UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

Commission File Number 0-26670

BioSource International, Inc.

(Exact name of registrant as specified in its charter)

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

542 Flynn Road, Camarillo, CA 93012

(Address of principal executive offices)

(805) 987-0086

(Registrant’s telephone number, including area code)

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 o No ý

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding as of June 23, 2005 was 9,844,913 shares.

BIOSOURCE INTERNATIONAL, INC.

Index

	Part I – Financial Information

Item 1.	Financial Statements

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
Condensed Notes to the Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

	Part II – Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.	Exhibits

Signatures

Exhibits

BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)
(amounts in thousands, except par value)

	March 31, 2005			December 31, 2004

Assets

Current assets
Cash and cash equivalents	$	5,176		$	4,210
Accounts receivable, net	8,064			7,165
Inventories, net	7,891			7,857
Notes receivable	—			544
Deferred income taxes	1,828			1,822
Prepaid expenses and other current assets	1,220			941

Total current assets	24,179			22,539

Property and equipment, net	4,942			5,241
Acquired intangible assets, net	4,808			4,946
Goodwill, net	307			307
Deferred income taxes, net	9,616			9,865
Other assets	700			651

Total assets	$	44,552		$	43,549

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable	$	3,400		$	2,358
Accrued expenses	3,563			3,891
Deferred revenue	253			410
Income taxes payable	462			462

Total current liabilities	7,678			7,121

Commitments and contingencies

Stockholders’ equity
Common stock, $.001 par value, 20,000,000 shares authorized; 9,744,879 and 9,708,860 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively	10			10
Additional paid-in capital	44,541			44,361
Treasury stock, at cost; 642,970 and 634,770 shares at March 31, 2005 and December 31, 2004, respectively	(4,101		)	(4,046		)
Accumulated deficit	(3,990		)	(4,670		)
Accumulated other comprehensive income	414			773

Total stockholders’ equity	36,874			36,428

Total liabilities and stockholders’ equity	$	44,552		$	43,549

See condensed notes to the consolidated financial statements.

BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(amounts in thousands except per share data)

	Three Months Ended March 31,
	2005			2004
				(as restated)

Net sales	$	12,733		$	11,532

Cost of goods sold	5,345			4,888

Gross profit	7,388			6,644

Operating expenses:
Sales and marketing	2,528			2,339
General and administrative	2,028			1,891
Research and development	1,558			1,385
Amortization of intangible assets	139			139
Total operating expenses	6,253			5,754

Income from continuing operations	1,135			890

Interest and other income (expense), net	(76		)	(17		)

Income from continuing operations before income taxes and other items	1,059			873

Provision for income taxes	379			180

Income from continuing operations before other items	680			693

Discontinued operations, net	—			(38		)

Net income	$	680		$	655

Basic earnings per share:
Income from continuing operations	$	0.07		$	0.07
Discontinued operations, net	—			—

Basic earnings per share	$	0.07		$	0.07

Diluted earnings per share:
Income from continuing operations	$	0.07		$	0.07
Discontinued operations, net	—			—

Diluted earnings per share	$	0.07		$	0.07

Shares used in per share calculations:
Basic	9,087			9,395

Diluted	9,226			9,752

See condensed notes to the consolidated financial statements.

BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	Three Months Ended March 31,
	2005			2004
				(as restated)
Cash flows from operating activities:
Net income from continuing operations	$	680		$	693
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	741			548
Deferred income taxes	242			(33		)
Income tax benefit from the exercise of stock options	49			—
Changes in operating assets and liabilities:
Accounts receivable	(1,077		)	(950		)
Notes receivable	544			—
Inventories, net	(193		)	(223		)
Prepaid expenses and other assets	(423		)	(309		)
Accounts payable	1,106			647
Accrued expenses	(239		)	(46		)
Deferred revenue	(157		)	(41		)
Income taxes payable	128			446

Net cash provided by operating activities	1,401			732

Cash flows from investing activities:
Capital expenditures	(328		)	(502		)

Net cash provided by investing activities	(328		)	(502		)

Cash flows from financing activities:
Purchases of common stock as treasury stock	(55		)	—
Proceeds from exercise of stock options	131			65

Net cash provided by financing activities	76			65

Net cash provided by discontinued operations	—			162

Effect of exchange rate changes on cash and cash equivalents	(183		)	40

Net increase in cash and cash equivalents	966			497

Cash and cash equivalents at beginning of period	4,210			3,297

Cash and cash equivalents at end of period	$	5,176		$	3,794

Supplementary disclosure of cash flows information:
Cash paid for interest	$	—		$	2
Cash paid for income taxes	$	118		$	132

See condensed notes to the consolidated financial statements.

BIOSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Consolidated Financial Statements

Basis of Presentation

The accompanying consolidated financial statements of BioSource International, Inc. (together with its subsidiaries, the “Company”) are unaudited and reflect all material adjustments, consisting of normal recurring adjustments which management considers necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the current interim period are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to these rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2004, as amended by the Company’s Annual Report on Form 10-K/A filed on June 28, 2005.

Description of Business

The Company develops, manufactures, markets and distributes products used worldwide in disease related biomedical research and clinical diagnostics, principally in the fields of immunology and molecular biology. Our products include assay test kits, clinical diagnostic kits, bioactive proteins, antibodies, bioactive peptides, oligonucleotides, serum, media and related products. These products enable biomedical researchers to better understand the biochemistry, immunology and cell biology of the human body.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant areas requiring the use of management estimates relate to the valuation of inventories, accounts receivable allowances, long-lived asset impairments, loss contingencies and income taxes. In addition, the Company uses assumptions when employing the Black-Scholes valuation model to estimate the fair value of stock options granted for pro forma disclosures.

