Summary of INVERNESS MEDICAL INNOVATIONS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Overview
We enable individuals to take charge of improving their health and quality of life by developing new capabilities in near patient diagnosis, monitoring and health management. As a leading global manufacturer and supplier of rapid diagnostics, our diagnostic products and development efforts are focused in the areas of infectious disease, cardiology, oncology, drugs of abuse and women's health. With our 2007 acquisitions of Biosite Incorporated, or Biosite, Cholestech Corporation, or Cholestech, and HemoSense, Inc., or HemoSense, we established our company as a leading supplier of cardiology diagnostic products. Our acquisitions of Biosite, Instant Technologies, Inc., or Instant, and Redwood Toxicology Laboratories, Inc., or Redwood, during 2007 enhanced our position in drugs of abuse testing. Additionally, with our December 2007 acquisition of Matritech, Inc., or Matritech, we also established a presence in oncology, by acquiring the unique NMP-22Ž ELISA and rapid point-of-care tests for the screening and monitoring of bladder cancer in conjunction with standard diagnostic procedures. We expect to continue to expand in all of these product categories through focused research and development projects and further development of our distribution capabilities.
During 2007 and 2008, we entered the growing health management market with our acquisitions of ParadigmHealth, Inc., or ParadigmHealth, Alere Medical Inc., or Alere, and more recently, Matria Healthcare, Inc., or Matria. With the acquisition of Matria, we are now a leader in this field offering a broad range of services aimed at lowering costs for health plans, hospitals, employers and patients. Our health management services are focused in the areas of women's and children's health, cardiology and oncology. We are confident that our ability to offer near patient monitoring tools combined with value-added healthcare services will improve care and lower healthcare costs for both providers and patients. During the third quarter of 2008, we began efforts to consolidate the health management businesses under a single brand. Today, Matria, ParadigmHealth and Alere, each a leader in their respective areas, are united as one business under the name Alere. Also during the third quarter of 2008, we acquired an overseas health management business enabling us to establish a presence in the newly-developing international health management market.
Our research and development programs have two general focuses. We are developing new technology platforms that will facilitate our primary objective of enabling individuals to take charge of improving their health and quality of life by moving testing out of the hospital and central laboratory, and into the physician's office and ultimately the home. Additionally, through our strong pipeline of novel proteins or combinations of proteins that function as disease biomarkers, we are developing new tests targeted towards all of our areas of focus.
We continue to advance toward our goal of establishing a worldwide distribution network that will allow us to bring both our current and future diagnostic products to the global professional market. In addition, we continue to focus on improving our margins through consolidation of certain of our higher cost manufacturing operations into lower cost facilities, including our 300,000 square foot manufacturing facility located in Hangzhou, China, as well as our jointly-owned facility in Shanghai, and we are already seeing improved margins on some of our existing products that we have moved to these facilities. Our business integration activities remain on track and we are beginning to see positive results as we continue to aggressively integrate acquired operations in order to achieve further synergies within expected timelines. During the second half of 2007, we began implementation of a plan to consolidate sales processing and certain other back-office services from seven of our U.S. operations into a shared service center, located in Orlando, Florida. This shared service center commenced operations at the beginning of the second quarter of 2008.
Net revenue increased by $201.2 million, or 85%, to $438.8 million for the three months ended September 30, 2008 from $237.6 million for the three months ended September 30, 2007. Revenue increased primarily as a result of our newly-formed health management segment which provided $118.7 million of incremental revenue and primarily included the activities of our recent acquisitions of Quality Assured Services, Inc., or QAS, Alere, ParadigmHealth and Matria. Also contributing to the increase in net revenue during the third quarter of 2008 were our other recently acquired businesses, primarily within our professional diagnostic products segment which provided $63.5 million of incremental revenue. Net revenue increased by $660.6 million, or 120%, to $1.2 billion for the nine months ended September 30, 2008, from $551.6 million for the nine months ended September 30, 2007.

