** **

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-K**

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

** **

**For thefiscal year ended December 31, 2004**

**CommissionFile Number 000-21930**

 

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**BIOSOURCE INTERNATIONAL, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **77-0340829**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **542 Flynn Road, Camarillo,  California  93012**           |
| (Address of  principal executive offices)                        |

 

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

 

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 by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes   ý       No   o

 

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

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes   o          No   ý

 

The aggregate marketvalue 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 of shares ofthe Registrant’s common stock outstanding as of March 14, 2005 was 9,729,282.

 

**DocumentsIncorporated by Reference.**

 

Certain portions of theRegistrant’s Proxy Statement relating to the Registrant’s 2005 Annual Meetingof Stockholders, to be held on May 24, 2005, are incorporated by reference intoPart III of this Annual Report on Form 10-K where indicated.

 

 

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**FORWARD-LOOKINGSTATEMENTS**

** **

ThisAnnual Report on Form 10-K contains forward-looking statements regarding futureevents and our future results that are subject to the safe harbors createdunder the Securities Act of 1933 and the Securities Exchange Act of 1934. Thesestatements are based on current expectations, estimates, forecasts, projectionsand assumptions that could cause actual results to differ materially from theresults expressed in these statements. Words such as “expects,” “anticipates,” “targets,”“goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues”,“may”, variations of such words and similar expressions are intended toidentify such forward-looking statements. In addition, any statements thatrefer to projections of our future financial performance, our anticipatedgrowth and trends in our businesses and other characterizations of futureevents or circumstances are forward-looking statements.  Readers are urged not to place undue relianceon these forward-looking statements, which speak only as of the date of thisAnnual Report on Form 10-K.  We undertake no obligation to revise orupdate any forward-looking statements in order to reflect any event orcircumstance that may arise after the date of this Annual Report onForm 10-K. Readers are urged to carefully review and consider the variousdisclosures made in this Annual Report, which attempt to advise interestedparties of the risks and factors that may affect our business, financialcondition, results of operations and prospects. Among the key factors that have a direct impact on our results ofoperations are:

 

•       the risks and other factors describedunder the caption “Risk Factors” in this Form 10-K;

 

•       the impact of business combinations,including acquisitions and divestitures, both internally for us and externally,in the biotechnology industry;

 

•       general economic and business conditions;

 

•       industry trends;

 

•                  ourassumptions about customer acceptance, overall market penetration andcompetition from providers of alternative products and services;

 

•                  ouractual funding requirements; and

 

•       availability, terms and deployment ofcapital.

 

In this Form 10-K, unlessthe context requires otherwise, “Biosource,” “Company,” “we,” “our,” and “us”mean Biosource International, Inc. and its subsidiaries.

 

**PART I**

 

**ITEM 1.          BUSINESS**

 

**Overview**

 

Wemanufacture, market and distribute products used worldwide for understandingdisease and developing new drug therapies and medical diagnostics.  Our products enable biomedical researchers tobetter understand disease processes as well as the biochemistry, immunology andcell biology of the human body.  We offermore than 3,000 products that are grouped into the following three categories:Assays (test kits); Biologicals (antibodies and bioactive proteins) and Other(serum, media, oligonucleotides and clinical diagnostics).

 

We believe that our broadproduct line, together with a strong scientific research staff and anestablished trade name, give us a significant presence in the biomedicalresearch market.  We intend to continueour focus on new product development, particularly assay kits, as the driver ofour anticipated future growth.  We mayalso pursue businesses, products and technologies complementary to our currentbusiness through acquisitions, licensing or joint ventures.

 

We were originallyincorporated as a California corporation in October 1989, and werereincorporated as a Delaware corporation in May 1993.  Our executive offices are located at 542Flynn Road, Camarillo, California93012, and our telephone number at that location is (805) 987-0086.  Our common stock is traded on the NasdaqNational Market under the ticker symbol “BIOI.” We file reports with the Securities and Exchange Commission (“Commission”).We make available on our website (www.biosource.com) free of charge our AnnualReports on Form 10-K, quarterly reports on Form 10-Q, and currentreports on Form 8-K and amendments to those reports as soon as reasonablypracticable after we electronically file such materials with, or furnish suchmaterials to, the

 

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Commission. You can alsoread and copy any materials we file with the Commission at its Public ReferenceRoom at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additionalinformation about the operation of the Public Reference Room by calling theCommission at 1-800-SEC-0330. In addition, the Commission maintains an Internetsite (www.sec.gov) that contains reports, proxy and information statements andother information regarding issuers that file electronically with theCommission, including us.  Information onour website, www.biosource.com, does not constitute part of this annual report.

 

#### **Industry Overview**

#### ** **

The biomedical researchindustry has made significant advances in the understanding of physiologicalprocesses at the cellular and molecular levels. The sequencing of the human genome has created a more immediate need formethods and products to research and identify thousands of previously unknownproteins that potentially play key roles in cellular function, both normal anddiseased.  These proteins are ofsignificant interest to the pharmaceutical industry, since they can be used asthe basis of new therapeutic discovery and development.  The core competencies we have developed inmolecular and cellular biology, immunology and custom biological servicesaddress this need.  Biomedicalresearchers around the world are in search of specialty research products andservices, which are necessary to conduct both basic and clinical research.  This research is conducted in settings thatrange from university and medical school laboratories to pharmaceutical andbiotechnology research and development groups. The success of this type of research depends upon the availability ofhigh quality biological reagents and services, including the assay kits andrelated biologicals and serum and media that we develop, manufacture and sell.

 

#### **Company Growth Strategy**

#### ** **

Our core strategy focuseson increasing our internal growth rate through focused investments in researchand development and sales and marketing initiatives in the rapidly growingcellular communication pathway markets. Cellular communication pathway marketsinclude both extracellular signaling products (such as cytokines) andintracellular signaling products (such as signal transduction).  We intend to utilize our strong productdevelopment capabilities to drive product growth in these markets withparticular emphasis on developing and selling assay kits. As a complement tothis strategy, we may also pursue businesses, products and technologiessynergistic with our current business through acquisitions, licensing or jointventures.

 

#### **Products**

#### ** **

Although we offer morethan 3,000 products, our strategy centers on developing and selling assays andrelated biologicals.  Assay kits andbiologicals are typically sold in higher volume and at a higher gross marginthan our other product lines.  In 2004,sales of our assay kits increased approximately 13% and representedapproximately 44% of our total sales. Our goal is to continue to increase this percentage in 2005 andbeyond.  We group our products into thefollowing categories:  Assays (testkits), Biologicals (antibodies and bioactive proteins) and Other (serum, media,oligonucleotides and diagnostics).  Webegin our Products discussion with biologicals as we believe that anunderstanding of biologicals is important to understanding our assay productsas the biologicals are the key active component of the assay kits.

 

***Biologicals***

*** ***

Wedefine a “biological” as naturally occurring or synthetically produced animal-or human-based nucleic acids and proteins. Nucleic acids are the basic building blocks of the genetic structure ofall living things.  This genetic structuredirects the synthesis of proteins. Proteins control the structure and function of all living organisms.

 

Biologicalsare the essential active components to our assay kits.  These may include monoclonal or polyclonalantibodies, bioactive recombinant proteins, synthetic peptides or syntheticoligonucleotides.  In addition to use inassay test kits, these biologicals are sold individually as a catalogproduct.  Our expertise in selecting,creating and purifying these biologicals is a differentiating core competencyof BioSource, resulting in high levels of sensitivity and specificity in ourcellular pathway research products.

 

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# *Antibodies*

# * *

Antibodiesare used in our assay kits as detector systems in the research of normal andabnormal proteins.  Antibodies areproteins generated by immune cells in response to foreign substances, which arecalled antigens.  Antibodies havespecific amino acid sequences, which cause them to interact only with theantigen that induced their creation. Antibodies circulate in the blood and assist the body’s immune system bysearching out and neutralizing or eliminating antigens.  Antibodies are used as tools by researchersin a variety of applications, including neutralization studies in bioassaysystems, as capture and detection molecules for protein quantitation and forcellular differentiation.  Antibodiesused in research are generally produced by injecting an antigen into animals,which cause the animals’ immune system to produce an antibody specific to thatantigen.  The antibodies derived fromanimals are mixtures of proteins that bind many different areas of a protein.In many cases this complex mixture or polyclonal antibody may be sufficient forthe researcher’s needs. In other cases, a more highly defined antibody can becreated through hybridoma technology. Through this process a cancer cell calleda myeloma is chemically fused with the spleen cells of the immunized animal.After screening and cell culture, a cell line can be selected that secretes aspecific antibody to the protein injected. This cell can live indefinitely inculture and produce a single form of a chemically identical antibody, called amonoclonal antibody. Monoclonal antibodies are preferred for some applicationsbecause of their consistency.

 

In addition to use in ourown assay kits, we provide researchers our biological reagents for theirinternally developed assays and for their specialized instruments.  Our secondary antibodies (conjugatedantibodies that react with other species of antibodies) are also commonly soldto researchers and other companies as a component for their test kits.

 

Wealso have developed a significant catalog of innovative signal transductiontools that enable customers to more readily understand the complex signalswhich control cellular processes.  Manyof these tools are antibodies that selectively recognize activated orinactivated forms of proteins containing one or more molecules of phosphate atspecific sites.  Such an addition ofphosphate molecules (phosphorylation) or removal of phosphate molecules(dephosphorylation) control much of the signaling within and betweencells.  Diseases such as cancer, heartdisease and Alzheimer’s have been shown to be at least in part due to themalfunctioning of key molecules within cells, in many cases due to alterationsin their activity through altered phosphorylation.

 

# *Bioactive Proteins and Peptides*

# * *

Proteins, which arechains of amino acids in particular sequences, and their interactions areresponsible for all of the biochemical and physical properties of a cell. Forexample, the genetic information in a bone cell and nerve cell is identical;however, it is the difference in proteins expressed in those cells that definetheir shape and function.  Proteins takevarious forms including enzymes, hormones, antibodies, receptors, cytokines andchemokines.  The study of proteins isfundamental to disease research.  Ourprimary protein products are cytokines, chemokines and kinases.

 

*Cytokines*. The development of an effective immune response involves complexcell-to-cell communications, which are mediated by a group of small,hormone-like, soluble, secreted proteins collectively called ‘cytokines’.Cytokines interact with specialized target receptors on the surface of thecells and stimulate a biological response. For example, cytokines can activate cells to recognize and eliminateharmful bacteria and viruses.  They carryvital signals to the cell’s genetic machinery that can trigger it to grow orstop growing.  Cytokines also can signala cell to differentiate, that is, to acquire the features necessary for it totake on more specialized tasks.  Specificcytokines play a key role in stimulating cells surrounding a wound to grow anddivide and also in attracting migratory cells to the site.  Some cytokines have a regulatory functionwhile other cytokines exert direct effects of their own.

 

Cytokinesare extracted from natural sources, such as human and animal platelets, whiteblood cells and lymphatic cells, or are produced through genetic engineering,also known as recombinant DNA technology. In addition to producing humancytokines, we also produce the equivalent proteins from mice, rats, swine andmonkeys.  Cytokines coordinate andorchestrate the proper functioning of the immune system.  Cytokines and other similar growth factorsand adhesion molecules are instrumental in the body’s defense against cancer,AIDS and other life- threatening disorders.

 

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*Chemokines. *Chemokines**are specific proteins that regulate the recruitment and activationof white blood cells at sites of inflammation. Significant interest in chemokines exists due to studies linkingchemokines and their receptors to the development of HIV.  In addition, this class of proteins plays acritical role in mediating inflammatory processes involved in trauma, heartdisease, diabetes and bone disease.

 

*Kinases. * Kinases arespecialized proteins within a cell that catalyze the addition of phosphate tospecific sites on specific proteins. This reaction controls the activity andmigration of that protein within the cell. Signal transduction proteins, ofwhich the function of only a fraction are fully understood, are expected toplay an important role as targets of drug discovery since the irregularfunctioning of these proteins is involved in most diseases.

 

*Peptides*. Bioactive peptides are subsections of proteins that we chemicallysynthesize in our laboratories. Bioactive peptides represent the active or inhibitory regions of aparticular protein and are used to study the activity of various proteins andthe signal transduction pathways that they activate.  Some bioactive peptides, such as beta amyloidpeptides, have been shown to play a major role in the development of Alzheimer’sdisease.

 

# ***Assays***

# *** ***

“Assays” or “Assay Kits” area collection of reagents, buffers, calibrators and active biologicals that arestandardized, validated and assembled into a ready-to-use package of products.Researchers use our assay kits to detect and quantitate specific responses inexperimental models used to study normal and disease states.   There are numerous hardware and softwaresystems used by researchers to perform these tests.  The majority of these test systems are “openplatforms” in that they allow the use of third party providers of assaykits.  We have targeted the open platformmarket.  The following represent some ofour more common assay technologies.

 

*Enzyme-Linked ImmunoSorbent Assay*(“ELISA”) *test kits*.  In atypical ELISA test kit, an antibody that specifically binds a protein of interestis immobilized or “bound” to the plastic surface of the kit’s test plate.  A sample containing the protein of interestis added by the researcher and allowed to react with the bound antibody.  After the plate is washed to remove unbound materials,a second antibody, also specific for the same protein, is added and allowed toreact with the bound antigen.  Thissecond antibody is conjugated with a specific enzymatic tag that produces acolored product at the end of the assay. The amount of color is proportional to the amount of protein present,which can be measured even in minute concentrations, using common laboratoryinstruments. This method of quantitation has become an integral tool both inresearch and diagnostic applications as it provides a relatively inexpensive,accurate and rapid method for the quantitation of specific proteins ofinterest.

 

Our cytokine ELISA testkits are a combination of cytokine standards, their antibodies and otherchemical reagents, and are used to measure the presence or quantity of aparticular bioactive protein in serum, plasma or another biologicalsample.  The quantitation of thesecytokines, chemokines and growth factors has been shown to be an excellent wayfor scientists to determine the functional status of the immune system.  Since many of the current targets ofpharmaceutical intervention are designed to modulate the immune system and alsoplay a critical role in many common diseases (cancer, diabetes, cardiovasculardisease, neurodegeneration, inflammatory disease), quantitation of thesemarkers as a means for gauging the effectiveness of treatment is becomingincreasingly necessary.

 

Ourcytokine ELISA tests produce results in a few hours, compared to days or evenweeks with bioassays.  We offer kits forhuman, mouse, rat, monkey and swine proteins. The diversity of species is important to allow investigators toestablish numerous measurements in pre-clinical animal model systems.  We offer more than 360 types of ELISA kitsand we believe we are the leader in sales of rat, monkey and swine cytokineELISA kits.  The detection offluctuations in cytokine levels by ELISA tests in an *in vitro*cell culture experiment of a new drug or in a patient’s serum provideresearchers and scientists with valuable information in understanding diseaseprogression, therapy and diagnosis.

 

More recently, we have expanded our offering of ELISAkits to include a series of kits for measuring protein phosphorylation eventsinvolving intracellular signaling proteins. Phosphorylation (addition of aphosphate molecule by an intracellular enzyme called a kinase) of proteins isan important modification that changes the function of the affectedproteins.  Cells respond to theirenvironment by turning events that occur on their cell surface into directionsto the cell nucleus.  These directionscan tell a cell to migrate, grow, divide or differentiate into another celltype or even die.  There is a growingunderstanding that inappropriate cellular

 

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responses as manifested by phosphorylation underlie manydiseases.  Thus, understanding the natureand control of these specific signals is critical to the basic understanding ofdisease and provides targets for modern drug development.  Currently we offer more than 300 individualphosphorylation site-specific antibodies and more than 50 ELISA kits thatincorporate a subset of these high-value reagents.

