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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

Commission file number: 0-21872

Gen-Probe Incorporated

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities to be registered pursuant to Section 12(g) of the Act:

      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 þ       No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $488,304,222 million, based on the closing price of the registrant’s common stock on the Nasdaq National Market on June 30, 2003 of $20.485 per share.

      As of March 1, 2004, 49,020,004 shares of registrant’s common stock, $0.0001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after close of the fiscal year are incorporated by reference into Part III of this report.

GEN-PROBE INCORPORATED

TABLE OF CONTENTS

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PART I

TRADEMARKS AND TRADE NAMES

      ACCUPROBE®, APTIMA®, APTIMA COMBO 2®, DTS^TM, GEN-PROBE®, LEADER®, PACE®, TIGRIS®, TMA^TM and our other logos and trademarks are the property of Gen-Probe Incorporated. PROCLEIX® and ULTRIO^TM are trademarks of Chiron Corporation. VERSANT® is a trademark of Bayer Corporation. All other brand names or trademarks appearing in this Annual Report on Form 10-K are the property of their respective holders. Use or display by us of other parties’ trademarks, trade dress or products in this Annual Report is not intended to, and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.

FORWARD-LOOKING STATEMENTS

      This Annual Report and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.

      Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “pro forma” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the heading “Item 1. Business — Risk Factors” and elsewhere in this Annual Report could substantially harm our business, results of operations and financial condition. If any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock.

      The cautionary statements made in this Annual Report are intended to be applicable to all related forward-looking statements wherever they may appear in this Annual Report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report.

Item 1.     Business

Overview

      We are a global leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid probe-based products used for the clinical diagnosis of human diseases and for screening donated human blood. Founded in 1983, we pioneered the scientific and commercial development of nucleic acid testing, or NAT. By utilizing nucleic acid probes that specifically bind to nucleic acid sequences known to be unique to target organisms, NAT enables detection of microorganisms that are difficult or time-consuming to detect with traditional laboratory methods. The United States Food and Drug Administration, or FDA, approved human immunodeficiency virus (type 1), or HIV-1, assay, hepatitis C virus, or HCV, assay, and our investigational test for West Nile virus, or WNV, are currently utilized to screen over 80% of the United States donated blood supply for HIV-1, HCV and WNV.

      We generate revenues primarily from sales of clinical diagnostic and blood screening assays. Our clinical diagnostic products are marketed to laboratories and public health institutions in the United States and Canada through our direct sales force of approximately 35 representatives. We have agreements with Chiron, Bayer, bioMérieux and Fujirebio, through its subsidiary Rebio Gen, Inc., to market some of our clinical

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      We have achieved a leading position in the industry because of our technologically advanced and reliable NAT assays and instruments and the capabilities of our sales force and technical support group. Our investment in research and development has enabled us to develop a portfolio of proprietary and patented technologies that we combine to create NAT products to meet our customers’ changing needs for rapid, accurate and cost-effective assays. We also have worked with outside vendors to develop a range of instrument systems to perform our assays. We have developed what we believe to be the world’s first fully automated, integrated, high-throughput, NAT instrument system, known as the TIGRIS DTS System or TIGRIS instrument. In December 2003, we received approval from the FDA for sexually transmitted disease, or STD, testing on the TIGRIS instrument using our APTIMA Combo 2 assay. We believe the TIGRIS instrument will significantly reduce labor costs and contamination risks in high-volume diagnostic testing environments and enable large blood collection centers to individually test each donor’s blood. The TIGRIS instrument is intended initially for clinical diagnostic applications. We initiated a clinical trial on the TIGRIS instrument for a blood screening application in January 2004.

      We were incorporated under the laws of the state of Delaware in 1987. In September 2002, we were spun off from Chugai Pharmaceutical, Ltd., our former indirect parent as a separate, stand-alone company. Our common stock began regular-way trading on the Nasdaq National Market on September 16, 2002.

      We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our Internet address is http://www.gen-probe.com. The information contained in, or that can be accessed through, our website is not part of this Annual Report.

