Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are based upon current expectations. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "intend", "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including, but not limited to, the following: the adverse impact of the significant global economic downturn on our target markets and our business; continued market acceptance of our healthcare associated infection products; changes in the protocols, best practices or level of testing for healthcare associated infections; development and manufacturing problems; the need for additional intellectual property licenses for new tests and other products and the terms of such licenses; our ability to successfully sell additional products in the Clinical market; lengthy sales cycles in certain markets; the performance and market acceptance of our new products; our ability to obtain regulatory approvals and introduce new products into the Clinical market; the level of testing at existing clinical customer sites; the mix of products sold, which can affect gross margins; our reliance on distributors to market, sell and support our products; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; our ability to integrate the businesses, technologies, operations and personnel of acquired companies; the scope and timing of actual United States Postal Service ("USPS") funding of the Biohazard Detection System ("BDS") in its current configuration; the rate of environmental testing using the BDS conducted by the USPS, which will affect the amount of consumable products sold; our success in increasing our direct sales and the effectiveness of our sales personnel; the impact of competitive products and pricing; our ability to manage geographically-dispersed operations; our ability to continue to realize manufacturing efficiencies, which are an important factor in improving gross margins; underlying market conditions worldwide; and the other risks set forth under "Risk Factors" and elsewhere in this report. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.

OVERVIEW

We are a broad-based molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for testing in the Clinical market, as well as for application in our legacy Biothreat, Industrial and Partner markets. Our systems enable rapid, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Molecular testing historically has involved a number of complicated and time-intensive steps, including sample preparation, DNA amplification and detection. Our easy-to-use systems integrate these steps and analyze complex biological samples in our proprietary test cartridges. We are currently the only company to have obtained Clinical Laboratory Improvement Amendments ("CLIA") moderate complexity categorization for an amplified molecular test system and associated specific infectious disease tests on the market in the United States.

Our two principal systems are the GeneXpert and SmartCycler systems. The GeneXpert system, our primary offering in the Clinical market, integrates sample preparation in addition to DNA amplification and detection. The GeneXpert system is designed for a broad range of user types ranging from reference laboratories and hospital central laboratories to satellite testing locations, such as emergency departments and intensive care units within hospitals and doctors' offices. The GeneXpert system is also our main system in the Biothreat market. The SmartCycler system integrates DNA amplification and detection to allow rapid analysis of a sample.

The GeneXpert system represents a paradigm shift in molecular diagnostics in terms of ease-of-use and flexibility, producing accurate results in a timely manner with minimal risk of contamination. Our GeneXpert system can provide rapid results with superior test specificity and sensitivity over comparable systems on the market today that are integrated but have open architectures.

We currently have available a broad and expanding menu of tests and reagents for use on our systems. Our reagents and tests are marketed along with our systems on a worldwide basis.

Sales Channels

Sales for products within our specific markets are conducted through both direct sales and indirect distribution channels worldwide. Clinical market sales in the United States and the United Kingdom are handled primarily through our direct sales force, while sales in all other markets are handled primarily through distributors. As international Clinical markets continue to develop, we expect to expand our direct sales efforts. Our marketing programs are managed on a direct basis.

Revenues

Currently, we derive our revenues primarily from the sales of our two systems and associated reagents and disposables in the Clinical, Biothreat, Industrial and Partner markets, and to a lesser extent from contract and government sponsored research.

Research and Development

The principal objective of our research and development program is to develop high-value clinical diagnostic products for the GeneXpert system. We focus our efforts on four main areas: a) assay development efforts to design, optimize, and produce specific tests that leverage the systems and chemistry we have developed, b) target discovery research to identify novel micro RNA targets to be used in the development of future assays, c) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays and d) engineering efforts to extend the multiplexing capabilities of our systems and to develop new low and high throughput systems.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

Management believes that there have been no significant changes during the nine months ended September 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operation in our 2008 Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission. For a description of those critical accounting policies, please refer to our 2008 Annual Report on Form 10-K, as amended.