 

*Multiplex test kits. *ELISA kits are designed to measure a singleprotein.  We also offer alternativemethods to allow many proteins to be detected and quantitated simultaneouslyfrom a single sample.  This technology iscalled ‘multiplex’ testing.  The theoryof these methods is similar to the ELISA, involving the binding of proteins byspecific antibodies.  This platformdiffers, however, in that the antibodies and assays are developed on separatemicrobeads or microspots in a well where the final response to a signal can besegregated by instrumentation made for that platform.  We have two types of multiplex testkits.  One type is designed for use ininstrument systems manufactured by Luminex Corporation, a third party.  Our multiplex menu for Luminex assays hasrapidly expanded to include kits for the measurement of human, mouse and ratcytokines, chemokines, growth factors and signal transduction/cell biologymarkers.  Our other type of multiplexplatform is for signal transduction/cell biology markers and is presented onglass slides.  Both types of ourmultiplex kits allow for investigators to establish screens for drug targetsand inhibitors in cell culture samples or to determine the diagnostic value ofa panel of proteins in human serum or plasma samples.  Multiplex kits are growing in popularitybecause they save the researcher time and labor and because they generate agreater amount of data on much less sample volume.

 

***Other Products***

*** ***

***Serum and Media***

*** ***

Asignificant amount of the disease research our customers pursue is performed ina laboratory on human or animal cells. These cells function as the disease model.  Serum and media support the growth,maintenance and experimental manipulation of these cell-based diseasemodels.  We have a broad serum and mediaproduct line which we manufacture under rigorous quality standards to providethe researcher with a highly consistent, viable and reproducible diseasemodel.  Since our media is manufacturedunder GMP controls, it can also be used by industry in the manufacturing oftheir regulated products.

 

*Oligonucleotides*

* *

Theproduction of oligonucleotides is a custom service we provide for researchersengaged in molecular biology. An oligonucleotide is a synthesized polymer madeup of the same building blocks that form DNA. Synthetic oligonucleotides have been used in molecular biology for overtwenty years, essentially as templates for nucleic acid and protein synthesis,and more recently, as the therapeutic agents for the inhibition of geneexpression or as a diagnostic agent to identify disease.  DNA is used by many disciplines in biomedicalresearch in both academic and commercial areas, including molecular biology andcell biology departments of major universities and biomedical companiesdeveloping gene therapy products.  Theseresearchers use synthetic oligonucleotides to determine the exact sequence of agene or to perform experiments leading to the potential development ofpharmaceutical drugs.  The primary use ofthe oligonucleotides we develop and sell is for DNA sequencing and polymerasechain reaction, or PCR, priming.

 

In DNA sequencing, wesynthesize oligonucleotides pursuant to customer specifications, which they useto initiate the process of sequencing a DNA strand.  DNA sequencing is used in a wide range ofbiomedical research applications to identify the makeup of particular strandsof DNA.  In PCR priming, our synthesizedoligonucleotides are used by our customers in combination with other reagentsto amplify a specific genetic sequence isolated from a cell sample.  PCR is an extremely powerful tool inmolecular biology research because it can amplify genetic information from a singlecopy of DNA or RNA.  Using PCRtechnology, the presence of the genetic message used to code for the productionof protein can be identified, thereby offering numerous possibilities in thedetection of genetic disorders, monitoring disease progression and inunderstanding cellular functions.

 

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***Diagnostics***

*** ***

Weproduce and market radioimmuno-assays (RIAs and ELISAs), which are sold outsideof the U.S. to clinical diagnostic laboratories for the measurement of hormonesand proteins important in endocrinology.

 

**Customers**

** **

**Wehave over 6,000 customers worldwide.  Nosingle customer accounted for more than 10% of our total net sales during anyof the last three years.**

** **

**Research and Development**

** **

As a life sciencescompany with significant internal R&D and manufacturing capability, westrive to produce uniquely capable test kits and related biologicals forcellular communication pathway research in the bio/pharma, government andacademic communities.  We have extensiveexperience in extra cellular signaling research, related to cytokines,chemokines and growth factors.  We expectto continue to leverage this immunological expertise to appropriately expandour product offerings in this area.  Wealso have extensive experience with intracellular signaling, more commonlyknown as signal transduction.  Signalingoccurs in all cells and tissues in the body and it is therefore critical tonormal homeostasis and understanding disease states. Signal transduction is amarket that is growing in importance as researchers begin to understand itscentral role in disease and its significance as targets for drug therapy.  To expand the application of this technology,we have invested in developing assays for use in high-content instrumentplatforms that address the increasing demand for quantitatively profilingvarious proteins. These platforms, such as microarrays and Luminex bead assays,enable pharmaceutical and biotechnology companies to realize the opportunitiesrepresented by the sequencing of the human genome. These product offeringsincorporate our phosphorylation site-specific antibodies and combine ourexpertise in signal transduction and assay development.

 

Our current research anddevelopment activities are focused in the following areas:

 

•       Continued development of new signaltransduction reagents, assays and platforms for measuring signal transductionproteins.

•       Selective addition of new cytokine,chemokine and growth factors to our existing product offerings.

•       Development of reagents for new detectiontechnologies and assay platforms for the growing high-content screeningmarkets.

•       Strategically aligning with top academicresearchers to bring new ideas and products to the commercial marketplace.

 

As of December 31, 2004,we employed 37 research scientists, 14 of whom hold Ph.D.’s.  Among these professionals are experts inmolecular biology, immunology, cell biology and signal transduction.  In particular, their knowledge is fundamentalto the development of peptides, oligonucleotides, proteins, antibodies and assaykits. Our research laboratories are located in Camarillo, California;Hopkinton, Massachusetts; and Nivelles, Belgium.  We introduced over 200 new products in2004.  We spent approximately $5.8million, $7.0 million and $6.2 million on research and development in 2004,2003 and 2002, respectively representing approximately 13%, 17% and 17% of netsales in 2004, 2003 and 2002, respectively.

 

**Manufacturing**

** **

Our largest productionfacility is located in our corporate headquarters in Camarillo, California wherewe manufacture the majority of our assay kits. We also manufacture antibodies and assay kits at our European facilityin Nivelles, Belgium.  We manufacture ourline of phosphorylation site- and cleavage site-specific antibodies and relatedpan antibodies at our Hopkinton, Massachusetts facility. We manufacture ouroligonucleotides at our facility in Foster City, California.  Our serum and media products are manufacturedat our facility in Rockville, Maryland. We currently manufacture products for inventory and strive to shipproducts shortly after receipt of orders. Accordingly, we have not developed a significant backlog of products anddo not anticipate we will develop a material backlog of products in the future.

 

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Labeling, packaging, andshipping are carried out independently at each facility.  We purchase our packaging components fromoutside suppliers who follow our custom packaging designs.  There are numerous available suppliers forour packaging components.

 

#### **Sales and Marketing**

#### ** **

We sell our productsdirectly and through approximately 80 independent distributors worldwide. Wesupplement our marketing efforts with appearances at trade shows,advertisements in trade journals and sales brochures. In addition, we sponsorsymposiums and educational programs to familiarize researchers with the leadingtechniques and methods using our products.

 

Weemploy approximately 62 sales and marketing professionals worldwide.  The principal markets for our products are inthe United States, Western Europe and Japan. We have a direct sales force strategically located in major metropolitanareas in the United States.  In addition to the United States, we selldirectly into Germany, Belgium, Holland, Denmark, Sweden, Norway, Finland andthe United Kingdom.  We utilize a networkof both exclusive and non-exclusive international distributors thatspecifically target selected markets in which we do not have direct salesrepresentation.  In 2004 and 2003,distributor sales accounted for approximately 26% and 25% of our net sales,respectively.  We distribute ourproduct catalog to current and selected potential customers.

 

Our sales peopletypically hold a minimum of a biological sciences undergraduate degree andundergo training in the nature and application of our products and provenselling techniques.  We believe that byinvesting in the scientific training of our sales force we are better able tosatisfy the needs of researchers and scientists in the biomedical community. Oursales force also is used to provide valuable feedback for productdevelopment.  Each representative isresponsible for the maintenance of existing accounts as well as the generationof new business. Representatives are paid a base salary and commissions.

 

**Technology Licensing**

** **

Many of our existingproducts are manufactured or sold under the terms of license agreements thatrequire us to pay royalties to the licensor based upon a percentage of thesales of products containing the licensed materials or technology. Although weemphasize our own research and development, we believe our ability toin-license new technology from third parties is and will continue to becritical to our ability to offer new products. Our ability to obtain thesein-licenses depends in part on our ability to convince inventors that we willbe successful in bringing new products to market which incorporate theirtechnology. Several of our significant licenses or exclusivity rights expire atvarious times during the next 15 years.

 

We cannot assureyou that we will be able to continue to identify attractive new technologiesdeveloped by others. Even if we are able to identify new technologies ofinterest, we may not be able to negotiate a license on acceptable terms, or atall.  We may not be able to renew some of our existing licenses onfavorable terms, or at all. If we lose the rights to patented technology, wemay need to discontinue selling certain of our products or redesign ourproducts, and we may lose a competitive advantage. Competitors could in-licensetechnologies that we fail to license and erode our market share for certainproducts.

 

Our licensestypically subject us to various economic and commercialization obligations. Ifwe fail to satisfy these requirements we could lose important rights under alicense, such as the right to exclusivity in a certain market. In some cases,we could also lose all rights under a license.

 

**SegmentInformation**

 

We operate primarily inone industry segment, the licensing, development, manufacture, marketing anddistribution of biological reagents and assays used in life sciences.  For information regarding the net salesassociated with our geographic segments and product groups, see Note 10 of theNotes to the Company’s Consolidated Financial Statements included elsewhere inthis filing.

 

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**Competition**

** **

We are engaged in asegment of the life sciences products industry that is highly competitive.  Our primary competitors include companiessuch as Techne Corporation, BD BioSciences, Cell Signaling Technologies, Bio-RadLaboratories, Serologicals Corporation and Invitrogen.  Many of our competitors have been involved inthe life sciences industry significantly longer than we have and benefit fromgreater name recognition.  We believethat a company’s competitive position in our markets is determined by productfunction, product quality, speed of delivery, technical support, price, breadthof product line and timely product development. We believe our customers are diverse and place varying degrees ofimportance on the competitive attributes listed above.  While it is difficult to rank theseattributes for all our customers in the aggregate, we believe we are wellpositioned to compete in each category. However, many of our competitors have greater resources to devote toresearch and development, sales and marketing and faster manufacturing anddelivery mechanisms and may engage in price cutting measures to achieveleadership in their field.  Acquisitionsand collaborations by and among other companies seeking a competitive advantagealso affect the competitive environment. We believe that customers in our markets display a significant amount ofloyalty to their initial supplier of a particular product. Therefore, it may bedifficult to generate sales to customers who have purchased products fromcompetitors. To the extent we are unable to be the first to develop and supplynew products, our competitive position may suffer.

 

**Patents and Trademarks**

** **

Wecurrently have and intend to seek further patent protection on certainproprietary technologies.  Although ourintent is to protect our interests in select technologies, there is noguarantee that these patents will be granted, or if granted, be effective infully protecting the use of these technologies. We also seek to protect our interests by treating certain technologiesand know-how as trade secrets and by requiring all employees and contractors toexecute invention and assignment agreements with us, which includeconfidentiality provisions relating to our proprietary information and intellectualproperty rights.

 

“PhosphoELISA,” “BGB,” “Messagescreen,”“TAGOImmunologicals,” “Cytoscreen,” “Primescreen,” “Cytosets” and “Cartesian”are unregistered product trademarks used for some of our products, but are onlyof limited importance to our business.  “Biofluids”is also a registered trademark we acquired as part of our acquisition ofBiofluids in December 1998.

 

We are also a party tolicense agreements allowing other companies to manufacture products using someof our technology in exchange for royalties and other compensation or benefits.Although we believe our patents and patent rights are valuable, our technicalknowledge with respect to manufacturing processes, materials, and productdesign are also valuable.

 

**Government Regulation**

** **

*FDA*

The majority of our products are sold as research products with thestatement “This product is for research use only.  Not for use in diagnostic procedures”.  Research products are not currently requiredto comply with the lengthy FDA premarket submission requirements processassociated with diagnostic or therapeutic products.  In the event we develop products directly forthe diagnostic market in the United States, we will be required to obtain FDAclearance prior to selling them.  Thisclearance, if required, could be time consuming and costly.

 

Some of our products, however, are used by our customers as rawmaterials or intermediates in the production of diagnostic products.  As such, our Camarillo, CA facility islicensed by the State of California and registered with the FDA to manufactureour TAGOIMMUNOLOGICALS product line as Analyte Specific Reagents. Thisregistration allows us to market these products to research institutions, *in vitro* diagnostic manufacturers and clinical laboratoriescertified to perform high complexity testing. Our Rockville, MD facility is also registered with the FDA as amanufacturer of Multipurpose Culture Medium which may be used for the growth ofcells to obtain test results that provide epidemiological information and aidin the diagnosis of disease. Analyte Specific Reagents and Multipurpose CultureMedium are classified as Class I exempt devices that are manufactured incompliance with the FDA's Quality System Regulation, also known as cGMP. Thisclassification of products is not subject to premarket submission requirementsby the FDA.

 

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*Other Regulations*

* *

We are subject tofederal, state, local and foreign environmental laws and regulations, includingthe U.S. Occupational Safety and Health Act, the U.S. Toxic Substances ControlAct, the U.S. Resource Conservation and Recovery Act, and other current andpotential future federal, state, or local regulations. Our manufacturing andresearch and development activities involve the controlled use of hazardousmaterials, chemicals, and biological materials, which require compliance withvarious laws and regulations regarding the use, storage, and disposal of suchmaterials.

 

Our European subsidiary’sclinical products are produced in facilities that have achieved ISO 9001 versionEN 13485 certification.  Our clinicaldiagnostic products carry the CE mark according to the EU directive on *in vitro* Diagnostics In each of the markets in which we sellthrough distributors, our distributors are contractually responsible for compliancewith the applicable governmental regulations. In addition, we have a radioactive materials license for our Belgiumfacility and are subject to adhering to ongoing monitoring.

 

We are also subject tovarious federal and state laws pertaining to health care information andprivacy and “fraud and abuse,” including anti-kickback laws and false claimslaws. Anti-kickback laws make it illegal to solicit, offer, receive, or pay anyremuneration in exchange for, or to induce, the referral of business, includingthe purchase or prescription of a particular product. The U.S. federalgovernment has published regulations that identify “safe harbors” or exemptionsfor certain payment arrangements that do not violate the anti-kickbackstatutes. We seek to comply with the safe harbors where possible. Due to thebreadth of the statutory provisions and the absence of guidance in the form ofregulations or court decisions addressing some of our practices, it is possiblethat our practices might be challenged under anti-kickback or similar laws.False claims laws prohibit anyone from knowingly and willingly presenting, orcausing to be presented for payment to third party payors (including Medicareand Medicaid), claims for reimbursed products or services that are false orfraudulent, claims for items or services not provided as claimed or claims formedically unnecessary items or services. Our activities relating to the saleand marketing of our products may be subject to scrutiny under these laws.Violations of fraud and abuse laws may be punishable by criminal and civilsanctions, including fines and civil monetary penalties, as well as thepossibility of exclusion from federal health care programs (including Medicareand Medicaid).

 

Our present and futurebusiness has been and will continue to be subject to various other laws andregulations.

 

*ForeignCorrupt Practices Act*

* *

The U.S. Foreign CorruptPractices Act, to which we are subject, prohibits corporations and individualsfrom engaging in certain activities to obtain or retain business or toinfluence a person working in an official capacity. It is illegal to pay, offerto pay, or authorize the payment of anything of value to any foreign governmentofficial, government staff member, political party, or political candidate inan attempt to obtain or retain business or to otherwise influence a personworking in an official capacity.