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Revenue increased primarily as a result of our professional diagnostic related acquisitions which contributed $364.3 million of the increase. Also contributing to the increase in net revenue during the nine months ended September 30, 2008 was our newly-formed health management segment which contributed $251.6 million of incremental revenue and included the activities of our recent acquisitions of QAS, Alere, ParadigmHealth, Matria and our most recently acquired healthcare business.
For the three and nine months ended September 30, 2008, we generated a net loss of $3.7 million and $38.2 million, respectively, compared to a net loss of $180.6 million and $229.0 million, for the three and nine months ended September 30, 2007, respectively.
Results of Operations
Net Product Sales, Total and by Business Segment. Total net product sales increased by $79.1 million, or 35%, to $305.3 million for the three months ended September 30, 2008, from $226.1 million for the three months ended September 30, 2007. Excluding the favorable impact of currency translation, net product sales for the three months ended September 30, 2008 increased by $78.0 million, or 35%, compared to the three months ended September 30, 2007. Total net product sales increased by $387.4 million, or 73%, to $918.5 million for the nine months ended September 30, 2008, from $531.1 million for the nine months ended September 30, 2007. Excluding the favorable impact of currency translation, net product sales for the nine months ended September 30, 2008 increased by $378.3 million, or 71%, compared to the nine months ended September 30, 2007. Net product sales by business segment for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

                                           Three Months Ended                                             Nine Months Ended
                                              September 30,                       %                         September 30,                            %
                                      2008                     2007            Change               2008                     2007                  Change
Professional
diagnostic products               $    245,142             $    172,193          42 %           $    740,570             $    347,781               113 %
Health management                        4,307                    3,985           8 %                 13,541                    4,981               172 %
Consumer diagnostic
products                                34,191                   29,240          17 %                102,306                  124,727               (18 )%
Vitamins and
nutritional
supplements                             21,626                   20,710           4 %                 62,067                   53,643                16 %

Total net product
sales                             $    305,266             $    226,128          35 %           $    918,484             $    531,132                73 %

Professional Diagnostic Products
Net product sales of our professional diagnostic products increased by $72.9 million, or 42%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Excluding the favorable impact from currency translation, net product sales of our professional diagnostic products increased by $71.2 million, or 41%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of:
(i) Cholestech, in September 2007, which contributed additional product revenue of $12.0 million in excess of those earned in the prior year's comparative quarter, (ii) HemoSense, in November 2007, which contributed product revenue of $8.5 million, (iii) BBI Holdings Plc, or BBI, in February 2008, which contributed product revenue of $8.5 million and (v) various less significant acquisitions, which contributed an aggregate of $23.1 million of such increase. Organic growth, particularly from our professional infectious disease products, also contributed to the growth. The currency adjusted organic growth for our professional diagnostic net product sales, excluding the impact of acquisitions, was 11%. Net product sales of our professional diagnostic products increased by $392.8 million, or 113%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Excluding the impact from currency translation, net product sales of our professional diagnostic products increased by $383.6 million, or 110%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Of the currency adjusted increase, revenue increased primarily as a result of our acquisitions of: (i) Biosite, in June 2007, which contributed additional product revenue of $161.7 million in excess of those earned in the prior year's comparative period, (ii) Cholestech, in September 2007, which contributed additional product revenue of $49.4 million in excess of those earned in the prior year's comparative period, (iii) Bio-Stat Healthcare Group, or Bio-Stat, in October 2007, which contributed product revenue of $21.6 million, (iv) HemoSense, in November 2007, which contributed product revenue of $23.7 million, (v) Redwood, in December 2007, which contributed product revenue of $18.4 million, (vi) BBI, in February 2008, which contributed product revenue of $23.0 million and (vii) various less significant acquisitions, which contributed an aggregate of $39.1 million of such increase. Organic growth,

