.

 

**The labor laws applicableto our employees in Europe may restrict the flexibility of our management.**

 

As of December 31,2004, 72 of our 239 employees worked for our BioSource Europe subsidiary, whichis located in Nivelles, Belgium.  As a result of certain labor laws, weare required to make specified severance payments in the event we terminate aEuropean employee.  Accordingly, we may be limited by the application ofthe Belgian labor laws in the determination of staffing levels resulting inless flexibility than our competitors whose employees are not subject tosimilar labor laws.

 

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**Risks Associated with OurIndustry**

 

**The biomedical researchproducts industry is very competitive, and we may be unable to continue tocompete effectively in this industry in the future.**

 

We are engagedin a segment of the biomedical research products industry that is highlycompetitive.  We compete with many other suppliers and new competitorscontinue to enter the markets.  Many of our competitors, both in theUnited States and elsewhere, are major chemical and life science companies withsubstantially greater capital resources, marketing experience, research anddevelopment staffs and facilities than we have.  Any of these companiescould succeed in developing products that are more effective than the productsthat we have or may develop and may also be more successful than us inproducing and marketing their products.  We expect this competition tocontinue and intensify in the future. Competition in our markets is primarilydriven by:

 

•                  product performance,features and liability;

•                  price;

•                  timing of productintroductions;

•                  ability to develop,maintain and protect proprietary products and technologies;

•                  sales anddistribution capabilities;

•                  technical supportand service;

•                  brand loyalty; and

•                  breadth of productline.

 

If acompetitor develops superior technology or cost-effective alternatives to ourproducts, our business, financial condition and results of operations could bematerially adversely affected.

 

Ourcompetitors have in the past and may in the future compete by loweringprices.  Our failure to anticipate and respond to price competition couldreduce our sales and profits, and may damage our market share.

 

**As a result ofconsolidation in the pharmaceutical industry, we may lose existing customers orhave greater difficulty obtaining new customers.**

 

In recentyears, the United States pharmaceutical industry has undergone substantialconsolidation.  As part of many business combinations, companiesfrequently reduce the number of suppliers used and we may not be selected as asupplier after a business combination.  Further, mergers or corporateconsolidations in the pharmaceutical industry could cause us to lose existingcustomers and potential future customers, which could have a material adverseeffect on our business, financial condition and results of operations.

 

**We are subject togovernment regulation.**

 

Our businessis currently subject to regulation, supervision and licensing by federal,state, local and foreign governmental authorities.  Also, from time totime we must expend resources to comply with newly adopted regulations, as wellas changes in existing regulations.  If we fail to comply with theseregulations, we could be subject to disciplinary actions or administrativeenforcement actions.  These actions could result in penalties, includingfines.

 

**Risks Associated with OurCommon Stock**

 

**Our stock price has beenvolatile, which may affect our ability to raise capital in the future and maysubject the value of your investment in our common stock to sudden decreases.**

 

Our commonstock is quoted on the Nasdaq National Market, and there has been substantialvolatility in the market price of our common stock.  The trading price ofour common stock has been, and is likely to continue to be, subject tofluctuations due to a variety of factors, including:

 

•                  fluctuations in ourquarterly financial results;

•                  the gain or loss ofsignificant contracts;

•                  loss of keypersonnel;

 

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•                  announcements oftechnological innovations or new products by us or by our competitors;

•                  delays in thedevelopment and introduction of new products;

•                  acquisitions anddispositions;

•                  legislative orregulatory changes;

•                  general trends inthe industry;

•                  recommendationsand/or changes in estimates by research analysts;

•                  biological ormedical discoveries;

•                  disputes and/ordevelopments concerning intellectual property, including patents and litigationmatters;

•                  public concern as tothe safety of new technologies;

•                  sales of our commonstock by existing holders;

•                  securities classaction or other litigation;

•                  developments in ourrelationships with current or future customers and suppliers; and

•                  general economicconditions, both in the United States and abroad.

 

As a result ofthese factors, and potentially others, the sales price of our common stock hasranged from $4.68 to $9.10 per share from January 1, 2002 through December 31,2004.

 

In addition,the stock market in general has experienced extreme price and volumefluctuations that have affected the market price of our common stock, as wellas the stock of many biotechnology companies.  Often, price fluctuationsare unrelated to operating performance of the specific companies whose stock isaffected.

 

In the past,following periods of volatility in the market price of a company’s stock,securities class action litigation has occurred against the issuingcompany.  If we were subject to this type of litigation in the future, wecould incur substantial costs and a diversion of our management’s attention andresources, each of which could have a material adverse effect on our revenueand earnings.  Any adverse determination in this type of litigation couldalso subject us to significant liabilities.

 

**Anti-takeover provisionsin our governing documents and under applicable law could impair the ability ofa third party to take over our company.**

 

We are subjectto various legal and contractual provisions that may impede a change in ourcontrol, including the following:

 

•                  our stockholders’rights plan which could result in the significant dilution of the ownership ofany entity that engages in an unsolicited attempt to take over the Company; and

 

•                  the ability of ourboard of directors to issue additional shares of our preferred stock, whichshares may be given superior voting, liquidation, distribution and other rightsas compared to our common stock.

 

Theseprovisions, as well as other provisions in our certificate of incorporation andbylaws under the Delaware General Corporations Law, may make it more difficultfor a third party to acquire our company, even if the acquisition attempt wasat a premium over the market value of our common stock at that time.

 

**Our principal stockholdersand management own a significant percentage of our common stock and will beable to exercise significant influence over our affairs.**

 

Our principalstockholders and management own a significant percentage of our common stockand will be able to exercise significant influence over our affairs. Accordingly, these stockholders:

 

•                  will be able tosignificantly influence the composition of our board of directors;

 

•                  will significantlyinfluence matters requiring stockholder approval, including the approval ofmergers and other significant corporate transactions, including change ofcontrol transactions; and

 

•                  will continue tohave significant influence over our business.

 

Thisconcentration of ownership of our common stock could have the effect ofdelaying, preventing or deterring a

 

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change ofcontrol of us or otherwise discouraging a potential acquirer from attempting toobtain control of us.  This in turn could have a negative effect on themarket price of our common stock.  It could also prevent our stockholdersfrom realizing a premium over the market prices for their shares of commonstock.

 

**Absence of dividends couldreduce our attractiveness to investors.**

 

Some investorsfavor companies that pay dividends, particularly in general downturns in thestock market.  We have never declared or paid any cash dividends on ourcommon stock.  We currently intend to retain any future earnings forfunding growth and stock repurchases.  We do not currently anticipatepaying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, the return on an investment in our commonstock likely depends on selling this stock at a profit.

 

**Caution RegardingForward-Looking Statements**

 

This Reportcontains forward-looking statements. These forward-looking statements includeour statements regarding the following: our belief that we can deliver salesand profit growth; our expectations regarding our product development efforts;our belief that our current real estate leases are sufficient to meet ourcurrent and near-term needs; our expectations regarding our use of cashgenerated in our business; the assumptions underlying our Critical AccountingPolicies; our belief that our income tax valuation allowance is sufficient; andour expectation that we may use cash for future acquisitions of technology andbusinesses and stock repurchases.

 

We cautioninvestors that forward-looking statements are only predictions based on ourcurrent expectations about future events and are not guarantees of futureperformance. Our actual results, performance or achievements could differmaterially from those expressed or implied by the forward-looking statementsdue to risks, uncertainties and assumptions that are difficult to predict.These risks and uncertainties include the following: the impact of intense competitionin our business; difficulty in developing and introducing new products andservices effectively; failure of customers to adopt our new products asexpected; difficulties with suppliers and distribution channels; significant impairment charges due to past acquisitions; and taxing authoritiesmay challenge our tax positions. In addition, the risks and uncertainties thatare discussed in this Item 7 under the caption *“RiskFactors”*may also impact these forward-looking statements. Weencourage you to read that section carefully along with the otherinformation provided in this Report and in our other filings with the SECbefore deciding to invest in our stock or to maintain or change yourinvestment. We undertake no obligation to revise or update any forward-lookingstatement for any reason, except as required by law.

 

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#### **ITEM 8**. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

#### ** **

The financial statements required by this item beginon page F-1 with the index to financial statements followed by the financialstatements.

 

#### **PART IV**

#### ** **

**ITEM 15.****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 
| * (a)* *Index to Financial Statements and Financial Statement Schedule* |                                                                                                                                    |
|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                              |                                                                                                                                    |   |
| (a)(1)                                                                            | The  financial statements listed below are included as part of this report:                                                             |   |
|                                                                              | Report  of Independent Registered Public Accounting Firm                                                                                |   |
|                                                                              | Consolidated Balance Sheets  at December 31, 2004 and 2003                                                                         |   |
|                                                                              | Consolidated  Statements of Operations for the three years ended December 31, 2004                                                 |   |
|                                                                              | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  three years ended December 31, 2004 |   |
|                                                                              | Consolidated  Statements of Cash Flows for the three years ended December 31, 2004                                                 |   |
|                                                                              | Notes to  Consolidated Financial Statements                                                                                             |   |
|                                                                              |                                                                                                                                    |   |
| (a)(2)                                                                            | Consolidated  Financial Statement Schedules:                                                                                            |   |
|                                                                              | Financial  Statement Schedule – Valuation and Qualifying Accounts                                                             |   |
|                                                                              | All other  schedules are omitted because the required information is not present or  required.                                          |   |
|                                                                              |                                                                                                                                    |   |
| (a)(3)                                                                            | *Exhibits*                                                                                                                              |   |
|                                                                              | The  following exhibits are filed as part of this Annual Report or Form 10-K.                                                           |   |

 

#### **ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

#### ** **

There were nochanges in or disagreements with accountants on accounting and financialdisclosure during fiscal 2003 or 2004.

 

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

An evaluation was carried out by BioSource’s management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934) as of December 31, 2004.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were, as of the end ofthe period covered by this report, not effective, due solely to the fact thatthe Company’s internal controls over loss reserves for previous manufacturedantibody inventory were not effective. As reflected in the restatement contained in this report, we have madeadjustments to our manufactured antibody inventory reserves followingadditional analysis with respect to our manufactured antibody inventory lossexperience.

 

The Company has determined that its incorrectaccounting treatment of the 2004 amendment to the Company’s outstandingwarrants, in reliance upon the advice of a “big four” public accounting firm,did not impact the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report.  The restatement contained in this report alsoreflects an adjustment for the 2004 amendment to the warrant agreements.