 

Except as we indicatedabove, we are not subject to direct governmental regulation other than the lawsand regulations generally applicable to businesses in the jurisdictions inwhich we operate, including those governing the handling and disposal ofhazardous wastes and other environmental matters.  Our research and development activitiesinvolve the controlled use of small amounts of hazardous materials, chemicaland radioactive compounds.  Although webelieve that our safety procedures for handling and disposing of such materialscomply with applicable regulations, the risk of accidental contamination orinjury from these materials cannot be completely eliminated.  In the event of such an accident, we could beheld liable for resulting damages.  Thisliability could have a material adverse effect on us.

 

#### **Employees**

 

As of December 31,2004, we had 239 employees, of which 167 were in the U.S. and 72 were at ourother international operations. Except for employees at our manufacturingfacility in Belgium, none of our employees is represented by a labor union.

 

Employees of our Belgiansubsidiary, BioSource Europe S.A., are represented by two national unions whorepresent employee interests to the national chemistry industry employer organization.  Since we currently

 

10

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employ over 50 employeesat our Belgian facility, we are subject to union representation for safetycouncils. We consider our current Belgium subsidiary employee and laborrelations to be good.

 

We recognize theimportance of environmental responsibility and the need to provide a safe andhealthy workplace for our employees by complying with all federal, state, andlocal laws, rules, and regulations. During the past fiscal year, we havereceived no citations, notices of violations or other censures from publicagencies regulating environmental compliance or our employees’ health andsafety. We do not expect any significant capital expenditures to comply withenvironmental, health, or safety regulations in 2005. We believe that ourcurrent systems and processes are adequate for current needs.

 

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

#### ** **

#### **We donot own any real property.  Our principallocations, their purposes and the expiration dates for the leases on facilitiesat those locations are shown in the table below. We have renewal options onmany of our leases.**

 
| **Location**              | ** ** | **Purpose**                                  | ** ** | **Approximate  Square  Feet** | ** ** | **Lease  Expiration  Dates** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
|                      |       |                                         |       |                          |       |                         |       |
| Camarillo,  California *  |       | Principal offices and corporate headquarters |       | 52,000                        |       | 2010                         |       |
|                      |       |                                         |       |                          |       |                         |       |
| Nivelles,  Belgium        |       | Headquarters for European operations         |       | 40,000                        |       | 2007                         |       |
|                      |       |                                         |       |                          |       |                         |       |
| Rockville,  Maryland      |       | Serum and media operations                   |       | 15,000                        |       | 2009                         |       |
|                      |       |                                         |       |                          |       |                         |       |
| Hopkinton,  Massachusetts |       | Research and development                     |       | 10,000                        |       | 2007                         |       |
|                      |       |                                         |       |                          |       |                         |       |
| Foster City, CA           |       | Oligonucleotides operations                  |       | 7,000                         |       | 2006                         |       |

 

----

** In March 2005, we extended thelease expiration to 2010.*

* *

In addition, we leaseoffice and warehouse space ranging from 1,500 square feet to 4,000 square feetfor international sales and administrative offices located in the United Statesand Europe. We believe our facilities are generally adequate for our needs forthe foreseeable future and that we will be able to locate additional facilitiesas needed. In the fourth quarter of 2004, we sold our custom antibodies andpeptides business located in Hopkinton, Massachusetts.  As part of this transaction, we guaranteedthe facility lease obligations through its expiration in May 2006.

 

**ITEM 3.          LEGAL PROCEEDINGS**

** **

We are subject tolegal proceedings, claims, and litigation arising in the ordinary course ofbusiness.  Some of these matters areexpected to be covered, at least partly, by insurance. While the outcome ofthese matters is currently not determinable, we do not expect that the ultimatecosts to resolve these matters will materially affect our consolidatedfinancial statements.

 

#### **ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submittedto a vote of security holders during the fourth quarter of fiscal 2004.

 

11

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**EXECUTIVEOFFICERS**

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                      |
|------------------------|------------|---------|------------|---------------------------------------------------|
| Terrance J. Bieker     |       | 59      |       | President and Chief Executive Officer, Director   |
|                   |       |    |       |                                              |
| Alan I. Edrick         |       | 37      |       | Executive Vice President, Chief Financial Officer |
|                   |       |    |       |                                              |
| Kevin J. Reagan, Ph.D. |       | 53      |       | Executive Vice President, Technical Operations    |

 

Terrance J. Bieker,President and Chief Executive Officer, has served as a director and thePresident and Chief Executive Officer since November 1, 2003.  From April 2003 to October 2003, Mr. Biekerserved as Chief Executive Officer of Axya Medical, Inc. a medical devicecompany engaged in the development and sales of orthopedic surgicaldevices.  From 2000 through 2002, Mr.Bieker served as President and Chief Executive Officer of MedSafe, Inc. amedical regulatory consulting company. Mr. Bieker was President and CEO of Transufsion TechnologiesCorporation, a medical device company from 1999 to 2000.  From 1997 to 1999, Mr. Bieker served asExecutive Vice President and Chief Operating Officer of Safeskin Corporation, amanufacturer of disposable gloveware. From 1989 to 1997, Mr. Bieker served as Chairman, CEO and President ofSanofi Diagnostics Pasteur, Inc., a clinical diagnostic division of Sanofi, SA,a French pharmaceutical and healthcare company. Prior to these appointments, Mr. Bieker served as General Manager ofGenetic Systems Corporation.  His earlycareer was with various divisions of American Hospital Supply Corporation.  Mr. Bieker holds a B.S. degree in Economicsfrom the University of Minnesota.

 

Alan I Edrick joined BioSource in May 2004 as Executive Vice Presidentand Chief Financial Officer.  Priorthereto, from 1998 to February 2004, Mr. Edrick served as Senior Vice Presidentand Chief Financial Officer at North American Scientific, Inc., a leadingmedical device and specialty pharmaceutical company.  From 1989 to 1998, Mr. Edrick worked at PriceWaterhouse LLP in various positions, including Senior Manager, Capital Markets.  Mr. Edrick received his B.A. degree from UCLAand an M.B.A. from the Anderson School at UCLA.

 

Kevin J. Reagan, Ph.D. became Executive Vice President of TechnicalOperations in February of 2004 and was Vice President, Immunology from December1996 through January 2004.  From 1991 toDecember 1996, Dr. Reagan served as the first Director of DevelopmentLaboratories and then Vice President, Laboratory Operations at SpecialtyLaboratories, Inc., a clinical reference lab. From 1990 to 1991, Dr. Reagan wasthe Associate Director of AIDS/Hepatitis R&D at Ortho Diagnostics, Inc., aJohnson & Johnson Company.  Dr.Reagan received his Bachelor of Arts in Biological Sciences from the Universityof Delaware.  Dr. Reagan received bothhis Masters and Ph.D. degrees in Microbiology and Immunology from HahnemannMedical College.

 

12

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**PART II**

 
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|

 

Our common stock istraded on the Nasdaq National Market under the symbol “BIOI.”  The following table sets forth, for theperiods indicated, the high and low closing sales price per share of our commonstock as reported on the Nasdaq National Market.

 
| ** **                    | ** ** | **High** | ** ** | **Low** |
|-------------------------------|------------|----------|------------|---------|
| Year Ended December 31,  2004 |       |     |       |    |
| First  Quarter                |       | $        | 8.09       |    | $ | 6.40 |
| Second Quarter                |       | 8.50     |       | 6.91    |
| Third  Quarter                |       | 7.50     |       | 6.06    |
| Fourth  Quarter               |       | 7.19     |       | 5.61    |
|                          |       |     |       |    |
| Year Ended December 31,  2003 |       |     |       |    |
| First  Quarter                |       | $        | 6.95       |    | $ | 5.83 |
| Second  Quarter               |       | 6.92     |       | 5.00    |
| Third  Quarter                |       | 7.97     |       | 6.15    |
| Fourth  Quarter               |       | 7.87     |       | 6.33    |

 

On March 14, 2005, theclosing sale price of our common stock on the Nasdaq National Market was$6.62.  As of March 14, 2005, there were309 holders of record of our common stock.

 

***Dividends***

*** ***

Wehave never paid cash dividends on our common stock and do not currentlyanticipate that we will do so in the foreseeable future. We currentlyanticipate that we will retain all future earnings for use in our business andfor repurchases of stock under our stock repurchase program.  Any determination to pay dividends in thefuture will be at the discretion of our Board of Directors and will depend uponour results of operations, financial condition, tax laws and other factors asthe Board of Directors, in its discretion, deems relevant.

 

***Repurchases of Equity Securities by the Issuer and AffiliatedPurchasers***

*** ***

The table belowsets forth certain information regarding our repurchases of our common stockduring the fourth quarter of 2004:

 
| **Period**               | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs(1)** | ** ** | **Aggregate Dollar Value  of Shares that  may yet be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
|                     |       |                                             |       |                                         |       |                                                                                                                                    |       |                                                                                                                                   |       |
| 10/1/04 –  10/31/04 |       | 4,450                                            |       | $                                            | 6.12       |                                                                                                                                    | 4,450      |                                                                                                                                   | $          | 7,525,172 |   |
| 11/1/04 –  11/30/04 |       | 168,440                                          |       | $                                            | 6.42       |                                                                                                                                    | 168,440    |                                                                                                                                   | $          | 6,451,453 |   |
| 12/1/04 –  12/31/04 |       | 71,450                                           |       | $                                            | 6.56       |                                                                                                                                    | 71,450     |                                                                                                                                   | $          | 5,986,128 |   |
|                     |       |                                             |       |                                         |       |                                                                                                                                    |       |                                                                                                                                   |       |
| Total                    |       | 244,340                                          |       | $                                            | 6.46       |                                                                                                                                    | 244,340    |                                                                                                                                   |       |   |

 

----

(1)               Theserepurchases were made pursuant to a repurchase program for up to $10 million ofour common stock which we announced on July 27, 2004. There is no expirationdate for this program.

 

***Equity Compensation Plan Information***

*** ***

Thefollowing table summarizes information as of December 31, 2004 relating to theshares of our common stock that may be issued under existing equitycompensation plans. The category “Equity compensation plans approved bysecurity holders” in the table below consists of the 1993 Stock Incentive Plan,the 2000 Non-Qualified Stock Option Plan and the Employee Stock Purchase Plan.

 

13

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| **Plan Category**                                          | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(a)**                                                                                                                               | ** ** | **(b)**                                                                                      | ** ** | **(c****)**                                                                                                                                                        |       |
| Equity compensation plans approved by security holders     |       | 345,224                                                                                                                               |       | $                                                                                            | 5.54       |                                                                                                                                                               | —     |   |
| Equity compensation plans not approved by security holders |       | 3,018,524                                                                                                                             | (1)        | $                                                                                            | 7.92       |                                                                                                                                                               | 203,570    |   |
|                                                       |       |                                                                                                                                  |       |                                                                                         |       |                                                                                                                                                               |       |
| Total                                                      |       | 3,363,748                                                                                                                             |       | $                                                                                            | 8.09       |                                                                                                                                                               | 203,570    |   |

 

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(1)     Includes1,287,000 warrants pursuant to a securities purchase agreement dated January10, 2000 as amended, with Genstar Capital Partners II L.P. and StargenLLC.  These warrants expire in February2007.

 

*The1993 Stock Incentive Plan*

* *

The 1993 StockIncentive Plan (the “1993 Plan”) was approved by the Board of Directors andexpired on December 31, 2003. As of December 31, 2004, options covering 345,224shares of common stock were outstanding under the 1993 Plan.

 

*The2000 Non-Qualified Stock Option Plan*

* *

The 2000Non-Qualified Stock Option Plan (the “2000 Plan”) is a non-shareholder approvedplan that was approved by the Board of Directors in 2000. The Board ofDirectors has authorized 2,000,000 shares of common stock for issuance underthe 2000 Plan. Options are generally granted with an exercise price per shareequal to the fair market value at the date of grant. Each option may be subjectto vesting. As of December 31, 2004, options covering 1,731,524 shares ofcommon stock were outstanding under the 2000 Plan, 203,570 shares remainedavailable for future option grants and options covering 64,906 shares had beenexercised.

 

#### **ITEM 6.          SELECTED CONSOLIDATED FINANCIAL DATA**

#### ** **

#### **Thefollowing tables show BioSource’s selected consolidated financial informationfor the past five fiscal years. The comparability of the information isaffected by a variety of factors, including the adoption of new accountingprinciples, a divestiture of one of our businesses and repurchases under ourstock repurchase programs.**

#### ** **

Effective January 1,2002, we adopted Statement of Financial Accounting Standards, or SFAS,No. 142, *“Goodwill and Other IntangibleAssets,”*on January 1, 2002 and stopped amortizing goodwill onthat date.   We recognized a $2.5 millioncharge, net of applicable income taxes, representing the cumulative effect of achange in accounting principle resulting from the adoption of thisstandard.  Fiscal years prior to 2002reflect significant goodwill amortization charges.

 

#### **In2004 we sold our custom antibody and peptides business. We accounted for thesale of this business as discontinued operations and, accordingly, we havereclassified the selected financial data for all periods prior to the sale toreflect the custom antibodies and peptides business as discontinued operations.To better understand the information in the tables, investors should read *“Management’s Discussion and Analysis of FinancialCondition and Results of Operations”* and the Consolidated FinancialStatements and related Notes included elsewhere in this Annual Report on Form10-K.**

 

14

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| ** **                                                                          | ** ** | **Years ended December 31,**              | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                          | ** ** | **(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                                                                 |       | 20,315                                    |       | 19,058 |   | 15,325 |   | 12,308 |   | 10,987 |   |
| Gross profit                                                                        |       | 24,067                                    |       | 22,201 |   | 21,711 |   | 19,818 |   | 18,412 |   |
| 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                                                           |       | 5,785                                     |       | 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                                                           |       | 23,343                                    |       | 23,545 |   | 20,418 |   | 18,768 |   | 19,005 |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                                           |       | 723                                       |       | (1,344 | ) | 1,293 |   | 1,050 |   | (593 | ) |
| Interest and  other income (expense), net                                           |       | 77                                        |       | (76 | ) | 123 |   | 460 |   | 72 |   |
| Income (loss)  from continuing operations before income taxes and other items       |       | 800                                       |       | (1,420 | ) | 1,416 |   | 1,510 |   | (521 | ) |
| Provision  (benefit) for income taxes                                               |       | 404                                       |       | (670 | ) | 15 |   | 265 |   | (486 | ) |
| Income (loss)  before redeemable preferred stock dividend and beneficial conversion |       | 396                                       |       | (750 | ) | 1,401 |   | 1,245 |   | (35 | ) |
| Redeemable  preferred stock dividend and accretion of beneficial conversion feature |       | —                                    |       | — |   | — |   | — |   | (3,853 | ) |
| Income (loss)  from continuing operations before other items                        |       | 396                                       |       | (750 | ) | 1,401 |   | 1,245 |   | (3,888 | ) |
| Discontinued  operations, net                                                       |       | (811                                      | )          | (320 | ) | (6 | ) | (504 | ) | (131 | ) |
| Cumulative  effect of accounting change, net                                        |       | —                                    |       | — |   | (2,447 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) available to common shareholders                                 |       | $                                         | (415       | ) | $ | (1,070 | ) | $ | (1,052 | ) | $ | 741 |   | $ | (4,019 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                                           |       | $                                         | .04        |   | $ | (.08 | ) | $ | 0.14 |   | $ | .12 |   | $ | — |   |
| Discontinued  operations, net                                                       |       | (.08                                      | )          | (.03 | ) | — |   | (.05 | ) | (.02 | ) |
| Accretion of  beneficial conversion feature                                         |       | —                                    |       | — |   | — |   | — |   | (.45 | ) |
| Cumulative  effect of accounting change, net                                        |       | —                                    |       | — |   | (0.25 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share                                                    |       | $                                         | (.04       | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | .07 |   | $ | (.47 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share                                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                                           |       | $                                         | .04        |   | $ | (.08 | ) | $ | 0.14 |   | $ | .12 |   | $ | — |   |
| Discontinued  operations, net                                                       |       | (.08                                      | )          | (.03 | ) | — |   | (.05 | ) | (.02 | ) |
| Accretion of  beneficial conversion feature                                         |       | —                                    |       | — |   | — |   | — |   | (.45 | ) |
| Cumulative  effect of accounting change, net                                        |       | —                                    |       | — |   | (0.24 | ) | — |   | — |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share                                                  |       | $                                         | (.04       | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | .07 |   | $ | (.47 | ) |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Shares used to  compute per share amounts:                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                               |       | 9,325                                     |       | 9,403 |   | 9,787 |   | 10,398 |   | 8,584 |   |
|                                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted                                                                             |       | 9,585                                     |       | 9,403 |   | 10,189 |   | 10,965 |   | 8,584 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                            | ** ** | **(in thousands)**     | ** ** |
|                                  |       |                   |       |   |   |   |   |   |   |   |   |
| **Consolidated  Balance Sheet Data:** |       |                   |       |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                      | 15,221     |   | $ | 15,663 |   | $ | 16,596 |   | $ | 19,000 |   | $ | 20,102 |   |
| Total assets                          |       | 43,352                 |       | 44,333 |   | 46,506 |   | 49,841 |   | 50,364 |   |
| Current  liabilities                  |       | 7,121                  |       | 6,031 |   | 6,793 |   | 5,963 |   | 6,318 |   |
| Long-term debt,  less current portion |       | —                 |       | — |   | — |   | — |   | — |   |
| Total  stockholders’ equity      |       | 36,231                 |       | 38,302 |   | 39,713 |   | 43,878 |   | 44,046 |   |
|                                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

