10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

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

For the transition period from                       to

Commission file number 000-21873

BIOSITE INCORPORATED

(Exact name of Registrant as specified in its charter)

Delaware	33-0288606
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11030 Roselle Street San Diego, California,  92121
(Address of principal executive offices)
Registrant’s telephone number, including area code: (858) 455-4808

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

The number of shares of the Registrant’s Common Stock, $0.01 par value, outstanding at November 8, 2002 was 14,824,632.

BIOSITE INCORPORATED

FORM 10-Q

INDEX

PART I.		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
	Condensed Balance Sheets
	Condensed Statements of Income (Unaudited)
	Condensed Statements of Cash Flows (Unaudited)
	Notes to Condensed Financial Statements (Unaudited)
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.		CONTROLS AND PROCEDURES
PART II.		OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS
ITEM 5.		OTHER INFORMATION
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS

Biosite®, Triage® and Omniclonal® are registered trademarks of Biosite Incorporated.  New Dimensions in Diagnosis (TM) and the Company’s logo are trademarks of Biosite Incorporated.

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

BIOSITE INCORPORATED

Condensed Balance Sheets

(in thousands, except par value)

	September 30, 2002		December 31, 2001
	(Unaudited)		(Note)
Assets
Current assets:
Cash and cash equivalents	$	14,909	$	13,011
Marketable securities, available-for-sale	53,360		42,486
Accounts receivable, net	10,028		8,254
Inventories, net	10,009		7,117
Income taxes receivable	—		155
Other current assets	2,674		2,779
Total current assets	90,980		73,802
Property, equipment and leasehold improvements, net	17,274		13,840
Patents and license rights, net	8,245		9,208
Other assets	7,282		5,890
	$	123,781	$	102,740
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,367	$	2,326
Accrued employee expenses and other	8,848		3,953
Income taxes payable	2,695		—
Current portion of long-term obligations	2,102		2,008
Total current liabilities	18,012		8,287
Long-term obligations	4,557		3,542
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued and outstanding at September 30, 2002 and December 31, 2001	—		—
Common stock, $.01 par value, 25,000 shares authorized; 14,783 and 14,639 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively	148		146
Additional paid-in capital	77,717		75,891
Unrealized net gain on marketable securities, net of related tax effect	452		405
Retained earnings	22,895		14,469
Total stockholders’ equity	101,212		90,911
	$	123,781	$	102,740

Note:  The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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BIOSITE INCORPORATED

Condensed Statements of Income (Unaudited)

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2002			2001			2002			2001
Revenues:
Product sales	$	28,103		$	15,941		$	69,014		$	45,477
Contract revenue	823			1,066			3,515			2,897
Total revenues	28,926			17,007			72,529			48,374
Operating expenses:
Cost of product sales	8,794			4,144			21,661			12,831
Selling, general and administrative	8,983			5,333			22,898			16,507
Research and development	4,636			3,573			12,089			10,189
License and patent disputes	1,228			1,185			4,043			1,658
Total operating expenses	23,641			14,235			60,691			41,185
Operating income	5,285			2,772			11,838			7,189
Interest and other income	572			677			1,813			1,921
Income before provision for income taxes	5,857			3,449			13,651			9,110
Provision for income taxes	(2,189		)	(1,319		)	(5,225		)	(3,534		)
Net income	$	3,668		$	2,130		$	8,426		$	5,576
Net income per share:
- Basic	$	0.25		$	0.15		$	0.57		$	0.39
- Diluted	$	0.24		$	0.14		$	0.55		$	0.36
Shares used in calculating per share amounts:
- Basic	14,769			14,538			14,713			14,355
- Diluted	15,464			15,463			15,427			15,525

See accompanying notes.

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BIOSITE INCORPORATED

Condensed Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2002			2001
OPERATING ACTIVITIES
Net income	$	8,426		$	5,576
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,692			2,977
Amortization of deferred compensation and non-cash equity compensation	11			30
Deferred income taxes	—			(460		)
Changes in operating assets and liabilities:
Accounts receivable	(1,774		)	3,680
Inventory	(2,891		)	(1,446		)
Income taxes	3,085			5,631
Other current assets	(195		)	291
Accounts payable	2,042			617
Accrued liabilities	4,894			413
Net cash provided by operating activities	$	17,290		$	17,309
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities	17,642			37,956
Purchase of marketable securities	(28,440		)	(47,861		)
Purchase of property, equipment and leasehold improvements	(6,287		)	(5,035		)
Patents, license rights, deposits and other assets	(999		)	(2,471		)
Net cash used in investing activities	(18,084		)	(17,411		)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations	2,824			1,541
Principal payments under financing obligations	(1,715		)	(1,575		)
Proceeds from issuance of common stock, net	1,584			5,086
Net cash provided by financing activities	2,692			5,052
Increase in cash and cash equivalents	1,898			4,950
Cash and cash equivalents at beginning of period	13,011			1,800
Cash and cash equivalents at end of period	$	14,909		$	6,750
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	338		$	323
Income taxes paid (refund)	$	2,140		$	(1,637	)
Income tax benefit of disqualifying dispositions of stock	$	234		$	4,548

See accompanying notes.

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BIOSITE INCORPORATED

Notes to Condensed Financial Statements (Unaudited)

1.       BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles in the United States for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.  The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented.  Interim results are not necessarily indicative of results for a full year.  We have experienced significant quarterly fluctuations in our operating results and we expect that these fluctuations in sales, expenses and operating results may continue.

The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year.  Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

2.       EARNINGS PER SHARE

At September 30, 2002, we had 14,782,862 common shares and 4,228,547 common stock options outstanding.  Earnings per share, EPS, is computed in accordance with the Financial Accounting Standards Board’s Statement No. 128, Earnings per share, FAS 128.  FAS 128 requires dual presentation of basic and diluted earnings per share.  Basic EPS includes no dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents which may be issuable upon exercise of outstanding common stock options.  Common stock equivalents are not considered in loss years as the effect is antidilutive.

Shares used in calculating basic and diluted earnings per share were as follows (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2002	2001	2002	2001
Weighted average common shares outstanding – Shares used in calculating per share amounts – Basic	14,769	14,538	14,714	14,355
Net effect of dilutive common share equivalents using the treasury stock method	695	925	713	1,170
Shares used in calculating per share amounts – Diluted	15,464	15,463	15,427	15,525

3.       BALANCE SHEET INFORMATION

Net inventories consist of the following (in thousands):

	September 30, 2002		December 31, 2001
Raw materials	$	3,464	$	2,007
Work-in-process	5,144		3,809
Finished goods	1,401		1,301
	$	10,009	$	7,117

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4.       COMPREHENSIVE INCOME

Financial Accounting Standards Board’s Statement No. 130, Comprehensive Income, FAS 130, establishes rules for the reporting and display of comprehensive income and its components.  FAS 130 requires the change in net unrealized gains or losses on marketable securities be included in comprehensive income.  As adjusted, our comprehensive income is as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2002		2001		2002		2001
Net income	$	3,668	$	2,130	$	8,426	$	5,576
Change in unrealized net gain on marketable securities, net of tax	130		339		47		595
Comprehensive income	$	3,798	$	2,469	$	8,873	$	6,171

5.       RECENT ACCOUNTING  PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangibles Assets, FAS 142.  Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment.  Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives, but with no maximum life.  The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.  With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective January 1, 2002.  The adoption of FAS 142 had no impact on our financial statements.

In October 2001, the FASB issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, FAS 144, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 supercedes the Financial Accounting Standards Board’s Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. FAS 144 is effective for fiscal years beginning after December 15, 2001.  The adoption of FAS 144 had no impact on our financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, dependence on others, the impact of competitive products, the enforcement, defense and resolution of license and patent disputes, changing market conditions and the other risks detailed under “Factors that May Affect Results” and throughout our Annual Report on Form 10–K for the year ended December 31, 2001.  Actual results may differ materially from those projected.  These forward-looking statements represent our judgment as of the date of the filing of this Form 10–Q and our Form 10-K, respectively.  We disclaim any intent or obligation to update these forward-looking statements.

Overview

We were established in 1988. We are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician’s ability to diagnose debilitating and life-threatening diseases and conditions. We combine integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes.

Our diagnostics business is a leading provider of rapid tests that aid in the diagnosis of a variety of critical diseases and conditions.  These tests are sold worldwide primarily for use in hospitals.  Our two product platforms are designed to provide rapid results through either qualitative visual readings or  meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously.  They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool.  Among the products expected to contribute most significantly to product sales in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac Panel and the Triage BNP Test.

The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States.  We aim to place our products in emergency departments and other point-of-care locations, as well as in laboratories.  In marketing our products we utilize a direct sales team that includes general account executives and cardiovascular account executives, who have extensive experience selling cardiovascular devices or drugs.  The Fisher HealthCare division of the Fisher Scientific Company, Fisher, distributes our products in U.S. hospitals and supports our direct sales force.  In international markets we utilize a network of country-specific and regional distributors.