 

There were no changes in our internal control overfinancial reporting during the fiscal quarter ended December 31, 2004identified in connection with the above-referenced evaluations that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                           |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                 |
| 3.1         |       | Certificate  of Incorporation of Registrant (1).                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                 |
| 3.2         |       | Bylaws of  Registrant (1).                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.1         |       | Specimen  Stock Certificate of Common Stock of Registrant (1).                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.2         |       | Certificate  of Designation of Series A Preferred Stock (9).                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.3         |       | Certificate  of Designation of Series B Preferred Stock (11).                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.4         |       | Rights  Agreement, dated as of February 25, 1999, between Registrant and U.S.  Stock Transfer and Trust Corporation, as Rights Agent (9).                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.5         |       | Amendment  to Rights Agreement, dated as of January 10, 2000, between Registrant  and U.S. Stock Transfer and Trust Corporation (13).                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.6         |       | Second  Amendment to Rights Agreement, dated September 28, 2000, between  Registrant and U.S. Stock Transfer and Trust Corporation (13).                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.7         |       | Form of  Right Certificate (9).                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.8         |       | Summary of  Share Purchase Rights (9).                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.9         |       | Investor  Rights Agreement dated February 15, 2000, by and among Registrant,  Genstar Partners II, L.P. and Stargen II LLC (12).                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.10        |       | Amendment to Investor Rights Agreement dated September 18,  2000, among Registrant, Genstar Capital Partners II, L.P., Stargen II LLC,  Russell D. Hays and George Uveges (13).                                                                                 |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.11        |       | Second  Amendment to Investor Rights Agreement, dated September 28, 2000, among  Registrant, Genstar Capital Partners II, L.P., Stargen II LLC, Russell D.  Hays, George Uveges, Jean-Pierre Conte, Richard Hoskins, Richard Paterson and  Robert Weltman (13). |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.12        |       | Warrant to  Purchase Common Stock of Registrant issued to Genstar Capital Partners II,  L.P. on February 15, 2000 (12).                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                 |
| 4.13        |       | Warrant to  Purchase Common Stock of Registrant issued to Stargen II LLC on February 15,  2000 (12).                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                 |
| 10.1        |       | Registrant’s  1993 Stock Incentive Plan (4).                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                 |
| 10.2        |       | Licensing  Agreement dated May 1, 1990, by and between TAGO, Inc., as licensee, and St.  Jude’s Children’s Hospital, as licenser (1).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                 |
| 10.3        |       | License  Agreement dated February 14, 1991, by and between Registrant and  Schering Corporation (1).                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                 |
| 10.4        |       | License  Agreement dated October 1, 1993, by and between Registrant, as licensee,  and Schering Corporation, as licensor (2).                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                 |
| 10.5        |       | Separation  and Consulting Agreement between Registrant and James H. Chamberlain dated September 19,  2000 (15).                                                                                                                                                |

 

24

----

 

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                            |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                  |
| 10.6        |       | License Agreement dated February 7, 1994, by and  between Registrant, as licensee and Fundacio Clinic (4).                                                                                                            |
|        |       |                                                                                                                                                                                                                  |
| 10.7        |       | Form of Indemnification Agreement for Directors and  Executive Officers (6).                                                                                                                                          |
|        |       |                                                                                                                                                                                                                  |
| 10.8        |       | List of Indemnities  relating to Form of Indemnification Agreement previously filed as Exhibit 10  (16).                                                                                                              |
|        |       |                                                                                                                                                                                                                  |
| 10.9        |       | Registrant’s Employee Stock Purchase Plan (7).                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                  |
| 10.10       |       | Securities Purchase Agreement dated January 10,  2000, by and among Registrant, Genstar Capital Partners II, L. P. and Stargen  II LLC (15).                                                                          |
|        |       |                                                                                                                                                                                                                  |
| 10.11       |       | Securities Purchase Agreement, effective as of  August 9, 2000, between the Registrant and Genstar Capital Partners II, L.P.  (13).                                                                                   |
|        |       |                                                                                                                                                                                                                  |
| 10.12       |       | Amendment to Securities Purchase Agreement, dated as  of September 28, 2000, among the Registrant, Genstar Capital Partners II,  L.P., Jean-Pierre Conte, Richard Hoskins, Richard Paterson and Robert Weltman  (13). |
|        |       |                                                                                                                                                                                                                  |
| 10.13       |       | Securities Purchase Agreement, effective as of  August 9, 2000, between the Registrant and Russell D. Hays (13).                                                                                                      |
|        |       |                                                                                                                                                                                                                  |
| 10.14       |       | Securities Purchase Agreement, effective as of  September 5, 2000, between the Registrant and George Uveges (13).                                                                                                     |
|        |       |                                                                                                                                                                                                                  |
| 10.15       |       | Letter agreement regarding employment, dated August  2, 2000, between Registrant and Russell D. Hays (15).                                                                                                            |
|        |       |                                                                                                                                                                                                                  |
| 10.16       |       | Amendment to letter agreement regarding employment,  dated September 18, 2000, between Registrant and Russell D. Hays (15).                                                                                           |
|        |       |                                                                                                                                                                                                                  |
| 10.17       |       | Letter agreement regarding employment, dated August  18, 2000 between Registrant and George Uveges (15).                                                                                                              |
|        |       |                                                                                                                                                                                                                  |
| 10.18       |       | Amendment to letter agreement regarding employment,  dated September 18, 2000, between Registrant and George Uveges (15).                                                                                             |
|        |       |                                                                                                                                                                                                                  |
| 10.19       |       | Registrant’s 2000 Non-Qualified Stock Option Plan  (14).                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                  |
| 10.20       |       | Lease Agreement for 542 Flynn Road, dated March 7,  2000, between Registrant and Lincoln Ventura Technology Center (15).                                                                                              |
|        |       |                                                                                                                                                                                                                  |
| 10.21       |       | Executive Employment Agreement between Registrant  and Leonard M. Hendrickson, dated September 24, 2001(16).                                                                                                          |
|        |       |                                                                                                                                                                                                                  |
| 10.22       |       | Separation and Release Agreement dated as of  September 29, 2003, between Registrant and Leonard Hendrickson (17).                                                                                                    |
|        |       |                                                                                                                                                                                                                  |
| 10.23       |       | Executive Employment Agreement between Registrant  and Terrance J. Bieker, dated as of October 8, 2003 (17).                                                                                                          |

 

25

----

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                       |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                             |
| 10.24       |       | Executive  Employment Agreement between Registrant and Alan I. Edrick, dated as of May  10, 2004 (18).                                                                                                                           |
|        |       |                                                                                                                                                                                                                             |
| 10.25       |       | Executive Employment Agreement between Registrant  and Kevin J. Reagan Ph.D. dated as of February 15, 2004 (19).                                                                                                                 |
|        |       |                                                                                                                                                                                                                             |
| 10.26       |       | Executive Severance Agreement between Registrant and  Terrance J. Bieker dated as of June 7, 2005 (20).                                                                                                                          |
|        |       |                                                                                                                                                                                                                             |
| 10.27       |       | Executive Severance Agreement between Registrant and  Alan I. Edrick dated as of June 7, 2005 (20).                                                                                                                              |
|        |       |                                                                                                                                                                                                                             |
| 10.28       |       | Executive Severance Agreement between Registrant and  Kevin J. Reagan dated as of June 7, 2005 (20).                                                                                                                             |
|        |       |                                                                                                                                                                                                                             |
| 10.29       |       | Form of Indemnification Agreement for Executive  Officers of Registrant.                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                             |
| 21.0        |       | Subsidiaries of the Company                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                             |
|        | ** ** | ** **                                                                                                                                                                                                                       | ** ** | **State/Country of** | ** ** |
|        | ** ** | **Name**                                                                                                                                                                                                                         | ** ** | **Incorporation** | ** ** |
|        |       | Keystone Laboratories,  Inc.                                                                                                                                                                                                     |   | California |   |
|        |       | BioSource Europe S.A                                                                                                                                                                                                             |   | Belgium |   |
|        |       | BioSource B.V.                                                                                                                                                                                                                   |   | Holland |   |
|        |       | BioSource GmbH                                                                                                                                                                                                                   |   | Germany |   |
|        |       | BioSource U.K., Ltd                                                                                                                                                                                                              |   | U.K. |   |
|        |       |                                                                                                                                                                                                                             |
| 23.1        |       | Consent of KPMG, LLP,  Independent Registered Public Accounting Firm.                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                             |
| 31.1        |       | Certificate of Terrance  J. Bieker, Chief Executive Officer of BioSource International, Inc. pursuant  to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.                                              |
|        |       |                                                                                                                                                                                                                             |
| 31.2        |       | Certificate of Alan I.  Edrick, Chief Financial Officer of BioSource International, Inc. pursuant to  Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.                                                  |
|        |       |                                                                                                                                                                                                                             |
| 32.1        |       | Certificate of Terrance  J. Bieker, Chief Executive Officer and Alan I. Edrick, Chief Financial  Officer of BioSource International, Inc. pursuant to Rule 13a-14(a) under the  Securities and Exchange Act of 1934, as amended. |

 

----

 (1)      Incorporatedby reference to the Company’s Registration Statement on Form S-4 as filed withthe Securities and Exchange Commission on October 22, 1992, as amended.

 (2)      Incorporatedby reference to the Company’s Form 10KSB for the year ended December 31, 1992.

 (3)      Incorporatedby reference to the Company’s Form 10KSB for the year ended December 31, 1993.

 (4)      Incorporatedby reference to the Company’s Form 10KSB for the year ended December 31, 1994.

 (5)      Incorporatedby reference to the Company’s Form 10KSB for the year ended December 31, 1995.

 (6)      Incorporatedby reference to the Company’s Registration Statement on Form  SB-2 (SEC No. 333-3336) as filed with theSecurities and Exchange Commission on May 31, 1996, as amended.

 (7)      Incorporatedby reference to the Company’s Registration Statement on Form S-8 (SEC No.33-91838) as filed with the Securities and Exchange Commission on May 4, 1995.

 (8)      Incorporatedby reference to the Company’s Current Report on Form 8-K/A filed with theSecurities and Exchange Commission on February 19, 1999.

 (9)      Incorporatedby reference to the Company’s Current Report on Form 8-A filed with theSecurities and Exchange Commission on March 1, 1999.

(10)     Incorporatedby reference to the Company’s Form 10-K for the year ended December 31, 1998.

(11)     Incorporatedby reference to the Company’s Registration Statement on Form S-3 as filed withthe Securities and Exchange Commission on March 16, 2000.

(12)     Incorporatedby reference to Amendment No. 1 to the Company’s Registration Statement on FormS-3 as filed with the Securities and Exchange Commission on March 22, 2000.

 

26

----

 

(13)     Incorporatedby reference to the Company’s Current Report on Form 8-K as filed with theSecurities and Exchange Commission on October 26, 2000, and as amended onOctober 31, 2000.

(14)     Incorporatedby reference to the Company’s definitive proxy statement as filed with theSecurities and Exchange Commission on May 16, 2000.

(15)     Incorporatedby reference to the Company’s Form 10-K for the year ended December 31, 2000.

(16)     Incorporatedby reference to the Company’s Form 10-K for the year ended December 31, 2001.

(17)     Incorporatedby reference to the Company’s Form 10-K for the year ended December 31, 2003.

(18)     Incorporatedby reference to the Company’s Form 10-Q for the quarter ended June 30, 2004.

(19)     Incorporatedby reference to the Company’s Form 10-Q for the quarter ended March 31, 2004.

(20)     Incorporatedby reference to the Company’s Current Report on Form 8-K as filed with theSecurities and Exchange Commission on June 13, 2005.

