This discussion should be read in conjunction with the information contained in both our Consolidated Financial Statements for the year ended December 31, 2008, as amended on May 18, 2009 on Form 8-K, and this report for the quarter and nine months ended September 30, 2009.

Other than statements of historical fact, statements made in this report include forward looking statements, such as statements with respect to Bio-Rad's future financial performance, operating results, plans and objectives that involve risk and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as, "believe," "expect," "may," "will," "intend," "estimate," "continue," or similar expressions or the negative of those terms or expressions. Such statements involve risks and uncertainties, which could cause actual results to vary materially from those expressed in or indicated by the forward-looking statements. We have based these forward looking statements on our current expectations and projections about future events. However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things:
changes in general domestic and worldwide economic conditions; our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our ability to successfully integrate any acquired business; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We caution you not to place undue reliance on forward-looking statements, which reflect an analysis only and speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise except as required by Federal Securities law.

Overview. We are a multinational manufacturer and worldwide distributor of Life Science research and Clinical Diagnostics products. Our business is organized into two primary segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics. We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. Because our customers require replication of results in manufacturing processes, research experiments and diagnostic tests, much of our revenues are recurring. Approximately 33% of our year-to-date 2009 consolidated net sales are from the United States and approximately 67% are from international locations. The international sales are largely denominated in local currencies such as Euros, Swiss Franc, Japanese Yen and British Sterling.
As a result, our consolidated sales expressed in dollars benefit when the U.S. dollar weakens and suffer when the dollar strengthens. When the U.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites as well as non-U.S. suppliers and from lower international operating expenses.

The market for reagents and apparatus remains good while growth rates have slowed due to both public and private grant funding being more measured. The market for large capital equipment has slowed, as many pharmaceutical and biotechnology customers delayed or reduced their capital spending. Bio-Rad is generally less impacted by trends in capital spending as lower priced reagents and apparatus comprise the majority of product sales.

The following shows gross profit and expense items as a percentage of net sales:

                                      Three Months Ended   Nine Months Ended
                                        September 30,        September 30,
                                       2009        2008     2009       2008

Net sales                              100.0      100.0    100.0       100.0
Cost of goods sold                      43.5       45.6     43.3        45.6
Gross profit                            56.5       54.4     56.7        54.4
Selling, general and administrative                                     33.2
expense                                 33.3       34.1     33.9
Research and development expense         8.6        8.8      9.2         9.0
Net income attributable to Bio-Rad       8.4        6.3      8.3         7.4

Critical Accounting Policies and Estimates

As previously disclosed in our Annual Report on Form 10-K for year ended December 31, 2008, as amended May 18, 2009 on Form 8-K, we have identified accounting for income taxes, valuation of long-lived and intangible assets and goodwill, valuation of inventories, valuation of investments, warranty reserves, allowance for doubtful accounts and litigation reserves as the accounting policies and estimates critical to the operations of Bio-Rad. For a full discussion of these policies, please refer to our amended Form 10-K for the year ended December 31, 2008. We have expanded our disclosure regarding our critical accounting policies and estimates relating to goodwill and long-lived assets.

Valuation of Goodwill and Long-lived Assets

Goodwill represents the excess of the cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill amounts are assigned to the reporting units based upon the amounts allocated at the time of their respective acquisition, adjusted for subsequent significant transfers of business between reporting units. We assess the impairment of goodwill annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. There was no indication of impairment in the first nine months of 2009. We perform the impairment tests of goodwill at our reporting unit level, which is one level below our reporting segments. The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.

We use projected discounted cash flow models to determine the fair value of a reporting unit. The discounted cash value projected for goodwill may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Projections such as discounted cash flow models are inherently uncertain and accordingly, actual future cash flows may differ materially from projected cash flows. Management judgment is required in developing the assumptions for the discounted cash flow model.
These assumptions include revenue growth rates, profit margins, future capital

expenditures, working capital needs, expected foreign currency rates, discount rates and terminal values. We estimate future cash flows using current and long-term high level strategic financial forecasts. These forecasts take into account the current economic environment. The discount rates used are compiled using independent sources, current trends in similar businesses and other observable market data. Changes to these rates might result in material changes in the valuation and determination of the recoverability of goodwill. For example, an increase in the discount rate used to discount cash flows will decrease the computed fair value. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we apply a 10% decrease to the fair value of each reporting unit.

To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of the reporting units to the enterprise market capitalization including an implied control premium. In performing the reconciliation we may, depending on the volatility of the market value of our stock price, use either the stock price on the valuation date or the average stock price over a range of dates around the valuation date. We compare the implied control premium to premiums paid in observable recent transactions of comparable companies to determine if the fair values of the reporting units are reasonable.

