10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

OR

oTRANSITION 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	(I.R.S. Employer Identification No.)
of incorporation or organization)
9975 Summers Ridge Rd
San Diego, California	92121
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (858) 805-2000

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  ý   No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No  ý

The number of shares of the Registrant’s Common Stock, $0.01 par value, outstanding at

November 7, 2005 was 17,420,921.

BIOSITE INCORPORATED

FORM 10-Q

INDEX

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.  CONTROLS AND PROCEDURES

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

ITEM 6.  EXHIBITS

SIGNATURES

Biosite^®, Triage^®, Cardio ProfilER^® and New Dimensions in Diagnosis^® are registered trademarks of Biosite Incorporated.  Profiler CP™, Profiler Shortness Of Breath™, Profiler SOB™, MultiMarker Index™ and the Company’s logos are trademarks of Biosite Incorporated.  Beckman Coulter^® is a registered trademark of Beckman Coulter, Inc.  This quarterly report on Form 10-Q also contains trademarks and trade names of other companies.

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Part I.Financial Information

ITEM 1.FINANCIAL STATEMENTS

BIOSITE INCORPORATED

Condensed Consolidated Balance Sheets

(in thousands, except par values)

	September 30,			December 31,
	2005			2004
	(Unaudited)			(Note)
Assets
Current assets:
Cash and cash equivalents	$	43,043		$	25,645
Marketable securities	85,803			46,765
Accounts receivable, net	26,875			36,867
Inventories, net	31,949			37,077
Deferred income taxes	7,432			7,432
Other current assets	4,760			7,081
Total current assets	199,862			160,867
Property, equipment and leasehold improvements, net	142,344			111,135
Patents and license rights, net	4,529			5,484
Deferred income taxes	3,668			3,668
Deposits and other assets	3,062			2,361
	$	353,465		$	283,515
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	14,308		$	18,662
Accrued employee expenses	11,043			11,008
Current portion of equipment financing notes	6,080			5,749
Income taxes payable	5,916			4,401
Other current liabilities	8,354			6,253
Total current liabilities	45,701			46,073
Equipment financing notes	12,462			15,292
Other long-term liabilities	2,387			1,813
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued and outstanding at September 30, 2005 and December 31, 2004	—			—
Common stock, $.01 par value, 60,000 shares authorized; 17,340 and 16,419 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively	173			164
Additional paid-in capital	158,651			125,013
Accumulated other comprehensive income (loss), net of related tax effect of $(109) and $(53) at September 30, 2005 and December 31, 2004, respectively	(316		)	1,086
Retained earnings	134,407			94,074
Total stockholders’ equity	292,915			220,337
	$	353,465		$	283,515

Note:The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by United States generally accepted accounting principles for complete financial statements.

See accompanying notes.

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BIOSITE INCORPORATED

Condensed Consolidated Statements of Income (Unaudited)

(in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Revenues:
Product sales	$	68,888		$	60,392		$	211,282		$	175,851
Contract revenue	780			791			3,996			2,871
Total revenues	69,668			61,183			215,278			178,722
Operating expenses:
Cost of product sales	20,900			18,583			64,155			57,920
Selling, general and administrative	17,858			16,108			54,930			47,664
Research and development	10,549			9,588			31,509			25,412
License and patent disputes	788			—			1,340			—
Total operating expenses	50,095			44,279			151,934			130,996
Operating income	19,573			16,904			63,344			47,726
Interest and other income, net	1,095			119			1,669			499
Income before provision for income taxes	20,668			17,023			65,013			48,225
Provision for income taxes	(8,099		)	(6,642		)	(24,680		)	(18,923		)
Net income	$	12,569		$	10,381		$	40,333		$	29,302
Net income per share:
- Basic	$	0.73		$	0.65		$	2.38		$	1.86
- Diluted	$	0.68		$	0.60		$	2.19		$	1.74
Shares used in calculating per share amounts:
- Basic	17,268			15,979			16,974			15,769
- Diluted	18,596			17,311			18,394			16,864

See accompanying notes.

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BIOSITE INCORPORATED

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine months ended September 30,
	2005			2004
OPERATING ACTIVITIES
Net income	$	40,333		$	29,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,887			12,816
Deferred income taxes	—			(1,400		)
Changes in operating assets and liabilities:
Net purchases of marketable securities classified as trading	(453		)	(314		)
Accounts receivable	9,322			4,100
Inventory	4,983			(8,593		)
Other current assets	2,238			(2,955		)
Income taxes	12,436			4,476
Accounts payable	(4,227		)	10,049
Other current and long-term liabilities	2,808			4,782
Net cash provided by operating activities	79,327			52,263
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities	47,650			21,313
Purchase of marketable securities	(86,262		)	(28,980		)
Purchase of property, equipment and leasehold improvements	(41,494		)	(36,208		)
Patents, license rights, deposits and other assets	(1,419		)	(853		)
Net cash used in investing activities	(81,525		)	(44,728		)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations	2,007			6,362
Principal payments under financing obligations	(4,506		)	(3,901		)
Proceeds from issuance of stock under stock plans, net	22,712			12,501
Net cash provided by financing activities	20,213			14,962
Effect of exchange rate changes on cash and cash equivalents	(617		)	(53		)
Increase in cash and cash equivalents	17,398			22,444
Cash and cash equivalents at beginning of period	25,645			19,537
Cash and cash equivalents at end of period	$	43,043		$	41,981
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	762		$	745
Income taxes paid	$	12,017		$	15,685
Income tax benefit of disqualifying dispositions of stock	$	10,935		$	3,947

See accompanying notes.

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BIOSITE INCORPORATED

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both U.S. generally accepted accounting principles 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 disclosures required by U.S. generally accepted accounting principles 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 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 our 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, as amended, for the year ended December 31, 2004.

The consolidated financial statements include our financial statements and those of our wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

Certain amounts in the financial statements for the three and nine months ended September 30, 2004 have been reclassified to conform to the presentation of the financial statements for the three and nine months ended September 30, 2005.

2.EARNINGS PER SHARE

Basic earnings per share includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted earnings per share 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.

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,
	2005	2004	2005	2004
Shares used in calculating per share amounts – Basic (Weighted average common shares outstanding)	17,268	15,979	16,974	15,769
Net effect of dilutive common share equivalents using the treasury stock method	1,328	1,332	1,420	1,095
Shares used in calculating per share amounts – Diluted	18,596	17,311	18,394	16,864

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3.BALANCE SHEET INFORMATION

Net inventories consist of the following:

	September 30,		December 31,
	2005		2004
	(in thousands)
Raw materials	$	10,314	$	12,852
Work-in-process	14,041		14,242
Finished goods	7,594		9,983
	$	31,949	$	37,077

4.COMPREHENSIVE INCOME

Statement of Financial Accounting Standards, or FAS No. 130, Comprehensive Income, establishes rules for the reporting and display of comprehensive income and its components.  FAS No. 130 requires that the change in net unrealized gains or losses on marketable securities and foreign currency translation adjustments 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,
	2005			2004		2005			2004
Net income	$	12,569		$	10,381	$	40,333		$	29,302
Change in unrealized net gain (loss) on marketable securities, net of tax	(63		)	10		(84		)	(144		)
Foreign currency translation gain (loss)	(265		)	22		(1,318		)	(42		)
Comprehensive income	$	12,241		$	10,413	$	38,931		$	29,116

5.STOCK-BASED COMPENSATION

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations in accounting for our stock-based compensation.  Stock options issued to non-employees are recorded at their fair value as determined in accordance with FAS No. 123, Accounting for Stock-based Compensation, and Emerging Issues Task Force, or EITF, Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling, Goods or Services, and are periodically remeasured as the stock options vest.

Adjusted pro forma information regarding net income is required by FAS No. 123 and has been determined as if we had accounted for our employee stock-based compensation under the fair value method of that Statement.  We changed our fair value option pricing model for all options granted on or after April 1, 2005 from the Black-Scholes model to a binomial model.  The fair value of stock options and purchase rights granted prior to April 1, 2005 was determined using the Black-Scholes model.  We believe that the binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model.  Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate and risk free interest rate.  However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.

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For purposes of adjusted pro forma disclosures, the estimated fair value of the stock-based compensation is amortized to expense over the options’ vesting period.  Our pro forma net income and net income per share are as follows (in thousands, except per share data):

	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net income, as reported	$	12,569		$	10,381		$	40,333		$	29,302
Pro forma FAS No. 123 compensation expense (net of tax)	(4,249		)	(5,122		)	(12,414		)	(16,363		)
Adjusted pro forma net income	$	8,320		$	5,259		$	27,919		$	12,939
Adjusted pro forma basic net income per share	$	0.48		$	0.33		$	1.64		$	.82
Adjusted pro forma diluted net income per share	$	0.45		$	0.30		$	1.52		$	.77

For the reasons noted below, certain adjustments were required to increase the pro forma expense for 2004, including a decrease of $337,000 and $1,425,000 to the adjusted pro forma net income, a decrease of $.02 and $.09 to the adjusted pro forma basic net income per share and a decrease of $.02 and $.08 to the adjusted pro forma diluted net income per share for the three and nine months ended September 30, 2004, respectively.

The pro forma effects on net income for the three and nine months ended September 30, 2005 and 2004 may not be representative of the effects on reported net income or loss in future quarters or years.  In management’s opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable.  In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility and the expected term of the options.  Changes in the subjective input assumptions can materially affect the fair value estimate of employee stock options.

During the quarter ended September 30, 2005, we received a technical alert from E*Trade Financial Corporate Services, the third-party manufacturer of EquityEdge, our stock administration software.  We were informed that certain routine reports that we generated using EquityEdge and that were used to determine our pro forma compensation expense, as disclosed in our Form 10-Q for the period ended June 30, 2005, were computing the amounts incorrectly.  In addition, in assessing the impact of adopting FASB Statement No. 123, we determined that we provided excess tax benefits on certain types of stock-based compensation before they were realized as required in FAS No. 123.  As a result, our pro forma compensation expense, adjusted for the two matters mentioned here, is different than the amounts previously disclosed as follows (in thousands):

	Six months		Three months		Three months		Year ended
	ended		ended		ended		December 31,
	June 30, 2005		June 30, 2005		March 31, 2005		2004		2003
As previously disclosed:
Pro forma net income	$	18,035	$	8,687	$	9,054	$	22,586	$	7,947
Pro forma diluted net income per share	$	.99	$	.47	$	.50	$	1.32	$	.48
As revised:
Pro forma net income	$	19,598	$	10,711	$	8,904	$	21,129	$	5,373
Pro forma diluted net income per share	$	1.07	$	.58	$	.49	$	1.24	$	.33

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6.EFFECT OF NEW ACCOUNTING STANDARDS

On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued FAS No. 123 (revised 2004), or Statement No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.  Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.  Generally, the approach in Statement No. 123(R) is similar to the approach described in FAS No. 123.  However, Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement No. 123(R) must be adopted no later than January 1, 2006.  Early adoption will be permitted in periods in which financial statements have not yet been issued.  We expect to adopt Statement No. 123(R) on January 1, 2006.  Statement No. 123(R) permits public companies to adopt its requirements using one of two methods:

1.A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement No. 123 for all awards granted to employees prior to the effective date of Statement No. 123(R) that remain unvested on the effective date.