 

27

----

 

**FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

We present theinformation required by Item 8 of Form 10-K here in the following order:

 
| Report  of KPMG, LLP, Independent Registered Public Accounting Firm                                                                        |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                       |   |
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                                                 |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Operations for each of the three years ended December 31, 2004                                                 |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each  of the three years ended December 31, 2004 |   |
|                                                                                                                                       |   |
| Consolidated  Statements of Cash Flows for each of the three years ended December 31, 2004                                                 |   |
|                                                                                                                                       |   |
| Notes to  Consolidated Financial Statements                                                                                                |   |
|                                                                                                                                       |   |
| Financial Statement Schedule – Valuation  and Qualifying Accounts                                                                     |   |

 

F-1

----

 

Report of IndependentRegistered Public Accounting Firm

 

To the Board ofDirectors and Stockholders of

BioSourceInternational, Inc.:

 

We have auditedthe consolidated financial statements of BioSource International, Inc. andsubsidiaries as listed in the accompanying index.  In connection with our audits of theconsolidated financial statements, we also have audited the financial statementschedule as listed in the accompanying index. These consolidated financial statements and financial statement scheduleare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and financial statement schedulebased on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of BioSource International, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed inNote 12 to the Consolidated Financial Statements, the Company has restated itsconsolidated financial statements as of December 31, 2004 and 2003 and for thethree years ended December 31, 2004.

 

As discussed inNote 1 to the consolidated financial statements, effective January 1, 2002, theCompany changed its method of accounting for goodwill and other intangibleassets.

 

KPMG LLP

 

Los Angeles,California

February 25, 2005except for Note 12,

which is as ofJune 20, 2005

 

F-2

----

 

**BIOSOURCE INTERNATIONAL, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**(amounts in thousands, except per share data)

** **
| ** **                                                                                                                                                          | ** ** | **December 31,**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                          | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| **Assets**                                                                                                                                                          |       |              |       |   |   |
|                                                                                                                                                                |       |              |       |   |   |
| Current assets                                                                                                                                                      |       |              |       |   |   |
| Cash and cash  equivalents                                                                                                                                          |       | $                 | 4,210      |   | $ | 3,297 |   |
| Accounts  receivable less allowance for doubtful accounts of $255 at December 31, 2004  and $258 at December 31, 2003                                               |       | 7,165             |       | 6,308 |   |
| Inventories, net                                                                                                                                                    |       | 7,857             |       | 9,411 |   |
| Notes receivable                                                                                                                                                    |       | 544               |       | — |   |
| Deferred income  taxes                                                                                                                                              |       | 1,822             |       | 2,229 |   |
| Prepaid expenses  and other current assets                                                                                                                          |       | 941               |       | 652 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Total current  assets                                                                                                                                               |       | 22,539            |       | 21,897 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Property and  equipment, net                                                                                                                                        |       | 5,241             |       | 6,235 |   |
| Acquired  intangible assets, net                                                                                                                                    |       | 4,946             |       | 5,500 |   |
| Goodwill, net                                                                                                                                                       |       | 307               |       | 307 |   |
| Deferred income  taxes, net                                                                                                                                         |       | 9,865             |       | 10,078 |   |
| Other assets                                                                                                                                                        |       | 651               |       | 519 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Total assets                                                                                                                                                        |       | $                 | 43,549     |   | $ | 44,536 |   |
|                                                                                                                                                                |       |              |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                      |       |              |       |   |   |
|                                                                                                                                                                |       |              |       |   |   |
| Current  liabilities                                                                                                                                                |       |              |       |   |   |
| Accounts payable                                                                                                                                                    |       | $                 | 2,358      |   | $ | 2,451 |   |
| Accrued expenses                                                                                                                                                    |       | 3,891             |       | 3,227 |   |
| Deferred revenue                                                                                                                                                    |       | 410               |       | 249 |   |
| Income taxes  payable                                                                                                                                               |       | 462               |       | 104 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Total current  liabilities                                                                                                                                          |       | 7,121             |       | 6,031 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Commitments and  contingencies                                                                                                                                      |       |              |       |   |   |
|                                                                                                                                                                |       |              |       |   |   |
| Stockholders’  equity                                                                                                                                          |       |              |       |   |   |
| Common stock,  $.001 par value, 20,000,000 shares authorized; 9,708,860 and 9,376,860 shares  issued and outstanding as of December 31, 2004 and 2003, respectively |       | 10                |       | 9 |   |
| Additional  paid-in capital                                                                                                                                         |       | 44,361            |       | 42,633 |   |
| Treasury stock,  at cost; 634,770 shares                                                                                                                            |       | (4,046            | )          | — |   |
| Accumulated  deficit                                                                                                                                                |       | (4,670            | )          | (4,249 | ) |
| Accumulated  other comprehensive income                                                                                                                             |       | 773               |       | 112 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Total  stockholders’ equity                                                                                                                                    |       | 36,428            |       | 38,505 |   |
|                                                                                                                                                                |       |              |       |   |   |
| Total  liabilities and stockholders’ equity                                                                                                                    |       | $                 | 43,549     |   | $ | 44,536 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-3

----

 

**BIOSOURCEINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(amountsin thousands, except per share data)

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                    | ** ** | **(as restated)**            | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                                                          |       |                         |       |   |   |   |   |
| Net sales                                                                     |       | $                            | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Cost of goods  sold                                                           |       | 20,330                       |       | 19,177 |   | 15,306 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Gross profit                                                                  |       | 24,052                       |       | 22,082 |   | 21,730 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Operating  expenses:                                                          |       |                         |       |   |   |   |   |
| Sales and  marketing                                                          |       | 9,557                        |       | 9,045 |   | 8,044 |   |
| General and  administrative                                                   |       | 7,446                        |       | 6,582 |   | 5,546 |   |
| Research and  development                                                     |       | 5,786                        |       | 7,002 |   | 6,187 |   |
| Long-lived asset  impairment                                                  |       | —                       |       | 341 |   | — |   |
| Amortization of  intangible assets                                            |       | 555                          |       | 575 |   | 641 |   |
| Total operating  expenses                                                     |       | 23,344                       |       | 23,545 |   | 20,418 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Income (loss)  from continuing operations                                     |       | 708                          |       | (1,463 | ) | 1,312 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Interest and  other income (expense), net                                     |       | 77                           |       | (76 | ) | 123 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Income (loss)  from continuing operations before income taxes and other items |       | 785                          |       | (1,539 | ) | 1,435 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Provision  (benefit) for income taxes                                         |       | 394                          |       | (714 | ) | 24 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Income (loss)  from continuing operations before other items                  |       | 391                          |       | (825 | ) | 1,412 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Discontinued  operations, net                                                 |       | (811                         | )          | (320 | ) | (6 | ) |
| Cumulative  effect of accounting change, net                                  |       | —                       |       | — |   | (2,447 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Net loss                                                                      |       | (420                         | )          | (1,145 | ) | (1,041 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Dividend (see  note 7)                                                        |       | (1,061                       | )          | — |   | — |   |
|                                                                          |       |                         |       |   |   |   |   |
| Net loss available  to common stockholders                                    |       | $                            | (1,481     | ) | $ | (1,145 | ) | $ | (1,041 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Basic earnings  (loss) per share:                                             |       |                         |       |   |   |   |   |
| Income (loss)  from continuing operations including dividend                  |       | $                            | (0.07      | ) | $ | (0.09 | ) | $ | 0.14 |   |
| Discontinued  operations, net                                                 |       | (0.09                        | )          | (0.03 | ) | — |   |
| Cumulative  effect of changes in accounting principles, net                   |       | —                       |       | — |   | (0.25 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Basic earnings  (loss) per share                                              |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.11 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted earnings  (loss) per share:                                           |       |                         |       |   |   |   |   |
| Income (loss)  from continuing operations including dividend                  |       | $                            | (0.07      | ) | $ | (0.09 | ) | $ | 0.14 |   |
| Discontinued  operations, net                                                 |       | (0.09                        | )          | (0.03 | ) | — |   |
| Cumulative  effect of changes in accounting principles, net                   |       | —                       |       | — |   | (0.24 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted earnings  (loss) per share                                            |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.10 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Shares used in  per share calculations:                                       |       |                         |       |   |   |   |   |
| Basic                                                                         |       | 9,325                        |       | 9,403 |   | 9,787 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted                                                                       |       | 9,325                        |       | 9,403 |   | 10,189 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

 

**BIOSOURCEINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE INCOME (LOSS)**

**For theThree Years ended December 31, 2004**

(amountsin thousands)

 
| ** **                                        | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | **Retained**      | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **       | ** ** | **Earnings**      | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Treasury**   | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stock**        | ** ** | **Deficit)**      | ** ** | **Income (Loss)**      | ** ** | **Equity** | ** ** |
| Balance at December 31, 2001, as reported         |       | 10,354           |       | $           | 10         |           | $          | 48,761           |       | —            |       | $                      | (2,330     | )          | $          | (2,563 | ) | $ | 43,878 |   |
|                                              |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Adjustment to opening accumulated deficit         |       | —           |       | —      |       | —         |       | —           |       | 267               |       |                   |       | 267        |       |
|                                              |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Balance at December 31, 2001, as restated         |       | 10,354           |       | 10          |       | 48,761         |       | —           |       | (2,063            | )          | (2,563                 | )          | 44,145     |       |
|                                              |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Exercise of stock options                         |       | 105              |       | —      |       | 291            |       |             |       | —            |       | —                 |       | 291        |       |
| Comprehensive income:                             |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Net loss, as restated                             |       | —           |       | —      |       | —         |       | —           |       | (1,041            | )          | —                 |       | (1,041     | )          |
| Translation adjustment                            |       | —           |       | —      |       | —         |       | —           |       | —            |       | 1,148                  |       | 1,148      |       |
| Total comprehensive income                        |       | —           |       | —      |       | —         |       | —           |       | —            |       | —                 |       | 107        |       |
| Purchase of treasury stock                        |       | (782             | )          | —      |       | (4,608         | )          | —           |       | —            |       | —                 |       | (4,608     | )          |
| Income tax benefit from exercise of stock options |       | —           |       | —      |       | 56             |       | —           |       | —            |       | —                 |       | 56         |       |
| Balance at December 31, 2002, as restated         |       | 9,677            |       | 10          |       | 44,500         |       |             |       | (3,104            | )          | (1,415                 | )          | 39,991     |       |
|                                              |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Exercise of stock options                         |       | 358              |       | —      |       | 1,075          |       | —           |       | —            |       | —                 |       | 1,075      |       |
| Comprehensive income:                             |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Net loss, as restated                             |       | —           |       | —      |       | —         |       | —           |       | (1,145            | )          | —                 |       | (1,145     | )          |
| Translation adjustment                            |       | —           |       | —      |       | —         |       | —           |       | —            |       | 1,527                  |       | 1,527      |       |
| Total comprehensive income                        |       | —           |       | —      |       | —         |       | —           |       | —            |       | —                 |       | 382        |       |
| Purchase of treasury stock                        |       | (658             | )          | (1          | )          | (3,480         | )          |             |       | —            |       | —                 |       | (3,481     | )          |
| Income tax benefit from exercise of stock options |       | —           |       | —      |       | 538            |       | —           |       | —            |       | —                 |       | 538        |       |
| Balance at December 31, 2003, as restated         |       | 9,377            |       | 9           |       | 42,633         |       | —           |       | (4,249            | )          | 112                    |       | 38,505     |       |
|                                              |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Exercise of stock options                         |       | 332              |       | 1           |       | 1,419          |       | —           |       | —            |       | —                 |       | 1,420      |       |
| Comprehensive income:                             |       |             |       |        |       |           |       |             |       |              |       |                   |       |       |       |
| Net loss, as restated                             |       | —           |       | —      |       | —         |       | —           |       | (420              | )          | —                 |       | (420       | )          |
| Translation adjustment                            |       | —           |       | —      |       | —         |       | —           |       | —            |       | 661                    |       | 661        |       |
| Total comprehensive income                        |       | —           |       | —      |       | —         |       | —           |       | —            |       | —                 |       | 241        |       |
| Purchase of treasury stock                        |       | —           |       | —      |       | —         |       | (4,046           | )          | —            |       | —                 |       | (4,046     | )          |
| Income tax benefit from exercise of stock options |       | —           |       | —      |       | 309            |       | —           |       | —            |       | —                 |       | 309        |       |
| Balance at December 31, 2004, as restated         |       | 9,709            |       | $           | 10         |           | $          | 44,361           |       | $                 | (4,046     | )                      | $          | (4,670     | )          | $ | 773 |   | $ | 36,428 |   |
|                                                   |            |                  |            |             |            |                |            |                  |            |                   |            |                        |            |            |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-5