For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess the impairment of long-lived assets (including identifiable intangibles) whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important that could trigger an impairment review include:

· significant under-performance relative to expected, historical or projected future operating results;
· significant changes in the manner of use of the long-lived assets, intangible assets or the strategy for our overall business;
· A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of before the end of its previously estimated useful life; and
· significant negative industry, legal, regulatory or economic trends.

When management determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we test for any impairment based on a projected undiscounted cash flow method. Projected future operating results and cash flows of the asset or asset group are used to establish the fair value used in evaluating the carrying value of long-lived and intangible assets. We estimate the future cash flows of the long-lived assets using current and long-term financial forecasts. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If this is the case, an impairment loss would be recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value.

Results of Operations

Net sales (sales) in the third quarter of 2009 increased 4.4% to $461.1 million from $441.8 million in the third quarter of 2008. On a currency neutral basis, sales increased 11.1%. Currency neutral sales growth was generated in the regions of Asia Pacific, the United States and developing or emerging markets of Eastern Europe and Latin America. Also contributing to sales growth are DiaMed Holding AG (DiaMed) European distributors acquired in late 2008.

The Life Science segment sales for the third quarter were $150.4 million, down 4.1% compared to the third quarter of 2008. On a currency neutral basis, sales declined 0.4%. Contributing to this decline in the Life Science segment sales are weakened demand in Europe and the United States. These sales declines have been somewhat offset by expanded sales in Asia Pacific. Large instrumentation sales remain weak. Sales across a number of product lines in the Life Science segment performed well during the quarter, such as process media and our real-time polymerase chain reaction (PCR) instruments and reagents.

The Clinical Diagnostics segment reported sales of $307.5 million for the third quarter, an increase of 9.3% compared to the third quarter of 2008. On a currency neutral basis, the Clinical Diagnostics segment increased 17.8%. These results reflect continued growth across most product lines, most notably the BioPlex® 2200 system, blood virus, immunology and q uality control products.
Geographically, sales increased in Asia Pacific, Eastern Europe and the United States. Certain sales in Eastern Europe were based on annual contracts and therefore will not be repeated in the fourth quarter. The acquisition of DiaMed distributors added incremental sales to Europe.

Consolidated gross margins were 56.5% for the third quarter of 2009 compared to 54.4% for the third quarter of 2008. Life Science segment gross margins improved from the third quarter of 2008 by approximately 1%. The improvement was the result of better manufacturing overhead absorption from a reduction in costs, the move of new products to more cost efficient off-shore manufacturing, and sales mix favoring higher margin reagents rather than instruments with typically lower margins. Clinical Diagnostics segment gross margins increased by approximately 2%. Improvements included lower royalty payments from the expiration of patents in blood virus and immunohematology products, increased margin from the acquisition of DiaMed distributors and the liquidation of inventory subject to purchase accounting rules. Additionally the BioPlex 2200 margins have improved from greater placements and higher test volume.

Selling, general and administrative expenses (SG&A) represented 33.3% of sales for the third quarter of 2009 compared to 34.1% of sales for the third quarter of 2008. The Life Science segment had declines in SG&A at a rate greater than the decline in sales both before and after adjusting for currency. The decline was primarily the result of cost-cutting efforts to temper weakened sales that included lower costs for travel, marketing, professional services and constraints on employee costs. The Clinical Diagnostic segment had SG&A growth at a much lower rate than sales growth. Again lower travel, marketing and professional fees were the source of cost reductions. Moderate employee cost increases and increased third-party commissions compared to the third quarter of 2008, offset the declining cost categories for the Clinical Diagnostics segment.

Research and development expense (R&D) increased to $39.5 million or 8.6% of sales in the third quarter of 2009 compared to $38.8 million or 8.8% of sales in the third quarter of 2008. Life Science segment R&D declined from the prior year. This decline represented an approximate 1% decrease in efforts based on the historical relationship to sales. Life Science segment R&D efforts are directed toward DNA amplification, proteomics and process chromatography.
Clinical Diagnostics segment R&D remained relatively flat as a percentage of sales for the third quarter of 2009 compared to the same quarter last year.
Clinical Diagnostics segment sales growth has provided the opportunity to expand R&D spending in absolute dollars. Clinical Diagnostics segment R&D efforts are concentrating on additional assays for the BioPlex 2200 testing platform and improvements to existing blood typing instrumentation, diabetes monitoring, autoimmune, blood virus and quality control products.