2.A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We are currently evaluating the two different methods for the adoption of Statement No. 123(R) and have not determined which of the two methods we will adopt.

As permitted by FAS No. 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, we generally recognize no compensation cost for employee stock options.  Accordingly, the adoption of Statement No. 123(R)’s fair value method will have a material impact on our results of operations.  The impact of adoption of Statement No. 123(R) cannot be predicted at this time because it will depend to a significant degree on levels of share-based payments granted in the future and our stock price volatility.  However, had we adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 5 above.  Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.  This requirement will shift cash flows related to the tax deductions from our net operating cash flows to our net financing cash flows in periods after adoption.  While we cannot estimate what those amounts will be in the future (because they depend on, among other things, the stock option exercise behavior of our employees), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $10.9 million and $3.9 million for the nine months ended September 30, 2005 and 2004, respectively and $5.6 million and $7.9 million for the years ended December 31, 2004 and 2003, respectively.

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7.LICENSE AND PATENT DISPUTES

In November 2004, Roche Diagnostics Corporation, together with certain of its affiliates, filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 (the “‘609 Patent”) and U.S. Patent 4,816,224 (the “‘224 Patent”), owned by Roche and/or its affiliates (the “Indiana Case”).  Biosite filed an answer and counterclaims to Roche’s complaint in February 2005.  In March 2005, at the mutual request of Biosite and Roche, the Indiana Case was, for purposes of claim construction of the ‘609 Patent only, consolidated-in-part with two other cases filed by Roche against several unrelated parties and pending in the same trial court.  The hearing on this subject of claim construction, which is commonly referred to as a Markman hearing, with respect to the ‘609 Patent occurred on August 1, 2005 and in October 2005 the court issued a ruling on the subjects at issue at that hearing.  The parties are engaged in discovery with respect to the Indiana Case.  Roche is seeking unspecified monetary damages and injunctive relief, among other remedies.  We believe Roche’s allegations of infringement of the ‘609 Patent and ‘224 Patent are without merit and we are vigorously contesting these claims.

Also, in November 2004, Biosite filed a complaint in the United States District Court, Southern District of California alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite.  The patents relate to methods for the measurement of cardiac troponin forms.  Roche filed an answer and counterclaims to our complaint in March 2005.  In October 2005, Biosite amended its complaint, further alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are also infringing U.S. Patent 6,939,678, a newly issued patent assigned to Biosite that is also related to methods for the measurement of cardiac troponin forms.  The parties have commenced preliminary discovery with respect to the California case. Biosite is seeking unspecified monetary damages and injunctive relief, among other remedies.  We believe our claims have merit and we are vigorously pursuing their prosecution.

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

Forward-looking Statements

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 impact of competition, including products competitive with our Triage^® BNP Tests, from companies with greater capital and resources; our ability to effectively promote and sell our products, whether directly or through distributors, including our ability to effectively promote and sell our products in the physician office market; our ability to successfully expand our business through direct sales in certain European countries; the outcome of ongoing litigation between us and Roche Diagnostics Corporation and others, and the costs associated with that litigation; potential contract disputes or patent conflicts; the extent to which our products and products under development are successfully developed and gain market acceptance; our ability to obtain regulatory approvals and complete other clinical and pre-market activities needed to launch new products and gain market acceptance of any new products; manufacturing inefficiencies, backlog, delays or capacity constraints; the timing of significant orders or the impact of seasonality; regulatory changes, uncertainties or delays; product recalls; dependence on third-party manufacturers and suppliers; changing market conditions and the other risks and uncertainties described under “Risk Factors” and throughout our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.  Actual results may differ materially from those projected.  These forward-looking statements represent our judgment as of the date of the filing of this Quarterly Report on Form 10-Q.  We disclaim any intent or obligation to update these forward-looking statements.

Overview

Founded in 1988, Biosite^® Incorporated is a leading bio-medical company commercializing proteomics discoveries for the advancement of medical diagnosis.  We believe that our novel, rapid medical diagnostic products, largely evolved from an intensive study of protein biomarkers of disease, can contribute to improvements in medical care by aiding physicians in the diagnosis of critical diseases and health conditions.  In selecting market opportunities, we primarily target highly prevalent diseases that are poorly diagnosed by existing technologies.  Currently, we offer diagnostic products for drug screening, heart attack, congestive heart failure, or CHF, acute coronary syndromes, or ACS, evaluation of shortness of breath and certain bacterial and parasitic infections.

Our products are principally sold to acute care hospitals, which number approximately 5,400 in the United States.  To market our products, we utilize a direct sales team that focuses its efforts primarily on larger centers with more than 200 beds and smaller hospitals that are high volume users of our products.  We also use a network of distributors both in the United States and internationally.

The Fisher HealthCare Division of the Fisher Scientific Company, or Fisher, distributes our products primarily in hospitals in the United States and supports our direct sales force, particularly in smaller hospitals.  We have a distribution agreement with Fisher that extends through December 31, 2005.  In October 2005, we entered into a new distribution agreement with Fisher that expires December 31, 2008, subject to some limited exceptions where a party may elect to terminate the agreement earlier.  Sales to Fisher represented 84% of our product sales in the first nine months of 2005 and 86% of our product sales for the full year 2004.  We primarily utilize distributor relationships with Physician Sales & Services, or PSS, and Henry Schein, Inc., or Henry Schein, to market our products to physician office laboratories in the United States.

In international markets, we have established direct selling efforts in several countries and utilize a network of country-specific and regional distributors in other areas.  During 2003 and 2004, we initiated direct sales and distribution operations in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy.  In the future, we may transition to direct sales and distribution of our products in additional countries.  We also employ a field-based network of clinically experienced individuals that support our direct sales force by providing pre- and post- sale education and training.

Our total revenues for the first nine months of 2005 were $211.3 million, representing a 20% increase over the same period of 2004.  This growth resulted largely from increased sales of our Triage BNP Test products, which are primarily used to aid in the diagnosis of CHF.  Our meter-based Triage BNP Test, launched domestically in January 2001, was the first blood test available to aid in the detection of CHF and benefited from a semi-exclusive position in the market, until the entry of direct competition in June 2003.  In December 2003, we received clearance from the

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United States Food and Drug Administration, or FDA, to market our Triage BNP Test for Beckman Coulter^® Immunoassay Systems and began selling the product in the United States in January 2004.  As a result, a customer can perform b-type natriuretic peptide, or BNP, testing using either our rapid, portable Triage MeterPlus system or any of Beckman Coulter, Inc.’s automated immunoassay systems.

Today, our Triage BNP Test products are among several FDA-cleared blood products for use as an aid in the diagnosis of CHF.  These include products from Bayer Healthcare, Dade Behring, Roche Diagnostics and Abbott Laboratories, which offer products based on large, centralized automated testing platforms.  In addition, Abbott Laboratories recently announced that it will offer a BNP test on its i-STAT meter product, which is designed for use at the point-of-care.  We have experienced, and continue to experience, competition from these companies and anticipate competition from others in the future. Our competitors may succeed in developing or marketing products that are more effective or more commercially attractive than the Triage BNP Tests.  Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully with these and other competitors in the future.

With several diagnostic products commercialized, our focus has expanded to include the search for proprietary disease markers that can potentially be applied to our testing platforms or to platforms marketed by other diagnostic companies with whom we might collaborate.  To that end, in 1999 we launched Biosite Discovery.  Through Biosite Discovery, we leverage our expertise in phage display antibody development to access protein targets via collaborations with clinical institutions or commercial companies, or via our internal research and licensing programs.  Biosite Discovery has also attracted the interest of leading clinical collaborators, who provide patient samples and assist in the analysis of clinical data.  The discovery of new disease markers and the extension of applications for existing products could enable us to expand our product sales into other healthcare market segments.  Included in contract revenues for the nine months ended September 30, 2005 are annual maintenance fees on antibodies produced by Biosite that continue to be used in research and development programs of our partners.

We have reported consecutive 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.  Some of the risks and uncertainties associated with our business and future operating results are discussed below in the sections entitled “Risk Factors” and “Liquidity and Capital Resources.”

Recent Developments

CLIA Waiver

In August 2005, we announced that the FDA granted a CLIA waiver for our Triage BNP Test, substantially expanding healthcare professionals’ access to the 15-minute blood test that aids in the diagnosis and assessment of patients with symptoms of heart failure.  The CLIA waiver will expand access to the test among physician office laboratories and decentralized hospital sites of service, allowing more patients to potentially benefit from rapid evaluation.

Additional Claims for Triage BNP Test

In September 2005, we announced that the FDA has cleared a new indication for our Triage BNP Test.  This test can now be used to help physicians assess the risk of mortality or rehospitalization in heart failure patients. Previously, the test was cleared as an aid in the diagnosis of CHF, assessment of disease severity and in the risk stratification of patients with ACS.

Renewal of Distribution Relationship with Fisher

In October 2005, we announced the renewal of our distribution relationship with Fisher.  The renewal becomes effective on January 1, 2006.  The new agreement extends the companies’ commercial relationship, which commenced in 1991, through 2008.  Under the agreement, Fisher’s distribution rights are semi-exclusive in the U.S. hospital market and non-exclusive in the U.S. physician office market.  Either party will have the right to terminate the agreement in the case of an uncured breach by the other party.  In addition, under certain circumstances, the distribution relationship may become non-exclusive or terminate with prior notice. For instance, if our direct sales to customers in the U.S. hospital market during a six month period exceed a specified percentage of the total sales of our products by both us and Fisher in that market segment, Fisher will have the option of converting the agreement

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to a mutually non-exclusive arrangement.  The specified percentage of direct sales in the contract that would trigger this option far exceeds the current level of direct sales.  If Fisher were to exercise the option, either party would have the ability to terminate the agreement upon prior notice to the other party.  Similarly, if Fisher elects to promote and sell certain products that are competitive with our products, then we will have the option of converting the agreement to a mutually non-exclusive arrangement.  If we were to exercise that option, either party would have the ability to terminate the agreement upon prior notice to the other party.