Recent Accounting Pronouncements

SFAS 123(R), “Share-Based Payment”

In December 2004 the FASB issued SFAS 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supercedes APB 25, “Accounting for Stock Issued to Employees.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative. SFAS 123(R) must be adopted no later than January 1, 2006, with earlier adoption permitted. The Company expects to adopt this new standard on January 1, 2006. The Company has not yet determined which fair-value method and transitional provision it will follow.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method. As a consequence, no compensation cost is recognized for employee stock options. Although the adoption of SFAS 123(R)’s fair value method will have no adverse impact on the balance sheet or net cash flows, it is expected to have a significant adverse impact on net income and earnings per share. The pro forma effects on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to share-based payments to employees in prior periods are disclosed in Note 7 under “Stock Incentive Plans.” Although the pro forma effects of applying SFAS 123 may be indicative of the effects of applying SFAS 123(R), the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123(R) will depend on numerous factors including the valuation model used to value future share-based payments to employees, estimated forfeiture rates and the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period.

SFAS 151, “Inventory Costs”

In November 2004, FASB issued SFAS No.151, “Inventory Costs, an amendment of ARB 43, Chapter 4,”(SFAS 151) which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing.” This Statement is the result of a broader effort by the FASB working with the International Accounting Standards Board to reduce differences between U.S. and international accounting standards. SFAS151 eliminates the “so abnormal” criterion in ARB No. 43 and companies will no longer be permitted to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. It also makes clear that fixed overhead should be allocated based on “normal capacity.” The provisions of this Statement will be effective for inventory costs incurred during the Company’s 2006 fiscal year. The Company is currently analyzing this statement and has not yet determined its expected impact on the consolidated financial statements.

Note 2 – Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common and dilutive potential common shares outstanding. Potential common shares consist of the shares issuable upon the exercise of stock options or warrants under the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

	Three Months Ended March 31,
	2005		2004
			(as restated)

Net income	$	680	$	655

Weighted average shares outstanding - Basic	9,087		9,395
Dilutive effect of stock options and warrants	139		357

Weighted average shares outstanding - Diluted	9,226		9,752

Basic earnings per share	$	0.07	$	0.07
Diluted earnings per share	$	0.07	$	0.07

Stock options to purchase 1,240,000 and 761,000 common shares for the three months ended March 31, 2005, and 2004, respectively, were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the Company’s common stock during the respective periods. In addition, warrants to purchase 1,287,000 shares were excluded from each period as the warrant exercise prices were also greater than the average market price of the Company’s common stock.

Note 3 – Notes Receivable

In December 2004, the Company sold all of the outstanding stock of its wholly owned subsidiaries, Quality Controlled Biochemicals, Inc. and Javelle, Inc (together “QCB”), which operated the Company’s custom antibodies and peptides business for approximately $0.8 million consisting of $0.2 million in cash consideration, and loans for $0.6 million. In addition, the Company agreed to provide a short-term working capital loan for up to an additional $150,000. As of December 31, 2004 the notes receivable totaled $544,000. The Company advanced an additional $150,000 on the working capital loan in the first two months of 2005. During the three months ended March 31, 2005, the loans including accrued interest were paid off.

In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company accounted for the sale as discontinued operations. QCB’s operating results and cash flows have therefore been segregated from continuing operations on the statements of operations and statements of cash flows for all periods prior to the sale. Discontinued operations are summarized as follows (in thousands):

	Three Months Ended March 31,
	2005		2004

Loss before income taxes	$	—	$	(64	)
Income taxes benefit	—		26
Discontinued operations, net	$	—	$	(38	)

Net sales from discontinued operations	$	—	$	753

Note 4 – Inventories

Inventories are summarized as follows (in thousands):

	March 31, 2005		December 31, 2004
			(as restated)

Raw materials	$	2,889	$	2,424
Work in process	677		563
Finished goods	4,325		4,870

	$	7,891	$	7,857

Note 5 – Property and Equipment

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

	March 31, 2005			December 31, 2004

Machinery and equipment	$	8,899		$	8,781
Office furniture and equipment	4,586			4,555
Leasehold improvements	1,892			1,921
	15,377			15,257
Less accumulated depreciation and amortization	(10,435		)	(10,016		)
	$	4,942		$	5,241

Note 6 – Stockholders’ Equity

Treasury Stock

In July 2004, the Company adopted a new stock repurchase program under which it can repurchase up to $10 million of common stock in open market purchases. During the three months ended March 31, 2005, the Company repurchased 8,200 shares of common stock for an aggregate purchase price of $55,000. The amount the Company spends and the number of shares repurchased varies based upon a variety of factors, including the stock price and blackout periods during which the Company is restricted from repurchasing shares.

Comprehensive Income

The components of comprehensive income are as follows (in thousands):

	Three Months Ended March 31,
	2005			2004
				(as restated)

Net income	$	680		$	655

Foreign currency translation adjustments, net of tax	(359		)	(164		)

Comprehensive income	$	321		$	491

Note 7 – Stock Incentive Plans

The following table illustrates the effect on net income and income per share if the Company had applied the fair value methodology of SFAS No. 123 (in thousands, except per share data):

	Three Months Ended March 31,
	2005			2004
				(as restated)

Net income, as reported	$	680		$	655
Less: Stock-based employee compensation expense determined under fair value method, net of tax	(209		)	(240		)
Pro forma net income	$	471		$	415

Net income per share:

Basic – as reported	$	0.07		$	0.07
Basic – pro forma	$	0.05		$	0.04

Diluted – as reported	$	0.07		$	0.07
Diluted – pro forma	$	0.05		$	0.04

The Company uses the Black-Scholes option-pricing model for estimating the fair value of options granted. Assumptions used for the valuation model are set forth below.

	March 31,
	2005		2004
Expected dividend yield	0.0	%	0.0	%
Risk-free interest rate	2.9	%	2.9	%
Expected volatility	45.1	%	45.1	%
Expected life (years)	4.0		4.1

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Company uses projected volatility rates, based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management’s opinion, do not necessarily provide a reliable single measure of the fair value of the Company’s options. In the future, the Company may elect or be required to use a different valuation model which could result in a significantly different impact on the Company’s pro forma net income.