Technology

      Nucleic acid testing technology is based on detection of unique portions of nucleic acids, which store and transfer genetic information in all living organisms. The two main types of nucleic acids are deoxyribonucleic acid, or DNA, and ribonucleic acid, or RNA. DNA functions as a stable repository of genetic information, while RNA typically serves to transfer the information stored within DNA to the cell’s machinery for making proteins.

      DNA and RNA are both composed of chains of chemical subunits called nucleotides. There are four types of nucleotides in DNA, which differ in one chemical part called a base. The four different bases are: adenine, thymine, guanine and cytosine (abbreviated A, T, G and C). These four nucleotides form the building blocks of all DNA. The sequence of the individual A, T, G and C nucleotides in a DNA molecule encodes the genetic information that instructs the cell how to make particular proteins. Because DNA sequences determine which proteins a cell will make, the differences in a cells’ DNA sequences make the cells of one organism differ from the cells of another.

      Most DNA in cells exists in the form of a double-stranded structure that resembles a twisted ladder. In double-stranded DNA, the nucleotides on opposite sides of the ladder are always paired in a precise way. An “A” nucleotide binds only to a “T” nucleotide on the opposite strand, and vice versa. Likewise, a “G” nucleotide binds only to a “C” nucleotide, and vice versa. Each combination of an “A” nucleotide with a “T” nucleotide (or a “C” with a “G”) is referred to as a “base pair.” The way in which each type of nucleotide binds only to one other type of nucleotide is called “complementary base pairing.” As a result of complementary base pairing, the sequence of nucleotides on one strand of a DNA molecule necessarily determines the sequence of nucleotides on the opposite strand.

      The “attraction” of a nucleotide sequence to its complementary sequence allows a scientist to use pieces of nucleic acid as probes to detect the presence of a target nucleic acid in a test sample. If two complementary pieces of DNA (or RNA) are present in a solution under the right conditions, the complementary bases will

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      If the target organism is present in the sample, the probe should bind to the target organism’s nucleic acids because the sequence of the probe has been designed to be complementary to them. By attaching a detectable label to a probe, it is possible to determine how much, if any, probe has bound to sequences from the target organism.

Current Market Opportunity

      The NAT market developed in response to a need for more rapid, sensitive and specific diagnostic tests for the detection of infectious microorganisms than were previously available using traditional laboratory procedures, such as culture and immunoassays. Culture methods require the growth of a microorganism in a controlled medium and can take several days or longer to yield a definitive diagnostic result. By contrast, nucleic acid probes, which specifically bind to nucleic acid sequences that are known to be unique to the target organisms, can generally deliver a diagnostic result in just hours. For example, culture tests for Mycobacterium tuberculosis can take six to eight weeks for a traditional culture-based diagnosis, compared to only a few hours for NAT. The greater sensitivity and increased specificity of NAT allows for the detection of the presence of a lower concentration of the target organism and helps clinicians distinguish between harmful and benign microorganisms, even when the organisms are closely related, reducing the potential for “false negative” results and thus the number of undiagnosed individuals or individuals who are incorrectly diagnosed as having the disease. For example, the greater sensitivity of amplified NAT allows for the rapid, direct detection of a target organism like Chlamydia trachomatis in urine, even when it is present in low concentrations. In addition, without amplified NAT, more invasive methods of collection like cervical or urethral swabs must be used.

      According to Boston Biomedical Consultants, Inc., the worldwide in vitro diagnostic, or IVD, NAT market in 2003, translated into United States dollars was approximately 1.5 billion. While NAT represents only a small portion of the estimated $26 billion worldwide IVD market, it is the fastest growing segment. Boston Biomedical Consultants, Inc., reported that the worldwide NAT market grew approximately 25% in dollars from 2002 to 2003 and 18% in local currency. We focus our business on market opportunities in two principal segments of the NAT market, clinical diagnostics and blood screening. The clinical diagnostic market currently accounts for the majority of our NAT sales. According to Sannes and Associates, Inc., our sales represented approximately 53% of the total chlamydia and gonorrhea tests sold in the United States in 2003. In addition, according to a June 2003 survey by the Centers for Disease Control and Prevention, or CDC, our sales represented approximately 71% of the United States amplified tuberculosis testing market at that time. We also are exploring opportunities to develop products to address emerging segments of the NAT market. The diagram below illustrates existing and emerging NAT markets with some examples of product targets within each category.