In March 1999, we launched Biosite Discovery, a collaborative research program dedicated to the identification of new protein markers for acute diseases.  Through Biosite Discovery, we conduct analyses on both known disease markers and potential markers accessed from internal research, the public domain, pharmaceutical and biotechnology companies in order to discover single-analyte markers or multiple-analyte markers (protein arrays) with diagnostic utility.  We refer to this process as marker mining.  If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology companies with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman’s Hospital, Duke University, Eli Lilly and Company, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex, Inc., MedImmune, Inc. and the San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology.  Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for

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which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration.  Also under Biosite Discovery, we’ve executed several license or cross-license agreements with companies such as BioInvent International, Morphosys AG, Dyax Corp. and others.

A significant portion of our product sales to date have resulted from sales of the Triage Drugs of Abuse Panel product line.  Sales of Triage Drugs of Abuse Panel products represented approximately 39% of our product sales in the first nine months of 2002 and 59% of our product sales during the full year 2001.  We believe that domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market.  Our cardiovascular products, consisting of the Triage Cardiac Panel, Triage BNP Test and Triage Meters, are becoming a greater proportion of our product sales as a result primarily of their own sales growth.  Sales of our Triage BNP Test represented 32% of our products sales in the first nine months of 2002, compared to only 6% of our product sales during the full year 2001.

All of our products are marketed by Fisher, pursuant to a distribution agreement, in the U.S. hospital market segment.  The term of the distribution agreement expires on December 31, 2003 and automatically renews for an additional two years unless a notice of non-renewal is delivered by either company.  Product sales to Fisher represented 85% of our product sales in the first nine months of 2002 and 85% of our product sales during the full year 2001.  Fisher reported to us that end-user sales of our products by Fisher were $70.4 million during the first nine months of 2002, and $62.1 million during the full year 2001.  Fisher’s end-user sales are not directly comparable to our product sales because the timing of shipments from Biosite to Fisher may not match the timing of shipments from Fisher to the end-user hospitals and due to changes in the quantities of our products Fisher purchases and stocks in its inventory.  Internationally, our products are distributed by country-specific and regional distributors.

We have reported quarterly operating profits since the third quarter of 1999, after incurring quarterly operating losses during the prior seven quarters.  Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts.   We may not be able to maintain profitability in the future.

We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•market acceptance of current or new products

•changes in the mix of products sold

•the timing and variability of significant orders

•seasonal or unanticipated changes in customer demand

•manufacturing capacity constraints, delays or inefficiencies

•competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources

•competitive pressures on average selling prices of our products

•changes in reimbursement policies

•costs, timing and effectiveness of further expansion of our sales force and field support resources

•whether and when new products are successfully developed and introduced by us

•research and development efforts, including clinical trials and new product scale-up activities

•ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues

•attainment of milestones under collaborative agreements necessary to earn contract revenues

•regulatory uncertainties or delays

•product recalls

•shipment problems

•enforcement, defense and resolution of license and patent disputes; and

•costs and timing associated with business development activities, including potential licensing of technologies.

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Operating results would also be adversely affected by a downturn in the market for our products.  Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations, Biosite Discovery and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our Biosite Discovery or product development efforts are unsuccessful or subject to delays.  Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis, and our growth or operating results may not be consistent with predictions made by securities analysts.

Recent Developments

License and patent disputes

In September 2002, we announced that we resolved all outstanding disputes regarding patent and licensing issues with XOMA so as to permit each the freedom to operate its business.  The parties have dismissed the pending legal proceedings between XOMA Ltd. and affiliates and Biosite.  See Part II, Item 1, Legal Proceedings, for more information.

FDA cleared Triage BNP Test for additional use

In the third quarter, we received FDA clearance for the Triage BNP Test to be used for the risk stratification of patients with acute coronary syndromes.  The data were produced in collaboration with the Thrombolysis In Myocardial Infarction (TIMI) Study Group, a research team that has been at the forefront of clinical research in acute coronary syndromes over the past two decades.

Triage BNP Test clinical study

We completed clinical studies pertaining to the potential waived status of the Triage BNP Test and submitted data to the FDA.  The clinical study evaluated the ability of non-professional users to perform the Triage BNP Test and obtain results that are comparable to professional users.  Waived status of the Triage BNP Test would enable us to market the test for prescription home use, as well as to physician office laboratories, outpatient clinics and other non-acute care hospital health care facilities that are not currently not able to run tests classified as moderately complex.  We currently do not have distribution arrangements or experience for the commercialization of the Triage BNP Test in those settings.

2002 Nonqualified Stock Incentive Plan

On November 7, 2002 the Board of Directors adopted the Biosite Incorporated 2002 Nonqualified Stock Incentive Plan (2002 Stock Plan).  The Board of Directors reserved 550,000 shares for issuance under the plan.  Directors and officers are not eligible to participate in the plan.  The Board of Directors adopted the plan to accommodate Biosite’s growth strategy, which includes hiring a significant number of employees over the next nine months.  Stockholder approval is not required for implementation of the 2002 Stock Plan.

Critical Accounting Policies Involving Management Assumptions and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes.  In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality.  We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below.  However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

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Revenue Recognition.  We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment.  Generally, we do not have any significant post-delivery obligations associated with our product sales.  We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements.  Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration.  Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless the Company has no further continuing performance obligations related to the fees.  Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance.  Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement.  Contract revenues that are based on the performance of and collection by our collaborative partners or their partners are deferred until such performance is complete and collection is probable.  We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

The Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition, SAB No. 101, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues.  We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Inventories and Related Allowance for Obsolete and Excess Inventory.   Net inventories are valued at the lower of the first-in, first-out (FIFO) cost or market value and have been reduced by an allowance for excess and obsolete inventories.  We utilize a standard cost system to track our inventories on a part-by-part, full absorption cost basis.   Adjustments are made to the standard labor and standard overhead costs to approximate actual labor and actual overhead costs on a FIFO cost basis.  The estimated allowance for excess and obsolete inventories is based on management’s review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

Intangible and Other Long-Lived Assets.  At September 30, 2002, we had approximately $32.8 million of long-lived assets, including $17.3 million of property, plant and equipment and $8.1 million of capitalized license rights.  Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives.  Useful lives are based on management’s estimates of the period that the assets will generate revenue directly or indirectly.  License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license.  The estimated revenues used as the base by which we amortize the license rights only includes estimated sales for products we are currently selling and does not include any estimated product sales expected to be realized during the license amortization term from products still in development today.  Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Deferred Income Taxes.  As of September 30, 2002, we have approximately $5.5 million of deferred tax assets, consisting primarily of research and development credits.  No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized.  We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets.  Examples of future events that may occur which would make the realization of such assets not likely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

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Results of Operations

Product Sales.   Product sales by product family were as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
Product Family	2002		2001		2002		2001
Triage BNP Test products	$	9,787	$	900	$	22,053	$	1,587
Triage Cardiac Panel products	5,923		4,036		13,543		12,757
Triage Meter products	1,174		198		2,638		552
Triage Drugs of Abuse and TOX Drug Screen products	10,061		9,583		27,356		27,336
Triage Microbiology products	1,158		1,224		3,424		3,245
Total Product Sales	$	28,103	$	15,941	$	69,014	$	45,477

Product sales for the three and nine months ended September 30, 2002 increased of 76% and 52%, respectively, as compared to the same periods of 2001.   The increases in total product sales were primarily attributable to the growth in net sales of our Triage BNP Test, one of our cardiovascular diagnostic products, of  $8.9 million and $20.5 million, respectively.

Due to the continued acceleration in customer demand for the Triage BNP Test, distributor inventory levels of some of our products were below targeted stocking levels at September 30, 2002.  We are expanding our manufacturing capacity through added production shifts and through the implementation of additional automated manufacturing equipment.  Product sales in future quarters will be impacted as we and our distributors attempt to adjust distributor inventories to targeted stocking levels.

Net sales of our cardiovascular products, consisting of our Triage Cardiac Panel, Triage BNP Test and the Triage Meters, totaled $16.9 million and $38.2 million, respectively, for the three and nine months ended September 30, 2002, as compared to $5.1 million and $14.9 million, respectively, for the same periods of 2001.  The net sales growth of our cardiovascular products of 329% and 257%, respectively, for the three and nine months ended September 30, 2002 as compared to the same periods of 2001, was primarily due to growth in sales volume of our Triage BNP Test and the Triage Meters. The Triage BNP Test was launched in the U.S. in December 2000.

The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure.  Other companies have certain diagnostic rights to the protein or have another product under development that may compete against our Triage BNP Test, and we anticipate competition from these companies in the future.   These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test.  Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future.