Note 8 – Business Segments and Geographic Information

The Company is engaged in a single industry: the development, manufacture, marketing and distribution of products used in biomedical research. The Company conducts business globally and is managed geographically. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management systems. Prior to the second quarter of fiscal 2004, the Company’s management analyzed its business based on three strategic business units, Cytokines, Signal Transduction and Custom. Beginning in the second quarter of fiscal 2004, the Company’s internal management systems were realigned to be consistent with the Company’s strategy of focusing on assays, biologicals and other product lines. As a result, effective in the second quarter of fiscal 2004, the Company’s management analyzes sales by geographic region and by product grouping and also analyzes operating income within the United States and Europe consistent with the strategy outlined above. Prior period information has been reclassified to conform to the current period’s presentation.

Segment information is summarized as follows (in thousands):

	Three Months Ended March 31,
	2005			2004
				(as restated)
Sales – by Geography:
Net sales to external customers in:
United States	$	6,159		$	5,559
Europe	4,415			3,926
Asia-Pacific	1,406			1,645
Other	753			402
Total	$	12,733		$	11,532

Operating income (loss):
United States	$	(227	)	$	(190	)
Europe	1,362			1,080
Total	$	1,135		$	890

Sales – by Product Group:
Assays	$	5,480		$	5,158
Biologicals	3,077			2,993
Other	4,176			3,381
Total	$	12,733		$	11,532

	March 31, 2005		December 31, 2004
Long-lived assets:
United States	$	9,028	$	9,319
Europe	1,729		1,826
Total	$	10,757	$	11,145

All assets:
United States	$	33,199	$	32,597
Europe	11,353		10,952
Total	$	44,552	$	43,549

Note 9 – Restatement of Previously Issued Financial Statements

The Company restated its consolidated financial statements as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004. The restatement reflects adjustments due to changes to the accounting treatment of (1) manufactured antibody inventory reserves and (2) the modification of terms in the warrant agreements. Subsequent to the filing of our 2004 Form 10-K, the Company conducted additional analysis with respect to its manufactured antibody inventory loss experience and determined that the previous loss reserves were not appropriate. The Company’s revised reserve methodology is based on analysis of sales levels by product, projections of future demand and age of inventory. In addition, the Company also conducted an analysis of the accounting treatment for its warrant agreements issued in connection with a private placement in 2000 and determined that the impact of the modification of terms should be reflected as a dividend. The effects of the restatement on previously reported consolidated financial statements for the three months ended March 31, 2004 are summarized below (in thousands, except for per share data).

	Three Months Ended March 31, 2004
	As Previously Reported			As Restated

Statement of Operations:
Cost of goods sold	$	4,802		$	4,888
Gross profit	6,730			6,644
Income from continuing operations	976			890
Provision for income taxes	213			180
Income from continuing operations before other items	746			693
Net income	708			655

Basic earnings per share:
Income from continuing operations	$	0.08		$	0.07
Discontinued operations, net	—			—
Basic earnings per share	$	0.08		$	0.07

Diluted earnings per share:
Income from continuing operations	$	0.08		$	0.07
Discontinued operations, net	—			—
Diluted earnings per share	$	0.08		$	0.07

Statement of Cash Flows:
Net income from continuing operations	746			693
Deferred income taxes	—			(33		)
Inventories, net	(309		)	(223		)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto included herein and other information, including information set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as amended, and the other filings we made with the Securities and Exchange Commission from time to time in 2005.

This Form 10-Q contains forward-looking statements, which are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Within this Form 10-Q, words such as “believes,” “expects,” “anticipates,” “plans,” “intends,” “strategy,” “estimates,” “continue” and “may,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These forward-looking statements involve a number of risks, uncertainties and other factors described throughout this Form 10-Q and in our other filings with the Securities and Exchange Commission. The actual results that we achieve may differ from any forward-looking statements due to such risks and uncertainties and other factors. We do not undertake any obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

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

The principal markets for our products include the life sciences research market and the biopharmaceutical production market. The life sciences research market consists of laboratories generally associated with universities, medical research centers and government institutions as well as biotechnology and pharmaceutical companies. Life sciences researchers use our products to perform a broad range of experiments in the laboratory.

Our strategy focuses on our core strengths of producing assay products. These assay products generally are higher margin products and are focused on gaining scientific understanding of both intra and extra-cellular pathways and the impact on those pathways of drugs or disease. We believe the strong market position of our assay products allows us to more effectively market our complimentary product lines to our existing customers.

We anticipate that our results of operations may fluctuate on a quarterly and annual basis and will be difficult to predict. The timing and degree of fluctuation will depend upon several factors, including those discussed below under “Risk Factors Related to Our Business.” In addition, our results of operations could be affected by the timing of orders from distributors and the mix of sales between distributors and our direct sales force. Although we have experienced revenue growth in recent years, there is no assurance that we will be able to sustain such growth or report profits on a quarterly basis.

Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

The table below and the discussion that follows are based upon the way we analyze our product groups. Prior to the second quarter of 2004, we analyzed our business based on three strategic business units, Cytokines, Signal Transduction and Custom. In the second quarter of 2004, we revised our internal management reporting systems to be consistent with our strategy of focusing on assays, biologicals and other product lines. See Note 8 to the consolidated financial statements for additional information about business segments.