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particularly from our professional infectious disease products, also contributed to the growth. The currency adjusted organic growth for our professional diagnostic net product sales excluding the impact of acquisitions was 13%. Health Management
Net product sales from our health management business segment increased by $0.3 million, or 8%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Net product sales from our health management business segment increased by $8.6 million, or 172%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The increase in net product sales in each of the respective periods represents organic growth of sales related to our acquisition of QAS in June 2007.
Consumer Diagnostic Products
Net product sales of our consumer diagnostic products increased by $5.0 million, or 17%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. The increase in net product sales is primarily attributed to our acquisitions of: (i) Bio-Stat, in October 2007, which contributed product revenue of $2.3 million and (ii) BBI, in February 2008, which contributed product revenue of $1.7 million.
Net product sales of our consumer diagnostic products decreased by $22.4 million, or 18%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The decrease in net product sales is primarily driven by the completion of our 50/50 joint venture with The Procter & Gamble Company, or P&G, in May 2007 in which we transferred substantially all of the assets of our consumer diagnostic products business, other than our manufacturing and core intellectual property assets. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting. Net product sales of our consumer diagnostic products for the nine months ended September 30, 2008 does, however, include $79.0 million of manufacturing revenue associated with our manufacturing agreement with the joint venture, whereby we manufacture and sell consumer diagnostic products to the joint venture. Partially offsetting the impact of the joint venture was an increase in revenue associated with the acquisitions of:
(i) First Check Diagnostics LLC, or First Check, in January 2007, which contributed additional product revenue of $1.1 million, (ii) Bio-Stat, in October 2007, which contributed product revenue of $6.9 million and (iii) BBI, in February 2008, which contributed product revenue of $4.4 million. Vitamins and Nutritional Supplements
Our vitamins and nutritional supplements net product sales increased by $0.9 million, or 4%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007, and increased by $8.4 million, or 16%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The increase in each of the respective periods is primarily a result of organic growth from our existing customers.
Services Revenue, Total and by Business Segment. Services revenue is primarily related to our newly-formed health management business segment which primarily includes our recent acquisitions of QAS, Alere, ParadigmHealth and Matria. In addition to the services revenue generated by our health management businesses, services revenue also includes revenue generated by our professional drugs of abuse testing and screening business, along with revenue associated with our long-term services agreement related to our consumer diagnostic joint venture formed with P&G in May 2007, pursuant to which we provide certain operational support services to the joint venture. Our services revenue was $127.8 million and $272.2 million for the three and nine months ended September 30, 2008, respectively.

                                               Three Months Ended                 Nine Months Ended
                                                  September 30,                     September 30,
                                              2008             2007             2008              2007
 Professional diagnostic products           $   7,442         $     -         $  22,032         $     -
 Health management                            119,785           1,350           248,239           1,719
 Consumer diagnostic products                     541           1,090             1,929           1,670

 Total services revenue                     $ 127,768         $ 2,440         $ 272,200         $ 3,389