Critical Accounting Policies Involving Management Estimates and Assumptions

We have changed our fair value option pricing model from the Black-Scholes model to a binomial model for all options granted on or after April 1, 2005.  The fair value of stock options and purchase rights prior to April 1, 2005 was determined using the Black-Scholes model.  We believe that the binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model.  Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate.  However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.  The fair value option pricing model is currently used solely for the calculation of the estimated fair value of the share-based compensation and related tax benefit for our adjusted pro forma disclosure contained in Note 5 of the Notes to the Condensed Consolidated Financial Statements set forth in Item 1 of this Quarterly Report on Form 10-Q.

There were no other significant changes in our critical accounting policies or estimation methods from those at December 31, 2004.

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	2005		2004		2005		2004
Cardiovascular products:
Triage BNP Test products	$	43,892	$	38,936	$	142,721	$	118,518
Triage Cardiac Panel	7,142		7,348		19,566		17,737
Triage Cardio ProfilER® and Profiler Shortness of BreathTM Panels	2,852		884		7,024		1,852
Triage D-Dimer Test	757		—		1,369		—
Triage MeterPlus products	538		564		2,007		2,229
Other products:
Triage Drugs of Abuse and TOX Drug Screen products	12,410		11,223		34,034		31,260
Triage Microbiology products	1,297		1,437		4,561		4,255
Total Product Sales	$	68,888	$	60,392	$	211,282	$	175,851

Product sales for the three and nine months ended September 30, 2005 were $68.9 million and $211.3 million, respectively, representing increases of 14% and 20%, respectively, compared to $60.4 million and $175.9 million, respectively, for the same periods of 2004.  The increases in total product sales for the three and nine months ended September 30, 2005, compared with the same periods of 2004, consisted primarily of product sales growth resulting from an increase in sales volume of $9.3 million and $38.1 million, respectively, partially offset by a decrease in product sales resulting from lower average selling prices of approximately $800,000 and $2.7 million, respectively.  Growth in the sales volume of our Triage BNP Tests represented 57% and 72%, respectively, of the product sales growth resulting from an increase in sales volume.

Primarily as a result of significant fluctuations in customer demand, inventory levels of our products have been and in the future may be below or above targeted stocking levels.  We adjust our manufacturing capacity by both adjusting our production activities and the number of production shifts we operate, as well as through the

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implementation of additional manufacturing equipment.  This allows us to modify our production volumes and manufacturing throughput to meet expected customer demand and targeted stocking levels.  Our product sales are also impacted by the buying patterns of our distributors and other customers.  Additionally, we believe that our products are subject to some seasonality in their use.  Higher utilization rates of our Triage BNP Tests may be due to a higher number of emergency department, or ED, visits by patients exhibiting shortness of breath, a symptom of congestive heart failure and of influenza.  However, higher utilization may also result from greater awareness, education and acceptance of the uses of our Triage BNP Test products, as well as additional users within the hospitals.  Product sales to our distributors in future periods will be impacted as we and our distributors attempt to adjust our distributors’ inventories to targeted stocking levels and as we seek to improve our effectiveness and efficiency in adjusting our manufacturing output and capacity.

Product sales of our cardiovascular products, consisting of our Triage BNP Tests, Triage Cardiac Panel, Triage Cardio ProfilER Panel, Triage Profiler Shortness of Breath Panel, Triage D-Dimer Test, and Triage MeterPlus, totaled $55.2 million and $172.7 million, respectively, for the three and nine months ended September 30, 2005.  This represented increases of 16% and 23%, respectively, as compared to $47.7 million and $140.3 million, respectively, for the same periods of 2004.  The product sales growth of our cardiovascular products was primarily due to growth in sales volume of our Triage BNP Tests of $5.3 million and $27.4 million, respectively, and our Triage Cardio ProfilER Panel of $1.5 million and $4.3 million, respectively.  This increase was partially offset by a reduction in product sales due to a decline in the average sales price of our Triage BNP Tests of $350,000 and $3.2 million, respectively.  Our product sales growth rate for our Triage BNP Tests in future periods may be lower than in the past periods because of increased competition from alternative tests and testing platforms that aid in the diagnosis of CHF.  In addition, because most U.S. hospitals are already performing some form of testing for natriuretic peptides, the sales growth for our Triage BNP Tests resulting from the addition of new hospital customers in the United States may be less than what we have experienced in the past.  In addition, as the global market for BNP testing matures and more competitive products become available, the average sales price for our Triage BNP Tests may continue to decline, which would negatively impact our revenue from product sales.

Product sales of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were $13.7 million and $38.6 million, respectively, for the three and nine months ended September 30, 2005.  This represented increases of 8% and 9%, respectively, as compared to $12.7 million and $35.5 million, respectively, for the same periods of 2004.  The increases in sales of these products for the three and nine months ended September 30, 2005 were primarily due to the growth in sales volume of our Triage TOX Drug Screen.  The increases were partially offset by a decrease in sales volume of the Triage Drugs of Abuse Panel.  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.

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, 2005 were $780,000 and $4.0 million, respectively, compared to $791,000 and $2.9 million, respectively, for the same periods of 2004.  Contract revenues recognized during the first nine months of 2005 and 2004 consisted primarily of research funding.  During each of the first three quarters of both 2005 and 2004, we recognized $750,000 of research funding from an alliance with Medarex Inc., which expires in 2008.  The increase in contract revenues for the nine months ended September 30, 2005 as compared to the same period of 2004 was related to an increase of $1.0 million in annual maintenance fees on antibodies produced by Biosite that continue to be used in research and development programs of our partners.  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 generate our contract revenues, and on internal research and development programs.  Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.8 million and $6.0 million for the three and nine months ended September 30, 2005, respectively, compared to approximately $1.8 million and $4.8 million, respectively, for the same periods of 2004.  These costs are included in research and development expenses.

Cost of Product Sales and Gross Profit From Product Sales.  Gross profit from product sales for the three and nine months ended September 30, 2005 was $48.0 million and $147.1 million, respectively, representing increases of 15% and 25%, respectively, compared to $41.8 million and $117.9 million, respectively, for the same periods of 2004.  The $6.2 million increase in gross profit from product sales in the third quarter of 2005, compared to the same period of 2004, consisted of $5.9 million attributable to product sales growth, and of approximately $300,000 resulting from changes in the gross margins of our different products.

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The overall gross margin for both the three and nine months ended September 30, 2005 was 70%, compared to 69% and 67%, respectively, for the same periods of 2004.  The increases in the overall gross margins were primarily due to greater manufacturing efficiencies, as well as a reduction in scrap and warranty costs for the three months and nine months ended September 30 as compared with the same periods of 2004.  For both the three and nine months ended September 30, 2005, the gross margins for our cardiovascular products were 68%, compared to 69% and 66%, respectively, for the same periods of 2004.  Our gross margins for our Triage Drugs of Abuse Panel, Triage TOX Drug Screen and other products for the three and nine months ended September 30, 2005 were 77% and 76%, respectively, compared to 70% and 70% for the same periods of 2004.  Sales of our cardiovascular products represented 80% and 79% of our product sales for the three months ended September 30, 2005 and 2004, respectively.

Although our gross profits may continue to grow, we expect our overall gross margin to fluctuate as a result of the changing mix of products sold with different gross margins, changes in our manufacturing processes or costs, and competitive pricing pressures.  Any new products that we successfully develop, acquire and sell may change our future gross margins.  Manufacturing inefficiencies, including inefficiencies experienced as we attempt to increase or decrease our manufacturing capacity, production volumes and manufacturing output will also impact our gross margins.  Our manufacturing overhead costs are spread over the changing production volumes manufactured during a quarter on a first in, first out basis.

We also expect that our fixed occupancy costs will significantly increase as we transition our manufacturing operations to our new corporate complex, in which our manufacturing operations will occupy a much larger manufacturing space than our existing facilities.  We may also incur unexpected costs and expenses in connection with our move from our existing facilities to our new corporate complex, or we may experience unanticipated decreases in productivity and other losses due to inefficiencies relating to this transition or due to delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities.  For instance, the scale-up of manufacturing at our new corporate complex could result in lower than expected manufacturing output and higher than expected product costs.  In addition, we expect to incur some duplicate facilities expenses during the period of time in which we transfer our operations to the new corporate complex as we will transfer our operations in stages over a three to six month period.

Selling, General and Administrative Expenses.  Selling, general and administrative, orSG&A, expenses for the three and nine months ended September 30, 2005 were $17.9 million and $54.9 million, respectively, representing increases of 11% and 15%, respectively, compared to $16.1 million and $47.7 million, respectively, for the same periods of 2004.  At September 30, 2005, our headcount for sales, marketing and administrative functions totaled 343 employees, compared with 336 employees at June 30, 2005 and 301 employees at September 30, 2004.  The increase in SG&A expenses was primarily associated with the addition of sales, clinical education and technical service resources, and administrative support.  The expansion of our direct sales, marketing and distribution operations in Europe resulted in increases in SG&A expenses for the three and nine months ended September 30, 2005 of $927,000 and $3.1 million, respectively, as compared to the same periods of 2004.  We began direct sales, marketing and distribution in certain European countries at different dates from July 2003 to June 2004, and we are continuing to scale-up our direct operations in Europe.  In the future, we also may transition to direct sales and distribution in additional countries, which will require additional sales, marketing and administrative resources outside the United States.  As a result of growth in sales activities, marketing activities and general administrative resources, for the three and nine months ended September 30, 2005, employee-related expenses in the United States increased approximately $486,000 and $2.2 million, respectively, as compared to the same period of 2004.

We expect SG&A expenses in 2005 to be higher than in 2004, as we continue to increase our sales, marketing, clinical education, technical service and general administration resources in the United States, as well as continue to build our direct sales, distribution and administrative infrastructure in Europe.  We also expect other non-employee-related costs, including sales and marketing program activities for our new products, to grow as our overall operations grow.  The timing of these increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products as well as the timing of any new product launches.  We also expect SG&A expenses to increase due to costs associated with our continuing consolidation from our existing facilities to our new corporate complex and higher occupancy costs primarily due to increased square footage at the new corporate complex and, for a period of time, occupancy costs of both facilities.