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      Clinical Diagnostics for the Detection of Non-Viral Microorganisms. NAT assays currently are used to detect the microorganisms causing various STDs, including chlamydia and gonorrhea, as well as those causing various other infectious diseases, such as Mycobacterium tuberculosis, Group A Streptococcus and Group B Streptococcus.

      Chlamydia, the common name for the condition of infection with the bacterium Chlamydia trachomatis, is the most prevalent bacterial sexually transmitted infection in the United States, with more than three million new cases in the United States each year according to the CDC. The clinical consequences of undiagnosed and untreated chlamydia infections include pelvic inflammatory disease, ectopic pregnancy and infertility. Gonorrhea, the disease caused by the bacterium Neisseria gonorrhoeae, is the second most frequently reported STD in the United States, according to the CDC. The CDC estimates that each year approximately 600,000 people in the United States develop gonorrhea. Untreated gonorrhea is also a major cause of pelvic inflammatory disease, which may lead to infertility or abnormal pregnancies. In addition, recent data suggests that gonorrhea facilitates HIV transmission. Chlamydia and gonorrhea infections frequently co-exist, complicating the clinical differential diagnosis. Because chlamydia and gonorrhea infections are often asymptomatic, screening programs are important in high-risk populations such as sexually active men and women between the ages of 14 and 24. Currently, most of the testing for chlamydia and gonorrhea occurs in the United States.

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      Tuberculosis, or TB, the disease caused by the microorganism Mycobacterium tuberculosis, remains one of the deadliest diseases in the world. The World Health Organization, or WHO, estimates that each year there are more than eight million new cases of tuberculosis worldwide and approximately two million people die from the disease. Group B Streptococcus, or GBS, represents a major infectious cause of illness and death in newborns in the United States and can cause epilepsy, cerebral palsy, visual impairment, permanent brain damage and retardation. Group A Streptococcus, or GAS, is the cause of “strep” throat, which if left untreated may cause serious complications, such as rheumatic fever and rheumatic heart disease.

      Clinical Diagnostics for the Detection of Viral Microorganisms. NAT assays can be used to detect viral DNA or RNA in a patient sample. These tests can be qualitative, meaning that the tests simply provide a “yes-no” answer for the presence or absence of the virus, or quantitative, meaning that the quantity of virus is determined in the patient sample. Quantitative tests are useful in monitoring the efficacy of treatments to reduce the amount of virus in circulation. NAT assays currently are used to detect viruses such as HIV, HCV and hepatitis B virus, or HBV.

      HIV is the virus responsible for acquired immune deficiency syndrome, or AIDS. In 2002, there were approximately 816,000 reported cases of AIDS in the United States, according to the CDC. Individuals with AIDS show progressive deterioration of their immune systems and become increasingly susceptible to various diseases, including many that rarely pose a threat to healthy individuals.

      HCV is a blood-borne pathogen posing one of the greatest health threats in developing countries. According to WHO, about 80% of newly infected patients progress to develop chronic infection, which can lead to both cirrhosis and liver cancer. In addition, WHO reports that approximately 170 million people are infected worldwide with HCV.

      The Hepatitis B Foundation estimates that almost 100,000 new people in the United States are infected with HBV. Chronic HBV infection can lead to the development of severe, potentially fatal complications, such as cirrhosis of the liver.