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2009 and 2008

Revenues



                                        Three Months Ended September 30,            Nine Months Ended September 30,
                                        2009           2008        % Change          2009           2008      % Change
                                           (In thousands)                              (In thousands)
Revenues:
System sales                         $    10,628    $    13,961         -24 %    $     27,448    $   40,708        -33 %
Reagent and disposable sales              30,170         28,432           6 %          89,498        82,558          8 %

Total product sales                       40,798         42,393          -4 %         116,946       123,266         -5 %
Other revenue                                837          2,522         -67 %           4,477         8,532        -48 %

Total revenues                       $    41,635    $    44,915          -7 %    $    121,423    $  131,798         -8 %

We operate in four market areas: Clinical, Industrial, Biothreat and Partner. The following table illustrates product sales in the four market areas:

                                        Three Months Ended September 30,            Nine Months Ended September 30,
                                        2009           2008        % Change          2009           2008      % Change
                                           (In thousands)                              (In thousands)
Product sales by market:
Clinical Systems                     $     5,804    $    10,654         -46 %    $     16,246    $   24,302        -33 %
Clinical Reagents                         24,098         17,238          40 %          64,101        41,506         54 %

Total Clinical                            29,902         27,892           7 %          80,347        65,808         22 %
Industrial                                 4,986          4,240          18 %          13,010        11,538         13 %
Biothreat                                  3,985          8,608         -54 %          19,666        30,581        -36 %
Partner                                    1,925          1,653          16 %           3,923        15,339        -74 %

Total product sales                  $    40,798    $    42,393          -4 %    $    116,946    $  123,266         -5 %

Total product sales decreased 4% to $40.8 million in the third quarter of 2009 from $42.4 million in the third quarter of 2008, primarily due to a decrease of sales in our legacy Biothreat market of $4.6 million, or 54%, offset by an increase in Clinical sales of $2.0 million. Clinical Reagents grew $6.9 million or 40%, driven primarily by an increase in sales of our healthcare associated infection ("HAI") tests, offset by a $4.9 million or 46% decrease in Clinical Systems product sales as Veterans Affairs ("VA") hospital system placements substantially declined in the third quarter of 2009 compared to the strong placements in the third quarter of 2008 and as customers have continued to be constrained by budgets due to the effect of the challenging economic environment on capital purchase decisions. In the Biothreat market, product sales decreased $4.6 million from the third quarter of 2008 compared to the same period in 2009, primarily due to reduced anthrax test cartridge sales to Northrop Grumman/USPS.

For the nine months ended September 30, 2009, total product sales were $116.9 million, a decrease of 5% from $123.3 million for the nine months ended September 30, 2008. The decrease was a result of a decline in sales in our legacy Biothreat and Partner markets of $22.3 million, offset by an increase in Clinical sales of $14.5 million or 22%. Clinical Reagents grew $22.6 million or 54%, driven primarily by an increase in sales of our HAI tests, offset by an $8.1 million or 33% decrease in Clinical Systems product sales, as Veterans Affairs ("VA") hospital system placements substantially declined in the nine months ended September 30, 2009 compared to the strong placements in the same period of 2008 and as customers have continued to be constrained by the effect of the challenging economic environment on capital purchase decisions. The decrease of $11.4 million or 74% in Partner product sales was due to the expiration of our contract with Becton Dickinson in the fourth quarter of 2008 and the cancellation of certain contracted purchases by Roche during 2008. In the Biothreat market, product sales decreased $10.9 million or 36% primarily due to reduced anthrax test cartridge sales to Northrop Grumman/USPS.