Research and Development Expenses.  Research and development, or R&D, expenses for the three and nine months ended September 30, 2005 were $10.5 million and $31.5 million, respectively, representing increases of approximately 10% and 24%, respectively, compared to $9.6 million and $25.4 million for the same periods of 2004.  The increase in R&D expenses for the three and nine months ended September 30, 2005 consisted primarily of increases in employee expenses of $373,000 and $2.3 million, respectively.  Additionally, for the nine months ended

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September 30, 2005, we experienced increases in supplies used in our R&D activities of $1.4 million and increases in consultant, clinical studies and patent-related expenses of $1.2 million.  During the first nine months of 2005, our R&D resources were focused primarily on product development for potential new diagnostic products, including a new ACS panel and other diagnostic products for critical health conditions such as sepsis and abdominal pain.  We also focused on the development of potential improvements to our existing products, including our Triage Cardiac Panel, 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 R&D group and were primarily related to Biosite Discovery.

We expect R&D expenses in 2005 to be higher than in 2004 and to relate primarily to:

•product development efforts, including the development of potential diagnostic products for ACS, stroke, sepsis and abdominal pain;

•clinical studies, including studies associated with potential diagnostic products for stroke and studies related to the exploration and validation of other potential uses for our Triage BNP Tests;

•engineering development programs intended to miniaturize the Triage MeterPlus Platform and automate and improve manufacturing processes;

•manufacturing scale-up for potential new products, including the Triage Stroke Panel;

•costs associated with FDA submissions for products under development, including the Triage Stroke Panel, and other interactions with the FDA;

•Biosite Discovery activities;

•performance-based compensation; and

•costs associated with our move from our existing facilities to our new corporate complex and higher occupancy costs primarily due to increased square footage at the new corporate complex and occupancy of both facilities for a period of time.

The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our products, as well as the timing and progress of our R&D efforts.

License and Patent Disputes.  Expenses associated with license and patent disputes incurred for the three and nine months ended September 30, 2005 totaled $788,000 and $1.3 million, respectively.  We did not incur any such expenses during the same periods in 2004.  The expenses consisted of legal costs related to two lawsuits involving Roche Diagnostics Corporation and several of its affiliates.  In November 2004, Roche Diagnostics Corporation and certain of its affiliates filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 and U.S. Patent 4,816,224, owned by Roche and/or its affiliates.  We believe these allegations of infringement are without merit and we are vigorously contesting these claims.  Also, in November 2004, we filed a complaint in the United States District Court, Southern District of California alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite.  In October 2005, we amended our complaint, further alleging infringement of a third Biosite patent, U.S. Patent 6,939,678.  All of the Biosite patents relate to methods for the measurement of cardiac troponin forms.  We believe that our claims have merit and we are vigorously pursuing their prosecution.  We also expect the ongoing costs associated with both lawsuits to continue to increase over the next several quarters unless and until there is a resolution of the disputes.

Interest and Other Income, Net.  Interest and other income, net was $1.1 million and $1.7 million, respectively, for the three and nine months ended September 30, 2005, compared to $119,000 and $499,000 for the same periods of 2004.  The increases resulted primarily from an increase in interest income due to higher average balances of cash and marketable securities and higher interest rates in the third quarter and first nine months of 2005 compared to the same periods in 2004.  Also in the quarter ended September 30, 2005, we recognized $290,000 on an investment that was previously deemed impaired.

Provision for Income Taxes.  As a result of the pre-tax income and the estimated tax credits and other permanent differences between our reported and tax results in 2005, we recorded a provision for income taxes of $24.7 million for the first nine months of 2005, equivalent to an effective tax rate of 38.0%.  For the same period in 2004, we recorded a provision for income taxes of $18.9 million, equivalent to an effective tax rate of 39.2%.  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.

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Liquidity and Capital Resources

Historically, our sources of cash have included:

•cash generated from operations, primarily from the collection of accounts receivable resulting from product sales;

•private and public placements of equity securities, including cash generated from the exercise of stock options and participation in our employee stock purchase plan;

•proceeds from equipment financing;

•cash received under collaborative development agreements; and

•interest income.

Our historical cash outflows have primarily been associated with:

•cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and R&D activities and other working capital needs; and

•the purchase of land and construction of facilities; and

•expenditures related to equipment and leaseholds used to increase our manufacturing capacity, improve our manufacturing efficiency and expand our research and development activities.

Other factors that impact our cash inflow and outflow include:

•We have experienced gross margins of greater than 65% in each of the last three years.  As our product sales have increased significantly since 2001, our gross profits have increased significantly as well, providing us with an increasing source of cash to finance our expansion of our operations; and

•Fisher, which represented 86% of our product sales in 2004, has historically been a timely and predictable payor of its outstanding accounts receivable.  In October 2005, we renewed our distribution relationship with Fisher through 2008.

As of September 30, 2005, we had cash, cash equivalents and marketable securities of $128.8 million compared with $72.4 million as of December 31, 2004.  The increase in cash, cash equivalents and marketable securities during the first nine months of 2005 was largely attributable to cash generated from operating activities, for which the sales volume growth of our Triage BNP Tests was the primary driver.  Additionally, we generated $22.7 million in cash from proceeds from the issuance of shares under our stock plans, as well as $10.9 million of tax benefit related to disqualifying dispositions of shares by employees during the first nine months of 2005.  We believe the increased activity related to the exercise of stock options and participation in our employee stock purchase plan by employees was driven by increases in the market price of our common stock.  Future proceeds from exercise of stock options and participation in our employee stock purchase plan will depend primarily upon the behavior, expectations and needs of the plan participants and upon our stock price.  The primary non-operating cash outflow during the nine months ended September 30, 2005 was cash used for the construction of our new corporate complex, which totaled $25.9 million.

In October 2003, we completed a two-part escrow closing to purchase land for the construction of our new corporate complex.  We purchased a total of 26.1 usable acres for approximately $28.2 million.  Through September 30, 2005, we have expended an additional $72.8 million for the design and construction of the new corporate complex.  We expect the new complex to provide us with up to 800,000 square feet of space, to be constructed in phases as needed.  The first phase will provide us with approximately 350,000 square feet of space.  The total cost of the land and the construction of the first phase are estimated to cost approximately $110.0 million.  We plan to finance the remaining construction costs using our available cash.  In July 2005, some of our research and development staff and general administrative staff relocated to the new corporate complex.  We expect to complete the other buildings in the first phase of construction during the first quarter of 2006 and to relocate our remaining operations in stages once the buildings are ready for use.  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.  We may also incur unexpected costs and expenses in connection with our move from our existing facilities to our new corporate complex, or we may experience unanticipated decreases in productivity and other losses due to inefficiencies relating to this transition, or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities.  For instance, the scale-up of manufacturing at our new corporate complex could result in lower than expected manufacturing output and higher than expected product

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costs.  In addition, we expect to incur some duplicate facilities expenses, such as rent, as we are transferring our operations to the new corporate complex in stages.

Our primary short-term needs for capital, which are subject to change, include:

•the remaining construction costs in the first phase of the new corporate complex, which we estimate to be approximately $9 million payable in the fourth quarter of 2005 and the first quarter of 2006;

•support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad;

•expenditures for equipment and other fixed assets for use in our new corporate complex, and for manufacturing and research and development purposes;

•the prosecution, defense and resolution of ongoing license and patent disputes;

•improvements in our manufacturing capacity and efficiency, new discovery and product development efforts;

•clinical studies, and the continued advancement of research and development efforts; and

•potential milestone payments under licensing agreements that cover intellectual property rights of third parties.

For the full year 2005, other than expenditures related to construction of our new corporate complex, we plan to spend approximately $25 million in cash for capital expenditures, primarily for manufacturing and R&D equipment, furniture, fixtures and computer equipment.  We intend to use our currently available cash and cash we expect to generate from operating activities to address our capital requirements.  We expect that the performance of our product sales and the resulting operating income will significantly impact our cash management decisions.  We have utilized, and may continue to utilize, credit arrangements with financial institutions to finance the purchase of capital equipment.  Factors such as interest rates and available cash will impact our decision to continue to utilize credit arrangements as a source of cash.

We believe that our available cash, cash from operations and proceeds from the issuance of stock under our stock plans will be sufficient to satisfy our funding needs for at least the next 24 months, except in the event that we determine to accelerate the development and/or construction of the remaining phases of our corporate complex.  We have used available cash balances to purchase the land for our new corporate complex and pay for the design and construction costs to date.  For the remainder of the construction costs, we plan to use our available cash.  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, 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 costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources;

•expansion of our manufacturing capacity and our facilities expansion needs, including the construction of our new corporate complex;

•the effects of competition, including products competitive with our Triage BNP Tests, from companies with greater financial capital and resources;

•the effect on sales and cash receipts for our Triage BNP Tests due to market saturation in the hospital market for natriuretic peptide testing in the United States;

•regulatory changes, uncertainties or delays;

•the impact of the prosecution, defense and resolution of ongoing and potential future license and patent disputes;

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

•seasonal or unanticipated changes in customer demand;

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

•changes in third-party reimbursement policies;

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

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

•any potential repurchase of our stock or early retirement of our debt.

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

Risk Factors

This Quarterly Report on Form 10-Q includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties.  See “Forward-looking Statements” above.  Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004.  In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial.  If any of these known or unknown risks or uncertainties actually occur, our business could be harmed substantially.

Our quarterly and annual revenues and operating results may fluctuate.  We may not maintain profitability.

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

•competition, including from products competitive with our Triage BNP Tests and from companies with greater financial capital and resources;

•our ability to promote and sell products in the markets in which we compete, including the hospital market, the physician office market and international markets;

•changes in the mix of products sold;

•seasonal or unanticipated changes in customer demand or the timing of significant orders;

•manufacturing problems, inefficiencies, capacity constraints, backlog or delays;

•regulatory approvals, market acceptance and sales execution of existing or new products;

•regulatory changes, uncertainties or delays;

•prosecution, defense and resolution of license, patent or other contract disputes;

•effectiveness in transitioning and operating a direct sales distribution model in certain international countries and expenses associated with these transitions;

•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 we successfully develop and introduce new products;

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

•our ability to execute, maintain and achieve performance milestones under license and collaborative agreements;

•product recalls;

•costs and timing associated with business development activities, including potential licensing of technologies or intellectual property rights; and

•temporary and permanent costs and timing associated with the relocation of our personnel, assets and activities to our new corporate facilities.

Our operating results would also be adversely affected by a downturn in the market for our products or slower than anticipated product sales growth.  We continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development.  Therefore, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase at the same or higher rate 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 achieve 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 us or by securities analysts.

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We are dependent on the market acceptance of our existing products and products under development for revenue growth and profitability.