      Blood Screening. We believe the field of blood screening is one of the fastest growing areas for NAT assays. Worldwide, approximately 75 million units of blood are drawn annually. Before being used for transfusion, blood must be screened to ensure that it does not contain infectious agents. The most serious threats to recipients of donated blood are HIV, HCV and HBV. There is also growing concern over the presence of other viruses in the donated blood supply, including WNV, parvo B19 and hepatitis A virus, or HAV. In the United States, most blood collection centers have begun NAT screening of donated blood by taking samples from individual units of blood and then combining these samples into pools of 16 or 24 samples. These pooled samples are then tested to determine whether HIV or HCV is present. If the presence of a virus is detected, additional testing is then conducted to determine which sample in the pool contains the virus. Some of our customers, such as the United States military, test blood units individually rather than in pools.

      Prior to the introduction of NAT for blood screening, blood collection centers used immunoassays to determine the presence of blood-borne pathogens through the detection of virus-specific antibodies and viral antigens. These tests either directly detect the viral antigens or detect antibodies formed by the body in response to the virus. Consequently, if the donor has not developed detectable antibodies or detectable amounts of viral antigens as of the time of the donation, recipients of that blood may be unwittingly exposed to serious disease. In the case of HIV-1, antibodies are detectable in the blood approximately 22 days after infection. With HCV, the window between the time of infection and the detection of the antibodies is much longer, approximately 70 days or more. NAT technology can narrow both windows significantly through amplification and detection of the nucleic acid material of the viruses themselves rather than requiring the development of detectable levels of antibodies or viral antigens. According to the CDC, NAT will reduce the window period for HIV-1 detection from 22 days for tests relying on HIV-1 antibodies to 12 days. We believe that NAT reduces the window period for HCV detection from approximately 70 days for tests relying on HCV antibodies to approximately 10 to 14 days. We believe that individual donor testing, or IDT, NAT assays may reduce the window period for HBV detection by 25 to 30 days, compared to HBV antibody tests for detection of HBV surface antigen.

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      Adoption of amplified screening technology. We believe that the market for clinical diagnostic products for the detection of non-viral microorganisms, particularly STDs, will expand due to the adoption of amplified screening technology. Target amplification is particularly advantageous when screening for the presence of a microorganism when the level of that microorganism in clinical samples might be insufficient to permit detection with other methods. While many potential carriers of STDs forego diagnosis due to the current invasive methods of testing, we believe amplified NAT technology, which can use samples collected non-invasively such as urine, will expand screening of high-risk populations and asymptomatic individuals. We believe expansion of the screening of these populations will be accelerated by adoption of guidelines by the Health Plan Employer Data and Information Set, or HEDIS, an organization that provides information about, and recommendations to, managed health care organizations, that call for routine screening of certain populations, such as women between the ages of 15 and 25, to improve early detection and treatment of chlamydia.

      Advances in automated testing. We believe that the introduction of automated instrumentation, such as our TIGRIS instrument, will facilitate growth in both the clinical diagnostics and blood screening segments of the NAT market. It is becoming increasingly difficult for clinical laboratories to recruit and retain skilled laboratory technologists. Within the STD segment, we anticipate that demand will increase as the technology is applied to diagnose new target viral microorganisms, including human papilloma virus, which has been linked to cervical cancer, and the herpes virus. The rate of market growth for testing additional STD-related microorganisms will depend heavily upon automation, as well as continuing advances in testing methodologies that address the issues of specificity, sensitivity, contamination, ease of use, time to results and overall cost effectiveness.

      Additionally, we believe there will be significant demand for automation if blood collection centers begin the screening of individual blood donations rather than the testing of pooled samples, in an effort to further improve the safety of the nation’s blood supply. Individual unit screening at larger blood centers currently is impractical without automated instrumentation because of the throughput limitations of current semi-automated instruments. In addition, we believe automation will encourage adoption of additional blood screening tests, such as tests for HBV, WNV, parvo B19 and HAV.