----

 

**BIOSOURCEINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 (amounts in thousands)

 
| ** **                                                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                            | ** ** | **(as restated)**            | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                                                                |       |                         |       |   |   |   |   |
| Net income  (loss) from continuing operations                                                                         |       | $                            | 391        |   | $ | (825 | ) | $ | (1,035 | ) |
| Adjustments to  reconcile net income (loss) from continuing operations to net cash provided  by operating activities: |       |                         |       |   |   |   |   |
| Depreciation and  amortization                                                                                        |       | 2,362                        |       | 2,240 |   | 2,006 |   |
| Long-lived asset  impairment                                                                                          |       | —                       |       | 341 |   | — |   |
| Income tax benefit from the exercise of stock options                                                                 |       | 309                          |       | 538 |   | 56 |   |
| Cumulative  effect of accounting change                                                                               |       | —                       |       | — |   | 4,629 |   |
| Deferred income  taxes                                                                                                |       | 235                          |       | (1,592 | ) | (1,765 | ) |
| Net loss on  divestiture of business                                                                                  |       | 85                           |       | — |   | — |   |
| Changes in  operating assets and liabilities:                                                                         |       |                         |       |   |   |   |   |
| Accounts  receivable                                                                                                  |       | (339                         | )          | 428 |   | 379 |   |
| Issuance of  notes receivables                                                                                        |       | (544                         | )          | — |   | — |   |
| Inventories, net                                                                                                      |       | 1,747                        |       | 651 |   | (1,043 | ) |
| Prepaid expenses  and other assets                                                                                    |       | (127                         | )          | (67 | ) | (19 | ) |
| Accounts payable                                                                                                      |       | (206                         | )          | (773 | ) | 467 |   |
| Accrued expenses                                                                                                      |       | 507                          |       | 57 |   | (79 | ) |
| Deferred revenue                                                                                                      |       | 113                          |       | (170 | ) | 31 |   |
| Income taxes  payable                                                                                                 |       | 126                          |       | 7 |   | (405 | ) |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Net cash  provided by operating activities                                                                            |       | 4,658                        |       | 835 |   | 3,221 |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Cash flows from  investing activities:                                                                                |       |                         |       |   |   |   |   |
| Capital  expenditures                                                                                                 |       | (1,582                       | )          | (1,307 | ) | (2,663 | ) |
| Proceeds from  sale of equipment                                                                                      |       | —                       |       | 253 |   | — |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Net cash used in  investing activities                                                                                |       | (1,582                       | )          | (1,054 | ) | (2,663 | ) |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Cash flows from  financing activities:                                                                                |       |                         |       |   |   |   |   |
| Purchases of  common stock as treasury stock                                                                          |       | (4,046                       | )          | (3,481 | ) | (4,608 | ) |
| Proceeds from  exercise of stock options and stock purchase plan                                                      |       | 1,420                        |       | 1,075 |   | 291 |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Net cash used in  financing activities                                                                                |       | (2,626                       | )          | (2,406 | ) | (4,317 | ) |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Net cash  provided by (used in) discontinued operations                                                               |       | 285                          |       | (266 | ) | (290 | ) |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                         |       | 178                          |       | 247 |   | 519 |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                 |       | 913                          |       | (2,644 | ) | (3,530 | ) |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                                                     |       | 3,297                        |       | 5,941 |   | 9,471 |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Cash and cash  equivalents at end of period                                                                           |       | $                            | 4,210      |   | $ | 3,297 |   | $ | 5,941 |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Non-cash  activities:                                                                                                 |       |                         |       |   |   |   |   |
| Dividends                                                                                                             |       | $                            | 1,061      |   | $ | — |   | $ | — |   |
|                                                                                                                  |       |                         |       |   |   |   |   |
| Other  supplementary information:                                                                                     |       |                         |       |   |   |   |   |
| Cash paid for  income taxes                                                                                           |       | $                            | 607        |   | $ | 738 |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 

**BIOSOURCE INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1 – Summary of Significant AccountingPolicies**

 

*Description of Business*

 

BioSource International,Inc. and its subsidiaries (BioSource or the Company), develop, manufacture,market and distribute products used worldwide in disease related biomedicalresearch and clinical diagnostics, principally in the fields of immunology andmolecular biology.  The Company’sproducts include assay test kits, clinical diagnostic kits, bioactive proteins,antibodies, bioactive peptides, oligonucleotides, serum, media and relatedproducts. These products enable biomedical researchers to better understand thebiochemistry, immunology and cell biology of the human body.

 

*Basis of Presentation*

 

The consolidated financial statements include the accounts of BioSourceInternational, Inc. and its wholly owned subsidiaries. All significantintercompany accounts and transactions have been eliminated inconsolidation.  Certain amountspreviously reported in our financial statements have been reclassified toconform to the current presentation. As discussed in Note 3, the December 2004sale of the custom antibodies and peptides business was accounted for asdiscontinued operations. Accordingly, the financial statements have beenreclassified for all periods prior to the sale to reflect this business asdiscontinued operations. Unless noted otherwise, discussions in these notespertain to the Company’s continuing operations.

 

# Use of Estimates

#  

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Significant areas requiring the use of management estimates relate tothe valuation of inventories, accounts receivable allowances, long-lived assetimpairments, loss contingencies and income taxes.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsinclude all cash balances and highly liquid investments with maturities ofthree months or less at date of purchase.

 

*Fair Value of Financial Instruments*

 

Our financial instruments, including cash, cash equivalents, marketablesecurities, accounts receivable, accounts payable, and notes receivable arecarried at cost, which approximates their fair value because of the short-termmaturity of these instruments.

 

*Inventories*

 

Inventories are stated at the lower of cost (determined by thefirst-in, first-out method) or market (net realizable value).  At eachbalance sheet date, we evaluate ending inventories for excess quantities andobsolescence. This evaluation includes analyses of sales levels by product,projections of future demand and age of inventory. If inventories on hand arein excess of forecasted demand, the Company provides appropriate reserves forsuch excess inventory. If the determination is made that inventory is obsolete,these inventories are reserved for the period the determination is made.Inventories are shown net of reserves of $7.8 million and $9.4 million atDecember 31, 2004 and 2003, respectively.

 

F-7

----

 

*Property and Equipment*

 

Property and equipment are stated at cost less accumulated depreciationand amortization.  Depreciation andamortization is calculated using the straight-line method over the estimateduseful lives of the related assets which generally range from three to tenyears.  Leasehold improvements areamortized over the shorter of their estimated useful lives or the leaseterm.  Repair and maintenance costs areexpensed as incurred.

 

*Goodwill and Other Intangible Assets*

 

Goodwill is recorded whenthe purchase price of net tangible and intangible assets acquired exceeds theirfair value.  In 2002 the Company adoptedStatement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill andOther Intangible Assets,” which established new accounting and reportingrequirements for goodwill and other intangible assets. Under SFAS No. 142,goodwill is no longer subject to amortization. Rather, goodwill is evaluatedfor impairment at least annually or more frequently if events and changes incircumstances suggest that the carrying amount may not be recoverable.Impairment of goodwill is tested at the reporting unit level by comparing thereporting unit’s carrying value, including goodwill, to the fair value of thereporting unit. The fair values of the reporting units are estimated using acombination of the income, or discounted cash flows, approach and the marketapproach, which utilizes comparable companies’ data. If the carrying amount ofthe reporting unit exceeds its fair value, goodwill is considered impaired andis then compared to the “implied fair value” of the goodwill to its carryingamount to determine the impairment loss, if any.

 

*Long-Lived Assets*

 

The Company evaluateslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment of Disposal ofLong-Lived Assets.” Factors considered important which could trigger animpairment review include, but are not limited to, significant underperformancerelative to expected or projected future operating results, significant changesin the manner of use of the acquired assets or the strategy for the overallbusiness, significant negative industry or economic trends. An asset isconsidered impaired if its carrying amount exceeds the future net cash flow theasset is expected to generate. If such asset is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the asset exceeds its fair market value. The recoverability oflong-lived and intangible assets is assessed by determining whether theunamortized balances can be recovered through undiscounted future net cashflows of the related assets.

 

*Advertising, Marketing and Promotion Costs*

 

For the years ended December 31, 2004and 2003, the Company capitalized its catalog production costs and expensedsuch costs evenly throughout the period of benefit.  Prior thereto, the Company expensed catalogproduction costs as incurred, which was primarily in the first quarter of its fiscalyear.  During 2002, and after productionof the 2002 catalog, the Company put substantial effort into increasing thenumber of customers in its customer database increasing its dependence on itscatalog to attract more customers.  As aresult, the Company believes that its 2003 and 2004 catalogs are a directresponse advertisement, the primary purpose of which is to elicit sales tocustomers who respond specifically to the catalog resulting in probable futureeconomic benefit.  Accordingly, beginningin 2003, the Company capitalized its catalog production costs and expensedthese costs throughout the period of benefit in accordance with the AICPA’sStatement of Position 93-07.  For theyears ended December 31, 2004, 2003 and 2002, the Company recordedapproximately $634,000, $560,000 and $529,000 of catalog costs expense,respectively.

 

## ***License Agreements***

 

License agreements are recorded at cost and are amortized using thestraight-line method over the shorter of the estimated useful lives of thelicense or the license term.  These costsare included with other assets in the consolidated balance sheets.  Accumulated amortization at December 31, 2004and 2003 was approximately $253,000 and $447,000, respectively.

 

F-8

----

 

*Revenue Recognition*

 

The Company sellscatalog and custom products directly to end users and distributors andrecognizes revenue upon transfer of title to the customer, which occurs uponshipment.  Certain customers prepay forproduct and request shipment of the product at future dates for which theCompany records deferred revenue until such time as a product is shipped to thecustomer.  The Company’s distributionagreements do not provide a general right of return.