We believe that our revenue growth and profitability will substantially depend upon our ability to expand market acceptance and sales of our newer products, such as the Triage BNP Tests, Triage Cardiac Panel, Triage Cardio ProfilER Panel, Triage Profiler Shortness of Breath Panel, Triage D-Dimer Test and, subject to obtaining appropriate regulatory approvals, our products currently under development, such as the Triage Stroke Panel and other tests for ACS, sepsis, abdominal pain and acute kidney injury.  Our revenue growth will also depend on our effectiveness in transitioning to and operating a direct sales and distribution model in certain international countries, and on our ability to appropriately manage our operating expenses and our capital expenditures to optimize our profitability.  We have made and continue to make significant investments in headcount, manufacturing equipment, facilities and infrastructure to address our current and planned future revenue growth.  We are also making significant investments in new market segments in the United States, such as physician office testing.  These investments and commitments are predicated on assumptions of market acceptance of our products and revenue growth.

If we fail to plan, establish and maintain:

•reliable, cost-efficient, high-volume manufacturing capacity;

•a cost-effective sales force, customer education and product support resources and administrative infrastructure;

•effective marketing to customers, especially in markets where we have limited experience or significant competition;

•an effective distribution system for our products; or

•appropriate strategies or tactics to address our competitors, sales of our products may not meet expectations and our profitability may suffer.

Our Triage BNP Tests have encountered, and may continue to encounter, significant competition from products developed and commercialized by companies with greater financial capital and resources.

Product sales of our Triage BNP Tests represented 68% of our product sales in the first nine months of 2005 and 67% in 2004.  Our Triage BNP Tests are currently two of several FDA-cleared tests used to aid in the diagnosis of CHF.  Bayer, Dade Behring, Roche Diagnostics and Abbott Laboratories have launched competitive tests at various times since November 2002.  Shionogi & Co., Ltd. sells a BNP radioimmunoassay product for research purposes only in the United States.  Scios, Inc., from which we licensed the technology and patents related to our Triage BNP Tests in 1996, was acquired by Johnson & Johnson in April 2003.

We have experienced, and continue to experience, competition from these companies and anticipate competition from others in the future.  Beginning in the third quarter of 2003, we experienced significant competition, primarily from Bayer, resulting in a loss of customers who wanted to utilize an automated immunoassay system for BNP testing.  After initiating sales outside of the United States in November 2003, Abbott Laboratories began selling a BNP test in the United States during the first quarter of 2004.  In addition, Abbott Laboratories recently announced that it will offer a BNP test on its i-STAT meter product, which is designed for use at the point-of-care.  Dade Behring began selling a NT-pro BNP diagnostic product in September 2004.  These and other competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Tests.  The risk of competition may increase as other potential competitors gain access to competing technologies, such as NT-pro BNP, which Roche is offering for license.  Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to successfully compete with these and other competitors in the future.  In addition, as the market for BNP testing matures and more competitive products become available, the average sales price for our Triage BNP Tests may decline, which may adversely impact our product sales, gross margins and our overall financial results.

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Competition and technological change in the diagnostic testing market may make our products less attractive or obsolete.

In addition to the specific competitive risks that we face in the market for our Triage BNP Tests, we face intense competition for our other products and in the general market for diagnostic testing.  Our competitors include:

•companies making laboratory-based tests and analyzers;

•clinical reference laboratories; and

•other rapid diagnostic product manufacturers.

Currently, the majority of diagnostic products used by physicians and other healthcare providers are performed by independent clinical reference laboratories and hospital-based laboratories using automated testing systems.  Therefore, with the exception of our Triage BNP Test for Beckman Coulter Immunoassay Systems, in order to achieve market acceptance for our products we will be required to demonstrate that our products provide clinical, cost-effective and time saving alternatives to automated tests traditionally used by clinical reference laboratories or hospital-based laboratories.  In the future, this may prove to be more difficult as CHF testing becomes more widely available on automated testing systems.

Our competitors have developed or are developing diagnostic products and/or testing systems that do or will compete with our products.  Many of our 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.  We utilize long-term contracts with some of our customers as a method of defending against competition.  Such contracts are of varying terms and expiration dates.  Expiring contracts may not be renewed and long-term contracts may not be acceptable to new customers, which could harm our competitive strategy.

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.  The success of our competitors, many of whom have made substantial investments in competing technologies, or our failure to compete successfully, may prevent, limit or interfere with our ability to make, use or sell our products in either the United States or in international markets.

The effect of market saturation may negatively affect the sales growth of our products, including our Triage BNP Tests.

The growth in our product sales in recent periods has been driven primarily by growth in the sales volumes of our Triage BNP Tests.  For example, growth in the sales volume of our Triage BNP Tests represented 57% and 72%, respectively, of our total product sales growth for the three and nine months ended September 30, 2005.  Our meter-based Triage BNP Test, launched domestically in January 2001, was the first blood test available to aid in the detection of CHF and benefited from a first to market position in the market until the entry of the direct competition in June 2003.  Today, our Triage BNP Test products are among several FDA-cleared products for the use as an aid in the diagnosis of CHF.

As the acute care and initial diagnosis market segment for natriuretic testing in the U.S. hospital setting becomes saturated, we expect the sales growth rates for our Triage BNP Tests in future periods to be lower than the growth rates we experienced over the past several years.  We have historically experienced decreases in the sales growth rates related to market saturation for our other products, such as our Triage Drugs of Abuse Panel products.  Unless we are able to successfully introduce new products into the market and achieve market acceptance of those products in a timely manner, the effect of market saturation on our existing products may negatively impact our product sales, gross margins and financial results.  Even if we are able to successfully commercialize any new products, we may not experience sales growth rates for those products that are similar to the sales growth rates we achieved with our Triage BNP Tests.

If we do not successfully develop new products and new manufacturing processes as currently planned, we may not recover our significant investments in those projects.

We are investing in the research and development of potential new products, including products for stroke, ACS, sepsis, abdominal pain and acute kidney injury, and in expanded uses of our existing products.  In certain cases, the

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successful development of our new products will depend on the development of new technologies.  We are also making significant investments in processes and equipment to improve our manufacturing efficiency and capacity, in anticipation of new products and revenue growth, as well as in the construction of our new corporate complex.  Our revenue growth and profitability are impacted by these investments.  We are required to undertake time consuming and costly development activities and seek regulatory approval for potential new products and for potential new uses of existing products.  Products that appear promising during product development and preclinical studies, including our Triage Stroke Panel, may not demonstrate clinical study results needed to support regulatory approval, or other parties have or may have patent or other proprietary rights to our potential new products, and may not allow us to sell them on reasonable terms, or at all.  We may experience difficulties that could delay or prevent the successful development, introduction or market acceptance of any such new products.  We will be harmed if we are unable, for technological or other reasons, to:

•complete new product development, processes, or capital projects, including projects intended to automate portions of our manufacturing processes,  in a timely manner or at all;

•complete appropriate clinical studies to validate the use of potential new products or expanded use of existing products;

•implement or effectively or efficiently scale-up manufacturing for new products; or

•obtain regulatory approval or clearance to market a new product for an intended use or an existing product for an alternative use.

Manufacturing risks and inefficiencies may adversely affect our ability to produce products and could reduce our gross margins and increase our research and development expenses.

We are subject to manufacturing risks, including our limited manufacturing experience with newer products and processes, which may hinder our ability to scale-up manufacturing.  Additionally, unanticipated acceleration or deceleration of customer demand may lead to manufacturing inefficiencies.  We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining acceptable product quality and manufacturing costs.  Significant additional resources, implementation of additional automated and semi-automated manufacturing equipment and changes in our manufacturing processes and organization have been, and may continue to be, required for the scale-up of each new product prior to commercialization or to meet increasing customer demand once commercialization begins, and this work may not be successfully or efficiently completed.

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.  It may not be possible for us, or any other party, to manufacture these products at a cost or in quantities to make these products commercially viable.  If we are unable to develop or contract for manufacturing capabilities as needed, on acceptable terms, our ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in delayed submissions for regulatory clearance or approval of products and initiation of other development programs, both of which would have a material adverse effect on us.

Manufacturing and quality problems have arisen and may arise in the future as we attempt to scale-up our manufacturing capacity and implement automated and semi-automated manufacturing methods.  For instance, we have experienced problems with third-party contractors that work with us in connection with our development of automated and semi-automated manufacturing equipment and we continue to rely on third parties for the manufacture of much of our automated and semi-automated manufacturing equipment.  Consequently, scale-up and implementation of automated and semi-automated manufacturing methods may not be achieved in a timely manner or at a commercially reasonable cost, or at all.  In addition, we continue to make significant investments to improve our manufacturing processes and to design, develop and purchase manufacturing equipment that may not yield the improvements that we expect.  Unanticipated acceleration and deceleration of customer demand for our products has resulted, and may continue to result, in inefficiencies or constraints related to our manufacturing, which has harmed and may in the future harm our gross margins and overall financial results.  Such inefficiencies or constraints may also result in delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.

We are dependent on key distributors and have limited direct distribution experience.  If any of our distribution relationships are terminated, or our distributors fail to adequately perform, our operating expenses will increase and our product sales may decrease.

We primarily rely upon for distribution of our products in the U.S. hospital market and may rely upon Fisher or other distributors to distribute new products or our existing products in other markets.  Fisher accounted for 84% of our product sales in the first nine months of 2005 and 86% for the full year 2004.  We have a distribution agreement with

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Fisher that expires on December 31, 2005.  In October 2006, we signed a new agreement that extends the distribution relationship through 2008.  We distribute products in the United States physician office market primarily through PSS and Henry Schein.  Internationally, we distribute products through country-specific and regional distributors, as well as through our direct sales force in selected countries.  The loss or termination of one or more of our distributors could have a material adverse effect on our sales in that market.

If any of our distribution or marketing agreements are terminated or expire, and we are unable to enter into alternative agreements or if we elect to distribute our products directly, we will have to invest in additional sales, marketing and administrative resources, including additional field account executives and customer support resources, which would significantly increase our expenses.  For instance, if we distribute our products directly to customers, we would need to hire additional personnel and would incur additional expenses relating to customer order processing and servicing, warehousing, shipping, billing and collections, which are costs that our distributors currently bear.  We may also need to invest in additional capital equipment, third-party services and facilities in order to administer the logistics of direct distribution.  Changes in the distribution of our products may also result in contract termination fees, transition related expenses, disruption of our business, increased competition and lower product sales and operating profits.  In addition, following the expiration or termination of any distribution agreement, a former distributor may attempt to compete directly with us by offering competitive products to our current customers.  We have limited experience in direct sales, marketing and distribution of our products, both domestically and internationally.  Our direct sales, marketing and distribution efforts may not be successful and we may not be able to successfully transition from a distributor model to a direct sales model.  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, to successfully market our products or to implement the logistics associated with direct product distribution to our customers would have a material adverse effect on us.