(Dollars in thousands)	Q1 2005		% of Net Sales		Q1 2004		% of Net Sales		2004-2005 % Change
Assays	$	5.5	43.3	%	$	5.1	44.3	%	7.8	%
Biologicals	3.1		24.4	%	3.0		26.1	%	3.3	%
Other	4.1		32.3	%	3.4		29.6	%	20.6	%
Total Sales	$	12.7			$	11.5			10.4	%

Net sales. Net sales increased $1.2 million, or 10%, to $12.7 million for the three months ended March 31, 2005 from $11.5 million for the three months ended March 31, 2004. Changes in foreign currency exchange rates increased U.S. dollar-denominated net sales by $0.3 million when comparing the three months ended March 31, 2005 with the corresponding period in 2004. The remainder of the increase was due primarily to volume increases in the sales of our assays, biologicals and other product lines.

Gross profit. Gross profit increased $0.7 million, or 11%, to $7.4 million for the three months ended March 31, 2005 from $6.6 million for the three months ended March 31, 2004. Our gross profit as a percent of sales of 58% in the first quarter of 2005 is comparable to the first quarter of the prior year.

Operating expenses

(Dollars in millions)	Q1 2005		% of Net Sales		Q1 2004		% of Net Sales		2004-2005 % Change
Sales and marketing	$	2.5	19.9	%	$	2.3	20.3	%	8.1	%
General and administrative	2.0		15.9	%	1.9		16.4	%	7.3	%
Research and development	1.6		12.3	%	1.4		12.0	%	12.4	%
Amortization of intangible assets	0.2		1.1	%	0.2		1.2	%	0.0	%
Total operating expenses	$	6.3	49.2	%	$	5.8	49.9	%	8.7	%

Sales and marketing. Sales and marketing expenses were $2.5 million, or 19.9% of sales, for the 2005 first quarter compared to $2.3 million or 20.3% of sales, in the first quarter of 2004. The decrease as a percentage of net sales was due to the continued focus on controlling our sales and marketing costs as sales increase.

General and administrative expenses. General and administrative (“G&A”) expenses were $2.0 million, or 15.9% of sales, for the three months ended March 31, 2005 compared to $1.9 million, or 16.4% of sales, in the first quarter of 2004. G&A decreased as a percentage of net sales due to a continued focus on controlling costs as sales increase.

Research and development. Research and development expenses in 2005 were relatively consistent with that of 2004 increasing $0.2 million, to $1.6 million or 12.3% of sales, for the three months ended March 31, 2005 from $1.4 million, or 12.0% of sales, for the three months ended March 31, 2004.

Amortization of intangible assets. Amortization of intangible assets was $0.2 million for the three months ended March 31, 2005 which was consistent with the comparable 2004 period.

Non-Operating Income and Expenses

Income taxes. Our consolidated effective tax rate for the three months ended March 31, 2005 was 36%, compared with 21% in the first quarter of 2004. Income taxes are determined using an estimated annual effective tax rate. The increase in the effective rate for 2005 is primarily due to lower anticipated tax credits in 2005 compared to 2004. In addition, as our taxable income increases, the impact of credits is reduced thus increasing our consolidated effective tax rate.

Discontinued operations. In December 2004 we sold our wholly owned subsidiaries, Quality Controlled Biochemicals, Inc. and Javelle, Inc., and accounted for the sale as discontinued operations. In accordance with SFAS 144, we have segregated the operating results of this business from continuing operations on our statement of operations for all periods prior to the sale. We recorded a net loss from discontinued operations of $38,000 in the first quarter of fiscal 2004. See Note 3 to the consolidated financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, among other things, the accounting for revenue recognition, allowance for doubtful accounts and inventories, long-lived asset impairments, loss contingencies and income taxes. Actual results could differ substantially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

Revenue Recognition

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

Allowance for Doubtful Accounts

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

Allowances for Inventory

Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market (net realizable value). At each balance sheet date, we evaluate ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product, projections of future demand and age of inventory. If the determination is made that inventory is obsolete, these inventories are reserved for in the period the determination is made. Inventories are shown net of reserves of $6.0 million and $6.6 million at March 31, 2005 and December 31, 2004, respectively.

Impairment of Long-lived Assets

We assess the impairment of long-lived assets, which include equipment and leasehold improvements and identifiable intangible assets, whenever events and circumstances indicate that such assets might be impaired. In the event the expected undiscounted future cash flow attributable to the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.

Accounting for Stock-Based Incentive Programs

We currently measure compensation expense for our stock-based incentive programs using the intrinsic value method prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, we do not record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market value of the stock when the option is granted. In accordance with SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we disclose our pro forma net income or loss and net income or loss per share as if the fair value-based method had been applied in measuring compensation expense for our stock-based incentive programs.

Income Taxes – Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance

When we prepare our consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We record an additional amount in our provision for income taxes in the period in which we determine that our recorded tax liability is less than we expect the ultimate tax assessment to be. If in a later period we determine that payment of this additional amount is unnecessary, we reverse the liability and recognize a tax benefit in that later period. As a result, our ongoing assessments of the probable outcomes of the audit issues and related tax positions require judgment and can materially increase or decrease our effective tax rate as well as impact our operating results. This also requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense on our statement of operations.

Our net deferred tax asset at March 31, 2005 was $11.5 million, net of the valuation allowance of $0.1 million. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets (consisting primarily of certain net operating loss and credit

carryforwards) before they expire. The valuation allowance is based on our estimates of taxable income for the jurisdictions in which we operate and the period over which our deferred tax assets will be realizable. While we have considered future taxable income in assessing the need for the valuation allowance, we could be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we make the increase.

Loss Contingencies

We record liabilities related to pending litigation when an unfavorable outcome is probable and we can reasonably estimate the amount of the loss. We are subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. We evaluate, among other factors, the degree of probability of an unfavorable outcome and an estimate of the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When we determine that it is probable that a loss has been incurred and the amount can be reasonably estimated, the effect is recorded promptly in our consolidated financial statements. Although the outcome of these claims cannot be predicted with certainty, we do not believe that any of our existing legal matters will have a material adverse effect on our financial condition or results of operations.