 

*Research and Development Costs*

 

Research and development costs are expensed as incurred.

 

*Income Taxes*

 

Income taxes are accounted for under the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

The Company hasnot provided U.S. federal or foreign withholding taxes on foreign subsidiaryundistributed earnings as of December 31, 2004, because such earnings areintended to be permanently invested.  Itis not practicable to determine the U.S. Federal income tax liability, if any,that would be payable if such earnings were not reinvested indefinitely.

 

*Comprehensive Income (Loss)*

 

Comprehensive income (loss) consists of net income (loss) and foreigncurrency translation adjustments and is presented in the consolidatedstatements of stockholders equity.

 

# Concentrations of CreditRisk

#  

Our cash, cashequivalents, marketable securities and accounts receivable are potentiallysubject to concentration of credit risk. Cash, cash equivalents and marketablesecurities are deposited with financial institutions that the Company believesare of high credit quality.  Accountsreceivables are derived from revenue earned from customers located primarily inthe United States, Europe and the Asia-Pacific region.  For the three years ended December 31, 2004,no single customer accounted for more than 10% of total net sales. At December31, 2004 and 2003 no single customer accounted for more than 10% of accountsreceivable.

 

The Company sells itsproducts to end-users and through distributors. An allowance for doubtful accounts is maintained based upon historicalcollections performance and knowledge of the customer.  If actual bad debts differ from the reservescalculated based on historical trends and known customer issues, an adjustmentto bad debt expense is recorded in the period in which the difference occurs.

 

# Foreign CurrencyTranslation

#  

The assets and liabilities of the Company’s foreign subsidiary, whosefunctional currency is Euros, are translated at the rate of exchange at thebalance sheet date, and related revenues and expenses are translated, ingeneral, at the average exchange rate in effect during the period.  Resulting translation adjustments arerecorded as a component of stockholders’ equity.  Gains and losses from foreign currencytransactions are included in net income.

 

*Per Share Computations*

 

Basic income or loss pershare is computed using the weighted average number of common sharesoutstanding during the period. Diluted income or loss per share is computedusing the weighted average number of common and dilutive potential commonshares outstanding during the period. Potential common shares consist of theshares

 

F-9

----

 

issuable upon theexercise of stock options or warrants under the treasury stock method.  During periods in which the Company reports adiscontinued operation, extraordinary item, or the cumulative effect of anaccounting change, income from continuing operations is used to determine whetherpotential common shares are dilutive or antidilutive.  The following table sets forth thecomputation of basic and diluted earnings per share (in thousands, except pershare amounts):

 
| ** **                                     | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                         |       |   |   |   |   |
| Net loss  available to common shareholders     |       | $                            | (1,481     | ) | $ | (1,145 | ) | $ | (1,041 | ) |
|                                           |       |                         |       |   |   |   |   |
| Weighted average  shares outstanding - Basic   |       | 9,325                        |       | 9,403 |   | 9,787 |   |
| Dilutive effect  of stock options and warrants |       | —                       |       | — |   | 402 |   |
|                                           |       |                         |       |   |   |   |   |
| Weighted average  shares outstanding - Diluted |       | 9,325                        |       | 9,403 |   | 10,189 |   |
|                                           |       |                         |       |   |   |   |   |
| Basic loss per  share                          |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.11 | ) |
| Diluted loss per  share                        |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.10 | ) |

 

The diluted net loss per share computations for these periods did notinclude the effect of options to purchase 1.1 million, 0.9 millionand 1.0 million shares of common stock because the option exercise priceswere greater than the average market price of the Company’s common stock. In addition, warrants to purchase 1.3 million shares were excluded fromeach period as the warrant exercise prices were also greater than the averagemarket price of the Company’s common stock.

 

*Stock Option Plan*

 

The Company applies the intrinsic-value-based method of accountingprescribed by Accounting Principles Board (APB) Opinion No. 25, Accountingfor Stock Issued to Employees, and related interpretations including FASBInterpretation No. 44, Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25, to account for itsfixed-plan stock options. Under this method, compensation expense is recordedon the date of grant only if the current market price of the underlying stockexceeded the exercise price. FASB Statement No. 123, Accounting forStock-Based Compensation and FASB Statement No. 148, Accounting for Stock-BasedCompensation – Transition and Disclosure, an amendment of FASB Statement No.123, established accounting and disclosure requirements using a fair-value-basedmethod of accounting for stock-based employee compensation plans. As permittedby existing accounting standards, the Company has elected to continue to applythe intrinsic-value-based method of accounting described above, and has adoptedonly the disclosure requirements of SFAS 123, as amended. To determine thepro forma impact of applying SFAS 123, the Company estimates the fair value ofoptions using the Black-Scholes option valuation model. This model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable. This model also requires theinput of highly subjective assumptions including the expected stock pricevolatility. The Company’s stock options have characteristics significantlydifferent from those of traded options, and changes in the subjective inputassumptions can materially affect the fair value estimates. Assumptions usedfor the valuation model are set forth below.

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Expected  dividend yield |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |
| Risk-free  interest rate |       | 2.9      | %          | 3.0      | %          | 3.8      | %          |
| Expected  volatility     |       | 45.1     | %          | 64.3     | %          | 72.3     | %          |
| Expected life  (years)   |       | 4.1      |       | 4.7      |       | 5.2      |       |

 

The weightedaverage fair value of stock options granted during 2004, 2003 and 2002 was$2.56, $3.19, and $3.72, respectively, on the date of grant using theBlack-Scholes option-pricing model.

 

The following table illustrates the effect on net income if the fair-value-basedmethod had been applied to all outstanding and unvested awards in eachperiod.  The pro forma stock basedincentive expense has no impact on the

 

F-10

----

 

Company’s cash flow.  In thefuture, the Company may elect or be required to use a different valuation modelwhich could result in a significantly different impact on the Company’s proforma net income (loss).

 
| ** **                                                                                       | ** ** | **Years Ended December 31,**              | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| Net loss  available to common stockholders:                                                      |       |                                      |       |   |   |   |   |
| As restated                                                                                      |       | $                                         | (1,481     | ) | $ | (1,145 | ) | $ | (1,041 | ) |
| Add: Stock-based  compensation, included in net loss available to common stockholders            |       | —                                    |       | — |   | — |   |
| Less:  Stock-based employee compensation expense determined under fair value method,  net of tax |       | (895                                      | )          | (959 | ) | (1,954 | ) |
| Pro forma net  loss available to common stockholders                                             |       | $                                         | (2,376     | ) | $ | (2,104 | ) | $ | (2,995 | ) |
|                                                                                             |       |                                      |       |   |   |   |   |
| Net loss per  share available to common stockholders:                                            |       |                                      |       |   |   |   |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| Basic – as  restated                                                                        |       | $                                         | (0.16      | ) | $ | (0.12 | ) | $ | (0.11 | ) |
| Basic – pro  forma                                                                          |       | $                                         | (0.25      | ) | $ | (0.22 | ) | $ | (0.31 | ) |
|                                                                                             |       |                                      |       |   |   |   |   |
| Diluted – as  restated                                                                      |       | $                                         | (0.16      | ) | $ | (0.12 | ) | $ | (0.10 | ) |
| Diluted – pro  forma                                                                        |       | $                                         | (0.25      | ) | $ | (0.22 | ) | $ | (0.29 | ) |

 

**Note 2 – Inventories**

 

Inventories are summarized as follows (in thousands):

 
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|
| ** **      | ** ** | **2004**         | ** ** | **2003** | ** ** |
|            |       |             |       |   |   |
| Raw materials   |       | $                | 2,424      |   | $ | 2,821 |   |
| Work in process |       | 563              |       | 455 |   |
| Finished goods  |       | 4,870            |       | 6,135 |   |
|            |       |             |       |   |   |
|            |       | $                | 7,857      |   | $ | 9,411 |   |

 

**Note 3 – Notes Receivable**

 

In December 2004, the Company sold all of the outstanding stock of itswholly owned subsidiaries, Quality Controlled Biochemicals, Inc. and Javelle,Inc (together “QCB”), which operated the Company’s custom antibodies andpeptides business for approximately $0.8 million consisting of $0.2 million incash consideration, a bridge loan for $0.5 million and a short-term workingcapital loan for up to $0.2 million.  As of December 31, 2004 the notesreceivable totaled $544,000.  In February 2005, the bridge loan includingaccrued interest was paid off.  The Company advanced an additional$150,000 on the working capital loan in the first two months of 2005.  The working capital loan is due March 31,2005.  In accordance with the provisionsof SFAS 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets*,” the Company accounted for the sale asdiscontinued operations. QCB’s operating results and cash flows have thereforebeen segregated from continuing operations on the statements of operations andstatements of cash flows for all periods prior to the sale. Net sales for thesesubsidiaries were $2.7 million, $2.8 million, and $3.0 million in fiscal2004, 2003 and 2002 respectively. Discontinued operations are summarized as follows (in thousands):

 

F-11

----

 
| ** **                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                         |       |                         |       |   |   |   |   |
| Loss before income taxes     |       | $                            | (266       | ) | $ | (534 | ) | $ | (10 | ) |
| Loss on sale                 |       | (85                          | )          | — |   | — |   |
| Income taxes (benefit)       |       | 460                          |       | (214 | ) | (4 | ) |
| Discontinued operations, net |       | $                            | (811       | ) | $ | (320 | ) | $ | (6 | ) |

 

**Note 4 – Property and Equipment**

 

Property and equipment, at cost, is summarized as follows (inthousands):

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                            |       |             |       |   |   |
| Machinery and  equipment                        |       | $                | 8,781      |   | $ | 9,225 |   |
| Office furniture  and equipment                 |       | 4,555            |       | 4,270 |   |
| Leasehold  improvements                         |       | 1,921            |       | 1,874 |   |
|                                            |       | 15,257           |       | 15,369 |   |
| Less accumulated  depreciation and amortization |       | (10,016          | )          | (9,134 | ) |
|                                            |       |             |       |   |   |
|                                            |       | $                | 5,241      |   | $ | 6,235 |   |

 

**Note 5 – Goodwill and Acquired Intangible Assets**

 

As discussed in Note 1, the Company adopted SFAS 142 on January 1,2002.