We expect our Clinical product sales to continue to increase during the fourth quarter of 2009 from the third quarter of 2009 with the continued expansion of the HAI market and our new products. We expect that our Partner product sales will decrease from the third quarter of 2009 to the fourth quarter of 2009, as the third quarter included a large, initial purchase from a new North American distributor. We expect our Biothreat sales to increase slightly in the fourth quarter of 2009 from the third quarter of 2009. However, we do not expect the USPS annual purchase volume to increase above the contractual minimum requirements. We expect Other revenue to decrease in the fourth quarter of 2009.

The following table provides a breakdown of our product sales by geographic regions (in thousands):

                                              Three Months Ended                   Nine Months Ended
                                                September 30,                        September 30,
                                          2009       2008     % Change        2009        2008      % Change
Product Sales Geographic information:
North America
Clinical                                $ 22,913   $ 22,956          0 %    $  61,424   $  51,266         20 %
Other                                      9,100     12,890        -29 %       31,127      45,713        -32 %

Total North America                       32,013     35,846        -11 %       92,551      96,979         -5 %

International
Clinical                                $  6,989   $  4,937         42 %    $  18,922   $  14,543         30 %
Other                                      1,796      1,610         12 %        5,473      11,744        -53 %

Total International                        8,785      6,547         34 %       24,395      26,287         -7 %

Total product sales                     $ 40,798   $ 42,393         -4 %    $ 116,946   $ 123,266         -5 %

Product sales in North America decreased $3.8 million, or 11%, from $35.8 million in the third quarter of 2008 to $32.0 million in the third quarter of 2009. The decrease in North America product sales was primarily driven by a $4.6 million decline in anthrax test cartridge sales to Northrop Grumman/USPS in the Biothreat market while Clinical sales remained flat. In the Clinical market, increases in reagent sales were offset by an equal decline in systems sales, as Veterans Affairs ("VA") hospital system placements substantially declined in the third quarter of 2009 compared to the strong placements in the third quarter of 2008 and as customers have continued to be constrained by the effect of the challenging economic environment on capital purchase decisions. International product sales, which primarily represent sales in Europe, increased $2.2 million, or 34%, from $6.5 million in the third quarter of 2008 to $8.8 million in the third quarter of 2009. The increase in international sales is related to a $2.9 million increase in Clinical reagent sales.

Product sales in North America decreased $4.4 million, or 5%, from $97.0 million for the nine months ended September 30, 2008 to $92.6 million for the nine months ended September 30, 2009. The decrease in North American product sales was primarily driven by a $10.9 million decline in anthrax test cartridge sales to Northrop Grumman/USPS in the Biothreat market and a $4.8 million decrease in Partner sales due to the expiration of our contract with Becton Dickinson in the fourth quarter of 2008. The decrease was largely offset by a $10.2 million increase in Clinical sales, due to higher reagent sales partially offset by lower systems sales. The lower systems sales was due to the decline of Veterans Affairs ("VA") hospital system placements in the nine months ended September 30, 2009 compared to the strong placements in the same period of 2008 and due to general market conditions as customers have continued to be constrained by the effect of the challenging economic environment on capital purchase decisions. International product sales, which primarily represent sales in Europe, decreased $1.9 million, or 7%, from $26.3 million in the nine months ended September 30, 2008 to $24.4 million for the nine months ended September 30, 2009. The decrease in international sales is mainly due to a $6.6 million decrease in Partner sales due to the expiration of our contract with Becton Dickinson in the fourth quarter of 2008 and the cancellation of certain contracted purchases by Roche during 2008. International Clinical sales grew by $4.4 million primarily driven by higher Clinical Reagent sales of $6.2 million primarily due to an increase in sales of our HAI tests, offset by Clinical System sales of $1.8 million.

No single country outside of the United States represented more than 10% of our total revenues in any period presented.