Liquidity and Capital Resources

To date, our short-term liquidity needs have generally consisted of operating capital to finance growth in inventories, trade accounts receivable, new product research and development, capital expenditures, stock repurchases, acquisitions and investments in strategic licensing. We have satisfied these needs primarily through a combination of cash generated by operations and from private placements of our common stock.

The following sections discuss the effects of changes in our cash flows. At March 31, 2005 our cash and cash equivalents totaled $5.2 million, an increase of $1.0 million from December 31, 2004.

Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, tax timing differences and other items can significantly impact cash flows. In the first quarter of 2005, net cash provided by operating activities was $1.4 million, an increase of $0.7 million compared to net cash provided by operating activities during the first quarter of 2004. This change was primarily due to a $0.2 million net change in operating assets and liabilities as well as to an increase in non-cash operating items of $0.5 million. The increase in non-cash operating items was principally related to the effect of deferred taxes as well as to increased depreciation and amortization. The change in operating assets and liabilities was primarily due to the receipt of $0.5 million related to obligations due under notes receivable issued in connection with the sale of our custom antibodies and peptides business in 2004. Changes in our operating assets and liabilities excluding notes receivable used $0.8 million and $0.5 million during the first three months of 2005 and 2004, respectively due primarily to the timing of customer receipts, vendor payments and tax payments. Accounts receivable increased $0.9 million during the first quarter of 2005. Accrued expenses decreased primarily due to the payout of 2004 incentive compensation in the first quarter of 2005. Changes in prepaid expenses and other current assets and liabilities were due to timing of payments versus when the expenses are incurred.

Investing activities. During the three months ended March 31, 2005 we used $0.3 million for investing activities, compared with $0.5 million for the comparable period in 2004. The decrease was primarily due to lower capital expenditures in 2005 due primarily to the timing of capital investments.

Financing activities. Net cash provided by financing activities during the three months ended March 31, 2005 was $0.1 million which was consistent with the comparable period in 2004. Financing activities in 2005 consisted of cash received from the exercise of stock options of $131,000 which was partially offset by purchases of our common stock under our stock repurchase program of $55,000. During the three months ended March 31, 2004, we received $65,000 from the exercise of stock options.

We expect that cash flows may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital management, research and development expenses, capital expenditures and stock repurchases. In addition, proceeds from the exercise of stock options will vary from period to period based upon, among other factors, fluctuations in the market value of our stock relative to the exercise price of such options.

Stock Repurchase Program

Our Board of Directors has initiated multiple common stock repurchase programs. During the first three months of fiscal 2005 we repurchased 8,200 shares of our common stock for $0.1 million under our only active stock repurchase program. At March 31, 2005 authorized funds of $5.9 million remained available under this program to repurchase shares in the future.

Other

We have never paid cash dividends on our common stock and have no plans to do so in the foreseeable future.

We expect to be able to meet our future cash and working capital requirements for operations and capital expenditures through currently available funds and cash generated from operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including future business acquisitions, stock repurchases and levels of research and development expenditures.

Contractual Obligations

We have operating lease obligations for facilities and equipment under non-cancelable operating lease agreements. Future minimum lease payments are subject to annual adjustment for increases in the Consumer Price Index. As of March 31, 2005, the payments due by period are as follows:

	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Operating leases	$	4,068,000	$	1,238,000	$	1,617,000	$	1,103,000	$	110,000

In December 2004, we sold our Hopkinton custom manufacturing operations. As part of this transaction, we guaranteed the real estate lease obligations through its expiration in May 2006.

Recent Accounting Pronouncements

based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative. SFAS 123(R) must be adopted no later than January 1, 2006, with earlier adoption permitted. The Company expects to adopt this new standard on January 1, 2006. The Company has not yet determined which fair-value method and transitional provision it will follow.

In November 2004, FASB issued SFAS No.151, “Inventory Costs, an amendment of ARB 43, Chapter 4,”(SFAS 151) which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing.” This Statement is the result of a broader effort by the FASB working with the International Accounting Standards Board to reduce differences between U.S. and international accounting standards. SFAS151 eliminates the “so abnormal” criterion in ARB No. 43 and companies will no longer be permitted to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. It also makes clear that fixed overhead should be allocated based on “normal capacity.” The provisions of this Statement are effective for inventory costs incurred during our 2006 fiscal year. We are currently analyzing this statement and have not yet determined its expected impact on our consolidated financial statements.

Foreign Currency

Changes in foreign currency exchange rates can affect our reported results of operations, which are reported in U.S. dollars. Based on the foreign currency rate in effect at the time of the translation of our non-U.S. results of operations into U.S. dollars, reported results could be different from prior periods even if the same amount and mix of our products were sold at the same local prices during the two periods. This will affect our reported results of operations, and also makes the comparison of our business performance in different periods more difficult. For example, our sales for the three months ended March 31, 2005, were $12.7 million using applicable foreign currency exchange rates for that period. However, applying the foreign currency exchange rates in effect during the three months ended March 31, 2004, to our non-U.S. sales for the same period in 2005 would result in $0.3 million less revenue for the 2005 period. These changes in currency exchange rates have affected, and will continue to affect, our reported results, including our sales, sales growth rates, gross margins and income or losses as well as assets and liabilities.

Risk Factors

You should carefully consider the following risk factors and all other information contained in this report which are incorporated herein by reference before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. If any of the following events or outcomes occurs, our business, operating results and financial condition could suffer. The risks described below are not the only ones we face. Additional risks not precisely known to us or that we currently deem immaterial may

also adversely affect our business.

Risks Related to Our Business

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

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

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

• the market’s continuing acceptance of our assay products;

• our ability to internally develop new products;

• our ability to acquire products or licenses to necessary technologies;

• our ability to facilitate transactions with strategic partners;

• establishment of new relationships or expansion of existing relationships with customers and suppliers; and

• availability of capital.

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

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

Reduction or delays in research and development budgets and in government funding may negatively impact our sales. Industry consolidation also could adversely affect our business.

Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to numerous factors that are outside of our control and are difficult to predict, including changes in available resources, spending priorities and institutional budgetary policies. Our business could be seriously damaged by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

A significant portion of our sales has been to researchers, universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies. Government funding

of research and development is subject to the political process, which is inherently fluid and unpredictable. Our sales may be adversely affected if our customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities. A reduction in government funding for the NIH or other government research agencies could seriously damage our business.

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

In recent years, the pharmaceutical industry has undergone substantial downsizing and consolidation. This could have an adverse effect on the ability of some of our existing customers to compete with larger companies in part because competition for funding may become more centralized and fierce because higher stakes are involved. Additional mergers or corporate consolidations in the pharmaceutical industry could cause us to lose existing customers and potential future customers, which could have a harmful effect on our business, financial condition and results of operations.

We rely on raw materials and specialized equipment for our manufacturing, which we may not always be able to obtain on favorable terms.

Our manufacturing process relies on the continued availability of high-quality raw materials, including biological materials, and specialized equipment. It is possible that a change in vendors, or in the quality or price of the raw materials supplied to us, could have an adverse impact on our manufacturing process and, ultimately, on the sale of our finished products. We have from time to time experienced a disruption in the quality or availability of key raw materials, which has created delays in our ability to fill orders for specific test kits. This could occur again in the future and could have a detrimental impact on the sale of our products and our results of operations. For example, the supply of raw fetal bovine serum (“FBS”) is sometimes limited because serum collection tends to be cyclical. These factors can cause the price of raw FBS to fluctuate. The profit margins we achieve on finished FBS, one of our major products, have been unstable in the past because of the fluctuations in the price of raw FBS, and any increase in the price could adversely affect those profit margins. In addition, if we are unable to obtain an adequate supply of FBS, we may lose market share. The availability and price of certain raw materials may be affected by scares or outbreaks of disease or similar health concerns, or perceptions about the materials’ safety, governmental regulation and trade restrictions. In addition, we rely on highly specialized manufacturing equipment that if damaged or disabled could adversely affect our ability to manufacture our products and therefore negatively impact our business.

Our research and development efforts for new products may be unsuccessful.

We incur significant research and development expenses to develop new products and technologies in an effort to maintain our competitive position in a market characterized by rapid rates of technological advancement. There can be no assurance that any of these products or technologies will be successfully developed or that, if developed, will be commercially successful. In the event that we are unable to develop commercialized products from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research and development investment, we could lose our entire investment in these new products and technologies. Any failure to translate research and development expenditures into successful new product introductions could have an adverse effect on our business.

Our loss of existing licenses or failure to license new technologies could impair our new product development.

Our business model of providing products to researchers working on a variety of scientific disciplines requires us to develop a wide spectrum of products. To generate broad product lines it is advantageous to sometimes license technologies from others rather than relying exclusively on our own internal development efforts. As a result, we believe our ability to license new technologies from third parties is and will continue to be important to our ability to offer new products.

In addition, from time to time we are notified or become aware of patents held by third parties that are related to technologies we are selling or may sell in the future. After a review of these patents, we may decide to obtain a license for these technologies from these third parties or discontinue the products. There can be no assurance that we will be able to continue to successfully identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all. If we lose the rights to patented technology or fail to license technologies important to our new product development, we may need to discontinue selling certain products or redesign our products, and we may lose a competitive advantage. Competitors could in-license technologies that we fail to license and potentially erode our market share for certain products. Our licenses typically subject us to various commercialization, sublicensing, minimum payment, and other obligations. If we fail to comply with these requirements, we could lose important rights under a license, such as the right to exclusivity in a certain market, or we could lose all rights under a license. In addition, certain rights granted under the license could be lost for reasons outside of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent. We do not always receive significant indemnification from a licensor against third party claims of intellectual property infringement.

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

Rapid technological change and frequent new product introductions are typical for the markets we serve. Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements. To the extent we fail to introduce new and innovative products, we may lose market share to our competitors, which will be difficult or impossible to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or damage our business.

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

• availability, quality and price relative to competitive products;

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

• customers’ opinion of the product’s utility;

• ease of use;

• consistency with prior practices;

• citation of the product in published research; and

• general trends in life sciences research.

The development, introduction and marketing of innovative products in our rapidly evolving markets will require significant sustained investment. We cannot assure you that cash from operations or other sources will be sufficient to meet these ongoing requirements.

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

Failure to attract and retain qualified scientific or production personnel or loss of key management or key personnel could adversely affect our business.

Recruiting and retaining qualified scientific and production personnel to perform research and development work and product manufacturing are critical to our success. We are in a very competitive industry and face significant challenges attracting and retaining this qualified personnel base. Although we believe we have been and will be able to attract and retain these personnel, there can be no assurance that we will be able to continue to successfully attract and retain qualified personnel. In addition, our growth and expansion into areas and activities requiring additional expertise may require the addition of new scientific and production management and the development of additional expertise within existing management. Additionally, some measures that we implement during the course of integrating acquired companies and businesses into our operations may be disruptive to some of our key personnel, including those in research and development, and cause them to leave us. The failure to attract and retain these personnel or, alternatively, to develop this expertise internally could adversely affect our business.

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

Some of our customers are obtaining products through alternative distribution channels and methods that may adversely impact our results of operations and financial condition.

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

We rely on rapid transport to ship product.

We rely on the timely transport of raw materials and finished products. Any disruption in rapid transportation systems could have an adverse impact on our ability to manufacture and supply products and could accordingly have an adverse effect on our business.

We rely on international sales, which are subject to additional risks, including foreign currency risk.