Net sales of our qualitative products, consisting of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were approximately $11.2 million and $30.8 million, respectively, for the three and nine months ended September 30, 2002, as compared to $10.8 million and $30.6 million, respectively, for the same periods of 2001.  The net sales growth of our qualitative products for the three months ended September 30, 2002, as compared to the same period in 2001, was primarily due to growth in sales volume of our Triage Drugs of Abuse Panel and the Triage TOX Drug Screen.  The net sales growth of our qualitative products for the nine months ended September 30, 2002, as compared to the same period in 2001, was primarily due to growth in sales volume of our Triage Drugs of Abuse Panel sold internationally, Triage C. difficile Panel, Triage Parasite Panel and the Triage TOX Drug Screen.  The net sales impact of sales volume increases of these products was partially offset by a decrease in our average selling price of our domestic sales of the Triage Drugs of Abuse

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Panel.  We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market.  The Triage TOX Drug Screen was launched in the U.S. in February 2002.

Contract Revenues.  Contract revenues consist of revenues associated with our research and development and licensing arrangements, including license fees, milestone revenues, royalties, research funding and antibody fees.  Contract revenues for the three and nine months ended September 30, 2002 were $823,000 and $3.5 million, respectively, compared to $1.1 million and $2.9 million, respectively, for the same periods of 2001.  Contract revenues recognized during the three and nine months ended September 30, 2002 consisted primarily of license fees, research funding and antibody fees.  In June 2000, we entered into an alliance with Medarex Inc.  Under the terms of the agreement, we receive research funding of $3.0 million per year over eight years from Medarex, along with research fees and, if any products are generated through the collaboration, milestone payments and royalties. We recognized $750,000 during each quarter of 2002 and 2001 of research funding from the alliance with Medarex.  Other contract revenues recognized during the three and nine months ended September 30, 2002 and 2001 included license fees, antibody fees, and amortization of up-front technology access fees.  The increase in contract revenues during the first nine months of 2002 resulted primarily from the grant of a non-exclusive license from us to a company for certain proprietary technology.

Biosite Discovery activities are performed and its costs are incurred by certain of our research and development teams.  These Biosite Discovery research and development resources concurrently focus on programs for our partners, which generated our contract revenue, and on internal research and development programs.  Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.3 million and $3.9 million for the three and nine months ended September 30, 2002, respectively, as compared to approximately $1.1 million and $3.2 million for the three and nine months ended September 30, 2001, respectively.   These costs are included in research and development expenses.

Cost of Sales and Gross Profit From Product Sales. Gross profit from product sales for the three and nine months ended September 30, 2002 were $19.3 million and $47.4 million, respectively, representing increases of 64% and 45%, compared to $11.8 million and $32.6 million, respectively, for the same periods of 2001.  Gross profits increased primarily due to an overall increase in product sales.  The overall gross margin for the three and nine months ended September 30, 2002 was 69%, compared to 74% and 72%, respectively, for the same periods of 2001.  The decrease in the overall gross margin was primarily as a result of the changing mix of net sales of our products that have different gross margins and manufacturing inefficiencies experienced as we attempt to increase our manufacturing capacity by adding production shifts and implementing semi-automated and automated manufacturing   equipment into the manufacturing processes.  Our cardiovascular products have lower gross margins than our Triage Drugs of Abuse Panel.  Sales of our cardiovascular products represented 60% and 55% of our product sales for the three and nine months ended September 30, 2002, respectively, compared to 32% and 33%, respectively, for the same periods in 2001.

Our newer products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel during the early stages of their commercialization as manufacturing capacity and production efficiency issues are addressed.  We also expect that although our gross profits may continue to grow, our overall gross margins may continue to decrease as a result of competitive pricing pressures related to the maturing Triage Drugs of Abuse product line and the changing mix of net sales of products with different gross margins.

Selling, General and Administrative Expenses (SG&A expenses). SG&A expenses for the three and nine months ended September 30, 2002 were $9.0 million and $22.9 million, respectively, representing increases of 68% and 39%, respectively, compared to $5.3 million and $16.5 million, respectively, for the same periods of 2001.  The increases in SG&A expenses was primarily associated with the addition of sales, clinical education and technical service resources, expanded sales activities related to our broader product lines, additional marketing activities relating to new products, increased administrative costs to support our expanded operations and higher performance-based compensation, such as sales commissions and bonuses based on the Company’s financial performance.

Selling, general and administrative costs in 2002 are, and will continue to be, higher than in 2001, as we continue to expand our overall operations, including sales and marketing activities for our new products.  We expect greater

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utilization of expanded sales, clinical education and technical service resources, and continued business development activities and administrative support functions.  We also expect our sales commissions and other performance-based compensation to be higher in 2002 than in 2001.  We also expect our SG&A expenses to be higher in 2003 than 2002 for many of these same reasons.  The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our new products and the progress of business development activities.

Research and Development Expenses. Research and development expenses for the three and nine months ended September 30, 2002 were $4.6 million and $12.1 million, respectively, compared to $3.6 million and $10.2 million, respectively, for the same periods of 2001.  During the third quarter and first nine months of 2002, our research and development resources were focused primarily on new product development, the development of potential improvements to our existing products and manufacturing processes, and research activities associated with Biosite Discovery.  Expenses related to the performance of our obligations associated with earning our contract revenues were incurred by our research and development group, primarily Biosite Discovery.  We expect our research and development expenses for 2002 to be higher than in 2001.  The increased expenditures will relate primarily to product development efforts, including the potential development of diagnostic products for stroke and acute coronary syndromes, clinical studies, Biosite Discovery, new product scale-up activities associated with potential new products and performance-based compensation resulting from the Company’s performance versus its beginning of the year goals.  The timing of the expenditures and their magnitudes depends primarily on the progress and success of research and development and the timing of potential product launches.

License and Patent Disputes. Expenses associated with license and patent disputes incurred during the three and nine months ended September 30, 2002 totaled $1.2 million and $4.0 million, respectively, compared to $1.2 million and $1.7 million, respectively, for the same periods of 2001.  No expenses associated with the XOMA litigation were incurred prior to May 2001.  The expenses consisted primarily of legal costs related to our litigation with XOMA.  In September 2002, we announced that we have resolved all outstanding disputes regarding patent and licensing issues with XOMA so as to permit each the freedom to operate its business.  We do not expect any remaining legal expenses related to the XOMA matter to be significant. The parties have agreed to dismiss the pending legal proceedings between XOMA Ltd. and affiliates and Biosite.  License and patent disputes during the nine months ended September 30, 2002 included $223,000 of costs associated with a European patent opposition proceedings concerning one of our patents.  In June 2002, the European Patent Office upheld our patent in oral proceedings.

Interest and Other Income, net. Interest and other income for the three and nine months ended September 30, 2002 decreased $105,000 and $108,000, respectively, from the same periods of 2001.  The decreases resulted primarily from lower returns on our cash equivalents and marketable securities due to overall decline in interest rates, offset by the higher average balance of cash and marketable securities during the third quarter and first nine months of 2002 compared to the same periods of 2001.

Benefit (Provision) for Income Taxes. As a result of the pre-tax income and the estimated tax credits to be generated in 2002, we recorded a provision for income taxes of $5.2 million for the first nine months of 2002.  For the same period in 2001, we recorded a provision for income taxes of $3.5 million. We will continue to assess the likelihood of realization of our tax credits and other net deferred tax assets.  If future events occur that do not make the realization of such assets more likely than not, a valuation allowance will be established against all or a portion of the net deferred tax assets.

Liquidity and Capital Resources

We have financed our operations through cash from operations, private and public placements of equity securities, debt and capital lease financing, cash received under collaborative agreements and interest income.  As of September 30, 2002, we had cash, cash equivalents and marketable securities of approximately $68.3 million compared to $55.5 million as of December 31, 2001.

The increase in cash, cash equivalents and marketable securities during the first nine months of 2002 was largely attributable to cash generated from operating activities of $17.3 million.  The cash generated from operating activities included increases in income taxes payable, account payable and accrued liabilities totaling approximately

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$10.0 million and non-cash expenses such as depreciation and amortization of $3.7 million offset by increases in accounts receivable of $1.8 million and inventory of $2.9 million.   Other sources of cash included the receipt of $2.8 million in proceeds from equipment financing and proceeds from the issuance of stock under our employee stock plans of $1.6 million.  Significant uses of cash during the first nine months of 2002 included expenditures for leasehold improvements and capital equipment of $6.3 million and principal payments under equipment financing debt arrangements of $1.7 million.

The increase in cash, cash equivalents and marketable securities during the first nine months of 2001 was largely attributable to cash generated from operating activities that totaled $17.3 million.  The cash generated from operating activities resulted primarily from the reduction of accounts receivable of $3.6 million, tax benefit of disqualifying dispositions of $4.5 million and a refund of income taxes paid of $1.6 million.  Other significant sources of cash included proceeds from the issuance of common stock under employee stock plans totaling $5.1 million. Significant uses of cash for the first nine months of 2001 included the purchase of leasehold improvements and capital equipment of approximately $5.0 million.