We may be unable to accurately predict future sales through our distributors, which could harm our ability to efficiently manage our internal resources to match market demand.

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 seasonal factors and fluctuations in the buying patterns of end-user customers, Fisher and our other distributors, and by the changes in inventory levels of our products held by these distributors.  Higher utilization rates of our Triage BNP Tests may be due to a higher number of ED visits by patients exhibiting shortness of breath, a symptom of CHF and of influenza.  However, higher utilization may also result from greater awareness, education and acceptance of the uses of our Triage BNP Tests, as well as additional users within the hospitals.

We are unable to verify the inventory levels of our international distributors and only have limited visibility over the inventory levels of our products at Fisher or our other domestic distributors.  While we attempt to assist Fisher in maintaining targeted stocking levels of our products, we may not be successful.  Attempting to assist Fisher in maintaining targeted stocking levels of our products involves the exercise of judgment and use of assumptions about 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, which may harm our future financial results.  This may result from unexpected buying patterns of our distributors or our inability to efficiently manage or invest in internal resources, such as manufacturing capacity, to meet the actual demand for our products.  In addition, if we begin direct distribution in any territory following the expiration or termination of a distribution agreement for that territory, it is likely that our product sales in that territory will decrease as our prior distributor sells its remaining inventory of our products.

The process of obtaining clearance or approval to market new medical devices in the United States is expensive, time consuming and uncertain.  We may not obtain required approvals for the commercialization of our products in the United States in a timely manner, if at all.

Our future performance depends on, among other matters, our estimates as to when and at what cost we will receive regulatory approval for new products.  Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and cost of obtaining approvals difficult to predict.

In the United States, clearance or approval to commercially distribute new medical devices is received from the FDA through clearance of a Premarket Notification, or 510(k), or through approval of a Premarket Approval Application, or PMA.  To receive 510(k) clearance, a new product must be substantially equivalent to a medical device first marketed in interstate commerce prior to May 1976.  The FDA may determine that a new product is not substantially equivalent to a device first marketed in interstate commerce prior to May 1976 or that additional

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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.  The 510(k) clearance and PMA approval processes can be expensive, uncertain and lengthy.  It generally takes from three to six months from submission to obtain 510(k) clearance, and from six to eighteen months from submission to obtain PMA approval; however, it may take longer, and 510(k) clearance or PMA approval may never be obtained.

For 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, require new 510(k) submissions.  We have made modifications to some of our products since receipt of initial 510(k) clearance.  With respect to several of these modifications, we filed new 510(k)s describing the modifications and have received FDA 510(k) clearance. We made other modifications to some of our products that we believe do not require the submission of new 510(k)s.  The FDA may not agree with any of our determinations not to submit a new 510(k) or PMA for any of these modifications made to our products.  If the FDA requires us to submit a new 510(k) or PMA for any device modification, we may be prohibited from marketing the modified products until the new submission is cleared by the FDA.

The FDA has made, and may continue to make, changes in its approval requirements and processes.  We cannot predict what these changes will be, how or when they will occur or what effect they will have on the regulation of our products.  Any new regulations may impose additional costs or lengthen review times of our products.  Delays in receipt of or failure to receive United States regulatory approvals or clearances for our new products would have a material adverse effect on our business, financial condition and results of operations.

In October 2004, we filed a 510(k) with the FDA seeking clearances for the Triage Profiler CP™ Panel.  The Triage Profiler CP Panel incorporates a proprietary MultiMarker™ Index algorithm which analyzes information from all four markers on the panel and presents a single composite index result.  Because of the proprietary MultiMarker Index algorithm used in the calculation of the composite result, the FDA determined that the device is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976 and therefore classified the device by statute into Class III (Premarket Approval).  We believe that the FDA’s decision to request that we file a PMA in no way reflects on the quality of the data we previously submitted, or on the perceived diagnostic utility of the MultiMarker Index algorithm.  Rather, we believe that the FDA’s decision was based on the fact that the Triage Profiler CP Panel has new technological characteristics that may not be generally used in medical practice today.  We are working with the FDA to determine the appropriate regulatory pathway for this potential product.

We submitted a PMA for our Triage Stroke Panel in December 2004.  In April 2005, we received a letter from the FDA indicating that the PMA submitted in 2004 for our Triage Stroke Panel is on hold pending submission of additional information.  The letter further states that the issues raised need to be resolved before the FDA can complete its review, otherwise the PMA in its current form would be considered not approvable.  In October 2005, the FDA agreed to our request for an extension to the PMA.  We are working with the FDA to address their concerns and intend to submit additional information to the FDA prior to the end of the first quarter of 2006.

Because we export our products to foreign countries, we are also subject to applicable regulatory approval requirements in those countries, which may impose additional costs upon us or prevent or delay us from marketing our products in those countries.

In addition to regulatory requirements in the United States, we are also subject to the regulatory approval requirements for each foreign country to which we export our products.  In the European Union, for example, the In Vitro Diagnostic Directive Medical Device Directive, or IVDD, mandates requirements for a quality management system and technical product information.  Regulatory compliance with the IVDD is represented by affixing the “CE” mark to product labeling.  Depending on product classification, the IVDD requirements may entail review by an European Union Member State Notified Body or self-certification by the manufacturer.  Although all of our products are currently eligible for CE marking through self-certification, this process can be lengthy and expensive.  As another example, in Canada, our products require approval by Health Canada prior to commercialization along with International Standards Organization, or ISO, 13485/CMDCAS certification.  It generally takes three to six months from submission to obtain a Canadian device license.  In some cases, device license approval may take longer or may not be obtained at all.  Any changes in foreign approval requirements and processes may cause us to incur additional costs or lengthen review times of our products.  We may not be able to obtain foreign regulatory approvals on a timely basis, if at all, and any failure to do so may cause us to incur additional costs or prevent us from marketing our products in foreign countries, which may have a material adverse effect on our business, financial condition and results of operations.

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We are subject to ongoing regulation of the products for which we have obtained regulatory clearance or approval, among other things, which may result in significant costs or in certain circumstances, the suspension or withdrawal of previously obtained clearances or approvals.

Any products for which we obtain regulatory approval or clearance continue to be extensively regulated by the FDA and other federal, state and foreign regulatory agencies.  These regulations impact many aspects of our operations, including manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping.  For example, our manufacturing facilities, including those at our new corporate complex, and those of our suppliers are, or can be, subject to periodic regulatory inspections.  The FDA and foreign regulatory agencies may require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any product approvals that could restrict the commercial applications of those products.  In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market.  We are also subject to routine inspection by the FDA and certain state agencies for compliance with Quality System Requirement and Medical Device Reporting requirements in the United States and other applicable regulations worldwide, including but not limited to ISO regulations.  In addition to product-specific regulations, we are 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.  We may incur significant costs to comply with these laws and regulations.  If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products or injunctions against their distribution, disgorgement of money, operating restrictions and criminal prosecution.

Changes in U.S. laboratory regulations for our customers may adversely affect us.

The use of our products is affected by the Clinical Laboratory Improvement Amendments of 1988, or 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.

Under CLIA quality control rules in effect from 1992 through 2002, laboratories using “unitized” test systems were in compliance with CLIA if they followed the manufacturers’ instructions for daily quality control, or QC, by relying on the internal controls built into unitized test systems, including our Triage products.  On January 24, 2003, the Centers for Medicare and Medicaid Services, or CMS, publicly issued a final QC rule under CLIA, which went into effect on April 24, 2003.  So long as laboratory directors, at a minimum, review manufacturers’ QC instructions, find those instructions to reasonably monitor the accuracy of the analytic process and the laboratory then follows those manufacturers’ instructions, the QC requirements contained in the 2003 modifications of the CLIA regulations will be satisfied.  Future amendments of CLIA, the promulgation of additional regulations or guidelines impacting laboratory testing, and uncertainties relating to the enforcement of CLIA may have a material adverse effect on our ability to market our products, our business and financial condition, our results of operations and our customers’ access to our products.

Diagnostic test systems are classified into one of three CLIA regulatory categories based on their potential risk to public health.  Waived tests are the lowest regulated category and those most used in physician offices.  In August 2005, we announced that the FDA granted a CLIA waiver to reclassify the Triage BNP Test from CLIA moderately complex to waived.

Delays in the conduct or completion of our clinical studies or the analysis of the data from our clinical studies may result in delays in our planned filings for regulatory approvals, and may adversely affect our ability to commercialize our products.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical studies that would cause us or regulatory authorities to delay or suspend our ongoing or planned clinical studies, or delay the analysis of data from our completed or ongoing clinical studies.

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Any of the following could delay the completion of our ongoing and planned clinical studies:

•ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical studies;

•delays in enrolling patients;

•lower than anticipated retention rate of patients in a clinical study;

•unexpected results or adverse events of clinical studies;

•insufficient supply or deficient quality of materials necessary for the performance of clinical studies; or

•difficulties in coordinating clinical study activities with third-party clinical study sites.

If the results of our ongoing or planned clinical studies for our potential products are not available when we expect or if we encounter any delay in the analysis of data from our clinical studies, we may not be able to commence marketing or commercial sales of products when we expect.

We are dependent on sole-source suppliers for our products.  A supply interruption would harm us.

Sole-source vendors provide some key components and raw materials used in the manufacture of our products.  Any interruption in supply of 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 the manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products.  We have products under development that, if developed and subject to obtaining appropriate regulatory approvals, 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 on acceptable terms, or at all, or the implementation of alternative processes for the manufacture of our future products, if any, could increase our manufacturing costs or limit our production capacity for one or more of our products, which would have a material adverse effect on us.

For example, we rely upon LRE Technology Partner Gmbh, or LRE, for production of the fluorometer that is used with our Triage MeterPlus Platform products, which include the rapid Triage BNP Test, Triage Cardiac Panel, Triage Cardio ProfilER Panel, Triage Profiler Shortness of Breath Panel, Triage TOX Drug Screen and other products currently under development.  In addition, we rely on Beckman Coulter to manufacture the Triage BNP Test for Beckman Coulter Immunoassay Systems for us.  If these or any other sole-source suppliers are unable or unwilling to manufacture sufficient quantities of the relevant items that meet our quality standards, we would be required to identify and qualify alternative suppliers.  Although we generally maintain safety stock inventory levels of these items, which would allow us some time to identify and qualify alternative suppliers, a delay or inability to identify and qualify alternative suppliers may materially and adversely affect:

•        our sales and profit margins;

•        our ability to adequately service our existing customers and market our products to potential new customers;

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

•        the timing of market introductions and subsequent sales of products.