15

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

** **

We begin our Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) with a discussion of the Critical Accounting Policies that webelieve are important to understanding the assumptions and judgments underlyingour financial statements.  This isfollowed by an overview of our business, a discussion of our Results of Operationsthat begins with an overview followed by a more detailed discussion of our netsales and expenses.  We then provide ananalysis of our Liquidity and Capital Resources with a discussion of keyaspects of our cash flows, changes in certain balance sheet items and ourfinancial commitments. You should also note that this MD&A discussioncontains forward-looking statements that involve risks and uncertainties.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 should read thisMD&A in conjunction with the Consolidated Financial Statements and relatedNotes. As discussed below, we sold our custom antibodies and peptides businessin 2004 and accounted for the sale of this business as discontinued operations.Accordingly, we have reclassified our financial statements for all periodsprior to the sale to reflect this business as discontinued operations. Unlessotherwise noted, the following discussion pertains only to our continuingoperations.

 

**CriticalAccounting 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.

 

*RevenueRecognition*

* *

We apply the provisionsof SEC Staff Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104),which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition,in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules and regulations.In accordance with SAB No. 104 and 101, the Company recognizes revenue relatedto product sales when (i) persuasive evidence of an arrangement exists, (ii)delivery has occurred, (iii) the price is fixed or determinable, and (iv)collectibility is reasonably assured.

 

*Allowancefor Doubtful Accounts*

* *

Wemake ongoing assumptions relating to the collectibility of our accountsreceivable. The accounts receivable amount on our balance sheet includes areserve for accounts that might not be paid. In determining the amount of thereserve, we consider our historical level of credit losses and the aging of theaccounts receivable. We also make judgments about the collectibility ofcustomer accounts based on ongoing evaluations. Our reserves have generallybeen adequate to cover our actual credit losses. However, since we cannotreliably predict future changes in the financial stability of our customers, wecannot guarantee that our reserves will continue to be adequate. If actualcredit losses are significantly greater than the reserve we have established,that would increase our general and administrative expenses and reduce ourreported net income. Conversely, if actual credit losses are significantly lessthan our reserve, this would eventually decrease our general and administrativeexpenses and increase our reported net income.

 

16

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*Allowances for Inventory*

* *

Wereview the components of our inventory on a regular basis forexcess, obsolete, slow moving and impaired inventory based on age,estimated future usage and sales. In particular, the manufacturing process forantibodies has and may continue to produce quantities substantially in excessof forecasted usage. Anticipated antibody sales volumes are highlyuncertain and realization of individual product costmay not occur. As a result, we reserve our manufactured antibodyinventory at 100% of its cost. As of December 31, 2004, we had $4.4 millionof manufactured antibodies in our inventory which were fullyreserved.  We will continueto monitor our antibody inventory and the continued needfor this reserve percentage.  Additionally, material inventorywrite-downs can occur if competitive conditions or sales forecasts vary fromour current expectations or if we discontinue products.

 

*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.

 

*Accountingfor Stock-Based Incentive 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 forStock Issued 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, *“Accounting for 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.

 

*IncomeTaxes – Estimates of Effective Tax Rates, Deferred Taxes and ValuationAllowance*

* *

When we prepare ourconsolidated financial statements, we estimate our income taxes based on thevarious jurisdictions where we conduct business. Significant judgment isrequired in determining our worldwide income tax provision. We recognizeliabilities for anticipated tax audit issues in the United States and other taxjurisdictions based on our estimate of whether, and the extent to which,additional taxes will be due. We record an additional amount in our provisionfor income taxes in the period in which we determine that our recorded taxliability is less than we expect the ultimate tax assessment to be. If in alater period we determine that payment of this additional amount isunnecessary, we reverse the liability and recognize a tax benefit in that laterperiod. As a result, our ongoing assessments of the probable outcomes of theaudit issues and related tax positions require judgment and can materiallyincrease or decrease our effective tax rate as well as impact our operatingresults. This also requires us to estimate our current tax exposure and toassess temporary differences that result from differing treatments of certainitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which we show on our consolidated balance sheet. Wemust then assess the likelihood that our deferred tax assets will be realized.To the extent we believe that realization is not likely, we establish avaluation allowance. When we establish a valuation allowance or increase thisallowance in an accounting period, we record a corresponding tax expense on ourstatement of operations.

 

Our net deferred taxasset at December 31, 2004 was $11.8 million, net of the valuationallowance of $0.1 million. We recorded the valuation allowance to reflectuncertainties about whether we will be able to utilize some of our deferred taxassets (consisting primarily of certain capital loss carryforwards) before theyexpire. The valuation allowance is based on our estimates of taxable income forthe jurisdictions in which we operate and the period over which our deferredtax assets will be realizable. While we have considered future taxable incomein assessing the need for the valuation allowance, we could be required toincrease the valuation allowance to take into account additional deferred taxassets that we may be unable to realize. An increase in the valuation allowancewould have an adverse impact, which could be material, on our income taxprovision and net income in the period in which we make the increase.

 

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*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 isrecorded promptly in our consolidated financial statements. Although theoutcome of these claims cannot be predicted with certainty, we do not believethat any of the existing legal matters will have a material adverse effect onour financial condition or results of operations.

 

**Business Overview**

** **

Wemanufacture, market and distribute products used worldwide for understandingdisease and developing new drug therapies and medical diagnostics. Our productsenable biomedical researchers to better understand disease processes as well asthe biochemistry, immunology and cell biology of the human body. We offer awide variety of products that are grouped into the following three categories:Assays (test kits); Biologicals (antibodies and bioactive proteins) and Other(serum, media, oligonucleotides and 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.

 

Ourstrategy focuses on our core strengths of producing assay products.  These assay products generally are highermargin products and are focused on gaining 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 andannual basis 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 experienced revenue growthin recent years, there is no assurance that we will be able to sustain suchgrowth or report profits on a quarterly basis.

 

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**Results of Operations**

** **

**Net Sales**

** **

**The table below and the discussion that follows are basedupon the way we analyze our product groups. Prior to the second quarter of2004, we analyzed our business based on three strategic business units,Cytokines, Signal Transduction and Custom. In the second quarter of 2004, werevised our internal management reporting systems to be consistent with ourstrategy of focusing on assays, biologicals and other product lines.  See Note 10 to the financial statements foradditional 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 | % |

 

*2004compared with 2003. *Netsales increased $3.1 million, or 8%, to $44.4 million for the year endedDecember 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 assays as a percentage of our total sales.  Biologicals and other products salesincreased at a more modest rate.

 

*2003compared with 2002. *Netsales increased $4.3 million, or 12%, to $41.3 million for the year endedDecember 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 as a percentage of our totalsales.  Other products sales increased ata more modest rate.

* *

**GrossProfit**

** **

*2004compared with 2003.* Gross profit increased$1.9 million, or 8%, to $24.1 million for the year ended December 31, 2004 from$22.2 million for the year ended December 31, 2003.  Our gross profit as a percent of sales of 54%in 2004 was consistent with that of 2003.

 

*2003compared with 2002.* Our gross margin was54% 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 as well as toa significant increase in our inventory reserves.  With our focus increasingly directed on assaykits and the related biological product lines, over 400 non-strategic productswere discontinued in 2003 and as a result, we recorded an inventory write-downof approximately $1.3 million in the fourth quarter of 2003.

* *

**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     | %          | $                    |  9.6  |                    | 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                  | %          | —   |       | —               |       | n/a                     |       | n/a                     |       |
| 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. **Salesand marketing expenses as a percentage of sales was relatively consistent in2004 compared with 2003 and in 2003 compared with 2002.  The increase in dollars was primarilyattributable to increased personnel costs associated with additional headcountand associated travel costs.

 

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**Generaland administrative expenses.**  General and administrative expenses increasedmodestly as a percentage of net sales in 2004 compared with 2003 and in 2003compared with 2002.

 

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

 

*2003compared 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, other severance and accounting fees which were partially offset bya decrease in certain benefit and incentive costs.

 

**Research and development**.  Research and development (“R&D”) expensesdecreased $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 comparable 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.  **Amortizationof intangible assets was $0.6 million for the year ended December 31, 2004which was consistent with the comparable 2003 and 2002 periods.

 

*Non-Operating Income and Expenses*

* *

**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 $(1.4) million.

** **

**Discontinuedoperations. **InDecember 2004 we sold our wholly owned subsidiaries, Quality ControlledBiochemicals, Inc. and Javelle, Inc., and accounted for the sale asdiscontinued operations. In accordance with SFAS 144, we have segregated theoperating results of this business from continuing operations on our statementof operations for all periods prior to the sale. We recorded a net loss fromdiscontinued operations of $0.8 million in the fourth quarter of fiscal 2004.See Note 3 to the consolidated financial statements.

 

**Cumulative effect of accountingchange.**  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 adopted FAS No.142 and as such we recognized 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.

 

**Quarterly Results**

 

Thefollowing table sets forth summarized quarterly financial data for the yearsended December 31, 2003 and 2004 and, in management’s opinion, includes allnormal recurring adjustments necessary to present fairly the information foreach of the interim periods below.

 

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| ** **                                                    | ** ** | **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 | ) |
|                                                          |       |               |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 | ) |

 

**Liquidity and 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 balance sheets andcash flows, and contractual commitments on our liquidity and capital resources.

 

**Balance Sheet and Cash Flows**

 

*Cash and cash equivalents*. At December 31, 2004, we had cash and cash equivalents aggregating approximately$4.2 million, an increase of approximately $0.9 million from $3.3 million at December 31,2003. The increase was primarily a result of (a)(i) 2004 operating cash flow of$4.7 million (ii) proceeds of $1.4 million from the exercise of stock options and(iii) cash provided by discontinued operations of $0.3 million partially offsetby (b)(i) 2004 capital expenditures of $1.6 million and (ii) stock repurchasesof $4.0 million.

 

Weexpect that cash may fluctuate in future periods as a result of a number offactors, including fluctuations in our operating results, working capitalmanagement, research and development expenses, capital expenditures, stockrepurchases and acquisitions.

 

Duringthe year ended December 31, 2004, we received $1.4 million from theexercise of stock options.  Proceeds from the exercise of stock optionswill vary from period to period based upon, among other factors, fluctuationsin the market value of our stock relative to the exercise price of suchoptions.

 

*Accounts receivable.* Accounts receivable increased approximately $0.9 million to $7.2 million at December 31,2004, from $6.3 million at December 31, 2003.  The increase isprimarily attributable to increased sales in the final two months of 2004compared to the final two months of 2003.

 

*Notes receivable.*  Notes receivable relate to the sale of ourcustom antibodies and peptides business. The sales price consisted of cash, a bridge loan note and a workingcapital note.  See Note 3 to thefinancial statements.

 

*Inventories, net.*  Net inventories decreased approximately $1.6million to $7.5 million at December 31, 2004, from $9.1 million at December 31,2003.  The decrease is consistent withour goal of reducing the number of day’s inventory on hand.

 

*Accounts payable and accrued expenses*.  Accounts payable and accrued expenses increased approximately $0.6million to $6.2 million as of December 31, 2004 from $5.7 million at December 31,2003. The increase was primarily a result of accrued severance and otherpayroll related expenses.

 

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**Stock Repurchase Program**

 

InJuly 2004, we adopted a new stock repurchase program under which we canrepurchase up to $10 million of our common stock.  Our previous stock repurchase program expiredin June 2004.  During the six monthsended June 30, 2004, we did not repurchase any shares of our commonstock.  Under the new program, werepurchased approximately 635,000 shares for an aggregate purchase price of$4.0 million in 2004.

 

**Other**

 

Wehave never paid 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.

 

**Contractual Obligations**

 

Wehave operating lease obligations for facilities and equipment undernon-cancelable operating lease agreements. Future minimum lease payments aresubject to annual adjustment 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 our Hopkinton custommanufacturing operations.  As part ofthis transition, we guaranteed the real estate lease obligations through itsexpiration in May 2006.

 

***Recent AccountingPronouncements***

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R), which requirescompanies to measure and recognize compensation expense for all stock-basedpayments at fair value. Stock-based payments include stock option grants andcertain transactions under other Company stock plans. SFAS 123R is effectivefor all interim or annual periods beginning after June 15, 2005. We arecurrently evaluating the impact that the adoption of SFAS 123R will have on ourconsolidated results of operations, financial position and cash flows.

 

In November 2004, FASB issued SFAS No.151, “Inventory Costs, anamendment of ARB 43, Chapter 4,”(SFAS 151) which amends the guidance in ARB No.43, Chapter 4, “Inventory Pricing.” This Statement is the result of a broadereffort by the FASB working with the International Accounting Standards Board toreduce differences between U.S. and international accounting standards. SFAS151eliminates the “so abnormal” criterion in ARB No. 43 and companies will nolonger be permitted to capitalize inventory costs on their balance sheets whenthe production defect rate varies significantly from the expected rate. It alsomakes clear that fixed overhead should be allocated based on “normal capacity.”The provisions of this Statement are effective for inventory costs incurredduring our fiscal year 2006. We are currently analyzing this statement and havenot yet determined its impact on our consolidated financial statements.

 

**Foreign Currency**

 

Changesin foreign currency exchange rates can affect our reported results ofoperations, 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 will affect 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 $44.4million using applicable

 

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foreigncurrency exchange rates for that period. However, applying the foreign currency exchange rates in effect duringthe year ended December 31, 2003, to our non-U.S. sales for the sameperiod in 2004 would result in $1.6 million less revenue for the 2004period.  These changes in currencyexchange rate have affected, and will continue to affect, our reported results,including our sales, sales growth rates, gross margins and income or losses aswell as assets and liabilities.

 

**RISK FACTORS**

** **

Youshould carefully consider the following risk factors and all other informationcontained in this report which are incorporated herein by reference beforepurchasing shares of our common stock. Investing in our common stock involves ahigh degree of risk.  If any of thefollowing events or outcomes occurs, our business, operating results and financialcondition could suffer.  The risksdescribed below are not the only ones we face. Additional risks not precisely known to us or that we currently deemimmaterial may also adversely affect our business.