Our primary short-term needs for capital, which are subject to change, are for the support of our commercialization efforts related to our products, including expansion of our direct sales force and field support resources, improvements in our manufacturing capacity and efficiency, facility expansion, new product development,  clinical trials, and the continued advancement of research and development efforts.  We executed agreements to license technologies patented by others that call for milestone payments and future royalties based on product sales utilizing the licensed technologies.  We may enter into additional licensing agreements that may include up-front and annual cash payments, milestone payments and future royalties based on product sales utilizing the licensed technologies. We utilized and may continue to utilize credit arrangements with financial institutions to finance the purchase of capital equipment. Additionally, we may utilize cash generated from operating activities, if any, to meet our capital requirements.

We are also addressing our future facilities expansion needs. We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs.  The estimated purchase price of the land is $28.1 million.  As of October 31, 2002 we had deposited $1.0 million in escrow.  There are various contingencies that remain before the close of escrow, including the construction of an access road that must be complete by January 31, 2003, subject to allowable delays.  Upon the close of escrow, expected to occur by the end of April 2003, we intend to pursue financing for a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing.  The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed.  The first phase will provide us with approximately 200,000 to 350,000 square feet of space.  The total land and construction cost of the first phase is estimated to range between $70 million and $83 million.  We expect the first phase of construction to be completed in 2004.  We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004.  Expanding into a new facility would be expected to result in both cash expenditures, for the purchase of the land and construction costs, that would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

We believe that our available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy our funding needs for at least the next 24 months, except for the potential funding requirement of a portion of the cost of our facility expansion plan.  If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities.  We intend to pursue additional credit facilities to finance a portion of the land purchase price and the subsequent buildings construction costs.   Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants.  Our future liquidity and capital funding requirements will depend on numerous factors, including:

•the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive

•the timing and variability of significant orders

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•seasonal or unanticipated changes in customer demand

•the costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources, expansion of our manufacturing capacity and Biosite Discovery activities and our facilities expansion needs

•the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues

•the timing and results of research and development efforts including clinical studies and regulatory actions regarding our potential products

•changes in third-party reimbursement policies, and

•the costs and timing associated with business development activities, including potential licensing of technologies patented by others.

Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rates, primarily from our variable-rate long-term debt arrangements and, to a lesser extent, our investments in available-for-sale marketable securities.  Under our current policies, we do not use interest rate derivatives instruments to manage this exposure to interest rate changes.  We do have the option to convert our variable-rate long-term debt arrangements to fixed-rate debt arrangements for a nominal transaction fee.  As of September 30, 2002, we had variable-rate debt totaling approximately $31,000.  A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

Additionally, our purchases of Triage Meters from LRE Technology Partner GmbH, LRE,are denominated in Euros and sales of some products to some international customers are denominated in the local currency of customers.  We have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes.  As of September 30, 2002, we had no outstanding forward exchange contracts.  Total receivables and payables denominated in foreign currencies as of September 30, 2002 were not material.

ITEM 4.  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation was performed of the effectiveness of the design and operation of the our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act of 1934) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this quarterly report.  Based upon that evaluation, the CEO and CFO concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required to be disclosed in our periodic SEC filings.  There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these internal controls subsequent to the Evaluation Date.

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FACTORS THAT MAY AFFECT RESULTS

This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in the Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2001.  The factors discussed below should be read in conjunction with the risk factors discussed in our Annual Report on Form 10-K, which are incorporated by reference.

We Have Only a Limited History of Profitability and We May Not Maintain Profitability.  In Addition Our Quarterly Results Will Fluctuate.

We have reported quarterly operating profits since the third quarter of 1999 after incurring quarterly operating losses during the prior seven quarters.  Our operating results may fluctuate on a quarterly or annual basis in the future.  We may not be able to maintain profitability in the future.  We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•market acceptance of current or new products

•changes in the mix of products sold

•the timing and variability of significant orders

•seasonal or unanticipated changes in customer demand

•manufacturing capacity constraints, delays or inefficiencies

•competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources

•competitive pressures on average selling prices of our products

•changes in reimbursement policies

•costs, timing and effectiveness of further expansion of our sales force and field support resources

•whether and when new products are successfully developed and introduced by us

•research and development efforts, including clinical trials and new product scale-up activities

•ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues

•attainment of milestones under collaborative agreements necessary to earn contract revenues

•regulatory uncertainties or delays

•product recalls

•shipment problems

•enforcement, defense and resolution of license and patent disputes; and

•costs and timing associated with business development activities, including potential licensing of technologies.

Operating results would also be adversely affected by a downturn in the market for our products.  Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our product development efforts are unsuccessful or subject to delays.  Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis and our growth or operating results may not be consistent with predictions made by securities analysts.

We Are Dependent on the Development, Introduction, and Market Acceptance of New Products for Revenue Growth and Profitability.

Except for our commercialized products, all of our products are still under development and may not be successfully developed or commercialized on a timely basis, or at all.  If we are unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing for any new

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product or if any new product is not approved for marketing or does not achieve or maintain a significant level of market acceptance, we will be harmed.

We believe that our revenue growth and profitability will substantially depend upon our ability to complete development of and successfully introduce new products, as well as continue to achieve a growing level of market acceptance of our newer products such as the Triage Cardiac Panel and the Triage BNP Test.  In addition, the successful development of some of these new products will depend on the development of new technologies.  We will be required to undertake time-consuming and costly development activities and seek regulatory clearance for these new products. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products.  Regulatory clearance or approval of any new products may not be granted by the U.S. Food and Drug Administration, the FDA, or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized.

If we fail to establish and maintain:

•reliable, cost-efficient, high volume manufacturing capacity

•a cost-effective sales force, implementation and customer support resources and administrative infrastructure; or

•an effective product distribution system for our products

we may not be able to successfully commercialize our current or new products or maintain or increase the market acceptance of these products.  Unanticipated acceleration of customer demand for our products have and may continue to result in constraints or inefficiencies related to our manufacturing, sales force, implementation resources and administrative infrastructure.  Such constraints or inefficiencies may adversely affect us as a result of delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.

We are Dependent on a Key Distributor and have Limited Direct Distribution Experience.  If Our Distributor’s Relationship Is Terminated, or Our Distributor Fails to Adequately Perform, Our Product Sales Will Suffer.

We rely upon a key distributor alliance with Fisher to distribute our products in the United States and may rely upon distributors to distribute products under development. All of our products are currently marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 85% of product sales in the first nine months of 2002 and 85% in the full year 2001) and internationally by country-specific and regional distributors.  The loss or termination of one or more of these distributors could have a material adverse effect on our sales.   The term of our distribution agreement with Fisher expires on December 31, 2003 and automatically renews for an additional two years unless a notice of non-renewal is delivered by either company.  Over the next few years, we anticipate transitioning the distribution of our products in some European countries to a direct sales and distribution basis.

If any of our distribution or marketing agreements are terminated and we are unable to enter into alternative agreements or if we elect to distribute our products directly, we would have to invest in additional sales and marketing resources, including additional field account executives and field support resources, which would significantly increase future selling, general and administrative expenses.  Changes in the distribution of our products may also result in contract termination fees, disruption of our business, increased competition and decline in product sales and operating profits.  We have limited experience in direct sales, marketing and distribution of our products.  Our direct sales, marketing and distribution efforts may not be successful.  Further, we may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all.  A failure to enter into acceptable distribution agreements or our failure to successfully market our products would have a material and adverse effect on us.

A significant portion of our product sales is made to Fisher domestically and other distributors internationally.  As a result, our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of the end-user customers, Fisher and our other distributors, as well as the changes in inventory levels of our product held by these distributors.  We are unable to verify the inventory levels of our international distributors.  We only have limited visibility over the inventory levels of our products at Fisher.  While we attempt to assist Fisher in maintaining targeted stocking level of our products, we may not consistently be accurate or

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successful.  This process involves the exercise of judgment and use of assumptions as to future uncertainties including end-user customer demand and, as a result, actual results could differ from our estimates.  Inventory levels of our products held by distributors may exceed or fall below the levels we consider desirable on a going-forward basis.

The Triage BNP Test May Encounter Significant Competition From Products To Be Developed and Commercialized By Companies with Greater Financial Capital and Resources

Net sales of our Triage BNP Test represented 32% of our product sales during the first nine months of 2002.  The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure.  Abbott Laboratories, Bayer Diagnostics and Shionogi  & Co., Ltd. have certain diagnostic rights to the protein and we anticipate competition from these companies in the future.   In addition, Roche Diagnostics has submitted a 510(k) pre-market notification for another product that may compete against the Triage BNP Test.  These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test.  Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future.

Competition and Technological Change May Make Our Products Less Attractive or Obsolete.

Diagnostics

The market in which we compete is intensely competitive.  Our competitors include:

•companies making laboratory-based tests and analyzers

•clinical reference laboratories; and

•other rapid diagnostic test manufacturers.

Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories.  We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures.  This will require physicians to change their established means of having such tests performed.  Our products may not be able to compete with the testing services provided by traditional laboratory services.