Other revenue of $0.8 million for the three months ended September 30, 2009 decreased 67% from $2.5 million for the same period in 2008. For the nine months ended September 30, 2009, other revenue decreased 48% from $8.5 million for the nine months ended September 30, 2008 to $4.5 million. The decrease in each period was primarily due to a decrease in our program associated with the development of a 6-color GeneXpert system as well as the expiration of the license fee deferral received from bioMerieux, Inc. in the first quarter of 2009. We expect that our quarterly other revenue will decrease during the fourth quarter of 2009 from the third quarter of 2009 as certain of our collaboration projects reach transition levels in their lifecycles.

Costs and Operating Expenses



                                             Three Months Ended                       Nine Months Ended
                                               September 30,                            September 30,
                                       2009          2008      % Change        2009           2008      % Change
                                         (In thousands)                           (In thousands)
                                                      As                                       As
                                                   Restated                                 Restated
                                                      (1)                                      (1)
Costs and operating expenses:
Cost of product sales                $ 23,765      $  23,792          0 %    $  67,705      $  69,985         -3 %
Collaboration profit sharing            1,306          2,460        -47 %        6,547          8,970        -27 %
Research and development                8,744         11,611        -25 %       29,397         32,473         -9 %
Sales and marketing                     7,040          7,871        -11 %       20,769         22,246         -7 %
General and administrative              5,223          5,517         -5 %       15,832         15,782          0 %
Gain from legal settlement               (243 )           -         100 %         (243 )           -         100 %
Restructuring charge                       -              -           0 %          747             -         100 %

Total costs and operating expenses   $ 45,835      $  51,251        -11 %    $ 140,754      $ 149,456         -6 %

(1) See Note 11, "Restatement of Condensed Consolidated Financial Statements" in Notes to Condensed Consolidated Financial Statements.

Cost of Product Sales

Cost of product sales consists of raw materials, direct labor and stock-based compensation expense, manufacturing overhead, facility costs and warranty costs. Cost of product sales also includes royalties on product sales and amortization of intangible assets related to technology licenses and intangibles acquired in the purchase of Sangtec. Cost of product sales was $23.8 million for both the third quarters of 2009 and 2008. Our product gross margin percentage was 42% for the third quarter of 2009 and 44% for the third quarter of 2008. The decrease in product gross margin percentage in the three months ended September 30, 2009 versus the same period in 2008 was primarily due to the decline in anthrax cartridge sales to Northrop Grumman/USPS, which generate higher gross margins, as well as the increase in international sales, which traditionally generate lower gross margins. For the nine months ended September 30, 2009, cost of product sales decreased 3% to $67.7 million from $70.0 million versus the same period in 2008, as a result of the decreased product sales to Northrop Grumman/USPS discussed above. Our product margin percentage was 42% for the nine months ended September 30, 2009 compared to 43% for the nine months ended September 30, 2008. The slight decrease in product gross margin percentage in the nine months ended September 30, 2009 versus the same period in 2008 was primarily due to an increase in license fee amortization expense from additional licenses, under-absorption of overhead in our European manufacturing facility that manufactures product for Roche, which cancelled certain contract purchases in 2008 an under-absorption of US overhead due to decreased Clinical System sales volume.

Collaboration Profit Sharing

Collaboration profit sharing represents the amount that we pay to ABI (now Life Technologies Corporation) under our collaboration agreement to develop reagents for use in the USPS BDS program. Under the agreement, computed gross margin on anthrax cartridge sales are shared equally between the two parties. Collaboration profit sharing expense was $1.3 million and $2.5 million for the third quarters of 2009 and 2008, respectively, and $6.5 million and $9.0 million for the first nine months of 2009 and 2008, respectively. The decreases in collaboration profit sharing for the third quarter of 2009 as compared to the third quarter of 2008 and the first nine months of 2009 as compared to the first nine months of 2008 were the result of decreased anthrax cartridge sales under the USPS BDS program. This expense will remain approximately proportional to the sales of anthrax cartridges under the USPS BDS program, which we expect will increase in the fourth quarter of 2009 from the third quarter of 2009.