      Responsiveness to newly emerging threats. We believe that our ability to respond rapidly to the emergence of deadly new infectious diseases, such as WNV and Severe Acute Respiratory Syndrome, or SARS, will contribute to the growth of our blood screening and diagnostic businesses. Our platform of generic reagents and assay formats allows us to rapidly develop new assays for our blood screening or diagnostic businesses as soon as we know the genetic sequence of a new organism.

      Increased focus on safety of blood supply. We believe blood collection centers will continue to focus on improving the safety of donated blood by adopting the most advanced blood screening technologies available. In addition, we believe that some blood collection centers will seek to adopt individual donor testing for some or all organisms, rather than the testing of pooled samples, as automated instrumentation technologies make such testing feasible.

      Growth in viral load testing. We expect increased monitoring of patients on antiviral therapies to contribute to the growth in the market for NAT products. Antiviral therapies are managed by periodic measurement of the virus to determine if the virus has cleared, is below the level of detection of the assay or the remaining level of the virus in a patient, known as the “viral load,” and the detection of viral sub-types when they are present. When the test result is not below the detectable level of the assay, monitoring the viral load can be used to determine when therapy is appropriate, to monitor therapy and to determine the optimal time for a change in therapy. The primary diseases that are the subject of viral monitoring include HIV, HCV and HBV. Nucleic acid viral load tests for HIV have been widely adopted by clinical laboratories over the past six years, but we expect market growth in the short-term because of the introduction of new therapies and increased testing worldwide. In addition, we expect increases in monitoring for HCV in connection with the emergence of new antiviral therapies for HCV. Numerous research programs exist today in anti-viral therapy, with novel antiviral therapeutics in development that have the potential to produce corresponding diagnostic

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      Development of emerging markets for NAT technology. We believe markets will continue to develop for new applications for NAT technology in both clinical and non-clinical fields. Among clinical fields, we believe NAT technology will be utilized in the areas of new analytes, such as the WNV, cancer diagnosis and pharmacogenomics, which involves the study of the relationship between nucleic acid variations and an individual’s response to a particular drug.

      DNA probe diagnostics for hematological cancers already are growing steadily, but we believe that the greatest opportunity will be in the diagnosis, prognosis, high-risk screening and monitoring of solid tumors. New markers to detect the presence of cancer cells in tumors are being discovered at an ever-increasing rate, and we believe that once these markers have been clinically validated, there will be a large market for NAT-based cancer diagnostic products. In addition, our recent license and collaboration agreement with DiagnoCure could represent an innovative application of our NAT technology to detect a new specimens genetic marker in urine for prostate cancer called PCA3 (DD3).

      We believe that NAT diagnostic assays will be used in the field of pharmacogenomics to screen patients prior to administering new drugs. Many genetic variations are caused by a single mutation in nucleic acid sequence, a so-called “single nucleotide polymorphism,” or SNP. Individuals with a specific SNP in a drug metabolism gene may not respond to a drug or may have an adverse reaction to that drug because the body may not metabolize the drug in a normal fashion. We believe the emergence of pharmacogenomics and individually targeted therapeutics will create opportunities for diagnostic companies to develop tests to detect genetic variations that affect responses to drug therapies.

      Emerging non-clinical markets for NAT include water, food, beverage, bioterrorism and environmental testing. Today, these markets predominately use traditional methods for microbiological testing, such as culture. However, there is increasing demand for NAT technology to provide more rapid and efficient tests.

      Improvements in Detection Technologies. Current amplified nucleic acid tests generally provide an “end point” result, requiring that the amplification and detection processes are completed before a result is obtained. New technology now in development is likely to permit kinetic or “real time” detection of target analytes as amplification proceeds, permitting conclusions to be drawn before the amplification process is complete, and thereby reducing the time to an “end point” result. Real time detection methods also offer the advantage of providing a qualitative and quantitative result from a single test.

Our Competitive Strengths

      Our competitive strengths form the foundation for our business and position us to compete effectively within the NAT market.