In addition, companies with a significant presence in the diagnostic market, such as:

•Abbott Laboratories

•Dade Behring

•Roche Diagnostics

•Bayer Diagnostics, and

•Beckman Coulter

have developed or are developing diagnostic products that do or will compete with our products.  These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us.  Moreover, these competitors offer broader product lines and have greater name recognition than us, and offer discounts as a competitive tactic.  In addition, several smaller companies are currently making or developing products that compete with or will compete with our products.

Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete.  Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future.  In addition, competitors, many of which have made substantial investments in

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competing technologies, may be more effective than us or may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

Discovery

Several companies, including Cambridge Antibody Technology, Morphosys and Dyax have invested significantly in phage display technology and each generally employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies.  Our competitors entered the marketplace before Biosite Discovery and have established a significant presence in the marketplace.  Our competitors may succeed in entering into agreements and providing antibodies to biotechnology and pharmaceutical companies and thereby prevent Biosite Discovery from penetrating the marketplace.

Our Limited Manufacturing Experience and Our Potential Inability to Scale-Up Manufacturing May Adversely Affect Our Ability to Produce Products.

We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Significant additional resources, implementation of additional automated and semi-automated manufacturing equipment or changes in our manufacturing processes has, and may continue to be, required for the scaling-up of each new product prior to commercialization or in order to meet increasing customer demand once commercialization begins, and this work may not be completed successfully or efficiently.

In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise.  These products may not be able to be manufactured by us or any other party at a cost or in quantities to make these products commercially viable.  If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, our ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on us.

Manufacturing and quality problems have arisen and may arise as we attempt to scale-up our manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all.  Unanticipated acceleration or deceleration in customer demand for our products has and may continue to result in manufacturing constraints or production inefficiencies.  Our manufacturing facilities and those of our contract manufacturers are, or will be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and these facilities are subject to Quality System Regulations requirements of the FDA.  We, or our contractors, may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on us.

We Are Dependent in the Near Term on Sales of the Triage Drugs of Abuse Panel.  A Significant Reduction in Sales of the Triage Drugs of Abuse Panel Would Harm Us.

Sales of the Triage Drugs of Abuse Panel products accounted for approximately 39% of our product sales in the first nine months of 2002 and 59% of our product sales during the full year 2001.  Additionally, the Triage Drugs of Abuse Panel provides the highest gross margins of our different product lines.  We expect our revenue and profitability to substantially depend on the sale of the Triage Drugs of Abuse Panel products for the foreseeable future.  A significant reduction in demand for the Triage Drugs of Abuse Panel products would have a material adverse effect on us.  We believe that domestic net sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated.  Competitive pressures could also erode our profit margins for the Triage Drugs of Abuse Panel products.  Our continued growth will depend on our ability to

•successfully commercialize our newer products, including the Triage TOX Panel

•develop and commercialize other products; and

•gain additional acceptance of the Triage Drugs of Abuse Panel products in new market segments, such as international markets.

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We may not be able to successfully commercialize, maintain or increase the market acceptance of our newer products, including the Triage Cardiac Panel and Triage BNP Test, which represented 20% and 32%, respectively, of our product sales in the first nine months of 2002, as compared to 27% and 6%, respectively, of our product sales for the same periods of 2001. We may not be able to maintain or expand our share of the drug-testing and cardiovascular markets. Technological change, competition or the development of new or improved diagnostic technologies could result in our products becoming obsolete or noncompetitive.

We Are Dependent on Sole-Source Suppliers For Our Products.  A Supply Interruption Would Harm Us.

Key components and raw materials used in the manufacture of our products are provided by single-source vendors.  Any supply interruption in a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified or alternative manufacturing processes are implemented and, as a result, would have a material adverse effect on us.  In addition, an uncorrected impurity or supplier’s variation in a raw material, either unknown to us or incompatible with our manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products.  We have under development products that, if developed, may require us to enter into additional supplier arrangements or implement alternative manufacturing processes.  We may not be able to enter into additional supplier arrangements on commercially reasonable terms, or at all.  We also may not be able to implement alternative manufacturing processes that are effective and cost efficient, or at all.  Failure to obtain a supplier or the implementation of alternative processes for the manufacture of our future products, if any, would have a material adverse effect on us.

We rely upon LRE for production of the fluorescent meter used in connection with our Triage Meter System platform products, including the Triage Cardiac System, Triage BNP System and Triage TOX Drug Screen and others currently under development.  If LRE is unable to manufacture sufficient quantities or quality of meters, this may adversely affect

• our sales and profit margins

• our ability to develop and manufacture products on a timely and competitive basis; or

• the timing of market introductions and subsequent sales of products incorporating the Triage Meters.

Health Care Reform and Restrictions on Reimbursement May Adversely Affect Our Results.

In the United States, health care providers that purchase our products and other diagnostic products generally rely on third-party payors to reimburse all or part of the cost of the procedure.  Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services.  In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement.  Further, some health care providers are moving towards a managed care system in which providers contract to provide comprehensive health care for a fixed cost per patient.  We are unable to predict what changes will be made in the reimbursement methods utilized by third-party payors. We could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which our products are used.

Third-party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our products on a profitable basis.  Failure by physicians and other users to obtain reimbursement from third-party payors, or changes in government and private third-party payors’ policies toward reimbursement of tests utilizing our products could have a material adverse effect on us.  Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for our existing products or products under development.

In addition, market acceptance of our products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in

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international markets vary significantly by country, and include both government sponsored health care and private insurance.

We believe that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by us.  Third-party reimbursement and coverage may not be available or adequate in either U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our products or our ability to sell our products on a profitable basis.

Our Patent and Proprietary Technology May Not Provide Us With Any Benefit and the Patents of Others May Prevent Us From Commercializing Our Products.

Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights.  Our patent applications may not result in the issuance of any patents.  Additionally, our patent applications may not have priority over others’ applications, or, if issued, our patents may not offer protection against competitors with similar technology.  Any patents issued to us may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage.

Our products and activities may be covered by technologies that are the subject of patents issued to, and patent applications filed by, others.  We have obtained licenses for some technologies.  We may negotiate to obtain other licenses for technologies patented by others.  Some of our current licenses are subject to rights of termination and may be terminated.  Our licensors may not abide by their contractual obligations and, as a result, may limit the benefits we currently derive from their licenses.  We may not be able to renegotiate or obtain licenses for technology patented by others on commercially reasonable terms, or at all.  We may not be able to develop alternative approaches if we are unable to obtain licenses and our current and future licenses may not be adequate for the operation of our business.  The failure to obtain, maintain or enforce necessary licenses or to identify and implement alternative approaches would prevent us from operating some or all of our business and would have a material adverse effect on us.

Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others.  We have already settled a number of patent infringement claims in the past.

Long-lived and Intangible Assets May Become Impaired and Result in An Impairment Charge

At September 30, 2002, we had approximately $17.3 million of property, plant and equipment and $8.1 million of capitalized license rights.  The carrying amounts of these long-lived and intangibles assets are affected whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other items. Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from long-lived and intangible assets. In the event impairment exists, an impairment charge would be determined by comparing the carrying amount of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. An impairment charge may result in a material adverse effect on our operating results.  In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.

As of September 30, 2002, we have approximately $4.2 million of long-term deferred tax assets, consisting primarily of research and development credits.  No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized.  We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets.  Examples of future events that may occur which would make the realization of such assets not likely

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would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

The Legal Proceedings to Obtain Patents and Litigation of Third-Party Claims of Intellectual Property Infringement Could Require Us to Spend Substantial Amounts of Money and Could Impair Our Operations.

We may become subject to additional patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office, or USPTO, to determine the priority of inventions. We also may receive correspondence from other parties calling to our attention the existence of patents that they believe cover technology that is or may be incorporated in our products and products under development.  Some of this correspondence may include offers to negotiate the licensing of the patented technologies.  There can be no assurance that these matters would not result in litigation to determine the enforceability, scope, and validity of the patents.  Litigation, if initiated, could seek to recover damages as a result of any sales of the products and to enjoin further sales of such products.

Litigation that could be brought forth by other parties may result in material expenses to us and significant diversion of effort by our technical and management personnel, regardless of the outcome.  The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that we had no successful defense to such claims.  An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling our products, which would have a material adverse effect on us.

We also rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position.  Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, and we may not be able to protect our trade secrets or our rights to our trade secrets.

Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to us.  Patent applications of others may have priority over patent applications filed by us.

Our commercial success depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology.  We may infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes.  We or our collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may not be made available on commercially acceptable terms, or at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there is significant litigation in the industry regarding patent and other intellectual property rights.  Litigation concerning patent and other intellectual property rights could consume a substantial portion of our managerial and financial resources, which would have a material adverse effect on us.

We May Need Additional Capital.  If Additional Capital is not Available, We May Have to Curtail or Cease Operations.