 

**Risks Related to Our Business**

 

**Failure to execute on our long-term strategicplan could impair our business.**

 

We historically have sought to increaseour sales and profitability primarily through the acquisition or internaldevelopment of new product lines, additional customers and new businesses.  Our historical sales growth is primarilyattributable to our acquisitions and new product development and, to a lesserextent, to increased sales from our existing products.  In the fourth quarter ended December 31,2003, we adopted a fundamental shift in strategy to focus our time, effort andfinancial resources on our core strengths producing assay products.  We have built a strategic plan to continue topenetrate and increase our market share in the assay market.  This strategy focuses our energies on thesehigh margin products and allows us to simultaneously cross-market ourcomplimentary product lines.  However, byfocusing 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 to achieve our strategicobjectives depends upon a variety of factors, including:

 

•                  themarket’s continuing acceptance of our assay products;

•                  ourability to internally develop new products;

•                  ourability to acquire products or licenses to necessary technologies;

•                  ourability to facilitate transactions with strategic partners;

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

•                  availabilityof capital.

 

Additionally, our shift in strategy caused us to evaluate othernon-strategic products and to discontinue certain products we offered in thepast. We expect to review our products on an ongoing basis.  While the impact to our financial resultsfrom our continuing evaluation of products is unknown at this time, futureproduct discontinuances would likely adversely affect our operating results.

 

If we are unable to manage this strategic shift effectively, our operatingresults could be adversely affected. Moreover, there can be no assurance that our historic rate of growthwill continue through this strategic shift, that we will continue tosuccessfully expand or that growth or expansion will result in profitability.

 

**Reduction or delays in research and developmentbudgets and in government funding may negatively impact our sales.  Industry consolidation also could adverselyaffect our business.**

 

Ourcustomers include researchers at pharmaceutical and biotechnology companies,academic institutions and government and private laboratories.  Fluctuations in the research and developmentbudgets of these researchers and their organizations could have a significanteffect on the demand for our products. Research and development budgets fluctuate due to numerous factors thatare outside of our control and are difficult to predict, including changes inavailable resources, spending priorities and institutional budgetarypolicies.  Our business could beseriously damaged by any significant decrease in life sciences research anddevelopment expenditures by pharmaceutical and biotechnology companies,academic institutions or government and private laboratories.

 

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Asignificant portion of our sales has been to researchers, universities,government laboratories and private foundations whose funding is dependent upongrants from government agencies such as the U.S. National Institutes of Health(NIH) and similar domestic and international agencies. Government funding ofresearch and development is subject to the political process, which isinherently fluid and unpredictable.  Oursales may be adversely affected if our customers delay purchases as a result ofuncertainties surrounding the approval of government 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 governmentfunding for the NIH or other government research agencies could seriouslydamage our business.

 

Manyof our customers receive funds from approved grants at particular times of theyear, as determined by the federal government. Grants have, in the past, been frozen for extended periods or haveotherwise become unavailable to various institutions without advancenotice.  The timing of the receipt ofgrant funds affects the timing of purchase decisions by our customers and, as aresult, can cause fluctuations in our sales and operating results.

 

Inrecent years, the pharmaceutical industry has undergone substantial downsizingand consolidation.  This could have anadverse effect on the ability of some of our existing customers to compete withlarger companies in part because competition for funding may become morecentralized and fierce because higher stakes are involved.  Additional mergers or corporateconsolidations in the pharmaceutical industry could cause us to lose existingcustomers and potential future customers, which could have a harmful effect onour business, financial condition and results of operations.

 

**We rely on raw materials and specialized equipmentfor our manufacturing, which we may not always be able to obtain on favorableterms.**

 

Ourmanufacturing process relies on the continued availability of high-quality rawmaterials, including biological materials, and specialized equipment.  It is possible that a change in vendors, orin the quality or price of the raw materials supplied to us, could have anadverse impact on our manufacturing process and, ultimately, on the sale of ourfinished products.  We have from time totime experienced a disruption in the quality or availability of key rawmaterials, which has created delays in our ability to fill orders for specifictest kits.  This could occur again in thefuture and could have a detrimental impact on the sale of our products and ourresults of operations.  For example, thesupply of raw fetal bovine serum (“FBS”) is sometimes limited because serumcollection tends to be cyclical.  Thesefactors can cause the price of raw FBS to fluctuate.  The profit margins we achieve on finishedFBS, one of our major products, have been unstable in the past because of thefluctuations in the price of raw FBS, and any increase in the price couldadversely affect those profit margins. In addition, if we are unable to obtain an adequate supply of FBS, wemay lose market share. The availability and price of certain raw materials maybe affected by scares or outbreaks of disease or similar health concerns, orperceptions about the materials’ safety, governmental regulation and traderestrictions.  In addition, we rely onhighly specialized manufacturing equipment that if damaged or disabled couldadversely affect our ability to manufacture our products and thereforenegatively impact our business.

 

**Our research and development efforts for newproducts may be unsuccessful.**

 

Weincur significant 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 be no assurance that any of theseproducts or technologies will be successfully developed or that, if developed,will be commercially successful.  In theevent that we are unable to develop commercialized products from our researchand development efforts or we are unable or unwilling to allocate amountsbeyond our currently anticipated research and development investment, we couldlose our entire investment in these new products and technologies.  Any failure to translate research anddevelopment expenditures into successful new product introductions could havean adverse effect on our business.

 

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**Our loss of existing licenses or failure tolicense new technologies could impair our new product development.**

 

Ourbusiness model of providing products to researchers working on a variety ofscientific disciplines requires us to develop a wide spectrum of products.  To generate broad product lines it isadvantageous to sometimes license technologies from others rather than relyingexclusively on our own internal development efforts.  As a result, we believe our ability tolicense new technologies from third parties is and will continue to beimportant to our ability to offer new products.

 

Inaddition, from time to time we are notified or become aware of patents held bythird parties that are related to technologies we are selling or may sell inthe future.  After a review of thesepatents, we may decide to obtain a license for these technologies from thesethird parties or discontinue the products. There can be no assurance that we will be able to continue tosuccessfully identify new technologies developed by others.  Even if we are able to identify newtechnologies of interest, we may not be able to negotiate a license onfavorable terms, or at all.  If we losethe rights to patented technology or fail to license technologies important toour new product development, we may need to discontinue selling certainproducts or redesign our products, and we may lose a competitiveadvantage.  Competitors could in-licensetechnologies that we fail to license and potentially erode our market share forcertain products.  Our licenses typicallysubject us to various commercialization, sublicensing, minimum payment, andother obligations.  If we fail to complywith these requirements, we could lose important rights under a license, suchas the right to exclusivity in a certain market, or we could lose all rightsunder a license.  In addition, certainrights granted under the license could be lost for reasons outside of ourcontrol.  For example, the licensor couldlose patent protection for a number of reasons, including invalidity of thelicensed patent.  We do not alwaysreceive significant indemnification from a licensor against third party claimsof intellectual property infringement.

 

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

 

Rapidtechnological change and frequent new product introductions are typical for themarkets we serve.  Our future successwill depend in part on continuous, timely development and introduction of newproducts that address evolving market 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.  Anyinability, for technological or other reasons, to successfully develop andintroduce new products could reduce our growth rate or damage our business.

 

Inthe past we have experienced, and are likely to experience in the future,delays in the development and introduction of products.  We cannot assure that we will keep pace withthe rapid rate of change in life sciences research or that our new productswill adequately meet the requirements of the marketplace or achieve marketacceptance.  Some of the factors affectingmarket acceptance of new products include:

 

•                  availability,quality and price relative to competitive products;

•                  thetiming of introduction of the product relative to competitive products;

•                  customers’opinion of the product’s utility;

•                  easeof use;

•                  consistencywith prior practices;

•                  citationof the product in published research; and

•                  generaltrends in life sciences research.

 

Thedevelopment, introduction and marketing of innovative products in our rapidlyevolving markets will require significant sustained investment.  We cannot assure you that cash fromoperations or other sources will be sufficient to meet these ongoingrequirements.

 

Theexpenses or losses associated with unsuccessful product development activitiesor lack of market acceptance of our new products could materially and adverselyaffect our business, operating results and financial condition.

 

**Failure to attract and retain qualified scientificor production personnel or loss of key management or key personnel couldadversely affect our business.**

 

Recruitingand retaining qualified scientific and production personnel to perform researchand development work and product manufacturing are critical to oursuccess.  We are in a very competitiveindustry and face significant challenges attracting and retaining thisqualified personnel base.  Although webelieve we have been and will be

 

25

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ableto attract and retain these personnel, there can be no assurance that we willbe able to continue to successfully attract and retain qualifiedpersonnel.  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, some measures that we implementduring the course of integrating acquired companies and businesses into ouroperations may be disruptive to some of our key personnel, including those inresearch and development, and cause them to leave us.  The failure to attract and retain thesepersonnel or, alternatively, to develop this expertise internally couldadversely affect our business.

 

Oursuccess also will continue to depend to a significant extent on the members ofour senior management team and other key personnel.  We do not maintain “key man” insurancepolicies regarding any of these individuals. We may not be able to retain the services of our executive officers andkey personnel or attract additional qualified members to management in thefuture.  The loss of services of our keymanagement or employees could have a material adverse effect upon our business.

 

**Some of our customers are obtaining productsthrough alternative distribution channels and methods that may adversely impactour results of operations and financial condition.**

 

Certainof our customers have developed purchasing initiatives to reduce their numberof vendors and to lower their supply costs. In some cases, these customers have established agreements with largedistributors who provide volume discounts and in-house purchasing processes andpersonnel.  These agreements may limitthe prices we can charge for our products, which could adversely impact ourbusiness, financial condition and results of operations.  In addition, although we accept and processsome orders through our internet website, we also implement sales through thirdparty internet vendors.  Internet salesthrough third parties will negatively impact our operating income because wepay commission on these sales.  However,if we do not enter into arrangements with third party e-commerce providers, wemay lose customers who prefer to purchase using that method.  Our business may be harmed as a result ofthese web sites or other sales methods which may be developed in the future.

 

**We rely on rapid transport to ship product.**

 

Werely on the timely transport of raw materials and finished products.  Any disruption in rapid transportationsystems could have an adverse impact on our ability to manufacture and supplyproducts and could accordingly have an adverse effect on our business.

 

**We rely on international sales, which are subjectto additional risks, including foreign currency risk.**

 

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

 

•                  unexpectedchanges in regulatory requirements and tariffs;

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

•                  longeraccounts receivable collection cycles in certain foreign countries;

•                  adverseeconomic or political changes;

•                  limitedprotection for intellectual property in some countries;

•                  foreigncurrencies we receive for sales outside the U.S. could be subject tounfavorable exchange rates with the U.S. dollar and reduce the amount ofrevenue we recognize;

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

•                  problemsin collecting accounts receivable; and

•                  potentiallyadverse tax consequences of overlapping tax structures.

 

**Our ability to distribute goods internationallycould be impaired by governmental regulation and loss of key distributors ofour products.**

 

Wegenerate significant revenues from sales outside the United States.  International distribution may be subject togreater governmental regulation in the future. These regulations, which include requirements for approvals or

 

26

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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 maynot be able to obtain regulatory approvals in the countries in which wecurrently sell our products or in countries where we may sell our products inthe future.  In addition, we may berequired to incur significant costs in obtaining necessary regulatoryapprovals.  Failure to obtain necessaryregulatory approvals or any other failure to comply with regulatoryrequirements could result in a material reduction in our revenues and earnings.

 

Wealso depend on third-party distributors for a significant portion of ourinternational sales.  If we suffer asignificant reduction in sales to certain distributors, our business could bematerially adversely affected.

 

**Our ability to raise the capital necessary toexpand our business or otherwise achieve our long-term objectives is uncertain.**

 

Inthe future, in order to expand our business through internal development oracquisitions or to otherwise achieve our long-term objectives, we may need toraise substantial additional funds through equity or debt financings, researchand development financings or collaborative relationships.  This additional funding may not be availableor, if available, may not be available on economically reasonable terms.Further, any additional funding may result in significant dilution to existingstockholders.  If adequate funds are notavailable, 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 additionalcapital is raised through the sale of equity, or securities convertible intoequity, you may experience dilution of your proportionate ownership of us.

 

**We cannot guarantee that future acquisitionswill be successful**.

 

Wecompete for acquisition and expansion opportunities with companies which havesignificantly greater financial and management resources than us.  There can be no assurance that suitableacquisition or investment opportunities will be identified, that any of thesetransactions can be consummated, or that, if acquired, these new businesses canbe integrated successfully and profitably into 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 areable to integrate our acquired operations, we cannot assure you that we willachieve synergies.  Our failure toachieve synergies could have a material adverse effect on our business, resultsof operations and financial condition.

 

**Our operating results may fluctuate in futureperiods.**

 

Ouroperating results may vary significantly from quarter to quarter and from yearto year as a result of a variety of factors. These factors include, but are not limited to:

 

•                  levelof demand for our products;

•                  changesin our customer and product mix;

•                  timingof acquisitions and investments in infrastructure;

•                  changesin customer research budgets;

•                  ourability to control or adjust expenses in response to changes in revenue;

•                  competitiveconditions;

•                  intellectualproperty litigation;

•                  currencyexchange rate fluctuations; and

•                  generaleconomic and political conditions.

 

Webelieve that quarterly comparisons of our financial results may not necessarilybe meaningful and should not be relied upon as an indication of futureperformance.  Additionally, if ouroperating results in one or more quarters do not meet the expectations ofsecurities analysts or others, the price of our common stock could be adverselyaffected.

 

Ourcontinued investment in product development and sales and marketing aresignificant ongoing expenses.  If salesin a particular period falls short of expectations, we may not be able toproportionately reduce our expenses for that period, which could materially andadversely affect the operating results for that period.

 

27

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**We may be unable to protect our trademarks, trade secrets andother intellectual property rights that are important to our business.**

 

Weregard our trademarks, trade secrets and other intellectual property as asignificant component of our success.  Wehave only one registered trademark and rely on common law trademarks and tradesecret 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 relyupon confidentiality and license agreements with employees, customers, partnersand others to protect our intellectual property.  Effective trademark and trade secretprotection may not be available in every country in which our products areavailable. We cannot be certain that we have taken adequate steps to protectour intellectual property, especially in countries where the laws may notprotect our rights in a manner comparable to that in the United States.  In addition, our third-party confidentialityagreements might be breached and, if they are, there may not be an adequateremedy available to us.  If our tradesecrets become known, our competitive position could be materially and adverselyimpacted.

 

**Intellectual property litigation and other litigation couldharm our business.**

 

Litigationregarding patents and other intellectual property rights is extensive in thebiotechnology industry.  We are awarethat patents have been applied for by, and in some cases issued to, thirdparties, claiming technologies that are closely related to ours.  As a result, and in part due to theambiguities and evolving nature of intellectual property law, we periodicallyreceive notices of potential infringement of patents held by others.  Although to date we have successfullyresolved these types of claims, we may not be able to do so in the future.

 

Anintellectual property dispute might result in litigation.  This litigation could involve proceedingsdeclared by the U.S. Patent and Trademark Office or the International TradeCommission, as well as proceedings brought directly by affected thirdparties.  Intellectual propertylitigation can be extremely expensive, and these expenses, as well as theconsequences should we not prevail, could seriously harm our business.

 

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

 

Inaddition to intellectual property litigation, other substantial, complex orextended litigation could result in large expenditures by us and distraction ofour management.  For example, lawsuits byemployees, stockholders, collaborators or distributors could be very costly andsubstantially disrupt our business. Disputes from time to time with companies or individuals are notuncommon in our industry, and we cannot assure you that we will always be able toresolve them out of court.  Unexpectedresults could cause our financial exposure in these matters to exceed statedreserves and insurance, requiring us to allocate additional funds and otherresources to address these liabilities. In addition, the negative press generated by litigation against us couldadversely affect our business.