Research and Development Expenses

Research and development expenses consist of salaries and employee-related expenses, which include stock-based compensation, clinical trials, research and development materials, facility costs and depreciation. Research and development expenses decreased 25% to $8.7 million for the third quarter of 2009 from $11.6 million for the third quarter of 2008. The decrease in research and development expenses of $2.9 million is primarily due to a $0.8 million decrease in salaries and employee-related expenses, a $0.8 million decrease in research and development supplies, a $0.7 million decrease in clinical trial costs and $0.1 million decrease of contractor costs. For the nine months ended September 30, 2009, research and development expenses decreased 9% to $29.4 million as compared to $32.5 million for the nine months ended September 30, 2008. The decrease in research and development expenses of $3.1 million is primarily due to a $1.6 million decrease in research and development supplies, a $0.6 million decrease in employee related expense, a $0.6 million decrease in clinical trial costs and a $0.2 million decrease in external services. We expect that our research and development expenses in the fourth quarter of 2009 will return to levels similar to the first and second quarters of 2009.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries and employee-related expenses, which include commissions and stock-based compensation, travel, facility-related costs and marketing and promotion expenses. Sales and marketing expenses decreased 11% to $7.0 million for the third quarter of 2009 from $7.9 million for the third quarter of 2008. The decrease in sales and marketing expenses is primarily due to a $0.5 million decrease in salaries and employee-related expenses and a $0.3 million decrease in advertising expense. Sales and marketing expenses decreased 7% to $20.8 million for the nine months ended September 30, 2009 from $22.2 million for the nine months ended September 30, 2008. The decrease in sales and marketing expenses is primarily due to a $0.8 million decrease in salaries and employee-related expenses and a $0.6 million decrease in advertising expense. We expect our sales and marketing expenses will increase as a percentage of total revenues in the fourth quarter of 2009 from the third quarter of 2009 due primarily to higher commissions as our sales professionals reach targeted commission accelerators in their compensation plans.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related expenses, which include stock-based compensation, travel, facility costs, legal, accounting and other professional fees. General and administrative expenses decreased 5% to $5.2 million for the third quarter of 2009 from $5.5 million for the third quarter of 2008. The decrease is primarily due to a $0.2 million decrease in salaries and employee-related expenses. General and administrative expenses of $15.8 million were the same for the nine months ended September 30, 2009 and September 30, 2008 with a $1.3 million increase in salaries and employee-related expenses, offset by a $1.1 million decrease of contractor costs as we brought certain tasks in-house. We expect our general and administrative expenses to remain relatively flat in the fourth quarter of 2009.

Gain from Legal Settlement

During the third quarter of 2009, we entered into a settlement with a vendor regarding certain issues under multiple agreements. Pursuant to the settlement, the vendor paid us $0.2 million, which we have recorded as a gain.

Restructuring Charge

During the first quarter of 2009, we eliminated 47 positions that impacted employees, contractors and replacement positions, which resulted in $0.7 million of restructuring expense, mainly related to severance. As of September 30, 2009, we have no material outstanding restructuring expenses to be paid.

Other Income (Expense), Net



                                                  Three Months Ended                      Nine Months Ended
                                                     September 30,                          September 30,
                                           2009         2008        % Change       2009        2008        % Change
                                             (In thousands)                         (In thousands)
Other income (expense), net:
Interest income                            $  69      $    241           -71 %    $  317      $ 1,039           -69 %
Interest expense                             (99 )          (1 )        9800 %      (247 )         (3 )        8133 %
Foreign currency exchange gain and other     146        (1,146 )        -113 %       577         (469 )        -223 %

Total other income (expense), net          $ 116      $   (906 )        -113 %    $  647      $   567            14 %

Other income (expense), net consists of interest income, interest expense and foreign currency exchange gain, net and other. Interest income decreased to $0.1 million for the third quarter of 2009 from $0.2 million for the third quarter of . . .