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Professional Diagnostic Products
Services revenue provided by our professional diagnostic business segment of $7.4 million and $22.0 million for the three and nine months ended September 30, 2008, respectively, represent revenue related to the laboratory-based professional drugs of abuse testing and screening business at Redwood, which was acquired in December 2007.
Health Management
Services revenue provided by our newly-formed health management business segment was $119.8 million and $248.2 million for the three and nine months ended September 30, 2008, respectively, with Matria contributing services revenue of $75.2 million and $119.7 million in each of the respective periods, Alere contributing services revenue during the respective periods of $22.9 million and $68.2 million, ParadigmHealth contributing services revenue during the respective periods of $18.2 million and $52.7 million, and QAS contributing services revenue during the respective periods of $3.0 million and $7.1 million. Consumer Diagnostic Products
Services revenue provided by our consumer diagnostic business segment decreased by $0.5 million, or 50%, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. Services revenue provided by our consumer diagnostic business segment increased by $0.3 million, or 16%, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. Services revenue provided by our consumer diagnostic business segment represents revenue related to our long-term services agreements with our 50/50 joint venture with P&G formed in May 2007, pursuant to which we provide certain operational support services to the joint venture.
License and Royalty Revenue. License and royalty revenue represents license and royalty fees from intellectual property license agreements with third parties. License and royalty revenue decreased by approximately $3.3 million, or 36%, to $5.8 million for the three months ended September 30, 2008, from $9.1 million for the three months ended September 30, 2007, and increased by approximately $4.4 million, or 26%, to $21.5 million for the nine months ended September 30, 2008, from $17.1 million for the nine months ended September 30, 2007. The decrease in license and royalty revenue for the three months ended September 30, 2008 primarily relates to a $2.6 million royalty/license fee received by Biosite during the third quarter of 2007. License and royalty revenue for the nine months ended September 30, 2008 increased primarily as a result of our acquisition of Biosite in June 2007, which contributed $5.5 million of such increase. This increase was partially offset by decreases in existing royalty agreements.
Gross Profit and Margin. Gross profit increased by $117.9 million, or 107%, to $228.1 million for the three months ended September 30, 2008, from $110.3 million for the three months ended September 30, 2007. Gross profit during the three months ended September 30, 2008 benefited primarily from higher than average margins earned on revenue from our recently acquired businesses, as discussed above. Gross profit for the three months ended September 30, 2008 included a $1.9 million restructuring charge related to the closure of various manufacturing and operating facilities. Gross profit for the three months ended September 30, 2007 included a $6.3 million charge related to the write up to fair market value of inventory acquired in connection with our acquisitions of Biosite and Cholestech.
Gross profit increased by $359.7 million, or 141%, to $614.6 million for the nine months ended September 30, 2008, from $255.0 million for the nine months ended September 30, 2007. Gross profit during the nine months ended September 30, 2008 benefited primarily from higher than average margins earned on revenue from our recently acquired businesses, as discussed above. Gross profit for the nine months ended September 30, 2008 included a $16.4 million restructuring charge related to the closure of various manufacturing and operating facilities and a $2.0 million charge related to the write up to fair market value of inventory acquired in connection with our first quarter of 2008 acquisitions of BBI and Panbio Limited, or Panbio. Gross profit for the nine months ended September 30, 2007 included a $7.5 million charge related to the write up to fair market value of inventory acquired in connection with our acquisitions of Biosite and Cholestech.
Cost of sales included amortization expense of $10.5 million and $7.5 million for the three months ended September 30, 2008 and September 30, 2007, respectively, and $34.2 million and $13.8 million for the nine months ended September 30, 2008 and September 30, 2007, respectively.

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Overall gross margin was 52% and 51% for the three and nine months ended September 30, 2008, respectively, compared to 46% for both the three and nine months ended September 30, 2007.
Gross Profit from Net Product Sales, Total and by Business Segment. Gross profit from net product sales represents net product sales less cost of net product sales. Gross profit from total net product sales increased by $51.1 million, or 51%, to $152.2 million for the three months ended September 30, 2008 from $101.1 million for the three months ended September 30, 2007.
Gross profit from total net product sales increased by $206.1 million, or 85%, to $448.3 million for the nine months ended September 30, 2008 from $242.2 million for the nine months ended September 30, 2007. Gross profit from net product sales by business segment for the three and nine months ended September 30, 2008 and 2007 are as follows (in thousands):

                                                             Three Months Ended                                                    Nine Months Ended
                                                                September 30,                            %                           September 30,                            %
                                                        2008                     2007                  Change                2008                     2007                  Change
Professional diagnostic products                    $    143,227             $     93,790                53 %            $    419,393             $    186,792               125 %
Health management                                            395                    1,134               (65 )%                  3,006                    1,539                95 %
Consumer diagnostic products                               6,703                    3,528                90 %                  18,925                   49,970               (62 )%
Vitamins and nutritional supplements                       1,838                    2,605               (29 )%                  7,000                    3,900                79 %

Total gross profit from net product sales           $    152,163             $    101,057                51 %            $    448,324             $    242,201                85 %