 

**Accidents related to hazardous materials couldadversely affect our business.**

 

Portionsof our operations require the controlled use of hazardous and radioactivematerials.  Although we believe oursafety procedures comply with the standards prescribed by federal, state, localand foreign regulations, the risk of accidental contamination of property orinjury to individuals from these materials cannot be completely eliminated.  In the event of an accident, we could beliable for any damages that result, which could seriously damage our business,results of operations and reputation.

 

**Our sales are subject to seasonality.**

 

Weexperience a slowing of sales in Europe during the summer months and worldwideduring the Christmas holidays. Generally, our first half revenues are stronger than our second halfrevenues.  We believe that period toperiod comparisons of our operating results may not necessarily be reliableindicators of our future performance.

 

28

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**Potential product liability claims could affectour earnings and financial condition.**

 

Weface a potential risk of liability claims based on our past, present and futureproducts and services, and we have faced such claims in the past.  We carry product liability insurance which islimited in scope and amount but which we believe to be adequate.  We cannot assure you, however, that we willbe able to maintain this insurance at a reasonable cost and on reasonableterms.  We also cannot assure you thatthis insurance will be adequate to protect us against a product liabilityclaim, should one arise.  If we do not orcannot maintain sufficient liability insurance, our ability to market ourproducts may be significantly impaired. In addition, product liability claims, as well as negative publicityarising out of such claims, could have a material adverse effect on ourbusiness, operating results and financial condition.

 

**The labor laws applicable to our employees inEurope may restrict the flexibility of our management.**

 

Asof December 31, 2004, 72 of our 239 employees worked for our BioSourceEurope subsidiary, which is located in Nivelles, Belgium.  As a result of certain labor laws, we arerequired to make specified severance payments in the event we terminate aEuropean employee.  Accordingly, we maybe limited by the application of the Belgian labor laws in the determination ofstaffing levels resulting in less flexibility than our competitors whoseemployees are not subject to similar labor laws.

 

**RisksAssociated with Our Industry**

** **

**The biomedical research products industry is verycompetitive, and we may be unable to continue to compete effectively in thisindustry in the future.**

 

Weare engaged in a segment of the biomedical research products industry that ishighly competitive.  We compete with manyother suppliers and new competitors continue to enter the markets.  Many of our competitors, both in the UnitedStates 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 companies could succeed in developing products that aremore effective than the products that we have or may develop and may also bemore successful than us in producing and marketing their products.  We expect this competition to continue andintensify in the future. Competition in our markets is primarily driven by:

 

•                  productperformance, features and liability;

•                  price;

•                  timingof product introductions;

•                  abilityto develop, maintain and protect proprietary products and technologies;

•                  salesand distribution capabilities;

•                  technicalsupport and service;

•                  brandloyalty; and

•                  breadthof product line.

 

Ifa competitor 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 andrespond to price competition could reduce our sales and profits, and may damageour market share.

 

**As a result of consolidation in the pharmaceuticalindustry, we may lose existing customers or have greater difficulty obtainingnew customers.**

 

Inrecent years, the United States pharmaceutical industry has undergonesubstantial consolidation.  As part ofmany business combinations, companies frequently reduce the number of suppliersused and we may not be selected as a supplier after a businesscombination.  Further, mergers orcorporate consolidations in the pharmaceutical industry could cause us to loseexisting customers and potential future customers, which could have a materialadverse effect on our business, financial condition and results of operations.

 

29

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**We are subject to government regulation.**

 

Ourbusiness is currently subject to regulation, supervision and licensing byfederal, state, local and foreign governmental authorities.  Also, from time to time we must expendresources to comply with newly adopted regulations, as well as changes inexisting regulations.  If we fail tocomply with these regulations, we could be subject to disciplinary actions oradministrative enforcement actions. These actions could result in penalties, including fines.

 

**Risks Associated with Our Common Stock**

 

**Our stock price has been volatile, which mayaffect our ability to raise capital in the future and may subject the value ofyour investment in our common stock to sudden decreases.**

 

Ourcommon stock is quoted on the Nasdaq National Market, and there has beensubstantial volatility in the market price of our common stock.  The trading price of our common stock hasbeen, and is likely to continue to be, subject to fluctuations due to a varietyof factors, including:

 

•                  fluctuationsin our quarterly financial results;

•                  thegain or loss of significant contracts;

•                  lossof key personnel;

•                  announcementsof technological innovations or new products by us or by our competitors;

•                  delaysin the development and introduction of new products;

•                  acquisitionsand dispositions;

•                  legislativeor regulatory changes;

•                  generaltrends in the industry;

•                  recommendationsand/or changes in estimates by research analysts;

•                  biologicalor medical discoveries;

•                  disputesand/or developments concerning intellectual property, including patents andlitigation matters;

•                  publicconcern as to the safety of new technologies;

•                  salesof our common stock by existing holders;

•                  securitiesclass action or other litigation;

•                  developmentsin our relationships with current or future customers and suppliers; and

•                  generaleconomic conditions, both in the United States and abroad.

 

Asa result of these factors, and potentially others, the sales price of ourcommon stock has ranged from $4.68 to $9.10 per share from January 1, 2002through December 31, 2004.

 

Inaddition, 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 fluctuations are unrelated to operating performance of thespecific companies whose stock is affected.

 

Inthe past, following periods of volatility in the market price of a company’sstock, securities class action litigation has occurred against the issuingcompany.  If we were subject to this typeof litigation in the future, we could incur substantial costs and a diversionof our management’s attention and resources, each of which could have amaterial adverse effect on our revenue and earnings.  Any adverse determination in this type oflitigation could also subject us to significant liabilities.

 

**Anti-takeover provisions in our governingdocuments and under applicable law could impair the ability of a third party totake over our company.**

 

Weare subject to various legal and contractual provisions that may impede achange in our control, including the following:

 

•                  ourstockholders’ rights plan which could result in the significant dilution of theownership of any entity that engages in an unsolicited attempt to take over theCompany; and

 

•                  theability of our board of directors to issue additional shares of our preferredstock, which shares may be given superior voting, liquidation, distribution andother rights as compared to our common stock.

 

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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 stockholders and management own asignificant percentage of our common stock and will be able to exercisesignificant influence over our affairs.**

 

Ourprincipal stockholders and management own a significant percentage of ourcommon stock and will be able to exercise significant influence over ouraffairs.  Accordingly, thesestockholders:

 

•                  willbe able to significantly influence the composition of our board of directors;

 

•                  willsignificantly influence matters requiring stockholder approval, including theapproval of mergers and other significant corporate transactions, includingchange of control transactions; and

 

•                  willcontinue to have significant influence over our business.

 

Thisconcentration of ownership of our common stock could have the effect ofdelaying, preventing or deterring a change of control of us or otherwisediscouraging a potential acquirer from attempting to obtain control of us.  This in turn could have a negative effect onthe market price of our common stock.  Itcould also prevent our stockholders from realizing a premium over the marketprices for their shares of common stock.

 

**Absence of dividends could reduce ourattractiveness to investors.**

 

Someinvestors favor companies that pay dividends, particularly in general downturnsin the stock market.  We have neverdeclared or paid any cash dividends on our common stock.  We currently intend to retain any futureearnings for funding growth and stock repurchases.  We do not currently anticipate paying cashdividends on our common stock in the foreseeable future.  Because we may not pay dividends, the returnon an investment in our common stock likely depends on selling this stock at aprofit.

 

**Caution Regarding Forward-Looking Statements**

 

This Report containsforward-looking statements. These forward-looking statements include ourstatements regarding the following: our belief that we can deliver sales andprofit growth; our expectations regarding our product development efforts; ourbelief that our current real estate leases are sufficient to meet our currentand near-term needs; our expectations regarding our use of cash generated inour business; the assumptions underlying our Critical Accounting Policies; ourbelief that our income tax valuation allowance is sufficient; and ourexpectation that we may use cash for future acquisitions of technology andbusinesses and stock repurchases.

 

We caution investorsthat forward-looking statements are only predictions based on our currentexpectations about future events and are not guarantees of future performance.Our actual results, performance or achievements could differ materially fromthose expressed or implied by the forward-looking statements due to risks,uncertainties and assumptions that are difficult to predict. These risks anduncertainties include the following: the impact of intense competition in ourbusiness; difficulty in developing and introducing new products and serviceseffectively; failure of customers to adopt our new products as expected;difficulties with suppliers and distribution channels;  significant impairment charges due to pastacquisitions; and taxing authorities may challenge our tax positions. Inaddition, the risks and uncertainties that are discussed in this Item 7under the caption *“Risk Factors”*mayalso impact these forward-looking statements. We encourage you to read that section carefullyalong with the other information provided in this Report and in our otherfilings with the SEC before deciding to invest in our stock or to maintain orchange your investment. We undertake no obligation to revise or update anyforward-looking statement for any reason, except as required by law.

 

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**ITEM 7A**.                    **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We conduct business in various foreign currencies, including Euros andBritish pounds, and are therefore subject to the transaction exposures thatarise from foreign exchange rate movements between the dates that foreigncurrency transactions are initiated and the dates that they are converted.  We are also subject to exchange rateexposures arising from the translation and consolidation of the financialresults of our foreign subsidiaries. Although a significant portion of theforeign currencies in which we conduct our business is currently, or isanticipated in the future to be, denominated in Euros as a result of theEuropean Monetary Union, we are not certain about the effect of the Euro on ourbusiness, financial condition or results of operations.  We do not currently hedge either ourtranslation risk or our economic risk associated with the exchange of foreigncurrencies into U.S. dollars.  There canbe no assurances that future changes in currency exchange rates will not have amaterial impact on our future cash collections and operating results.

 

**ITEM8.****                            ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 
| 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                             |   |

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

 

There were no changes in or disagreements with accountants onaccounting and financial disclosure during fiscal 2003 or 2004.

 
| **Item 9A.** | ** ** | **CONTROLS  AND PROCEDURES** |
|--------------|------------|------------------------------|

 

An evaluation was carried out by BioSource’s management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934) as of December 31, 2004. Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that thedesign and operation of these disclosure controls and procedures were, as ofthe end of the period covered by this report, effective and designed to ensurethat material information relating to BioSource and its consolidatedsubsidiaries would be made known to them by others within these entities. Therewere no changes in our internal control over financial reporting during thefiscal quarter ended December 31, 2004 identified in connection with theabove-referenced evaluations that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 
| **Item 9B.** | ** ** | **OTHER  INFORMATION** |
|--------------|------------|------------------------|

 

None.

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**PART III**

 

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

#### ** **

Other than “ExecutiveOfficers of the Company” which is set forth at the end of Part I of this Form10-K, the information required by Item 10 is incorporated herein by referenceto the sections entitled “Election of Directors,” “Meetings and Committees ofthe Board of Directors” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the Company’s proxy statement for its 2005 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A within 120 days after the close of the fiscal year for whichthis report is filed.

 

Informationregarding our Audit Committee and designated “audit committee financialexperts,” is incorporated herein by reference to the Company’s 2005 proxy statementfor its 2005 Annual Meeting of Shareholders to be filed with the Securities andExchange Commission pursuant to Regulation 14A within 120 days after the closeof the fiscal year for which this report is filed.

 

OurCode of Ethical Conduct (the “Code of Conduct”) requires all employees,directors and officers, including our Chief Executive Officer and ChiefFinancial Officer, to adhere to the Code of Conduct in addressing legal andethical issues encountered in conducting their work.  The Code of Conduct requires that theseindividuals avoid conflicts of interest, comply with all laws and other legalrequirements, conduct business in an honest and ethical manner and otherwiseact with integrity and in our best interest. The Code of Conduct contains additional provisions that applyspecifically to our Chief Financial Officer and other financial officers withrespect to full and accurate reporting. The Code of Conduct is available on our website at www.biosource.com.

 

**ITEM 11.****                     ****EXECUTIVE COMPENSATION**

 

The information required by this item is incorporated herein byreference to information under the caption “Executive Compensation” of the Company'sproxy statement for its 2005 Annual Meeting of Shareholders to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A within 120days after the close of the fiscal year for which this report is filed.

 

#### **ITEM12.**                      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

#### ** **

The information required by this item is incorporated herein byreference the information under the captions “Security Ownership of CertainBeneficial Owners and Management” and “Securities Authorized for IssuancesUnder Equity Compensation Plans” of the Company's proxy statement for its 2005Annual Meeting of Shareholders to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A within 120 days after the close of thefiscal year for which this report is filed.

 

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

#### ** **

The informationrequired by this item will be contained under the caption “EmploymentAgreements” of the Company's proxy statement for its 2005 AnnualMeeting of Shareholders to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A within 120 days after the close of the fiscal yearfor which this report is filed.

 

# ***ITEM 14.*****                     ****PRINCIPAL ACCOUNTING FEES ANDSERVICES**

# * *

The information required in this item is incorporated herein byreference to information under the caption “Independent Registered PublicAccounting Firm” of the Company's proxy statement for its 2005 Annual Meetingof Shareholders to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A within 120 days after the close of the fiscal yearfor which this report is filed.

 

 

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#### **ITEM15.**                      EXHIBITSAND 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.                 |                                        |

 

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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).                                                                                                                                                |

 

35

----

 
| **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).                                                                                                          |
|                |       |                                                                                                                                                                                                                       |
| 10.24               |       | Executive Employment Agreement between  Registrant and Alan I. Edrick, dated as of May 10, 2004 (18).                                                                                                                      |

 

36

----

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                |
| 10.25               |       | Executive Employment Agreement between  Registrant and Kevin J. Reagan Ph.D. dated as of February 15, 2004 (19).                                                               |
|                |       |                                                                                                                                                                                |
| 21.0                |       | Subsidiaries of the Company                                                                                                                                                         |
|                |       |                                                                                                                                                                                |
|                |       | **Name**                                                                                                                                                                            | ** ** | **State/Country of  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 of BioSource International, Inc. pursuant to Rule 13a-14(a)  under the Securities and Exchange Act of 1934, as amended. |

 

----

(1)   Incorporated by reference to the Company’sRegistration Statement on Form S-4 as filed with the Securities and ExchangeCommission on October 22, 1992, as amended.

(2)   Incorporated by reference to the Company’sForm 10KSB for the year ended December 31, 1992.

(3)   Incorporated by reference to the Company’sForm 10KSB for the year ended December 31, 1993.

(4)   Incorporated by reference to the Company’sForm 10KSB for the year ended December 31, 1994.

(5)   Incorporated by reference to the Company’sForm 10KSB for the year ended December 31, 1995.

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

(7)   Incorporated by reference to the Company’sRegistration Statement on Form S-8 (SEC No. 33-91838) as filed with theSecurities and Exchange Commission on May 4, 1995.

(8)   Incorporated by reference to the Company’sCurrent Report on Form 8-K/A filed with the Securities and Exchange Commissionon February 19, 1999.

(9)   Incorporated by reference to the Company’sCurrent Report on Form 8-A filed with the Securities and Exchange Commission onMarch 1, 1999.

(10)Incorporated by reference to the Company’sForm 10-K for the year ended December 31, 1998.

(11)Incorporated by reference to the Company’sRegistration Statement on Form S-3 as filed with the Securities and ExchangeCommission on March 16, 2000.

(12)Incorporated by reference to Amendment No. 1to the Company’s Registration Statement on Form S-3 as filed with theSecurities and Exchange Commission on March 22, 2000.

(13)Incorporated by reference to the Company’sCurrent Report on Form 8-K as filed with the Securities and Exchange Commissionon October 26, 2000, and as amended on October 31, 2000.

(14)Incorporated by reference to the Company’sdefinitive proxy statement as filed with the Securities and Exchange Commissionon May 16, 2000.

(15)Incorporated by reference to the Company’sForm 10-K for the year ended December 31, 2000.

(16)Incorporated by reference to the Company’sForm 10-K for the year ended December 31, 2001.

(17)Incorporated by reference to the Company’sForm 10-K for the year ended December 31, 2003.

(18)Incorporated by reference to the Company’sForm 10-Q for the quarter ended June 30, 2004.