 

The pro forma effects of implementation of SFAS 142 to prior periodswould be as follows: (amounts in thousands, except per share data):

 
| ** **                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss available to common stockholders, as restated                      |       | $                            | (1,481     | ) | $ | (1,145 | ) | $ | (1,041 | ) |
| Impairment charge, net of tax                                               |       | —                       |       | — |   | 2,447 |   |
| Pro forma net income (loss) available to common stockholders  (as restated) |       | $                            | (1,481     | ) | $ | (1,145 | ) | $ | 1,406 |   |
|                                                                        |       |                         |       |   |   |   |   |
| Basic earnings (loss) per share:                                            |       |                         |       |   |   |   |   |
| As restated                                                                 |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.11 | ) |
| Pro forma (as restated)                                                     |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | 0.14 |   |
|                                                                        |       |                         |       |   |   |   |   |
| Diluted earnings (loss) per share:                                          |       |                         |       |   |   |   |   |
| As restated                                                                 |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | (0.10 | ) |
| Pro forma (as restated)                                                     |       | $                            | (0.16      | ) | $ | (0.12 | ) | $ | 0.14 |   |

 

The components of acquired intangible assets are as follows (inthousands):

 
| ** **           | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **Gross Carrying**          | ** ** | **Accumulated**             | ** ** | ** ** | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Amount**                  | ** ** | **Amortization**            | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Developed Technology |       | $                           | 7,656      |                        | $          | (3,105 | ) | $ | 4,551 |   | $ | 7,656 |   | $ | (2,597 | ) | $ | 5,059 |   |
| Core technology      |       | 665                         |       | (270                        | )          | 395 |   | 665 |   | (225 | ) | 440 |   |
| Tradename            |       | 257                         |       | (257                        | )          | — |   | 257 |   | (256 | ) | 1 |   |
| Total                |       | $                           | 8,578      |                        | $          | (3,632 | ) | $ | 4,946 |   | $ | 8,578 |   | $ | (3,078 | ) | $ | 5,550 |   |

 

The Company’s acquiredidentifiable intangible assets are subject to amortization and have approximateoriginal estimated weighted-average useful lives as follows: Developed and coretechnologies – fifteen years; tradenames five years.

 

F-12

----

 

At December 31, 2004, the estimated futureamortization expense of acquired intangible assets is as follows (inthousands): 2005 - $555; 2006 - $555; 2007 - $555; 2008 - $555; 2009 - $555;and an aggregate of $2,171 thereafter.

 

**Note 6 – Stockholders Equity**

 

*Treasury Stock*

 

In July 2004, the Company adopted a new stock repurchase program underwhich it can repurchase up to $10 million of common stock.  The previous stock repurchase program expiredin June 2004.  During the year endedDecember 31, 2004, the Company repurchased approximately 635,000 shares for anaggregate purchase price of approximately $4.0 million.

 

*Stockholder Rights Plan*

 

The Companyadopted a stockholders’ rights plan to protect the Company and its stockholdersfrom any unsolicited acquisition attempts. The rights plan has no immediate dilutive effect and does not diminishthe Company’s ability to accept an offer to purchase the Company that isapproved by the board of directors.  Thestockholder rights plan was implemented through a dividend of one preferredshare purchase right for each outstanding share of the Company’s common stockoutstanding on March 2, 1999.  Each rightentitles stockholders to buy one one-thousandth of a share of Series Apreferred stock at an exercise price of $24.50. The rights become exercisable (with certain limited exceptions providedin the rights agreement) following the tenth day after: (a) a person or groupannounces an acquisition of 15% or more of the Company’s common stock, (b) aperson or group announces the commencement of a tender offer the consummationof which would result in ownership by the person or group of 15% or more of theCompany’s common stock, or (c) the filing of a registration statement for anysuch exchange offer under the Securities Act of 1933.  The buyer would not be entitled to exerciserights under the rights plan.  The effectof the rights plan is to discourage acquisitions of more than 15% of theCompany’s common stock without negotiations with the Company’s Board ofDirectors.  The Company can redeem therights for $.001 per right at certain times as provided in the rightsagreement.  The rights expire on January31, 2009.

 

**Note 7 – Stock Options, Employee Stock PurchasePlan and Warrants**

 

*Stock Option Plans*

 

The Company has two stock option plans - the 1993 Stock Incentive Plan(the “1993 Plan”) and the 2000 Non-Qualified Stock Option Plan (the “2000 Plan”).

 

Under the 1993 Plan, incentive and non-qualified stock options may begranted to employees, directors and consultants of the Company to purchase amaximum of 2,000,000 shares of the Company’s common stock.  The option exercise price is generally thefair market value at the date of grant and vest up to four years.  The stock options expire ten years from thedate of grant.

 

Under the 2000Plan, non-qualified stock options may be granted to employees, directors andconsultants of the Company to purchase a maximum of 2,000,000 shares of theCompany’s common stock.  The optionexercise price is generally the fair market value at the date of grant and vestup to four years.  The stock optionsexpire ten years from the date of grant.

 

The following table summarizes the stock option transactions under the1993 Plan and the 2000 Plan during the periods presented:

 

F-13

----

 
| ** **                                | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Weighted**       | ** ** |
|-------------------------------------------|------------|------------|------------|---------------|------------|--------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Price**     | ** ** | **average**        | ** ** |
| ** **                                | ** ** | **Shares** | ** ** | **Per Share** | ** ** | **Exercise price** | ** ** |
|                                      |       |       |       |          |       |               |       |
| Options  outstanding at December 31, 2001 |       | 2,050,352  |       | $1.38         | -          | $31.00             |       | $ | 8.74 |   |
| Options granted                           |       | 474,300    |       | 5.09          | -          | 8.30               |       | 6.12 |   |
| Options  exercised                        |       | (76,514    | )          | 1.38          | -          | 4.63               |       | 3.10 |   |
| Options canceled                          |       | (519,063   | )          | 2.69          | -          | 31.00              |       | 13.14 |   |
|                                      |       |       |       |          |       |               |       |   |   |
| Options  outstanding at December 31, 2002 |       | 1,929,075  |       | 1.38          | -          | 31.00              |       | 7.14 |   |
| Options granted                           |       | 303,000    |       | 5.00          | -          | 7.33               |       | 7.14 |   |
| Options  exercised                        |       | (170,830   | )          | 1.38          | -          | 7.00               |       | 3.07 |   |
| Options canceled                          |       | (136,622   | )          | 2.69          | -          | 27.63              |       | 7.42 |   |
|                                      |       |       |       |          |       |               |       |   |   |
| Options  outstanding at December 31, 2003 |       | 1,924,623  |       | 1.38          | -          | 31.00              |       | 7.48 |   |
| Options granted                           |       | 596,800    |       | 6.10          | -          | 7.99               |       | 6.87 |   |
| Options  exercised                        |       | (180,334   | )          | 1.38          | -          | 7.45               |       | 3.51 |   |
| Options canceled                          |       | (264,341   | )          | 4.88          | -          | 27.63              |       | 8.45 |   |
|                                      |       |       |       |          |       |               |       |   |   |
| Options  outstanding at December 31, 2004 |       | 2,076,748  |       | $2.41         | -          | $31.00             |       | $ | 7.52 |   |

 

At December 31, 2004, the range of exercise prices and weighted averageremaining contractual life of outstanding options were as follows:

 
| **Options Outstanding**        | ** ** | **Options Exercisable**                 | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|
| **Range  of  Exercise Prices** | ** ** | **Number  Outstanding  (in thousands)** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $1.37                          | -          | $3.10                                   |       |   | 72,861 |   | 2.5 |   | $ | 2.73 |   | 72,861 |   | $ | 2.73 |   |
| $3.11                          | -          | $6.20                                   |       |   | 432,860 |   | 5.9 |   | 5.09 |   | 349,439 |   | 4.89 |   |
| $6.21                          | -          | $9.30                                   |       |   | 1,223,247 |   | 8.3 |   | 7.13 |   | 461,011 |   | 7.29 |   |
| $9.31                          | -          | $15.50                                  |       |   | 209,624 |   | 5.0 |   | 9.80 |   | 200,097 |   | 9.82 |   |
| $15.51                         | -          | $31.00                                  |       |   | 138,156 |   | 4.6 |   | 17.10 |   | 138,156 |   | 17.69 |   |
|                           |       | 2,076,748                               |       | 7.0 |   | $ | 7.52 |   | 1,221,564 |   | $ |  7.92 |   |
|                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In addition, the Company had a stock option agreement with a formerchief executive officer of the Company that is outside the 1993 and the 2000Plan that expired on December 31, 2004.

 

The following summarizes transactions outside the option plans duringthe periods presented:

 

F-14

----

 

| ** **                                | ** ** | ** ** | ** ** | **Weighted**       | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Average**        | ** ** |
| ** **                                | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
|                                      |       |       |       |               |       |
| Options  outstanding at December 31, 2001 |       | 506,000    |       | $                  | 4.19       |   |
| Options granted                           |       | —     |       | —             |       |
| Options  exercised                        |       | (28,600    | )          | 2.00               |       |
| Options canceled                          |       | —     |       | —             |       |
|                                      |       |       |       |               |       |
| Options  outstanding at December 31, 2002 |       | 477,400    |       | $                  | 4.33       |   |
|                                      |       |       |       |               |       |
| Options granted                           |       | —     |       | —             |       |
| Options  exercised                        |       | (187,400   | )          | 2.94               |       |
| Options canceled                          |       | (113,335   | )          | 6.44               |       |
|                                      |       |       |       |               |       |
| Options  outstanding at December 31, 2003 |       | 176,665    |       | $                  | 5.19       |   |
|                                      |       |       |       |               |       |
| Options granted                           |       | —     |       | —             |       |
| Options  exercised                        |       | 151,666    |       | 5.19               |       |
| Options canceled                          |       | 24,999     |       | 5.19               |       |
|                                      |       |       |       |               |       |
| Options  outstanding at December 31, 2004 |       | —     |       | $                  | —     |   |

 

*Employee Stock Purchase Plan*

 

In April 1995, theCompany adopted an Employee Stock Purchase Plan to provide substantially allfull-time employees, excluding officers, an opportunity to purchase shares ofits common stock through payroll deductions. In addition, the Company provides a matching contribution equal to 50%of the participant’s contribution.  Allcontributions are invested in the Company’s common stock, which is purchased onthe open market at prevailing market prices. Participants have a fully vested interest in the shares purchased withpayroll deductions and become fully vested in the shares purchased with Companymatching contributions after two years. The Company’s matching expense for the years ended December 31, 2004,2003 and 2002 was approximately $27,000, $30,000, and $24,000, respectively.

 

*Warrants*

 

The Company issued warrants to purchase 1,287,000 shares in connectionwith a private placement in 2000.  InJune 2004, the warrant agreements were amended to extend the expiration datefrom February 15, 2005 to February 15, 2007. In connection with this amendment, the exercise price per shareunderlying the warrants was increased from $7.77 per share to $9.00 per share.The modification of warrant terms has been reflected as a dividend in thestatement of operations, similar to a dividend on a preferred equity security,of $1,061,000 in 2004 which was determined by comparing the value of thewarrants using the Black-Scholes model immediately before and after themodification of terms. The warrants are classified as equity instruments in theCompany’s consolidated balance sheets. The dividend had no impact on the consolidated balance sheet as ofDecember 31, 2004 or the statement of stockholders’ equity as of and for theyear ended December 31, 2004.