If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities.  Additional capital, if needed, may not be available on satisfactory terms, or at all.

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Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants.  Our future liquidity and capital funding requirements will depend on numerous factors, including:

•the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive

•the timing and variability of significant orders

•seasonal or unanticipated changes in customer demand

•the costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources, expansion of our manufacturing capacity and Biosite Discovery activities and our facilities expansion needs

•the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues

•the timing and results of research and development efforts including clinical studies and regulatory actions regarding our potential products

•changes in third-party reimbursement policies; and

•the costs and timing associated with business development activities, including potential licensing of technologies patented by others.

The failure by us to raise capital on acceptable terms when needed would cause us to have to scale back our operations, reduce our work force and license to others products we would otherwise seek to develop or commercialize ourselves.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Ownership of a New Corporate Headquarters May Negatively Impact Operating Results

We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs.  The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed.  The first phase will provide us with approximately 200,000 to 350,000 square feet of space.  The total cost of the land and construction costs of the first phase is estimated to range between $70 million and $83 million.  We expect the first phase of construction to be completed in 2004.   We expect our occupancy costs to increase primarily due to increased square footage.  Should there be a downturn in our business or the markets in which we compete, we may not have a need to expand our facilities as we have planned.  As a result, we may then seek an alternative use for all or a portion of the property, or seek to sell the property, which may have a negative impact on our operating results.

The Regulatory Approval Process is Expensive, Time Consuming and Uncertain.  As a Result, We May Not Obtain Required Approvals or Previously Acquired Approvals for the Commercialization of Our Products May Be Rescinded.

The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies.  Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. We will not be able to commence marketing or commercial sales in the United States of new products under development until we receive clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process.  Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution.  The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by us.

In the United States, medical devices are classified into one of three classes (Class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, pre-market notification and adherence to the Quality System Regulation, QSR), and Class II devices are subject to general and special controls (e.g., performance standards, post-market

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surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive pre-market clearance by the FDA to ensure their safety and effectiveness, e.g., life-sustaining, life-supporting and implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices.

Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance through clearance of a 510(k) notification or approval of a pre-market approval, PMA, application. A PMA application must be filed if a proposed device is a new device not substantially equivalent to a legally-marketed Class I or Class II device or if it is a pre-amendment Class III device for which the FDA has called for PMAs.  A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical investigations, bench tests, laboratory and animal studies. The PMA application must also contain a complete description of the device and its components and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and any training materials. The PMA approval process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.

Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is complete, the FDA will accept the application for filing. Once the submission is accepted, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the application is accepted, but may take significantly longer. The review time is often significantly extended by FDA requests for additional information or clarification of information already provided in the submission. During the review period, it is likely that an advisory committee, typically a panel of clinicians, will be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendation of the advisory panel. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer’s facilities to ensure that the facilities are in compliance with applicable QSR requirements. If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a non-approvable letter. The FDA may determine that additional clinical investigations must be performed, in which case the PMA may be delayed for one or more years while additional clinical investigations are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to an approved PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.

A 510(k) clearance will be granted if the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed Class I or Class II medical device or to a pre-amendment Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring submission of clinical data and other performance data. It generally takes from four to twelve months from submission to obtain 510(k) pre-market clearance but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device or that additional information is needed before a substantial equivalence determination can be made. A “not substantially equivalent” determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions.

We have made modifications to our products since receipt of initial 510(k) clearance. With respect to several of these modifications, we filed new 510(k) notices describing the modifications and have received FDA clearance of

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those 510(k) notices. We made other modifications to some of our products that we believe do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of our determinations not to submit a new 510(k) notice for any of these modifications, or would not require us to submit a new 510(k) notice for any of these modifications made to our products.  If the FDA requires the Company to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified products until the 510(k) notice is cleared by the FDA.

We are uncertain of the regulatory path to market that the FDA will ultimately apply to our products currently in development. Although the Triage Drugs of Abuse Panel, Triage C. difficile Panel, Triage Parasite Panel, Triage Cardiac Panel and Triage BNP Test received 510(k) clearance, a PMA was initially required for the Triage BNP Test and may be required for the other products now in development.  There can be no assurance that the FDA will not determine that we must adhere to the more costly, lengthy and uncertain PMA approval process for any of our products in development.

We may not be able to obtain necessary regulatory approvals or clearances for our products on a timely basis, if at all.  Delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

Before the manufacturer of a device can submit the device for FDA approval or clearance, it generally must conduct a clinical investigation of the device. Although clinical investigations of most devices are subject to the investigational device exemption, IDE, requirements, clinical investigations of in vitro diagnostic, IVD, tests, such as all of our products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA’s prior clearance or approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition, the IVD must be labeled for research use only, RUO, or investigational use only, IUO, and distribution controls must be established to assure that IVDs distributed for research or clinical investigation are used only for those purposes.

We intend to conduct clinical investigations of our products under development, which will entail distributing them in the United States on an IUO basis.  There can be no assurance that the FDA would agree that our IUO distribution of our IVD products under development will meet the requirements for IDE exemption. Furthermore, failure by us or the recipients of our products under development to maintain compliance with the IDE exemption requirements could result in enforcement action by the FDA, including, among other things, the loss of the IDE exemption or the imposition of other restrictions on our distribution of our products under development, which would adversely affect our ability to conduct the clinical investigations necessary to support marketing clearance or approval.

Any devices manufactured or distributed by us pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to QSR, which includes testing, control, documentation, and other quality assurance requirements. Manufacturers must also comply with Medical Device Reporting, MDR, requirements that a manufacturer report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.

We are subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR requirements and other applicable regulations. The QSR requirements include the addition of design controls that will likely increase the cost of compliance.  Changes in existing requirements or adoption of new requirements could have a material adverse effect on our business, financial condition and results of operation. There can be no assurance that we will not incur significant costs to comply with laws and regulations in the future or that

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laws and regulations will not have a material adverse effect upon our business, financial condition and results of operations.

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that we will not incur significant costs to comply with laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business, financial condition and results of operations.

The use of our products is also affected by the Clinical Laboratory Improvement Amendments of 1988, CLIA, and related federal and state regulations which provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections. CLIA categorizes tests as “waived,” “moderately complex” or “highly complex,” on the basis of specific criteria. There can be no assurance that any future amendment of CLIA or the promulgation of additional regulations impacting laboratory testing will not have a material adverse effect on our ability to market our products or on our business, financial condition or results of operations.

The Food and Drug Administration Modernization Act of 1997 makes changes to the device provisions of the FD&C Act or the Act and other provisions in the Act affecting the regulation of devices.  Among other things, the changes will affect the Investigational Device Exemption, 510(k) and PMA processes, and also will affect device standards and data requirements, procedures relating to humanitarian and breakthrough devices, tracking and postmarket surveillance, accredited third-party review, and the dissemination of off-label information.  We cannot predict how or when these changes will be implemented or what effect the changes will have on the regulation of our products.  There can be no assurance that the new legislation will not impose additional costs or lengthen review times of our products.

We Are Dependent on Others for the Development of Products.  The Failure of Our Collaborations to Successfully Develop Products Would Harm Our Business.

Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with third parties.  We are or will be dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected and no revenue may be derived from these arrangements.  Under our Biosite Discovery collaborations, we rely and are dependent upon other parties to perform their responsibilities.  In the third quarter of 2001, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the then existing dispute between Biosite and XOMA.  During the fourth quarter of 2001, we established a $267,000 reserve for doubtful accounts related to our collaboration with Large Scale Biology Corporation as a result of the impact of the then existing XOMA dispute on our collaboration with them.  On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement.  We do not agree with Large Scale Biology Corporation’s position and are attempting to find a mutually acceptable solution.

We entered into agreements with partners for the development and marketing of products. The agreements are subject to rights of termination and may be terminated.  Our collaborators may not abide by their contractual obligations and may discontinue or sell their current lines of business.  The research for which we receive or provide funding may not lead to the development of products.  We intend to enter into additional development and marketing agreements.  We may not be able to enter into agreements on acceptable terms, or at all.

We May Not Be Able to Manage Our Growth.

We anticipate increased growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations as new products are developed and commercialized.  This growth will result in an increase in responsibilities for both existing and new management personnel. Our ability to manage growth effectively will require us to continue to implement and improve our operational, financial and management

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information systems and to train, motivate and manage our employees.  We may not be able to manage our expansion, and a failure to do so could have a material adverse effect on us.

If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional Personnel, We May Not Be Able to Pursue Collaborations or Develop Our Own Products.

Our future success depends in part on the continued service of our key technical, sales, marketing and executive personnel, and our ability to identify, hire and retain qualified personnel.  Competition for such personnel is intense and we may not be able to retain existing personnel or identify or hire additional personnel.

We May Have Significant Product Liability Exposure.

The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability claims.  Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy.  Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all.  In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage, that claim could exceed our total assets.