Our patents 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.  Any of these circumstances could prevent us from selling any or all of our products.  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, from time to time, we participate in interference proceedings declared by the United States Patent and Trademark Office, or USPTO, and similar proceedings in foreign jurisdictions.  These proceedings could result in a substantial cost to us.

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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, and 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.

We 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.  We may not be able to meaningfully protect our trade secrets, or be capable of protecting our rights to our trade secrets.

Legal proceedings to obtain patents and litigation of third-party claims of intellectual property infringement or relating to existing licenses could require us to spend substantial amounts of money and could impair our operations.

Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us, to determine the enforceability, scope and validity of the proprietary rights of others, or to enforce our rights under license and other intellectual property-related agreements.  Litigation related to intellectual property matters has in the past, and may in the future, result in material expenses to us and be a significant diversion of effort by our technical and management personnel, regardless of the outcome.  Litigation, if initiated, could seek to recover damages as a result of any sales of the products subject to the litigation and to enjoin further sales of such products.  The outcome of litigation, both pending and potentially in the future, is inherently uncertain.  An adverse outcome in any litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling any or all of our products, which could have a material adverse effect on our business, financial condition and results of operations.

Our commercial success also 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.  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.  There can be no assurance that we do not or will not infringe these patents, or other patents or proprietary rights of third parties.  Any legal action against us or our collaborators 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 collaborators to obtain a license in order to continue to manufacture or market the affected products and processes.  There can be no assurance that our collaborators or we would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if 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 may be significant litigation in the industry regarding patent and other intellectual property rights.

In November 2004, Roche Diagnostics Corporation, together with several of its affiliates, filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division, alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 and U.S. Patent 4,816,224, owned by Roche and/or its affiliates.  We believe these allegations of infringement are without merit and we are vigorously contesting these claims.  Also, in November 2004, we filed a complaint in the United States District Court, Southern District of California, alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite.  In October 2005, we amended our complaint, further alleging infringement of a third Biosite patent, U.S. Patent 6,939,678.  All of the Biosite patents relate to methods for the measurement of cardiac troponin forms.  We believe that our claims have merit and we are vigorously pursuing their prosecution.

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We may not be successful in transitioning from the use of distributors in international markets to directly selling our products in those markets, which may result in lower product sales and higher expenses.

Until recently, we sold all of our products internationally through independent distributors.  We transitioned to a direct sales and distribution model in France and Germany in 2003 and in Belgium, Luxembourg, the United Kingdom and Italy in 2004.  Over the next few years, we may transition the distribution of our products in some additional international countries to a direct sales and distribution model.  In any country in which we transition to a direct sales and distribution model, we will need to make investments in facilities, resources and personnel.  In addition, we will assume additional administrative expenses to manage our operations in those countries.  We may also incur expenses associated with the termination of our existing distribution arrangements in those countries.  We possess limited experience in managing operations outside of the United States and in direct sales, marketing and distribution of our products in international markets.  If our efforts to implement direct sales and distribution in countries where we elect to do so are unsuccessful, we may not achieve our projected sales objectives, and we may also incur additional expenses, or our operating profits may be lower than anticipated.

Our international sales and operations may be harmed by political, social or economic changes, or other factors.

Export sales to international customers amounted to $26.4 million for the first nine months of 2005 and $26.0 million for the full year 2004.  Since 2003, we have significantly expanded our direct sales and distribution operations outside of the United States in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy, and we may expand these operations into additional countries in the future.  Sales and costs resulting from our direct sales and distribution operations in Europe are denominated primarily in local currencies, including the Euro, and are subject to fluctuations in currency exchange rates.  Further, we purchase our Triage MeterPlus inventory from LRE and incur other operating expenses, including clinical trials, which are denominated in Euros and other local currencies.  Significant fluctuations in the currency exchange rates may negatively impact our consolidated sales and earnings.

International sales and operations are also subject to a variety of other risks, including:

•difficulty in staffing, monitoring and managing foreign operations;

•understanding of, and compliance with local employment laws, including reduced flexibility and increased cost of staffing adjustments;

•longer collection cycles;

•greater risk of uncollectible accounts;

•unknown or changes in regulatory practices, including import or export license requirements, trade barriers, tariffs, employment and tax laws;

•adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries;

•restrictions on repatriation of locally-derived revenue;

•competition from locally-produced products with cost advantages or national appeal;

•local business practices that could expose our direct sales and marketing organization to Foreign Corrupt Practices Act risks;

•political, social or economic conditions and changes in these foreign markets; and

•government spending patterns.

As a result, our operating results will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results.

Healthcare reform and restrictions on reimbursement may adversely affect our results.

In the United States, healthcare 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.  In international markets, reimbursement and healthcare payment systems vary significantly by country, and include both government sponsored healthcare and private insurance.  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 laboratory testing services.  Third-party payors are increasingly scrutinizing and challenging the prices charged for both existing and new medical products and services.  Lower than expected or 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 to the physicians at prices we target.  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

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our products or our ability to sell our products on a profitable basis.

Changing facilities costs and other risks relating to our move to our new corporate complex may negatively impact our operating results.

In October 2003, we completed a two-part escrow closing to purchase land for the construction of our new corporate complex.  We purchased a total of 26.1 usable acres for approximately $28.2 million.  We expect the new complex to provide us with up to 800,000 square feet of space, to be constructed in phases as needed.  The first phase will provide us with approximately 350,000 square feet of space.  The total cost of the land and the construction of the first phase is estimated to be approximately $110.0 million, of which we have incurred approximately $101.0 million through September 30, 2005.  We have funded and currently plan to continue to finance the construction of the complex using our available cash.  In July 2005, some of our research and development staff and general administrative staff relocated to the new corporate complex.  We expect to complete the other buildings in the first phase of construction during the first quarter of 2006 and to relocate our remaining operations in stages once the buildings are ready for use.  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 all or a portion of the property, which may have a negative impact on our operating results.  We may also incur unexpected costs and expenses in connection with our move from our existing facilities to our new corporate complex, or we may experience unanticipated decreases in productivity and other losses due to inefficiencies relating to this transition or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of the manufacturing facilities.  For instance, the scale-up of manufacturing at our new corporate complex could result in lower than expected manufacturing output and higher than expected product costs.  In addition, we expect to incur some duplicate facilities expenses, such as rent, as we are transferring our operations in stages to the new corporate complex.

Recently, the San Diego Airport Authority issued a draft of proposed changes to land uses, such as restrictions on maximum building heights, personnel densities and hazardous materials storage, in areas surrounding airports throughout San Diego County.  Several of these changes, if approved, could potentially negatively impact our ability to construct our corporate complex as we currently plan.  In that case, we may need to alter our development plans for the remainder of our corporate complex.  However, any such regulatory changes are still in the early stages and it is not possible for us to predict whether any changes will be adopted or implemented, and whether such changes could adversely impact our corporate complex.

Some of our existing office and laboratory leases in the United States will expire during the next year.  In the event of any delays in the construction or completion of the other buildings at our new corporate complex, we may not be able to extend these existing leases on acceptable terms or at all and we may not be able to find acceptable alternative facilities.  This and other consequences of any delay in the construction or completion of our new corporate complex may significantly disrupt our business, increase our operating expenses and reduce our productivity, which could harm our financial results.

Long-lived and intangible assets may become impaired and result in an impairment charge.

At September 30, 2005, we had approximately $153.6 million of long-lived assets, including $29.0 million of land, $72.1 million of building construction-in-progress, $476,000 of leasehold improvements, $40.7 million of equipment, furniture and fixtures, $3.7 million of deferred taxes and $7.6 million of capitalized license rights and other assets.  Leasehold improvements, equipment, intangible assets and certain other long-lived assets are amortized or depreciated over the lesser of their useful lives or the remaining lease term.  In San Diego, we lease five buildings with leases that expire between December 2005 and February 2006.  The carrying amounts of long-lived and intangible assets are affected whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Such events or changes might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other matters.  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.

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At September 30, 2005, we had approximately $11.1 million of short-term and long-term deferred tax assets, consisting primarily of temporary differences between book and tax treatment of certain items such as depreciation.  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 unlikely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of shares issued under our stock plans.

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.  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 costs, timing and effectiveness of further expansion of sales, marketing and manufacturing activities and resources;

•expansion of our manufacturing capacity and our facilities expansion needs, including the construction of our new corporate complex;

•the effects of competition, including products competitive with our Triage BNP Tests, from companies with greater financial capital and resources;

•the effect on sales and cash receipts for our Triage BNP tests due to market saturation in the hospital market for natriuretic peptide testing in the United States;

•regulatory changes, uncertainties or delays;

•the impact of the prosecution, defense and resolution of ongoing and potential future license and patent disputes;

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

•seasonal or unanticipated changes in customer demand;

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

•changes in third-party reimbursement policies;

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

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

•any potential repurchase of our stock or early retirement of our debt.

If we require additional capital, and if we are not able to raise capital on acceptable terms when needed, we would have to scale back our operations, reduce our work force and license or sell to others products we would otherwise seek to develop or commercialize ourselves.

We are dependent on others for the development of products.  The failure of our collaborations to successfully develop products would harm our business.

Our business strategy includes entering into agreements with clinical and commercial collaborators and other third parties for the development, clinical evaluation and marketing of existing products and products under development. Many of the agreements are subject to rights of termination and may be terminated without our consent.  These parties also may not abide by their contractual obligations to us and may discontinue or sell their current lines of business.  Research performed under a collaboration for which we receive or provide funding may not lead to the development of products in the timeframe expected, or at all.  If these agreements are terminated earlier than expected, or if third parties do not perform their obligations to us properly and on a timely basis, we may not be able to successfully develop new products as planned, or at all.

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We may not be able to manage our growth, and we may experience constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand.

We have experienced growth and anticipate continued growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations if market acceptance of our products increases and potential 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 information systems and internal control, and to train, motivate and manage our employees.  We may not be able to adequately manage our expansion, and a failure to do so could have a material adverse effect on us.

Unanticipated acceleration and deceleration of customer demand for our products has 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.  Similarly, over-expansion or investments in anticipation of growth that does not materialize could harm our financial results and result in overcapacity.  For instance, we have made non-cancelable purchase commitments for certain inventory and product components.  Any such inventory or components that are not used when planned are subject to loss because of spoilage or obsolescence.