Interest expense for the third quarter of 2009 increased by $6.3 million compared to the third quarter of 2008. An additional $300 million of Senior Subordinated Notes were issued in May 2009, increasing our indebtedness to $744.0 million at September 30, 2009, and increasing our interest expense.
Included in the increased interest is the amortization of bond discount and debt issuance costs.

Exchange gains and losses consist of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair market value of our forward foreign exchange contracts used to manage our foreign exchange risk. The loss in the current quarter is attributable to greater market volatility, higher costs to hedge, and the result of the estimating process inherent in the timing of shipments and payments of intercompany debt.

Other income and expense, net for the third quarter of 2009 was a net expense of $0.2 million compared to income net of $0.5 million for the third quarter of 2008. The change primarily represents lower return on invested funds.

Bio-Rad's effective tax rate was 23% and 29% for the third quarter of 2009 and 2008, respectively. The effective tax rates for the third quarter of 2009 and 2008 are lower than the statutory rate due to tax benefits for nontaxable dividend income, research and development tax credits, and differences between U.S. and foreign taxes. The lower effective tax rate for the third quarter of 2009 reflects a benefit related to adjustments made to properly reflect deferred tax liabilities.

Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including but not limited to statutory tax rates, changes in existing laws or regulations, tax audits and settlements, and generation of tax credits.

Results of Operations

Net sales (sales) in the first nine months of 2009 declined 2.1% to $1.29 billion from $1.31 billion in the first nine months of 2008. For consolidated Bio-Rad on a currency neutral basis, sales for the first nine months of 2009 grew 5.9% compared to the prior period.

Our Life Science segment sales were $440.5 million, a decline of 6.9% compared to the first nine months of 2008 or a 1.2% decline on a currency neutral basis.
Excluding the impact of a declining BSE market, Life Science segment sales grew a currency neutral 1.5%. Product groups showing positive growth include PCR chemicals and instruments, the Bio-Plex® suspension array system, and the Biotechnology ExplorerTM program. Sales growth in the Life Science segment is limited to Asia Pacific, while the United States declined less than 1%, and European sales represent the majority of declining sales.

For the nine months ended September 30, 2009 Clinical Diagnostics segment sales have grown by 0.8% compared to the first nine months of 2008. Excluding the impact of foreign currency, sales increased 10.3% compared to the first nine months of 2008. The Clinical Diagnostics segment is experiencing sales growth in BioPlex 2200 systems, quality controls and blood virus products. On a regional basis, currency neutral sales growth was provided by Asia Pacific, the United States, Eastern Europe and Latin America.

Consolidated gross margins were 56.7% for the first nine months of 2009 compared to 54.4% for the first nine months of 2008 and 54.6% for all of 2008. Life Science segment gross margins improved in the first nine months of 2009 by approximately 1%. The improvement was the result of better manufacturing overhead absorption from a reduction in costs, the move of new products to more cost efficient off-shore manufacturing, and sales mix favoring higher margin reagents rather than instruments with typically lower margin. Clinical Diagnostics segment gross margins improved by approximately 3%. Improvements included lower royalty payments from the expiration of patents in blood virus and immunohematology products, increased margin from the acquisition of DiaMed distributors and the liquidation of inventory subject to purchase accounting rules. Additionally the BioPlex 2200 margins have improved from greater placements and higher test volume.

SG&A represented 33.9% of sales for the first nine months of 2009 compared to 33.2% of sales in the prior year period. The small net change in SG&A expense was primarily due to moderate growth in employee-related expenses and third party commissions compared to the first nine months of 2008. Offsetting this small net change were declines due to currency translation of foreign denominated expenses, lower travel costs, marketing and professional services.

R&D was $119.1 million for the first nine months of 2009, or 9.2% of sales, compared to 9.0% in the first nine months of 2008. Life Science segment development efforts are directed towards genomics, proteomics and process chromatography applications. Clinical Diagnostics segment development efforts are focused on expanded tests for the BioPlex 2200 testing platform, as well as other enhancements to existing automation and reagents used for immunohematology, clinical microbiology and blood virus diagnostic tests and additional quality control products.

Interest expense for the first nine months of 2009 increased 35.4% to $32.7 million when compared to the first nine months of 2008. An additional $300 million of Senior Subordinated Notes were issued in May 2009, increasing our indebtedness to $744.0 million at September 30, 2009 and increasing our interest expense.

Exchange gains and losses consist of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign exchange risk. The first nine months of 2009 exchange loss of $3.2 million is attributable to greater market volatility, higher costs to hedge, and the result of the estimating process inherent in the timing of shipments and payments of intercompany debt.