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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On May 10, 2001, we received notice from XOMA Ltd. and its affiliates, XOMA, alleging that we have breached our obligations under three license agreements with XOMA.  The license agreements relate to the bacterial expression of antibodies.  On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA’s threat to terminate the agreements.  On July 5, 2001, XOMA filed a complaint in the same court (the “XOMA action”).  In September, 2001, the Court denied Biosite’s request for a preliminary injunction, dismissed XOMA’s action in part with leave to amend, and dismissed Biosite’s action without prejudice to Biosite’s right to plead its claims in defense and counterclaims in the XOMA action.  XOMA’s complaint was to allege fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite.  XOMA sought injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages.  On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference.  In September 2002, we announced that we have resolved all outstanding disputes regarding patent and licensing issues with XOMA so as to permit each the freedom to operate its business.  The parties have dismissed the pending legal proceedings between XOMA Ltd. and affiliates and Biosite.

Agreements reached between the two companies include the following:

•XOMA will receive a royalty-free, irrevocable and perpetual license to practice Biosite’s “Dower” patents (that are related to the practice of multi-chain antibody phage display) with regard to certain activities, as well as an assignment of Biosite’s antibody expression technology that was announced earlier this year.  Biosite will receive a non-exclusive license to the assigned patent rights.

•Biosite will receive a royalty-free, irrevocable and perpetual license to utilize XOMA’s bacterial cell expression technology for production of antibodies as well as for the development of new antibody products.  This license also will allow Biosite to transfer antibodies to its Biosite Discovery partners.

•XOMA will have the right to present an agreed number of targets to Biosite and receive expression libraries including screened high-affinity antibodies for each target.

•XOMA’s license to Biosite for the LBP diagnostic assay is terminated by mutual agreement.  Those rights were obtained by Biosite in 1996 but were never commercialized.

•The settlement includes entry of a consent judgment dismissing the pending legal proceedings with prejudice.

ITEM 5.  OTHER INFORMATION

The Chief Executive Officer and Chief Financial Officer of the Company have certified that the Quarterly Report of the Company on Form 10-Q for the quarterly period ended September 30, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. (ss) 78m or (ss) 78o(d)) and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits

10.1         Biosite Incorporated 2002 Nonqualified Stock Incentive Plan

(b)     Reports on Form 8-K

On August 14, 2002, we filed a current report on Form 8-K, for purposes of voluntarily complying with Order No. 4-460 and Section 21(a)(1) of the Securities Exchange Act of 1934, by voluntarily filing as exhibits separate statements under oath by the Principal Executive Officer and Principal Financial Officer regarding facts and circumstances relating to Exchange Act of 1934 Filings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:  November 13, 2002		BIOSITE INCORPORATED
	By:	/s/ CHRISTOPHER J. TWOMEY
		Christopher J. Twomey
		Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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CERTIFICATIONS

I, Kim D. Blickenstaff, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Biosite Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002
	/s/ Kim D. Blickenstaff
	Kim D. Blickenstaff
	President, Chief Executive Officer, Secretary and Treasurer

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I, Christopher J. Twomey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Biosite Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002
	/s/ CHRISTOPHER J. TWOMEY
	Christopher J. Twomey
	Vice President, Finance and Chief Financial Officer

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EX-10.1

Exhibit 10.1

 BIOSITE INCORPORATED

2002 NONQUALIFIED

STOCK INCENTIVE PLAN

ARTICLE 1            INTRODUCTION.

The Plan was adopted by the Board on November 7, 2002, to be effective on that date.

The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Participants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Participants with exceptional qualifications and (c) linking Participants directly to stockholder interests through increased stock ownership.  The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which shall only include nonstatutory stock options) or stock appreciation rights.

The Plan shall be governed by, and construed in accordance with, the laws of the State of California.

ARTICLE 2            ADMINISTRATION.

2.1           Committee Composition.  The Plan shall be administered by the Committee.  Except as provided below, the Committee shall consist exclusively of directors of the Company, who shall be appointed by the Board.  In addition, the composition of the Committee shall satisfy:

(a)         Such requirements, if any, as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b–3 (or its successor) under the Exchange Act; and

(b)         Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code.

The Board may act on its own behalf with respect to Outside Directors and may also appoint one or more separate committees composed of one or more officers of the Company who need not be directors of the Company and who need not satisfy the foregoing requirements, who may administer the Plan with respect to Participants who are not “covered employees” under section 162(m)(3) of the Code and who are not required to report pursuant to § 16(a) of the Exchange Act.

2.2           Committee Responsibilities.  The Committee shall (a) select the Participants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan.  The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan.  The Committee’s determinations under the Plan shall be final and binding on all persons.

ARTICLE 3            SHARES AVAILABLE FOR GRANTS.

3.1           Basic Limitation.  Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares.  The aggregate number of Common Shares available for Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall not exceed five hundred fifty thousand (550,000).  The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10.

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3.2           Additional Shares.  If Stock Units, Options or SARs are forfeited or if Options or SARs terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for Awards under the Plan.  If Restricted Shares are forfeited before any dividends have been paid with respect to such Shares, then such Shares shall again become available for Awards under the Plan.  If Stock Units are settled, then only the number of Common Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan.  If SARs are exercised, then only the number of Common Shares (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan.

3.3           Dividend Equivalents.  Any dividend equivalents distributed under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units.

ARTICLE 4            ELIGIBILITY AND PARTICIPATION.

4.1           Eligibility.  Only Eligible Employees and consultants (who are natural persons) of the Company, Parent or Subsidiary shall be eligible for designation as Participants by the Committee, provided, however, that Officers and members of the Board shall not be eligible for designation as Participants by the Committee or the Board and shall not be eligible to receive any Awards under this Plan.

4.2           Participation.  Only persons eligible to participate in this Plan as provided in Section 4.1 above and who are designated as Participants by the Committee and are granted specific Awards by the Committee  under this Plan shall participate in this Plan.

ARTICLE 5            OPTIONS.

5.1           Stock Option Agreement.  Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company.  Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan.  The provisions of the various Stock Option Agreements entered into under the Plan need not be identical.  Options may be granted in consideration of a cash payment or in consideration of a reduction in the Optionee’s other compensation.  A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2.

5.2           Number of Shares.  Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10.

5.3           Exercise Price.  Each Stock Option Agreement shall specify the Exercise Price provided that the Exercise Price under an NSO shall in no event be less than the par value of the Common Shares subject to such NSO.  In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding.

5.4           Exercisability and Term.  Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable.  The Stock Option Agreement shall also specify the term of the Option.  A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service.

Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited.  NSOs may also be awarded in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited.

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5.5           Effect of Change in Control.  The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.

5.6           Modification or Assumption of Options.  Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options.  The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option.

ARTICLE 6            PAYMENT FOR OPTION SHARES.

6.1           General Rule.  The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows.  The Exercise Price may be paid in such form permitted in the Stock Option Agreement for such Options and the Committee may, in its discretion at any time accept payment in any form(s) described in this Article 6.

6.2           Surrender of Stock.  To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for more than six months.  Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan.

6.3           Exercise/Sale.  To the extent that this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

6.4           Exercise/Pledge.  To the extent that this Section 6.4 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Common Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

6.5           Promissory Note.  To the extent that this Section 6.5 is applicable, payment may be made with a full-recourse promissory note with interest at a rate to be determined by the Company; provided that the par value of the Common Shares shall be paid in cash.

6.6           Other Forms of Payment.  To the extent that this Section 6.6 is applicable, payment may be made in any other form that is consistent with applicable laws, regulations and rules.

ARTICLE 7            STOCK APPRECIATION RIGHTS.

7.1           SAR Agreement.  Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between the Optionee and the Company.  Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan.  The provisions of the various SAR Agreements entered into under the Plan need not be identical.  SARs may be granted in consideration of a reduction in the Optionee’s other compensation.

7.2           Number of Shares.  Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 10.  SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 250,000 Common Shares, subject to adjustment in accordance with Article 10.

7.3           Exercise Price.  Each SAR Agreement shall specify the Exercise Price.  An SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding.

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7.4           Exercisability and Term.  Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable.  The SAR Agreement shall also specify the term of the SAR.  An SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service.  SARs may also be awarded in combination with Options, Restricted Shares or Stock Units, and such an Award may provide that the SARs will not be exercisable unless the related Options, Restricted Shares or Stock Units are forfeited.  An SAR may be included in an NSO at the time of grant or thereafter.  An SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.

7.5           Effect of Change in Control.  The Committee may determine, at the time of granting an SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company.

7.6           Exercise of SARs.  The exercise of an SAR shall be subject to the restrictions imposed by Rule 16b–3 (or its successor) under the Exchange Act, if applicable.  If, on the date when an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion.  Upon exercise of an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine.  The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price.

7.7           Modification or Assumption of SARs.  Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price.  The foregoing notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR.

ARTICLE 8            RESTRICTED SHARES AND STOCK UNITS.