International sales accounted for approximately 52% of our net sales in the first three months of 2005 and 2004. International sales can be subject to many inherent risks that are difficult or impossible for us to predict or control, including:

• unexpected changes in regulatory requirements and tariffs;

• difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships;

• longer accounts receivable collection cycles in certain foreign countries;

• adverse economic or political changes;

• limited protection for intellectual property in some countries;

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

• potential trade restrictions, exchange controls and import and export licensing requirements;

• problems in collecting accounts receivable; and

• potentially adverse tax consequences of overlapping tax structures.

Our ability to distribute goods internationally could be impaired by governmental regulation and loss of key distributors of our products.

We generate significant revenues from sales outside the United States. International distribution may be subject to greater governmental regulation in the future. These regulations, which include requirements for approvals or clearance to market, additional time required for regulatory review and sanctions imposed for violations, as well as the other risks indicated in the items listed in the above paragraph, vary by country. We may not be able to obtain regulatory approvals in the countries in which we currently sell our products or in countries where we may sell our products in the future. In addition, we may be required to incur significant costs in obtaining necessary regulatory approvals. Failure to obtain necessary regulatory approvals or any other failure to comply with regulatory requirements could result in a material reduction in our revenues and earnings.

We also depend on third-party distributors for a significant portion of our international sales. If we suffer a significant reduction in sales to certain distributors, our business could be materially adversely affected.

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

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

We cannot guarantee that future acquisitions will be successful.

We compete for acquisition and expansion opportunities with companies which have significantly greater financial and management resources than us. There can be no assurance that suitable acquisition or investment opportunities will be identified, that any of these transactions can be consummated, or that, if acquired, these new businesses can be integrated successfully and profitably into our operations. These acquisitions and investments also may require a significant allocation of resources, which will reduce our ability to focus on the other portions of our business, including many of the factors listed in the prior risk factor. Even if we are able to integrate our acquired operations, we cannot assure you that we will

achieve synergies. Our failure to achieve synergies could have a material adverse effect on our business, results of operations and financial condition.

Our operating results may fluctuate in future periods.

Our operating results may vary significantly from quarter to quarter and from year to year as a result of a variety of factors. These factors include, among others:

• level of demand for our products;

• changes in our customer and product mix;

• timing of acquisitions and investments in infrastructure;

• changes in customer research budgets;

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

• competitive conditions;

• intellectual property litigation;

• currency exchange rate fluctuations; and

• general economic and political conditions.

We believe that quarterly comparisons of our financial results may not necessarily be meaningful and should not be relied upon as an indication of future performance. Additionally, if our operating results in one or more quarters do not meet the expectations of securities analysts or others, the price of our common stock could be adversely affected.

Our continued investment in product development and sales and marketing are significant ongoing expenses. If sales in a particular period fall short of expectations, we may not be able to proportionately reduce our expenses for that period, which could materially and adversely affect our operating results for that period.

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

We regard our trademarks, trade secrets and other intellectual property as a significant component of our success. We have only one registered trademark and rely on common law trademarks and trade secret protection. Our common law trademark rights may not be recognized in all countries and the use by third parties of similar trademarks could be confusing and interfere with our rights to use these trademarks. We also rely upon confidentiality and license agreements with employees, customers, partners and others to protect our intellectual property. Effective trademark and trade secret protection may not be available in every country in which our products are available. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries where the laws may not protect our rights in a manner comparable to that in the United States. In addition, our third-party confidentiality agreements might be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become known, our competitive position could be materially and adversely impacted.

Intellectual property litigation and other litigation could harm our business.

Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. We are aware that patents have been applied for by, and in some cases issued to, third parties, claiming technologies that are closely related to ours. As a result, and in part due to the ambiguities and evolving nature of intellectual property law, we periodically receive notices of potential infringement of patents held by others. Although to date we have successfully resolved these types of claims, we may not be able to do so in the future.

An intellectual property dispute might result in litigation. This litigation could involve proceedings declared by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business.

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

In addition to intellectual property litigation, other substantial, complex or extended litigation could result in large expenditures by us and distraction of our management. For example, lawsuits by employees, stockholders, collaborators or distributors could be very costly and substantially disrupt our business. Disputes from time to time with companies or individuals are not uncommon in our industry, and we cannot assure you that we will always be able to resolve them out of court. Unexpected results could cause our financial exposure in these matters to exceed stated reserves and insurance, requiring us to allocate additional funds and other resources to address these liabilities. In addition, the negative press generated by litigation against us could adversely affect our business.

Accidents related to hazardous materials could adversely affect our business.

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

Our sales are subject to seasonality.

We experience a slowing of sales in Europe during the summer months and worldwide during the Christmas holidays. Generally, our first half revenues are stronger than our second half revenues. We believe that period to period comparisons of our operating results may not necessarily be reliable indicators of our future performance.

Potential product liability claims could affect our earnings and financial condition.

We face a potential risk of liability claims based on our past, present and future products and services, and we have faced such claims in the past. We carry product liability insurance which is limited in scope and amount but which we believe to be adequate. We cannot assure you, however, that we will be able to maintain this insurance at a reasonable cost and on reasonable terms. We also cannot assure you that this insurance will be adequate to protect us against a product liability claim, should one arise. If we do not or cannot maintain sufficient liability insurance, our ability to market our products may be significantly impaired. In addition, product liability claims, as well as negative publicity arising out of such claims, could have a material adverse effect on our business, operating results and financial condition.

The labor laws applicable to our employees in Europe may restrict the flexibility of our management.

As of March 31, 2005, 73 of our 242 employees worked for our BioSource Europe subsidiary, which is located in Nivelles, Belgium. As a result of certain labor laws, we are required to make specified severance payments in the event we terminate a European employee. Accordingly, we may be limited by the application of the Belgian labor laws in the determination of staffing levels resulting in less flexibility than our competitors whose employees are not subject to similar labor laws.

Risks Associated with Our Industry

The biomedical research products industry is very competitive, and we may be unable to continue to compete effectively in this industry in the future.