Professional Diagnostic Products
Gross profit from net product sales for our professional diagnostic segment increased by $49.4 million, or 53%, to $143.2 million during the three months ended September 30, 2008, compared to $93.8 million for the three months ended September 30, 2007. The increase in gross profit was largely attributed to the increase in net product sales resulting primarily from our acquisitions of Cholestech, HemoSense and BBI, as discussed above.
Gross profit from net product sales for our professional diagnostic segment increased by $232.6 million, or 125%, to $419.4 million during the nine months ended September 30, 2008, compared to $186.8 million for the nine months ended September 30, 2007. The increase in gross profit was largely attributed to the increase in net product sales resulting primarily from our acquisitions of Biosite, Cholestech and HemoSense, as discussed above.
As a percentage of our professional diagnostic net product sales, gross margin for the three and nine months ended September 30, 2008 was 58% and 57%, respectively, compared to 54% for the three and nine months ended September 30, 2007.
Health Management
Gross profit from net product sales for our health management business segment decreased by $0.7 million, or 65%, to $0.4 million during the three months ended September 30, 2008, compared to $1.1 million for the three months ended September 30, 2007.
Gross profit from net product sales for our health management business segment increased by $1.5 million, or 95%, to $3.0 million during the nine months ended September 30, 2008, compared to $1.5 million for the nine months ended September 30, 2007. The increase in gross profit for the nine months ended September 30, 2008 primarily relates to our acquisition of QAS in June 2007.
As a percentage of our health management net product sales, gross margin for the three and nine months ended September 30, 2008 was 9% and 22%, respectively, compared to 28% and 31% for both the three and nine months ended September 30, 2007, respectively.
Consumer Diagnostic Products
Gross profit from net product sales for our consumer diagnostic segment increased by $3.2 million, or 90%, to $6.7 million for the three months ended September 30, 2008, compared to $3.5 million for the three months ended

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September 30, 2007. The increase during the three months ended September 30, 2008 is primarily a result of the gross profit earned on revenue from our acquisitions of BBI and Bio-Stat.
Gross profit from net product sales for our consumer diagnostic segment decreased by $31.0 million, or 62%, to $18.9 million for the nine months ended September 30, 2008, compared to $50.0 million for the nine months ended September 30, 2007. The decrease during the nine months ended September 30, 2008 is primarily a result of the formation of our consumer diagnostic business joint venture with P&G in May 2007, partially offset by the gross profit earned on revenue from our acquisitions of BBI, Bio-Stat and First Check, as discussed above, and manufacturing profit associated with products sold under our manufacturing agreement with the joint venture.
As a percentage of our consumer diagnostic net product sales, gross margin for the three and nine months ended September 30, 2008 was 20% and 18%, respectively, compared to 12% and 40% for the three and nine months ended September 30, 2007, respectively. The increase in gross margin percentage for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 is primarily a result of the gross profit earned on the revenue from the acquisitions of BBI and Bio-Stat. The decrease in gross margin percentage for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 is driven by the completion of our 50/50 joint venture with P&G in May 2007. As a result of the joint venture, our consumer diagnostic net product sales consist of the manufacturing revenue associated with our manufacturing agreement with the joint venture, whereby we manufacture and sell consumer diagnostic products to the joint venture. Vitamins and Nutritional Supplements
Gross profit from our vitamins and nutritional supplements business decreased by $0.8 million, or 29%, to $1.8 million from $2.6 million, comparing the three months ended September 30, 2008 to the three months ended September 30, 2007. The decrease is primarily the result of shift in product mix to lower margin product sold sales versus the comparative quarter in 2007.
Gross profit from our vitamins and nutritional supplements business increased by $3.1 million, or 79%, to $7.0 million from $3.9 million, comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007. The increase is primarily the result of improved factory utilization and our cost reduction initiatives in our private label manufacturing business.
As a percentage of net product sales, gross margin for our vitamins and nutritional supplements business was approximately 8% and 11%, for the three and nine months ended September 30, 2008, respectively, compared to 13% and 7%, for the three and nine months ended September 30, 2007, respectively. . . .