(19)Incorporated by reference to the Company’sForm 10-Q for the quarter ended March 31, 2004.

 

*(b)* Current *Reports on Form 8-K:*

 

Form 8-K furnished October 22,2004—The Company issued a press release regarding its financial results for itsthird fiscal quarter ended September 30, 2004.

 

37

----

 

**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | BioSource International, Inc |
|--------|------------------------------|
|   |                         |
|   | Date: March 18, 2005    | By: | /s/ Terrance J. Bieker |   |
|   |                         | Terrance J. Bieker |
|   |                         | President and Chief Executive Officer |
|   |                         | (Principal Executive Officer) |
|   |                         |   |
|   | Date: March 18,  2005   | By: | /s/ Alan I.  Edrick |   |
|   |                         | Alan I. Edrick |
|   |                         | Executive Vice President and Chief  Financial Officer |
|   |                         | (Principal Financial Officer) |

 

**POWER OF ATTORNEY**

** **

Each person whose signature appears below constitutes and appointsTerrance J. Bieker and Alan I. Edrick, and each of them, as his true and lawfulattorneys-in-fact and agents with full power of substitution andresubstitution, for him and his name, place and stead, in any and allcapacities, to sign any or all amendments to this Annual Report on Form 10-Kand to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full power and authorityto do and perform each and every act and thing requisite and necessary to bedone in and about the foregoing, as fully to all intents and purposes as hemight or could do in person, hereby ratifying and confirming all that saidattorneys-in-fact and agents, or either of them, or their substitutes, maylawfully do or cause to be done by virtue hereof.

 

In accordance with the Exchange Act, this report has been signed belowby the following person on behalf of the Registrant and in the capacities andon the date indicated:

 
| **Signature** | ** **              | **Title** | ** **                 | **Date** |
|---------------|-------------------------|-----------|----------------------------|----------|
|          |                    |      |                       |     |
| /s/           | Terrance J. Bieker      |      | President, Chief Executive |     | March 18,  2005 |
|          | Terrance J.  Bieker     |      | Officer and  Director      |     |   |
|          |                    |      |                       |     |
| /s/           | David J. Moffa,  Ph.D.  |      | Director                   |     | March 18, 2005 |
|          | David J. Moffa, Ph.D.   |      |                       |     |   |
|          |                    |      |                       |     |
| /s/           | John R.  Overturf, Jr.  |      | Director                   |     | March 18, 2005 |
|          | John R. Overturf, Jr.   |      |                       |     |   |
|          |                    |      |                       |     |
| /s/           | Jean-Pierre L.  Conte   |      | Director                   |     | March 18, 2005 |
|          | Jean-Pierre L.  Conte   |      |                       |     |   |
|          |                    |      |                       |     |
| /s/           | Robert J. Weltman       |      | Director                   |     | March 18,  2005 |
|          | Robert J.  Weltman      |      |                       |     |   |
|          |                    |      |                       |     |
| /s/           | John L. Zabriskie Ph.D. |      | Director                   |     | March 18,  2005 |
|          | John L.  Zabriskie Ph.D |      |                       |     |   |

 

38

----

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS AND**

**FINANCIALSTATEMENT SCHEDULE**

 
| Report  of Independent Registered Public Accounting Firm                                                                                | F-2    |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                    |   |
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                                         | F-3    |
|                                                                                                                                    |   |
| Consolidated Statements of Operations for  the three years ended December 31, 2004                                                 | F-4    |
|                                                                                                                                    |   |
| Consolidated Statements of Stockholders’  Equity and Comprehensive Income (Loss)                                                   | F-5    |
| for the three years ended December 31,  2004                                                                                       |   |
|                                                                                                                                    |   |
| Consolidated Statements of Cash Flows for  the three years ended December 31, 2004                                                 | F-6    |
|                                                                                                                                    |   |
| Notes to  Consolidated Financial Statements as of December 31, 2004 and 2003 and  for the three years ended December 31, 2004 | F-7    |
|                                                                                                                                    |   |
| Financial Statement  Schedule—Valuation and Qualifying Accounts                                                                    | F-19   |

 

F-1

----

 

Report of IndependentRegistered Public Accounting Firm

 

The Board of Directors and Stockholders

BioSource International, Inc.:

 

We have audited the consolidatedfinancial statements of BioSource International, Inc. and subsidiaries aslisted in the accompanying index.  Inconnection with our audits of the consolidated financial statements, we also haveaudited the financial statement schedule as listed in the accompanyingindex.  These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, 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 acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to theconsolidated financial statements, effective January 1, 2002, the Companychanged its method of accounting for goodwill and other intangible assets.

 

KPMGLLP

 

LosAngeles, California

February 25,2005

 

F-2

----

 

**BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(amounts in thousands, exceptpar value)**

** **
| ** **                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                                                                                                                                |       |             |       |   |   |
| **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                                                                                                                                                    |       | 7,535            |       | 9,074 |   |
| Notes receivable                                                                                                                                                    |       | 544              |       | — |   |
| Deferred income taxes                                                                                                                                               |       | 1,947            |       | 2,363 |   |
| Prepaid expenses and other current assets                                                                                                                           |       | 941              |       | 652 |   |
|                                                                                                                                                                |       |             |       |   |   |
| Total current assets                                                                                                                                                |       | 22,342           |       | 21,694 |   |
|                                                                                                                                                                |       |             |       |   |   |
| 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                                                                                                                                                        |       | $                | 43,352     |   | $ | 44,333 |   |
|                                                                                                                                                                |       |             |       |   |   |
| **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                                                                                                                                                 |       | (4,867           | )          | (4,452 | ) |
| Accumulated other comprehensive income                                                                                                                              |       | 773              |       | 112 |   |
|                                                                                                                                                                |       |             |       |   |   |
| Total stockholders’ equity                                                                                                                                     |       | 36,231           |       | 38,302 |   |
|                                                                                                                                                                |       |             |       |   |   |
| Total liabilities and stockholders’ equity                                                                                                                     |       | $                | 43,352     |   | $ | 44,333 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-3

----

** **

**BIOSOURCE INTERNATIONAL, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Amounts in thousands, except pershare data)

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                          |       |                         |       |   |   |   |   |
| Net sales                                                                     |       | $                            | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Cost of goods sold                                                            |       | 20,315                       |       | 19,058 |   | 15,325 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Gross profit                                                                  |       | 24,067                       |       | 22,201 |   | 21,711 |   |
|                                                                          |       |                         |       |   |   |   |   |
| 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                                      |       | 723                          |       | (1,344 | ) | 1,293 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Interest and other income (expense), net                                      |       | 77                           |       | (76 | ) | 123 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Income (loss) from continuing operations  before income taxes and other items |       | 800                          |       | (1,420 | ) | 1,416 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Provision (benefit) for income taxes                                          |       | 404                          |       | (670 | ) | 15 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Income (loss) from continuing operations  before other items                  |       | 396                          |       | (750 | ) | 1,401 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Discontinued operations, net                                                  |       | (811                         | )          | (320 | ) | (6 | ) |
| Cumulative effect of accounting change, net                                   |       | —                       |       | — |   | (2,447 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Net loss                                                                      |       | $                            | (415       | ) | $ | (1,070 | ) | $ | (1,052 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Basic earnings (loss) per share:                                              |       |                         |       |   |   |   |   |
| Income (loss) from continuing operations                                      |       | $                            | 0.04       |   | $ | (0.08 | ) | $ | 0.14 |   |
| Discontinued operations, net                                                  |       | (0.08                        | )          | (0.03 | ) | — |   |
| Cumulative effect of changes in accounting principles, net                    |       | —                       |       | — |   | (0.25 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Basic earnings (loss) per share                                               |       | $                            | (0.04      | ) | $ | (0.11 | ) | $ | (0.11 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted earnings (loss) per share:                                            |       |                         |       |   |   |   |   |
| Income (loss) from continuing operations                                      |       | $                            | 0.04       |   | $ | (0.08 | ) | $ | 0.14 |   |
| Discontinued operations, net                                                  |       | (0.08                        | )          | (0.03 | ) | — |   |
| Cumulative effect of changes in accounting principles, net                    |       | —                       |       | — |   | (0.24 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted earnings (loss) per share                                             |       | $                            | (0.04      | ) | $ | (0.11 | ) | $ | (0.10 | ) |
|                                                                          |       |                         |       |   |   |   |   |
| Shares used in per share calculations:                                        |       |                         |       |   |   |   |   |
| Basic                                                                         |       | 9,325                        |       | 9,403 |   | 9,787 |   |
|                                                                          |       |                         |       |   |   |   |   |
| Diluted                                                                       |       | 9,585                        |       | 9,403 |   | 10,189 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**BIOSOURCE INTERNATIONAL, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME (LOSS)**

**For the Three Years endedDecember 31, 200****4**

(Amounts in thousands)

 
| ** **                                         | ** ** | **Common stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Treasury  Stock** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|----------------------------------------------------|------------|------------------|------------|----------------------------------|------------|---------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
| **Shares**                                         | ** ** | **Amount**       |
| Balance at December 31, 2001                       |       | 10,354           |       | $                                | 10         |                | $          | 48,761                                         |       | —                                               |       | $                                     | (2,330     | ) | $ | (2,563 | ) | $ | 43,878 |   |
|                                               |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Exercise of stock options                          |       | 105              |       | —                           |       | 291                 |       |                                           |       | —                                               |       | —                                |       | 291 |   |
| Comprehensive income:                              |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Net loss                                           |       | —           |       | —                           |       | —              |       | —                                         |       | (1,052                                               | )          | —                                |       | (1,052 | ) |
| Translation adjustment                             |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | 1,148                                 |       | 1,148 |   |
| Total comprehensive income                         |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | —                                |       | 96 |   |
| Purchase of treasury stock                         |       | (782             | )          | —                           |       | (4,608              | )          | —                                         |       | —                                               |       | —                                |       | (4,608 | ) |
| Income tax benefit from  exercise of stock options |       | —           |       | —                           |       | 56                  |       | —                                         |       | —                                               |       | —                                |       | 56 |   |
| Balance at December 31, 2002                       |       | 9,677            |       | 10                               |       | 44,500              |       |                                           |       | (3,382                                               | )          | (1,415                                | )          | 39,713 |   |
|                                               |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Exercise of stock options                          |       | 358              |       | —                           |       | 1,075               |       | —                                         |       | —                                               |       | —                                |       | 1,075 |   |
| Comprehensive income:                              |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Net loss                                           |       | —           |       | —                           |       | —              |       | —                                         |       | (1,070                                               | )          | —                                |       | (1,070 | ) |
| Translation adjustment                             |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | 1,527                                 |       | 1,527 |   |
| Total comprehensive income                         |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | —                                |       | 457 |   |
| 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                       |       | 9,377            |       | 9                                |       | 42,633              |       | —                                         |       | (4,452                                               | )          | 112                                   |       | 38,302 |   |
|                                               |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Exercise of stock options                          |       | 332              |       | 1                                |       | 1,419               |       | —                                         |       | —                                               |       | —                                |       | 1,420 |   |
| Comprehensive income:                              |       |             |       |                             |       |                |       |                                           |       |                                                 |       |                                  |       |   |   |
| Net loss                                           |       | —           |       | —                           |       | —              |       | —                                         |       | (415                                                 | )          | —                                |       | (415 | ) |
| Translation adjustment                             |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | 661                                   |       | 661 |   |
| Total comprehensive income                         |       | —           |       | —                           |       | —              |       | —                                         |       | —                                               |       | —                                |       | 246 |   |
| Purchase of treasury stock                         |       | —           |       | —                           |       | —              |       | (4,046                                         | )          | —                                               |       | —                                |       | (4,046 | ) |
| Income tax benefit from exercise of stock options  |       | —           |       | —                           |       | 309                 |       | —                                         |       | —                                               |       | —                                |       | 309 |   |
| Balance at December 31, 2004                       |       | 9,709            |       | $                                | 10         |                | $          | 44,361                                         |       | $                                                    | (4,046     | )                                     | $          | (4,867 | ) | $ | 773 |   | $ | 36,231 |   |
|                                                    |            |                  |            |                                  |            |                     |            |                                                |            |                                                      |            |                                       |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-5

----

 

**BIOSOURCE INTERNATIONAL, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 (Amounts in thousands)

 
| ** **                                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                           | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                 |       |                         |       |   |   |   |   |
| Cash flows from operating activities:                                                                                |       |                         |       |   |   |   |   |
| Net income (loss) from continuing  operations                                                                        |       | $                            | 396        |   | $ | (750 | ) | $ | (1,046 | ) |
| 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                                                                                                |       | 244                          |       | (1,548 | ) | (1,774 | ) |
| 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                                                                                                     |       | 1,732                        |       | 532 |   | (1,024 | ) |
| 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                                                                                                 |       | (1,584                       | )          | (1,307 | ) | (2,663 | ) |
| Proceeds from sale of equipment                                                                                      |       | —                       |       | 253 |   | — |   |
|                                                                                                                 |       |                         |       |   |   |   |   |
| Net cash used in investing activities                                                                                |       | (1,584                       | )          | (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                                                        |       | 180                          |       | 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 |   |
|                                                                                                                 |       |                         |       |   |   |   |   |
| Supplementary disclosure of cash flows  information:                                                                 |       |                         |       |   |   |   |   |
| Cash paid for income taxes                                                                                           |       | $                            | 607        |   | $ | 738 |   | $ | — |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-6

----

 

**BIOSOURCE INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 – Summary of Significant Accounting Policies**

 

*Description of Business*

 

BioSourceInternational, Inc. and subsidiaries (BioSource or the Company), develops,manufactures, markets and distributes products used worldwide in diseaserelated biomedical research and clinical diagnostics, principally in the fieldsof immunology and molecular biology.  Ourproducts 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, theDecember 2004 sale of the custom antibodies and peptides business wasaccounted for as discontinued operations. Accordingly, the financial statementshave been reclassified for all periods prior to the sale to reflect thisbusiness as discontinued operations. Unless noted otherwise, discussions inthese notes pertain 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 expenses duringthe reporting period.  Actual resultscould 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*

 

Cashand cash equivalents include all cash balances and highly liquid investmentswith maturities of three 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*

 

Inventoriesare stated at the lower of cost (first-in, first-out) or market (net realizablevalue).  Reserves are provided forexcess, obsolete, slow-moving and impaired inventory based on age, future usageand sales.  Manufactured antibodies arefully reserved.

 

*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

 

F-7

----

 

which generally range from three to ten years.  Leasehold improvements are amortized over theshorter of their estimated useful lives or the lease term.  Repair and maintenance costs are expensed asincurred.

 

*Goodwill and Other Intangible Assets*

 

Goodwill is recorded when the purchase priceof net tangible and intangible assets acquired exceeds their fair value.  In 2002 the Company adopted Statement ofFinancial Accounting Standards, or SFAS, No. 142, “Goodwill and OtherIntangible Assets,” which established new accounting and reporting requirementsfor goodwill and other intangible assets. Under SFAS No. 142, goodwill is nolonger subject to amortization. Rather, goodwill is evaluated for impairment atleast annually or more frequently if events and changes in circumstancessuggest that the carrying amount may not be recoverable. Impairment of goodwillis tested at the reporting unit level by comparing the reporting unit’scarrying value, including goodwill, to the fair value of the reporting unit.The fair values of the reporting units are estimated using a combination of theincome, or discounted cash flows, approach and the market approach, whichutilizes comparable companies’ data. If the carrying amount of the reportingunit exceeds its fair value, goodwill is considered impaired and is thencompared to the “implied fair value” of the goodwill to its carrying amount todetermine the impairment loss, if any.