We are engaged in a segment of the biomedical research products industry that is highly competitive. We compete with many other suppliers and new competitors continue to enter the markets. Many of our competitors, both in the United States and elsewhere, are major chemical and life science companies with substantially greater capital resources, marketing experience, research and development staffs and facilities than we have. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may also be more successful than us in producing and marketing their products. We expect this competition to continue and intensify in the future. Competition in our markets is primarily driven by:

• product performance, features and liability;

• price;

• timing of product introductions;

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

• sales and distribution capabilities;

• technical support and service;

• brand loyalty; and

• breadth of product line.

If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be materially adversely affected.

Our competitors have in the past and may in the future compete by lowering prices. Our failure to anticipate and respond to price competition could reduce our sales and profits, and may damage our market share.

As a result of consolidation in the pharmaceutical industry, we may lose existing customers or have greater difficulty obtaining new customers.

In recent years, the United States pharmaceutical industry has undergone substantial consolidation. As part of many business combinations, companies frequently reduce the number of suppliers used and we may not be selected as a supplier after a business combination. Further, mergers or corporate consolidations in the pharmaceutical industry could cause us to lose existing customers and potential future customers, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to government regulation.

Our business is currently subject to regulation, supervision and licensing by federal, state, local and foreign governmental authorities. Also, from time to time we must expend resources to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these

regulations, we could be subject to disciplinary actions or administrative enforcement actions. These actions could result in penalties, including fines.

Risks Associated with Our Common Stock

Our stock price has been volatile, which may affect our ability to raise capital in the future and may subject the value of your investment in our common stock to sudden changes.

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

• fluctuations in our quarterly financial results;

• the gain or loss of significant contracts;

• loss of key personnel;

• announcements of technological innovations or new products by us or by our competitors;

• delays in the development and introduction of new products;

• acquisitions, dispositions and other significant transactions that affect us;

• legislative or regulatory changes;

• general trends in the industry;

• recommendations and/or changes in estimates by research analysts;

• biological or medical discoveries;

• disputes and/or developments concerning intellectual property, including patents and litigation matters;

• public concern as to the safety of new technologies;

• sales of our common stock by existing holders;

• securities class action or other litigation;

• developments in our relationships with current or future customers and suppliers; and

• general economic conditions, both in the United States and abroad.

As a result of these factors, and potentially others, the sales price of our common stock has ranged from $5.45 to $10.69 per share from January 1, 2004 through June 23, 2005.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our common stock, as well as the stock of many biotechnology companies. Often, price fluctuations are unrelated to operating performance of the specific companies whose stock is affected.

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

Anti-takeover provisions in our governing documents and under applicable law could impair the ability of a third party to take over our company.

We are subject to various legal and contractual provisions that may impede a change in our control, including the following:

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

• the ability of our board of directors to issue additional shares of our preferred stock, which shares may be given superior voting, liquidation, distribution and other rights as compared to our common stock.

These provisions, as well as other provisions in our certificate of incorporation and bylaws and under the Delaware General Corporation Law, may make it more difficult for a third party to acquire our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time.

Our principal stockholders and management own a significant percentage of our common stock and have the ability to exercise significant influence over our affairs.

Our principal stockholders [and management] own a significant percentage of our common stock and have the ability to exercise significant influence over our affairs. Accordingly, these stockholders:

• have the ability to significantly influence the composition of our board of directors;

• can significantly influence matters requiring stockholder approval, including the approval of mergers and other significant corporate transactions, including change of control transactions; and

• will continue to have significant influence over our business.

This concentration of ownership of our common stock could have the effect of delaying, preventing or deterring a change of control of us or otherwise discouraging a potential acquirer from attempting to obtain control of us. This in turn could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock.

Absence of dividends could reduce our attractiveness to investors.

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

Caution Regarding Forward-Looking Statements

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

We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties include the following: the impact of intense competition in our business; difficulty in developing and introducing new products and services effectively; failure of customers to adopt our new

products as expected; difficulties with suppliers and distribution channels; significant impairment charges due to past acquisitions; taxing authorities may challenge our tax positions; and the effects of our previously announced process to evaluate strategic alternatives, including a possible sale of the Company, and any transaction we may enter into in connection with that process. In addition, the risks and uncertainties that are discussed in this Item 7 under the caption “Risk Factors” may also impact these forward-looking statements. We encourage you to read that section carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the three months ended March 31, 2005 does not differ materially from that discussed under Item 7A of the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures were, as of the end of the period covered by this report, not effective, due solely to the fact that the Company’s internal controls over loss reserves for previous manufactured antibody inventory were not effective. As reflected in the restatement contained in the Company’s 2004 Annual Report on Form 10-K/A (Amendment No. 2), the Company has made adjustments to its manufactured antibody inventory reserves following additional analysis with respect to its manufactured antibody inventory loss experience.

As of the end of the period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended) that materially affects, or that is reasonably likely to materially affect, this internal control.

PART II – OTHER INFORMATION

We were not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q except as follows:

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock repurchase activity during the three months ended March 31, 2005 was as follows:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Aggregate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs

1/1/05 – 1/31/05	—	$	—	—	$	5,986,128
2/1/05 – 2/28/05	—	$	—	—	$	5,986,128
3/1/05 – 3/31/05	8,200	$	6.65	8,200	$	5,931,576

Total	8,200	$	6.65	8,200

(1) These repurchases were made pursuant to a repurchase program for up to $10 million of our common stock which we announced on July 27, 2004. There is no expiration date for this program.

Item 6. Exhibits

Exhibits.

Exhibit No.		Title

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.

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.

		BIOSOURCE INTERNATIONAL, INC.


Date: June 24, 2005	By:	/s/ Terrance J. Bieker
		Name:	Terrance J. Bieker
		Title:	President and Chief Executive Officer


Date: June 24, 2005	By:	/s/ Alan I. Edrick
		Name:	Alan I. Edrick
		Title:	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

BIOSOURCE INTERNATIONAL INC 10-Q