If we lose our key personnel or are unable to attract and retain additional personnel, we may not be able to manage our business, 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 involves factors such as compensation, equity incentives, work culture, organization and direction.  We may not be able to retain existing personnel or identify or hire additional personnel.  If we are unable to retain existing personnel or identify or hire additional personnel, we may not be able to research, develop, commercialize or market our products, and as a result, our business may be harmed.

We may have significant clinical and product liability exposure.

The testing, manufacturing and marketing of medical diagnostic products entails an inherent risk of clinical and product liability claims.  Our launch of new products, subject to obtaining appropriate regulatory approvals, to assist in the diagnosis of other indications, such as stroke, sepsis, abdominal pain and acute kidney injury, may further increase our risk of these claims.  Potential clinical and product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy.  In the future, 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, our liabilities could exceed our total assets.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective.  New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future.  Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.  For example, changes have been approved by the Financial Accounting Standards Board, or FASB, that require that beginning January 1, 2006, we record compensation expense in our statements of income for equity compensation instruments, including employee stock options, using the fair value method.  Our reported financial results beginning in the first quarter of 2006 will be negatively and materially impacted by this accounting change.  Other potential changes in existing taxation rules related to stock options and other forms of equity compensation could also have a significant negative effect on our reported results.

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Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission, or SEC, regulations and Nasdaq National Market rules are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

Investor confidence and share value may be adversely impacted if our independent auditors are unable to provide us with the attestation of the adequacy of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K a report of management on our internal controls over financial reporting, including an assessment by management of the effectiveness of those internal controls over financial reporting.  In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting.  How companies are implementing these new requirements including internal control reforms, if any, to comply with Section 404’s requirements, and how independent auditors are applying these new requirements and testing companies’ internal controls, remain subject to some uncertainty.  We expect that our internal controls will continue to evolve as our business activities change.  Although we will continue to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met.  If, during any year, our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent auditors interpret the applicable requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified.  This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our shares.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in interest rates, primarily from 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.  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.

Since 2003, we have significantly expanded our direct sales and distribution operations in France, Germany, Belgium, Luxembourg, the United Kingdom and Italy, and we may expand into additional countries in the future.  Sales and costs resulting from our direct sales and distribution operations in Europe are denominated in local currencies and are subject to fluctuations in currency exchange rates.  Further, we purchase our Triage MeterPlus inventory from LRE in Euros, and we incur employee and other operating costs in foreign currencies.  As a result, our costs will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results.  In prior years, we have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes.  As of September 30, 2005, we had no outstanding forward exchange contracts.  We recognized a net currency exchange loss on foreign currency denominated transactions of $217,000 for the nine months ended September 30, 2005 compared to a net loss of $10,000 for the same period of 2004.  Significant fluctuations in currency exchange rates may negatively impact our consolidated sales and earnings.

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International sales and operations are also subject to a variety of other risks, including:

•difficulty in staffing, monitoring and managing foreign operations;

•reduced flexibility and increased cost of staffing adjustments;

•longer collection cycles;

•greater risk of uncollectible accounts;

•unknown or changes in regulatory practices, including import or export license requirements, trade barriers, tariffs and tax laws;

•adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries;

•political, social or economic conditions and changes in these foreign markets; and

•government spending patterns.

ITEM 4.  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we conducted an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report.  Based upon that evaluation, the CEO and CFO concluded that, as of the end of such period, our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.  There was no change in our internal controls that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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Part II.  Other Information

ITEM 1.  LEGAL PROCEEDINGS

In November 2004, Roche Diagnostics Corporation, together with certain of its affiliates, filed a complaint in the United States District Court, Southern District of Indiana, Indianapolis Division alleging that Biosite is infringing two patents, U.S. Patent 5,366,609 (the “‘609 Patent”) and U.S. Patent 4,816,224 (the “‘224 Patent”), owned by Roche and/or its affiliates (the “Indiana Case”).  Biosite filed an answer and counterclaims to Roche’s complaint in February 2005.  In March 2005, at the mutual request of Biosite and Roche, the Indiana Case was, for purposes of claim construction of the ‘609 Patent only, consolidated-in-part with two other cases filed by Roche against several unrelated parties and pending in the same trial court.  The hearing on this subject of claim construction, which is commonly referred to as a Markman hearing, with respect to the ‘609 Patent occurred on August 1, 2005 and in October 2005 the court issued a ruling on the subjects at issue at that hearing.  The parties are engaged in discovery with respect to the Indiana Case.  Roche is seeking unspecified monetary damages and injunctive relief, among other remedies.  We believe Roche’s allegations of infringement of the ‘609 Patent and ‘224 Patent are without merit and we are vigorously contesting these claims.

Also, in November 2004, Biosite filed a complaint in the United States District Court, Southern District of California alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are infringing two patents, U.S. Patent 6,174,686 and U.S. Patent 5,795,725, owned by Biosite.  The patents relate to methods for the measurement of cardiac troponin forms.  Roche filed an answer and counterclaims to our complaint in March 2005.  In October 2005, Biosite amended its complaint, further alleging that Roche Diagnostics Corporation and Roche Diagnostics GmbH are also infringing U.S. Patent 6,939,678, a newly issued patent assigned to Biosite that is also related to methods for the measurement of cardiac troponin forms.  The parties have commenced preliminary discovery with respect to the California case. Biosite is seeking unspecified monetary damages and injunctive relief, among other remedies.  We believe our claims have merit and we are vigorously pursuing their prosecution.

ITEM 6.  EXHIBITS

3.(i)(1)	Restated Certificate of Incorporation.
3.(i)  (1)	Certificate of Amendment to the Restated Certificate of Incorporation.
3.(i)(1)	Certificate of Designation of Rights and Preferences of Series A Participating Preferred Stock.
3.(ii)  (4)	Certificate of Amendment to the Restated Certificate of Incorporation.
3.(iii)(3)	Amended and Restated Bylaws.
4.1(2)	Form of Common Stock Certificate with rights legend.
10.42 (A)	Biosite Incorporated 2002 Nonqualified Stock Incentive Plan.
31.1	Section 302 Certification of Kim D. Blickenstaff, Chief Executive Officer.
31.2	Section 302 Certification of Christopher J. Twomey, Chief Financial Officer.
32.1	Section 906 Certification of Kim D. Blickenstaff, Chief Executive Officer.
32.2	Section 906 Certification of Christopher J. Twomey, Chief Financial Officer.

(1)	Incorporated by reference to the exhibit of the same number to Biosite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(2)	Incorporated by reference to the exhibit of the same number to Biosite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
(3)	Incorporated by reference to exhibit 3.(ii) to Biosite’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
(4)	Incorporated by reference to exhibit 3.(ii) to Biosite’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
(A)	Indicates management contract or compensatory plan or arrangement.

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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 8, 2005	BIOSITE INCORPORATED
	By:	/s/ CHRISTOPHER J. TWOMEY
		Christopher J. Twomey
		Senior Vice President, Finance, Chief
		Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

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EX-10.42

EXHIBIT 10.42

AMENDED AND RESTATED

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, and was amended by the Board on October 23, 2003 and on October 6, 2005.

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 also seeks to retain the services of persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company within the meaning of Rule 4350(i)(1)(A) of the NASD Marketplace Rules, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its affiliated corporations.

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.

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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 one million four hundred fifty thousand (1,450,000). This share reserve includes five hundred fifty thousand (550,000) Common Shares originally reserved under the Plan, plus nine hundred thousand (900,000) Common Shares that are subject to the limitations contained in Section 4.3 hereof. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10.

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, except for Awards covering Inducement Shares (as defined below) as to which Officers may be designated as Participants and receive such Awards.

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.

4.3           Inducement Shares.   This Section 4.3 shall apply with respect to the five hundred thousand (500,000) Common Shares reserved under this Plan by action of the Board on October 23, 2003 and the four hundred thousand (400,000) Common Shares reserved under this Plan by action of the Board on October 6, 2005 (together, the “Inducement Shares”). The persons who are eligible for Awards of Inducement Shares shall consist of Eligible Employees whose potential contribution, in the judgment of the Committee, will benefit the future success of the Company and/or an affiliated corporation. An Award covering Inducement Shares may be granted only to an Eligible Employee not previously an employee or Director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company within the meaning of Rule 4350(i)(1)(A) of the NASD Marketplace Rules. In addition, notwithstanding any other provision of the Plan to the contrary, all such Awards covering Inducement Shares must be granted either by a majority of the Company’s independent directors or a committee comprised of a majority of independent directors.

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

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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.

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.

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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.

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.

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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 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

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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.

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.

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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 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

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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.

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

8

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.

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.

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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 Amended and Restated 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.

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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EX-31.1

EXHIBIT 31.1

BIOSITE INCORPORATED

CHIEF EXECUTIVE OFFICER 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2005
	/s/ Kim D. Blickenstaff
	Kim D. Blickenstaff
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

BIOSITE INCORPORATED

CHIEF FINANCIAL OFFICER CERTIFICATIONS

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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2005
	/s/ Christopher J. Twomey
	Christopher J. Twomey
	Senior Vice President, Finance,
	Chief Financial Officer and Secretary

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 1350 OF CHAPTER 63 OF 18 U.S.C.

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Biosite Incorporated (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kim D. Blickenstaff, Chief Executive Officer of the Company, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and § 1350 of Chapter 63 of 18 U.S.C., as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

                (1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the

                                Exchange Act; and

                (2)           The information contained in the Report fairly presents, in all material respects,

                                the financial condition and results of operations of the Company for the period

                                covered by the Report.

/s/ Kim D. Blickenstaff

Kim D. Blickenstaff

Chief Executive Officer

November 8, 2005

A signed original of this written statement required by Section 906 has been provided to Biosite Incorporated and will be retained by Biosite Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Exchange Act, or deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

SECTION 1350 OF CHAPTER 63 OF 18 U.S.C.

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Biosite Incorporated (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Twomey, Chief Financial Officer of the Company, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and § 1350 of Chapter 63 of 18 U.S.C., as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

                (1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the

                                Exchange Act; and

                (2)           The information contained in the Report fairly presents, in all material respects,

                                the financial condition and results of operations of the Company for the period

                                covered by the Report.

/s/ Christopher J. Twomey

Christopher J. Twomey

Chief Financial Officer

November 8, 2005

A signed original of this written statement required by Section 906 has been provided to Biosite Incorporated and will be retained by Biosite Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Exchange Act, or deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.