Other income and expense, net for the first nine months of 2009 includes investment and dividend income; generally interest income on our cash and cash equivalents, short-term investments and long term marketable securities. The current year increase includes a one-time receipt of $4.6 million for relief of a foreign non-income based tax obligation, offset by lower interest and dividend income in current capital markets. We would also include in this category any gains or losses associated with the sale or disposal of surplus manufacturing equipment or other productive assets.

Bio-Rad's effective tax rate was 23% for the first nine months of 2009 and 25% for the first nine months of 2008. The effective tax rates for both nine month periods are lower than the statutory rate due to tax benefits for nontaxable dividend income, research and development tax credits, and differences between U.S. and foreign taxes. The lower effective tax rate for the first nine months of 2009 reflects a benefit related to adjustments made to properly reflect deferred tax liabilities.

Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including but not limited to statutory tax rates, changes in existing laws or regulations, tax audits and settlements, and generation of tax credits.

Liquidity and Capital Resources

Bio-Rad operates and conducts business globally, primarily through subsidiary companies established in the markets in which we trade. Goods are manufactured in a small number of locations, and are then shipped to local distribution facilities around the globe. Our product mix is diversified, and certain products compete largely on product efficacy, while others compete on price.
Gross margins are generally sufficient to exceed normal operating costs. Funding for research and development of new products as well as routine outflows of capital expenditure and tax expense are covered by cash flow from operations. Our cash flow from operations is also sufficient to make interest payments. In addition to the annual positive cash flow from operating activities, additional liquidity is readily available via the sale of short-term investments and access to our revolving credit facility.

At September 30, 2009, we had available $642.1 million in cash, cash equivalents and short-term investments. Under domestic and international lines of credit we have $229.0 million available for borrowing of which $4.6 million is reserved for standby letters of credit issued by our banks to guarantee our obligations to certain insurance companies. The $200.0 million Revolving Credit Facility terminates on June 21, 2010 unless it is renewed. Management believes that this availability, together with cash flow from operations, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and future acquisitions.

Cash Flows from Operations

Net cash provided by operations was $209.4 million compared to $113.0 million for the nine months ended September 30, 2008. The net improvement of $96.4 million represents a $95.4 million improvement in the net change in cash received from customers and cash paid to suppliers. The largest item contributing to the increase in cash flows was primarily due to relatively flat inventory levels in 2009 compared to approximately $60 million of cash outflows in 2008 to build inventory levels. In addition, the expiration of some patents have reduced royalty payments, moderation in the growth of employee compensation, and reduction in other SG&A costs all contributed to an improved cash flow. Additionally, we experienced a reduction in taxes paid of $3.3 million.

We regularly review the allowance for uncollectible receivables and believe net accounts receivable are fully realizable. We also routinely review inventory for the impact of obsolescence and changes in market prices caused by the introduction of new products, technologies and government reimbursement policies.

Cash Flows from Investing Activities

Net capital expenditures totaled $48.9 million for the nine months ended September 30, 2009 compared to $62.7 million for the same period of 2008.
Capital expenditures represent the addition and replacement of production machinery and research equipment, ongoing manufacturing and facility additions for expansions, regulatory and environmental compliance, and leasehold improvements. Also included in capital expenditures are investments in business systems and data communication upgrades and enhancements. All periods include equipment placed with Clinical Diagnostics segment customers who then contract to purchase our reagents for use.

On April 30, 2009, we acquired 955 of the remaining 1,000 shares of DiaMed Holding AG, held by multiple noncontrolling shareholders. We paid approximately $30 million to these shareholders under the terms of the original purchase agreement dated October 1, 2007. The acquisition of the noncontrolling shares was accounted for as an equity transaction. Although we own 99.8% of DiaMed Holding AG, there are still outstanding noncontrolling interests in certain subsidiaries acquired as part of the DiaMed acquisition.

Bio-Rad announced on October 23, 2009 that it had signed an agreement to acquire certain diagnostic businesses of Biotest AG for 45 million Euros, or approximately $67 million at September 30, 2009 exchange rates. The transaction is subject to certain closing conditions, including regulatory approvals, and is expected to close in the first quarter of 2010.

We continue to review possible other acquisitions to expand both our Life Science and Clinical Diagnostics segments. We routinely meet with the principals or brokers of the subject companies. We are evaluating additional acquisitions on a preliminary basis. It is not certain that any of these transactions will advance beyond the preliminary stages or be completed.

The Board of Directors has authorized the repurchase of up to $18.0 million of Bio-Rad's common stock over an indefinite period of time of which $3.3 million is remaining. Our credit agreements restrict our ability to repurchase our stock. There were no share repurchases made in the first nine months of 2009 or during 2008.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) established the . . .