8.1           Time, Amount and Form of Awards.  Awards under the Plan may be granted in the form of Restricted Shares, in the form of Stock Units, or in any combination of both.  Restricted Shares or Stock Units may also be awarded in combination with NSOs or SARs, and such an Award may provide that the Restricted Shares or Stock Units will be forfeited in the event that the related NSOs or SARs are exercised.

8.2           Payment for Awards.  To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares.  To the extent that an Award is granted in the form of Restricted Shares from the Company’s treasury or in the form of Stock Units, no cash consideration shall be required of the Award recipients.

8.3           Vesting Conditions.  Each Award of Restricted Shares or Stock Units shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement.  A Stock Award Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events.  The Committee may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company.

8.4           Form and Time of Settlement of Stock Units.  Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee.  The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors.  Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days.  Vested Stock Units may be settled in a lump sum or in installments.  The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later

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date.  The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents.  Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10.

8.5           Death of Recipient.  Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries.  Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company.  A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death.  If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate.

8.6           Creditors’ Rights.  A holder of Stock Units shall have no rights other than those of a general creditor of the Company.  Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Award Agreement.

ARTICLE 9            VOTING AND DIVIDEND RIGHTS.

9.1           Restricted Shares.  The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders.  A Stock Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares.  Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.  Such additional Restricted Shares shall not reduce the number of Common Shares available under Article 3.

9.2           Stock Units.  The holders of Stock Units shall have no voting rights.  Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents.  Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding.  Dividend equivalents may be converted into additional Stock Units.  Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both.  Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach.

ARTICLE 10          PROTECTION AGAINST DILUTION.

10.1         Adjustments.  In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the number of NSOs to be granted to Outside Directors under Section 4.2, (d) the number of Stock Units included in any prior Award which has not yet been settled, (e) the number of Common Shares covered by each outstanding Option and SAR or (f) the Exercise Price under each outstanding Option and SAR.  Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

10.2         Reorganizations.  In the event that the Company is a party to a merger or other reorganization, outstanding Options, SARs, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization.  Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash.

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ARTICLE 11          AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs.  Such awards may be settled in the form of Common Shares issued under this Plan.  Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3.

ARTICLE 12          LIMITATION ON RIGHTS.

12.1         Retention Rights.  Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent or a Subsidiary.  The Company and its Parents and Subsidiaries reserve the right to terminate the service of any employee, consultant or director at any time, with or without cause, subject to applicable laws, the Company’s certificate of incorporation and by-laws and a written employment agreement (if any).

12.2         Stockholders’ Rights.  A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares.  No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10.

12.3         Regulatory Requirements.  Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required.  The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

ARTICLE 13          LIMITATION ON PAYMENTS.

13.1         Excise Tax.   If any acceleration of the vesting of a Participant’s Awards under this Plan  (“Acceleration”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Acceleration shall be reduced to the Reduced Amount.  The “Reduced Amount” shall be whichever of the following which would provide the largest after-tax benefit to the Participant: (i) the largest portion of the Acceleration that would result in no portion of the Acceleration being subject to the Excise Tax or (ii) the largest portion, up to and including the total, of the Acceleration, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Participant’s receipt, on an after-tax basis, of the greater amount of the Acceleration notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. In the event that the Acceleration is to be reduced, such Acceleration shall be cancelled in the reverse order of the date of grant of the Participant’s Awards unless the Participant elects in writing a different order for cancellation.

The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the transaction triggering the Acceleration (“Triggering Transaction”) shall perform the foregoing calculations.  If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Triggering Transaction, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder.  The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

13.2         Calculations.  The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Corporation and Participant within fifteen (15) calendar days after the date on which Participant’s right to Acceleration arises (if requested at that time by

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the Company or Participant) or at such other time as requested by the Company or Participant.  If the accounting firm determines that no Excise Tax is payable with respect to an Acceleration, either before or after the application of the Reduced Amount, it shall furnish the Company and Participant with an opinion reasonably acceptable to Participant that no Excise Tax will be imposed with respect to such Acceleration.  Any good faith determination of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Participant.

13.3         Related Corporations.  For purposes of this Article 13, the term “Company” shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code.

ARTICLE 14          WITHHOLDING TAXES.

14.1         General.  To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan.  The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied.

14.2         Share Withholding.  The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired.  Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash.  Any payment of taxes by assigning Common Shares to the Company may be subject to restrictions, including any restrictions required by rules of the Securities and Exchange Commission.

ARTICLE 15          ASSIGNMENT OR TRANSFER OF AWARDS.

15.1         General.  An Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law, except as approved by the Committee.  However, this Article 15 shall not preclude a Participant from designating a beneficiary who will receive any outstanding Awards in the event of the Participant’s death, nor shall it preclude a transfer of Awards by will or by the laws of descent and distribution.

15.2         Trusts.  Neither this Article 15 nor any other provision of the Plan shall preclude a Participant from transferring or assigning Restricted Shares to (a) the trustee of a trust that is revocable by such Participant alone, both at the time of the transfer or assignment and at all times thereafter prior to such Participant’s death, or (b) the trustee of any other trust to the extent approved in advance by the Committee in writing.  A transfer or assignment of Restricted Shares from such trustee to any person other than such Participant shall be permitted only to the extent approved in advance by the Committee in writing, and Restricted Shares held by such trustee shall be subject to all of the conditions and restrictions set forth in the Plan and in the applicable Stock Award Agreement, as if such trustee were a party to such Agreement.

ARTICLE 16          FUTURE OF THE PLAN.

16.1         Term of the Plan.  The Plan, as set forth herein, was adopted on November 7, 2002, and became effective November 7, 2002.  The Plan shall remain in effect until it is terminated under Section 16.2.

16.2         Amendment or Termination.  The Board may, at any time and for any reason, amend or terminate the Plan.  An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules or applicable stock exchange rules.  No Awards shall be granted under the Plan after the termination thereof.  The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan.

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ARTICLE 17          DEFINITIONS.

17.1         “Award” means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan.

17.2         “Board” means the Company’s Board of Directors, as constituted from time to time.

17.3         “Change in Control” shall mean the occurrence of any of the following events:

(a)         The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization;

(b)         A change in the composition of the Board, as a result of which fewer than one-half of the incumbent directors are directors who either:

(A)          Had been directors of the Company 24 months prior to such change; or

(B)           Were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or

(c)         Any “person” (as such term is used in sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company.

The term “Change in Control” shall not include a transaction, the sole purpose of which is to change the state of the Company’s incorporation.

17.4         “Code” means the Internal Revenue Code of 1986, as amended.

17.5         “Committee” means a committee of the Board, as described in Article 2.

17.6         “Common Share” means one share of the common stock of the Company.

17.7         “Company” means Biosite Incorporated, a Delaware corporation.

17.8         “Eligible Employee” means a common–law employee of the Company, a Parent or a Subsidiary.

17.9         “Exchange Act” means the Securities Exchange Act of 1934, as amended.

17.10       “Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement.  ”Exercise Price,” in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR.

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17.11       “Fair Market Value” means the market price of Common Shares, determined by the Committee as follows:

(a)         If the Common Shares were traded over-the-counter on the date in question but was not traded on the Nasdaq Stock Market or the Nasdaq National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Common Shares are quoted or, if the Common Shares are not quoted on any such system, by the “Pink Sheets” published by the National Quotation Bureau, Inc.;

(b)         If the Common Shares were traded over-the-counter on the date in question and were traded on the Nasdaq Stock Market or the Nasdaq National Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by the Nasdaq Stock Market or the Nasdaq National Market;

(c)         If the Common Shares were traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and

(d)         If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of The Wall Street Journal.  Such determination shall be conclusive and binding on all persons.

17.12       “ISO” means an incentive stock option described in section 422(b) of the Code.

17.13       “NSO” means a stock option not described in section 422 or 423 of the Code.

17.14       “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated there thereunder and also means a person who holds a Vice President or higher position with the Company.

17.15       “Option” means a nonstatutory stock option granted under the Plan and entitling the holder to purchase one Common Share.  The term “Option” shall not include an incentive stock option described section 422 of the Code.

17.16       “Optionee” means an individual or estate who holds an Option or SAR.

17.17       “Outside Director” shall mean a member of the Board who is not a common-law employee of the Company, a Parent or a Subsidiary.

17.18       “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.  A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

17.19       “Participant” means an individual or estate who holds an Award as provided in Section 4.2.

17.20       “Plan” means this Biosite Incorporated 2002 Nonqualified Stock Incentive Plan, as amended from time to time.

17.21       “Restricted Share” means a Common Share awarded under the Plan.

17.22       “SAR” means a stock appreciation right granted under the Plan.

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17.23       “SAR Agreement” means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR.

17.24       “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and restrictions pertaining to such Restricted Share or Stock Unit.

17.25       “Stock Option Agreement” means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option.

17.26       “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan.

17.27       “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.  A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

ARTICLE 18          EXECUTION.

To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto.

BIOSITE INCORPORATED

By     /s/  KIM D. BLICKENSTAFF

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