 

*Long-Lived Assets*

 

The Company evaluates long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable in accordance with SFAS No.144, “Accounting for the Impairment of Disposal of Long-Lived Assets.” Factorsconsidered important which could trigger an impairment review include, but arenot limited to, significant underperformance relative to expected or projectedfuture operating results, significant changes in the manner of use of theacquired assets or the strategy for the overall business, significant negativeindustry or economic trends. An asset is considered impaired if its carryingamount exceeds the future net cash flow the asset is expected to generate. Ifsuch asset is considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the asset exceeds itsfair market value. The recoverability of long-lived and intangible assets isassessed by determining whether the unamortized balances can be recoveredthrough undiscounted future net cash flows of the related assets.

 

*Advertising, Marketing and Promotion Costs*

 

For the years ended December 31,2004 and 2003, the Company capitalized its catalog production costs andexpensed such costs evenly throughout the period of benefit.  Prior thereto, the Company expensed catalogproduction costs as incurred, which was primarily in the first quarter of itsfiscal year.  During 2002, and afterproduction of the 2002 catalog, the Company put substantial effort intoincreasing the number of customers in its customer database increasing itsdependence on its catalog to attract more customers.  As a result, the Company believes that its2003 and 2004 catalogs are a direct response advertisement, the primary purposeof which is to elicit sales to customers who respond specifically to thecatalog resulting in probable future economic benefit.  Accordingly, beginning in 2003, the Companycapitalized its catalog production costs and expensed these costs throughoutthe period of benefit in accordance with the AICPA’s Statement of Position93-07.  For the years ended December 31,2004, 2003 and 2002, the Company recorded approximately $634,000, $560,000 and$529,000 of catalog costs expense, respectively.

 

## *LicenseAgreements*

## * *

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*

 

TheCompany sells catalog and custom products directly to end users anddistributors and recognizes revenue upon transfer of title to the customer,which occurs upon shipment.  Certaincustomers prepay for product and request shipment of the product at futuredates for which the Company records deferred revenue until such time as aproduct is shipped to the customer.  TheCompany’s distribution agreements 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 Companyhas not provided U.S. federal or foreign withholding taxes on foreignsubsidiary undistributed earnings as of December 31, 2004, because suchearnings are intended to be permanently invested.  It is not practicable to determine the U.S.Federal income tax liability, if any, that would be payable if such earningswere 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 Credit Risk*

# * *

Our cash, cash equivalents, marketable securitiesand accounts receivable are potentially subject to concentration of creditrisk. Cash, cash equivalents and marketable securities are deposited withfinancial institutions that the Company believes are of high credit quality.  Accounts receivables are derived from revenueearned from customers located primarily in the United States, Europe and theAsia-Pacific region.  For the three yearsended December 31, 2004, no single customer accounted for more than 10% oftotal net sales. At December 31, 2004 and 2003 no single customer accounted formore than 10% of accounts receivable.

 

The Company sells its products to end-usersand through distributors.  An allowancefor doubtful accounts is maintained based upon historical collectionsperformance and knowledge of the customer. If actual bad debts differ from the reserves calculated based onhistorical trends and known customer issues, an adjustment to bad debt expenseis recorded in the period in which the difference occurs.

 

F-9

----

 

# *Foreign Currency Translation*

# * *

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 per share is computed using the weighted averagenumber of common shares outstanding during the period. Diluted income or lossper share is computed using the weighted average number of common and dilutivepotential common shares outstanding during the period. Potential common sharesconsist of the shares issuable upon the exercise of stock options or warrantsunder 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 determinewhether potential common shares are dilutive or antidilutive.

 

The Company’s diluted net income (loss) per share computations for fiscal2004, 2003 and 2002 included 0.3 million, 0.0 million and0.4 million potential common shares. The diluted net income (loss) pershare computations for these periods did not include the effect of options topurchase 1.1 million, 0.9 million and 1.0 million shares ofcommon stock because the option exercise prices were greater than the averagemarket price of the Company’s common stock.  In addition, warrants topurchase 1.3 million shares were excluded from each period as the warrantexercise prices were also greater than the average market price of the Company’scommon 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      |       |

 

F-10

----

 

Theweighted average fair value of stock options granted during 2004, 2003 and 2002was $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 Company’s cash flow.  In the future, the Company may elect or berequired to use a different valuation model which could result in asignificantly different impact on the Company’s pro forma net income (loss).

 
| ** **                                                                                      | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                      | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                            |       |                                      |       |     |       |     |       |
| Net loss:                                                                                       |       |                                      |       |     |       |     |       |
| As reported                                                                                     |       | $                                         | (415       | )   | $          | (1,070   | )          | $ | (1,052 | ) |
|                                                                                            |       |                                      |       |     |       |     |       |
| Add: Stock-based compensation, included in  reported net loss                                   |       | —                                    |       | —   |       | —   |       |
| Less: Stock-based employee compensation  expense determined under fair value method, net of tax |       | (895                                      | )          | (959     | )          | (1,954   | )          |
| Pro forma net loss                                                                              |       | $                                         | (1,310     | )        | $          | (2,029   | )          | $ | (3,006 | ) |
|                                                                                            |       |                                      |       |     |       |     |       |
| Net income (loss) per share from continuing  operations:                                        |       |                                      |       |     |       |     |       |
|                                                                                            |       |                                      |       |     |       |     |       |
| Basic – as reported                                                                        |       | $                                         | (0.04      | )   | $          | (0.11    | )          | $ | (0.11 | )  |
| Basic – pro forma                                                                          |       | $                                         | (0.14      | )        | $          | (0.22    | )          | $ | (0.31 | ) |
| Diluted – as reported                                                                      |       | $                                         | (0.04      | )        | $          | (0.11    | )          | $ | (0.10 | ) |
| Diluted – pro forma                                                                        |       | $                                         | (0.14      | )        | $          | (0.22    | )          | $ | (0.30 | ) |

 

**Note 2 – Inventories**

 

Inventories are summarized as follows (in thousands):

 
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|
| ** **      | ** ** | **2004**         | ** ** | **2003** | ** ** |
|            |       |             |       |   |   |
| Raw materials   |       | $                | 2,240      |   | $ | 3,193 |   |
| Work in process |       | 563              |       | 455 |   |
| Finished goods  |       | 4,732            |       | 5,426 |   |
|            |       |             |       |   |   |
|            |       | $                | 7,535      |   | $ | 9,074 |   |

 

**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

 

F-11

----

 

paid off.  The Company advanced an additional $150,000 on theworking 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 Impairmentor Disposal of Long-Lived Assets*,” the Company accounted for thesale as discontinued operations. QCB’s operating results and cash flows havetherefore been segregated from continuing operations on the statements ofoperations and statements of cash flows for all periods prior to the sale. Netsales for these subsidiaries were $2.7 million, $2.8 million, and $3.0million in fiscal 2004, 2003 and 2002 respectively.  Discontinued operations are summarized asfollows (in thousands):

 
| ** **                   | ** ** | **Year 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):

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                |       |                        |       |   |   |   |   |
| Net income (loss), as reported      |       | $                           | (415       | ) | $ | (1,070 | ) | $ | (1,052 | ) |
| Impairment charge, net of tax       |       | —                      |       | — |   | 2,447 |   |
| Goodwill amortization, net of  tax  |       | —                      |       | — |   | — |   |
| Adjusted net income (loss)          |       | $                           | (415       | ) | $ | (1,070 | ) | $ | 1,395 |   |
|                                |       |                        |       |   |   |   |   |
| Basic earnings (loss) per  share:   |       |                        |       |   |   |   |   |
| As reported                         |       | $                           | (0.04      | ) | $ | (0.11 | ) | $ | (0.11 | ) |
| As adjusted                         |       | $                           | (0.04      | ) | $ | (0.11 | ) | $ | 0.14 |   |
|                                |       |                        |       |   |   |   |   |
| Diluted earnings (loss) per  share: |       |                        |       |   |   |   |   |
| As reported                         |       | $                           | (0.04      | ) | $ | (0.11 | ) | $ | (0.10 | ) |
| As adjusted                         |       | $                           | (0.04      | ) | $ | (0.11 | ) | $ | 0.14 |   |

 

F-12

----

 

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

 
| ** **           | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003**   | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross Carrying****Amount** | ** ** | **Accumulated****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 acquired identifiableintangible assets are subject to amortization and have approximate originalestimated weighted-average useful lives as follows: Developed and coretechnologies—fifteen years; tradenames five years.

 

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*

 

TheCompany adopted a stockholders’ rights plan to protect the Company and itsstockholders from any unsolicited acquisition attempts.  The rights plan has no immediate dilutiveeffect and does not diminish the Company’s ability to accept an offer topurchase the Company that is approved by the board of directors.  The stockholder rights plan was implementedthrough a dividend of one preferred share purchase right for each outstandingshare of the Company’s common stock outstanding on March 2, 1999.  Each right entitles stockholders to buy oneone-thousandth of a share of Series A preferred stock at an exercise price of$24.50.  The rights become exercisable(with certain limited exceptions provided in the rights agreement) followingthe 10th day after: (a) a person or group announces an acquisition of 15% ormore of the Company’s common stock, (b) a person or group announces thecommencement of a tender offer the consummation of which would result inownership by the person or group of 15% or more of the Company’s common stock,(c) the filing of a registration statement for any such exchange offer underthe Securities Act of 1933, or (d) the Company’s board of directors determiningthat a person is an “adverse person,” as defined in the rights plan.  The buyer or any “adverse person” would notbe entitled to exercise rights under the rights plan.  The effect of the rights plan is todiscourage acquisitions of more than 15% of the Company’s common stock withoutnegotiations with the Company’s Board of Directors.  The Company can redeem the rights for $.001per right at certain times as provided in the rights agreement.  The rights expire on January 31, 2009.

 

F-13

----

 

**Note 7 – Stock Options, Employee Stock Purchase Plan 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.

 

Underthe 2000 Plan, non-qualified stock options may be granted to employees, directorsand consultants 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:

 
| ** **                               | ** ** | **Shares** | ** ** | **Exercise  Price  Per Share** | ** ** | **Weighted  average  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 |   |

 

F-14

----

 

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:

 
| ** **                               | ** ** | **Shares** | ** ** | **Weighted  Average  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, the Company adopted an Employee StockPurchase Plan to provide substantially all full-time employees, excludingofficers, an opportunity to purchase shares of its common stock through payrolldeductions.  In addition, the Companyprovides a matching contribution equal to 50% of the participant’scontribution.  All contributions areinvested in the Company’s common stock, which is purchased on the open marketat 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 1,287,000shares in connection with a private placement in 2000.  In June 2004, the warrant agreements wereamended to extend the expiration date from February 15, 2005 to February 15,2007.  In connection with this amendment,the exercise price per share underlying the warrants was increased from $7.77per share to $9.00 per share.

 

F-15

----

 

**Note 8 – Income Taxes**

 

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

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | (268       | )        | $          | 99       |       | $ | (440 | ) |
| State      |       | 3        |       | 109      |       | 401      |       |
| Foreign    |       | 107      |       | 391      |       | 552      |       |
|       |       | $        | (158       | )        | $          | 599      |       | $ | 513 |   |
|       |       |     |       |     |       |     |       |
| Deferred:  |       |     |       |     |       |     |       |
| Federal    |       | 231      |       | (770     | )          | 310      |       |
| State      |       | (7       | )          | 30       |       | (548     | )          |
| Foreign    |       | 338      |       | (529     | )          | (260     | )          |
|       |       | 562      |       | (1,269   | )          | (498     | )          |
|       |       | $        | 404        |     | $          | (670     | )          | $ | 15 |   |

 

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):

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Deferred tax assets:                     |       |     |       |     |       |
| Reserves for inventory                   |       | $        | 1,816      |     | $          | 1,960 |   |
| Purchased in-process technology/goodwill |       | 2,617    |       | 2,385    |       |
| Net operating loss carryforwards         |       | 5,708    |       | 6,067    |       |
| Allowance for doubtful accounts          |       | 32       |       | 72       |       |
| R & D and AMT credit carryforwards   |       | 1,393    |       | 2,107    |       |
| Other                                    |       | 563      |       | 460      |       |
| Total deferred tax assets                |       | 12,129   |       | 13,051   |       |
|                                     |       |     |       |     |       |
| Deferred tax liabilities:                |       |     |       |     |       |
| Depreciation                             |       | (182     | )     | (217     | )          |
|                                     |       |     |       |     |       |
| Valuation allowance                      |       | (135     | )          | (393     | )          |
|                                     |       |     |       |     |       |
| Net deferred tax assets                  |       | $        | 11,812     |     | $          | 12,441 |   |

 

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):

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |     |       |
| Computed “expected” tax expense (benefit) |       | $        | 273        |     | $          | (483     | )          | $ | 481 |   |
| Nondeductible items                                 |       | 64       |       | 52       |       | 24       |       |
| State taxes (net of Federal benefit)                |       | 37       |       | (222     | )          | (97      | )          |
| Tax credits                                         |       | (47      | )          | (285     | )          | (213     | )          |
| Extraterritorial income exclusion                   |       | (73      | )          | (139     | )          | (244     | )          |
| Effect of foreign operations                        |       | 31       |       | 25       |       | (43      | )          |
| Change in valuation allowance                       |       | —   |       | 393      |       | —   |       |
| Other                                               |       | 119      |       | (11      | )          | 107      |       |
|                                                |       |     |       |     |       |     |       |
| Total                                               |       | $        | 404        |     | $          | (670     | )          | $ | 15 |   |

 

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**

 

TheCompany has a 401(k) profit sharing plan, which covers substantially alldomestic employees.  Plan participantsmay make voluntary contributions up to 20% of their earnings up to thestatutory limitation.  The Companymatched $0.25 for each $1.00 contributed by employees up to the first $2,000.Company contributions 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.

 

Theretirement benefits for most employees of non-U.S. operations are generallyprovided by government sponsored or insured programs.  The Company’s contributions for thesebenefits were $165,000, $145,000 and $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 and operating income by geographic region and alsoanalyzes sales by product grouping consistent with the strategy outlined above.Prior period information has been reclassified to conform to the current period’spresentation.  Segment information is summarized as follows (inthousands):

 

F-17

----

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                 |       |                        |       |   |   |   |   |
| **Sales – by Geography:**       |       |                        |       |   |   |   |   |
| Net sales to external customers  in: |       |                        |       |   |   |   |   |
| United States                        |       | $                           | 21,671     |   | $ | 21,148 |   | $ | 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):**         |       |                        |       |   |   |   |   |
| United States                        |       | $                           | (1,793     | ) | $ | (3,050 | ) | $ | (1,240 | ) |
| Europe                               |       | 2,516                       |       | 1,706 |   | 2,533 |   |
| Total                                |       | $                           | 723        |   | $ | (1,344 | ) | $ | 1,293 |   |
|                                 |       |                        |       |   |   |   |   |
| **Sales – by Product Group:**   |       |                        |       |   |   |   |   |
| Assays                               |       | $                           | 19,701     |   | $ | 17,598 |   | $ | 14,690 |   |
| Biologicals                          |       | 11,106                      |       | 10,574 |   | 9,785 |   |
| Other                                |       | 13,575                      |       | 13,057 |   | 12,559 |   |
| Total                                |       | $                           | 44,382     |   | $ | 41,259 |   | $ | 37,036 |   |

 

**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 obtained the right to produce,use and sell patented technology through various license agreements and paysroyalties ranging from 5% to 10% of the related sales, depending upon saleslevels. Royalty expense under these agreements was approximately $481,000,$335,000 and $291,000 for the years ended December 31, 2004, 2003 and2002, 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 ofQCB.  The remaining funds held in escrow were released to theformer shareholders of QCB.  The settlement amount reduced the goodwilloriginally recorded in the acquisition of QCB which was included as acumulative effect of accounting change in the adoption of FASB 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.

 

F-18

----

 

**BIOSOURCE INTERNATIONAL, INC. ANDSUBSIDIARIES**

** **

**ScheduleII – Valuation and QualifyingAccounts**

(in thousands)

 
| ** **                       | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of  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-19

----