 

F-15

----

 

**Note 8 – Income Taxes**

 

The provision (benefit) for income taxes fromcontinuing operations is summarized as follows (in thousands):

 
| ** ** | ** ** | **Years Ended December 31,** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** ** | ** ** | **(as restated)**            | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Current:   |       |                         |       |   |   |   |   |
| Federal    |       | $                            | (269       | ) | $ | 99 |   | $ | (440 | ) |
| State      |       | 3                            |       | 109 |   | 401 |   |
| Foreign    |       | 107                          |       | 391 |   | 552 |   |
|       |       | $                            | (159       | ) | $ | 599 |   | $ | 513 |   |
| Deferred:  |       |                         |       |   |   |   |   |
| Federal    |       | 203                          |       | (792 | ) | 310 |   |
| State      |       | (13                          | )          | 25 |   | (549 | ) |
| Foreign    |       | 363                          |       | (546 | ) | (250 | ) |
|       |       | 553                          |       | (1,313 | ) | (489 | ) |
|       |       | $                            | 394        |   | $ | (714 | ) | $ | 24 |   |

 

Tax savings from deductions associated with the various stock optionplans are not reflected in the current federal and state provisions.  The Company has credited to additionalpaid-in-capital tax benefits totaling $309,000, $538,000, and $56,000 in fiscalyears 2004, 2003 and 2002, respectively.

 

The principal items that comprise the Company’s net deferred tax assetsare as follows (in thousands):

 
| ** **                                | ** ** | **December 31,**  | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                      |       |              |       |   |   |
| Deferred tax  assets:                     |       |              |       |   |   |
| Reserves for  inventory                   |       | $                 | 1,694      |   | $ | 1,825 |   |
| Purchased  in-process technology/goodwill |       | 2,617             |       | 2,385 |   |
| Net operating  loss carryforwards         |       | 5,705             |       | 6,072 |   |
| Allowance for  doubtful accounts          |       | 32                |       | 72 |   |
| R & D and  AMT credit carryforwards   |       | 1,393             |       | 2,107 |   |
| Other                                     |       | 563               |       | 455 |   |
| Total deferred  tax assets                |       | 12,004            |       | 12,917 |   |
|                                      |       |              |       |   |   |
| Deferred tax  liabilities:                |       |              |       |   |   |
| Depreciation                              |       | (182              | )          | (217 | ) |
|                                      |       |              |       |   |   |
| Valuation  allowance                      |       | (135              | )          | (393 | ) |
|                                      |       |              |       |   |   |
| Net deferred tax  assets                  |       | $                 | 11,687     |   | $ | 12,307 |   |

 

The Company has provided a valuation reserve related to the benefits ofcertain capital loss carryforwards that the Company believes are unlikely to berealized.

 

F-16

----

 

The income tax expense (benefit) from continuing operations differsfrom the amounts computed by applying the federal statutory tax rate to thefollowing (in thousands):

 
| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                              | ** ** | **(as restated)**            | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                                    |       |                         |       |   |   |   |   |
| Computed  “expected” tax expense (benefit)    |       | $                            | 267        |   | $ | (523 | ) | $ | 488 |   |
| Nondeductible  items                                    |       | 64                           |       | 52 |   | 24 |   |
| State taxes  including credits (net of federal benefit) |       | (7                           | )          | (225 | ) | (97 | ) |
| Federal tax  credits                                    |       | (7                           | )          | (285 | ) | (213 | ) |
| Extraterritorial  income exclusion                      |       | (73                          | )          | (139 | ) | (244 | ) |
| Effect of  foreign operations                           |       | 32                           |       | 24 |   | 52 |   |
| Change in  valuation allowance                          |       | —                       |       | 393 |   | — |   |
| Other                                                   |       | 118                          |       | (11 | ) | 14 |   |
|                                                    |       |                         |       |   |   |   |   |
| Total                                                   |       | $                            | 394        |   | $ | (714 | ) | $ | 24 |   |

 

No provision has been made for U.S. or additional foreign taxes on theundistributed earnings of its foreign subsidiaries since the Company intends toreinvest indefinitely its earnings in such subsidiaries.  It is not practical to determine the U.S.federal income tax liability, if any, that would be payable if such earningswere not reinvested indefinitely.

 

As of December 31, 2004, the Company had net operating loss (NOL)carryforwards of approximately $12.4 million, $9.6 million and $3.0 million forfederal, state and foreign income tax purposes, respectively.  The federal NOL’s will expire at variousdates beginning in 2020 if not utilized. The state NOLs will expire at various dates beginning in 2012 if notutilized.  The foreign carryforwards haveno expiration date.

 

**Note 9 – 401(k) Benefit Plan**

 

The Company has a401(k) profit sharing plan, which covers substantially all domesticemployees.  Plan participants may makevoluntary contributions up to 20% of their earnings up to the statutorylimitation.  The Company matched $0.25for each $1.00 contributed by employees up to the first $2,000. Companycontributions have no vesting period. The Company’s contributions to the 401(k) plan were $67,000, $66,000 and$57,000 in 2004, 2003 and 2002, respectively.

 

The retirementbenefits for most employees of non-U.S. operations are generally provided bygovernment sponsored or insured programs. The Company’s contributions for these benefits were $165,000, $145,000and $98,000 in fiscal 2004, 2003 and 2002, respectively.

 

**Note 10 – Business Segments**

 

The Company is engaged in a single industry: the development,manufacture, marketing and distribution of products used in biomedicalresearch. The Company conducts business globally and is managed geographically.The Company’s management makes financial decisions and allocates resourcesbased on the information it receives from its internal management systems.Prior to the second quarter of fiscal 2004, the Company’s management analyzedits business based on three strategic business units, Cytokines, SignalTransduction and Custom. In the second quarter of fiscal 2004, the Company’sinternal management systems were realigned to be consistent with the Company’sstrategy of focusing on assays, biologicals and custom and other product lines.As a result, effective in the second quarter of fiscal 2004, the Company’smanagement analyzes sales by geographic region and by product grouping and alsoanalyzes operating income within the United States and Europe consistent withthe strategy outlined above. Prior period information has been reclassified toconform to the current period’s presentation.  Segment information issummarized as follows (in thousands):

 

F-17

----

 
| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                            |       |                         |       |   |   |   |   |
| **Sales – by Geography:**                  |       |                         |       |   |   |   |   |
| Net sales to external customers in:             |       |                         |       |   |   |   |   |
| United States                                   |       | $                            | 21,670     |   | $ | 21,149 |   | $ | 20,775 |   |
| Europe                                          |       | 15,516                       |       | 13,547 |   | 10,745 |   |
| Asia-Pacific                                    |       | 5,544                        |       | 5,050 |   | 4,416 |   |
| Other                                           |       | 1,652                        |       | 1,513 |   | 1,100 |   |
| Total                                           |       | $                            | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   |
|                                            |       |                         |       |   |   |   |   |
| **Operating income (loss) – as restated:** |       |                         |       |   |   |   |   |
| United States                                   |       | $                            | (1,879     | ) | $ | (3,119 | ) | $ | (1,243 | ) |
| Europe                                          |       | 2,587                        |       | 1,656 |   | 2,555 |   |
| Total                                           |       | $                            | 708        |   | $ | (1,463 | ) | $ | 1,312 |   |
|                                            |       |                         |       |   |   |   |   |
| **Sales – by Product Group:**              |       |                         |       |   |   |   |   |
| Assays                                          |       | $                            | 19,701     |   | $ | 17,633 |   | $ | 14,690 |   |
| Biologicals                                     |       | 11,106                       |       | 10,582 |   | 9,785 |   |
| Other                                           |       | 13,575                       |       | 13,044 |   | 12,561 |   |
| Total                                           |       | $                            | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   |

 
| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|------------------|------------|
| ** **            | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **Long-lived assets** |       |             |       |   |   |
| United States         |       | $                | 9,319      |   | $ | 10,845 |   |
| Europe                |       | 1,825            |       | 1,717 |   |
| Total                 |       | $                | 11,145     |   | $ | 12,562 |   |
|                  |       |             |       |   |   |
| **All assets**        |       |             |       |   |   |
| United States         |       | $                | 32,597     |   | $ | 34,203 |   |
| Europe                |       | 10,952           |       | 10,333 |   |
| Total                 |       | $                | 43,549     |   | $ | 44,536 |   |

 

**Note 11 – Commitments andContingencies**

 

*Lease Obligations*

 

The Company has entered into non-cancelable operating leases for officeand manufacturing space.  The futureminimum lease commitments under the Company’s non-cancelable operating leasesat December 31, 2004 are as follows (in thousands):  2005 - $1,024; 2006 - $747; 2007 - $238; and$315 thereafter.

 

Rent expense totaled $1.2 million, $1.3 million, and $1.3 million forthe years ended December 31, 2004, 2003 and 2002 respectively.

 

In connection with the sale of the Hopkinton Custom business inDecember 2004 (note 3), the Company remained liable for all lease obligationsat the related facility which expires in May 2006.

 

The Company has obtainedthe right to produce, use and sell patented technology through various licenseagreements and pays royalties ranging from 5% to 10% of the related sales,depending upon sales levels. Royalty expense under these agreements wasapproximately $481,000, $335,000 and $291,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

*Litigation*

 

On July 2, 2002, the Company settled anarbitration proceeding filed by the former shareholders of QCB, which includeda final settlement of all related claims maintained against those formershareholders, in consideration of the payment to the Company of $800,000 fromescrowed funds held by the Company in connection with the acquisition

 

F-18

----

 

of QCB.  The remaining funds held in escrowwere released to the former shareholders of QCB.  The settlementamount reduced the goodwill originally recorded in the acquisition of QCB whichwas included as a cumulative effect of accounting change in the adoption ofFASB Statement No. 142 in 2002.

 

The Company is involved in various other claims and lawsuits incidentalto its business.  In the opinion of management, these claims and suits inthe aggregate will not materially affect the financial position, results ofoperations or liquidity of the Company.

 

**Note 12 – Restatement ofPreviously Issued Consolidated Financial Statements**

 

The Company restated its consolidated financial statements as ofDecember 31, 2004 and 2003 and for each of the years in the three-year periodended December 31, 2004.  The restatementreflects adjustments due to changes to the accounting treatment of (1) manufacturedantibody inventory reserves and (2) the modification of terms in the warrantagreements. Subsequent to the filing of the 2004 Form 10-K, the Companyconducted additional analysis with respect to its manufactured antibodyinventory loss experience and determined that the previous loss reserves werenot appropriate.  The Company’s revisedreserve methodology is based on analysis of sales levels by product,projections of future demand and age of inventory. In addition, the Companyalso conducted an analysis of the accounting treatment for its warrantagreements issued in connection with a private placement in 2000 and determinedthat the impact of the modification of terms should be reflected as a dividend.Refer to note 7 for additional details regarding the accounting treatment forthe warrants. The effects of the restatement on previously reportedconsolidated financial statements as of December 31, 2004 and 2003 and for eachof the years in the three-year period ended December 31, 2004 are summarizedbelow (in thousands, except for per share data).

 
| ** **                                       | ** ** | **December 31,**  | ** ** |
|--------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **As Previously** | ** ** | ** ** | ** ** | **As Previously** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Reported**      | ** ** | **As Restated** | ** ** | **Reported** | ** ** | **As Restated** | ** ** |
| Balance Sheet:                                   |       |              |       |   |   |   |   |   |   |
| Inventories, net                                 |       | $                 | 7,535      |   | $ | 7,857 |   | $ | 9,074 |   | $ | 9,411 |   |
| Deferred income  taxes, net                      |       | 1,947             |       | 1,822 |   | 2,363 |   | 2,229 |   |
| Total current  assets                            |       | 22,342            |       | 22,539 |   | 21,694 |   | 21,897 |   |
| Total assets                                     |       | 43,352            |       | 43,549 |   | 44,333 |   | 44,536 |   |
| Accumulated  deficit                             |       | (4,867            | )          | (4,670 | ) | (4,452 | ) | (4,249 | ) |
| Total  stockholders’ equity                 |       | 36,231            |       | 36,428 |   | 38,302 |   | 38,505 |   |
| Total  liabilities and stockholders’ equity |       | 43,352            |       | 43,549 |   | 44,333 |   | 44,536 |   |
|                                                  |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

The effect of the restatement adjustments to the Company’s consolidatedbalance sheet as of December 31, 2001 was to reduce accumulated deficit by $0.3million.

 

F-19

----

 
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **As Previously**            | ** ** | ** ** | ** ** | **As Previously** | ** ** | ** ** | ** ** | **As Previously** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Reported**                 | ** ** | **As Restated** | ** ** | **Reported** | ** ** | **As Restated** | ** ** | **Reported** | ** ** | **As Restated** | ** ** |
| Statement of  Operations:                                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Cost of goods  sold                                          |       | 20,315                       |       | 20,330 |   | 19,058 |   | 19,177 |   | 15,325 |   | 15,306 |   |
| Gross profit                                                 |       | 24,067                       |       | 24,052 |   | 22,201 |   | 22,082 |   | 21,711 |   | 21,730 |   |
| Income from  continuing operations                           |       | 723                          |       | 708 |   | (1,344 | ) | (1,463 | ) | 1,293 |   | 1,312 |   |
| Provision  (benefit) for income taxes                        |       | 404                          |       | 394 |   | (670 | ) | (714 | ) | 15 |   | 24 |   |
| Income from  continuing operations before other items        |       | 396                          |       | 391 |   | (750 | ) | (825 | ) | 1,401 |   | 1,412 |   |
| Net loss                                                     |       | (415                         | )          | (420 | ) | (1,070 | ) | (1,145 | ) | (1,052 | ) | (1,041 | ) |
| Dividend on  warrants                                        |       | —                       |       | (1,061 | ) | — |   | — |   | — |   | — |   |
| Net loss  available to common stockholders                   |       | (415                         | )          | (1,481 | ) | (1,070 | ) | (1,145 | ) | (1,052 | ) | (1,041 | ) |
|                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share:                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations including dividend |       | $                            | 0.04       |   | $ | (0.07 | ) | $ | (0.08 | ) | (0.09 | ) | $ | 0.14 |   | $ | 0.14 |   |
| Discontinued  operations, net                                |       | (0.08                        | )          | (0.09 | ) | (0.03 | ) | (0.03 | ) | — |   | — |   |
| Cumulative  effect of accounting change                      |       | —                       |       | — |   | — |   | — |   | (0.25 | ) | (0.25 | ) |
| Basic earnings  (loss) per share                             |       | $                            | (0.04      | ) | $ | (0.16 | ) | $ | (0.11 | ) | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.11 | ) |
|                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share:                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations including dividend |       | $                            | 0.04       |   | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.09 | ) | $ | 0.14 |   | $ | 0.14 |   |
| Discontinued  operations, net                                |       | (0.08                        | )          | (0.09 | ) | (0.03 | ) | (0.03 | ) | — |   | — |   |
| Cumulative  effect of accounting change                      |       | —                       |       | — |   | — |   | — |   | (0.24 | ) | (0.24 | ) |
| Diluted earnings  (loss) per share                           |       | $                            | (0.04      | ) | $ | (0.16 | ) | $ | (0.11 | ) | $ | (0.12 | ) | $ | (0.10 | ) | $ | (0.10 | ) |
|                                                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Statement of  Cash Flows:                                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) from continuing operations                |       | $                            | 396        |   | $ | 391 |   | $ | (750 | ) | $ | (825 | ) | $ | (1,046 | ) | $ | (1,035 | ) |
| Deferred income  taxes                                       |       | 244                          |       | 235 |   | (1,548 | ) | (1,592 | ) | (1,774 | ) | (1,765 | ) |
| Inventories, net                                             |       | 1,732                        |       | 1,747 |   | 532 |   | 651 |   | (1,024 | ) | (1,043 | ) |

 

**Note 13 – Selected QuarterlyFinancial Data (unaudited)**

 

The Selected QuarterlyFinancial data set forth in this Note 13 has been revised to reflect therestatement.  For a discussion of therestatement, see “Note 12 Restatement of Previously Reported ConsolidatedStatements” above.

 
| ** **                                                    | ** ** | **(As  previously reported)** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | **2003**                      | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **Q1**                        | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                    | ** ** | **(in  thousands)**           | ** ** |
|                                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                             | 10,177     |   | $ | 10,999 |   | $ | 10,043 |   | $ | 10,039 |   | $ | 11,532 |   | $ | 11,241 |   | $ | 10,660 |   | $ | 10,947 |   |
| Gross profit                                                  |       | 6,136                         |       | 6,306 |   | 5,710 |   | 4,049 |   | 6,730 |   | 6,296 |   | 5,663 |   | 5,377 |   |
| Income (loss)  from continuing operations                     |       | 154                           |       | 381 |   | 25 |   | (1,310 | ) | 746 |   | 489 |   | 107 |   | (946 | ) |
| Discontinued  operations, net                                 |       | (51                           | )          | (56 | ) | (106 | ) | (107 | ) | (38 | ) | (44 | ) | (69 | ) | (660 | ) |
| Net income (loss)                                             |       | 103                           |       | 325 |   | (81 | ) | (1,417 | ) | 708 |   | 445 |   | 38 |   | (1,606 | ) |
| Net income (loss)  available to common stockholders           |       | $                             | 103        |   | $ | 325 |   | $ | (81 | ) | $ | (1,417 | ) | $ | 708 |   | $ | 445 |   | $ | 38 |   | $ | (1,606 | ) |
|                                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share from continuing operations   |       | $                             | .02        |   | $ | .04 |   | $ | .00 |   | $ | (.14 | ) | $ | .08 |   | $ | .05 |   | $ | .01 |   | $ | (.10 | ) |
| Basic earnings  (loss) per share                              |       | $                             | .01        |   | $ | .03 |   | $ | (.01 | ) | $ | (.15 | ) | $ | .08 |   | $ | .05 |   | $ | .00 |   | $ | (.18 | ) |
|                                                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share from continuing operations |       | $                             | .02        |   | $ | .04 |   | $ | .00 |   | $ | (.14 | ) | $ | .08 |   | $ | .05 |   | $ | .01 |   | $ | (.10 | ) |
| Diluted earnings  (loss) per share                            |       | $                             | .01        |   | $ | .03 |   | $ | (.01 | ) | $ | (.15 | ) | $ | .07 |   | $ | .05 |   | $ | .00 |   | $ | (.18 | ) |

 

F-20

----

 
| ** **                                                    | ** ** | **(As  restated)**  | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                    | ** ** | **2003**            | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **Q1**              | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                    | ** ** | **(in  thousands)** | ** ** |
|                                                          |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                   | 10,177     |   | $ | 10,999 |   | $ | 10,043 |   | $ | 10,039 |   | $ | 11,532 |   | $ | 11,241 |   | $ | 10,660 |   | $ | 10,947 |   |
| Gross profit                                                  |       | 5,946               |       | 6,407 |   | 5,548 |   | 4,181 |   | 6,644 |   | 6,480 |   | 5,540 |   | 5,388 |   |
| Income (loss)  from continuing operations                     |       | 33                  |       | 444 |   | (75 | ) | (1,227 | ) | 693 |   | 659 |   | 33 |   | (937 | ) |
| Discontinued  operations, net                                 |       | (51                 | )          | (56 | ) | (106 | ) | (107 | ) | (38 | ) | 603 |   | (69 | ) | (660 | ) |
| Net income (loss)                                             |       | (18                 | )          | 388 |   | (181 | ) | (1,334 | ) | 655 |   | 558 |   | (36 | ) | (1,597 | ) |
| Net income (loss)  available to common stockholders           |       | $                   | (18        | ) | $ | 388 |   | $ | (181 | ) | $ | (1,334 | ) | $ | 655 |   | $ | (503 | ) | $ | (36 | ) | $ | (1,597 | ) |
|                                                          |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share from continuing operations   |       | $                   | .00        |   | $ | .05 |   | $ | (.01 | ) | $ | (.13 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.10 | ) |
| Basic earnings  (loss) per share                              |       | $                   | .00        |   | $ | .04 |   | $ | (.02 | ) | $ | (.14 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.17 | ) |
|                                                          |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share from continuing operations |       | $                   | .00        |   | $ | .04 |   | $ | (.01 | ) | $ | (.13 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.10 | ) |
| Diluted earnings  (loss) per share                            |       | $                   | .00        |   | $ | .04 |   | $ | (.02 | ) | $ | (.14 | ) | $ | .07 |   | $ | (.05 | ) | $ | .00 |   | $ | (.17 | ) |

 

Diluted earnings (loss)per share for the quarters may not add to the amounts for the year, as each periodis computed on a discrete basis.

 

F-21

----

 

**Schedule II****– Valuation and Qualifying Accounts**

(in thousands)

 
| ** **                        | ** ** | **Balance at** | ** ** | ** **    | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|-----------------------------------|------------|----------------|------------|---------------|------------|----------------|------------|----------------|------------|
| ** **                        | ** ** | **Beginning**  | ** ** | ** **    | ** ** | ** **     | ** ** | **End of**     | ** ** |
| ** **                        | ** ** | **of Year**    | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Year**       | ** ** |
|                              |       |           |       |          |       |           |       |           |       |
| **Year  ended December 31, 2004** |       |           |       |          |       |           |       |           |       |
| Allowance for  doubtful accounts  |       | $              | 258        |          | 146        |           | 148        |           | 255        |   |
|                              |       |           |       |          |       |           |       |           |       |
| **Year  ended December 31, 2003** |       |           |       |          |       |           |       |           |       |
| Allowance for  doubtful accounts  |       | $              | 261        |          | 164        |           | 167        |           | 258        |   |
|                              |       |           |       |          |       |           |       |           |       |
| **Year ended  December 31, 2002** |       |           |       |          |       |           |       |           |       |
| Allowance for  doubtful accounts  |       | $              | 261        |          | 140        |           | 140        |           | 261        |   |

 

F-22

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this Form 10-K/A(Amendment No. 2) to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| ** **                | **BIOSOURCE INTERNATIONAL, INC.** |
|---------------------------|-----------------------------------|
| ** **                | ** **                        | ** ** |
|                      |                              |   |
|  Date: June 24, 2005 | By:                               | /s/     Terrance J. Bieker |
|                      |                              | Terrance J. Bieker  President and Chief Executive Officer |
|                      |                              |   |
|                      |                              |   |
| Date: June 24, 2005       | By:                               | /s/     Alan I. Edrick |
|                      |                              | Alan I. Edrick  Executive Vice President and Chief Financial  Officer |

 

----