      We believe that we have developed one of the broadest arrays of core NAT technologies in the industry. Our products incorporate these technologies, which, in combination, have significantly advanced NAT assays, making them more specific, more sensitive, easier to use and faster than products based on competing NAT technologies. For example, our proprietary Transcription-Mediated Amplification, or TMA, technology offers significant advantages over other available amplification methods, including Polymerase Chain Reaction, or PCR. We believe TMA technology allows our products to offer a higher degree of sensitivity, less risk of contamination and greater ease of use than our competitors’ amplification products. In the past, we have leveraged our core technologies to develop products that have achieved leading positions in new NAT markets, such as blood screening and tuberculosis testing. We plan to continue to use our core NAT technologies as a platform for the development of additional products addressing emerging segments of the NAT market.

      We believe that we are unique in offering our customers a broad portfolio of both non-amplified and amplified NAT assays, as well as multiple instrumentation platforms on which to perform our NAT assays. Our expertise in NAT products has enabled us to develop FDA-approved products for the detection of

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      We pioneered the development of the NAT market with our introduction of the first FDA-approved probe-based assays in 1985. As of January 31, 2004, our world-class research and development group, consisted of more than 200 employees, 84 of whom hold advanced degrees. From our PACE family of products to our amplified APTIMA Combo 2 assay, which can detect both chlamydia infections and gonorrhea in urine samples from symptomatic or asymptomatic patients, our scientists have developed proprietary assays that have brought significant innovation to the market for NAT clinical diagnostics. To complement these products, we have developed and continue to develop instrumentation technologies that enable our customers to increase throughput while improving accuracy in a cost-effective manner. We have developed what we believe to be the world’s first fully automated, integrated, high-throughput, NAT instrument system, known as the TIGRIS. Our current initiatives to expand our position in clinical diagnostics and blood screening while applying our core NAT technologies to cancer detection, genetic testing and industrial testing, are consistent with our philosophy of designing innovative products to meet the existing needs of our customers as well as the emerging needs of new markets.

      We believe that we benefit from significant brand name recognition and customer loyalty among laboratories and physicians in the market for NAT assays. We believe our history of technological innovation, quality manufacturing, comprehensive sales capabilities and commitment to customer support has resulted in customer satisfaction and retention. We estimate that greater than 90% of our STD product sales during 2003 were to repeat customers. We believe that our brand name also facilitates market acceptance of our new products, providing us with opportunities for growth. Our selection in 1998 by The American Red Cross as its sole source for NAT assays for blood screening is an example of our standing in the industry.

      As of January 31, 2004, our direct sales force consisted of approximately 35 representatives and a 16-member technical field support group. We believe that these individuals comprise one of the most knowledgeable and effective sales and support organizations in the molecular diagnostics industry. Our sales representatives have an average of 15 years of overall sales experience, with an average of 6 years focused on sales of NAT products. We view our long-standing relationships with laboratory customers and the value-added services that our sales force and technical field specialist group offer, including technical product assistance, customer support and new product training, as central to our success in the United States clinical diagnostics market. We complement our sales force with leading international distributors and the direct sales organizations of our collaborative partners.

      Our products, design control and manufacturing processes are regulated by numerous third parties including the FDA, foreign governments, independent standards auditors and customers. Our team of nearly 95 regulatory, clinical and quality systems professionals has successfully led us through multiple quality and compliance audits. In addition, we have designed and built our two manufacturing facilities to comply with the highest FDA and quality standards. We began production in our blood screening product manufacturing facility in 1999. This facility meets the strict standards set by the FDA’s Center for Biologics Evaluation and Research, or CBER, for the production of blood screening products. In addition, we have obtained ISO 9001

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Our Growth Strategy

      We have successfully created and maintained a leadership position in the NAT testing market. From this strong position, we plan to grow our business through the following strategies:

      We have had a successful track record in identifying new market opportunities and becoming the market leader in a number of NAT testing segments by providing innovative product solutions based on our proprietary technology base. In the past we have utilized our patented technology portfolio, innovation and market development expertise to establish leadership positions in a number of areas, including chlamydia, gonorrhea and tuberculosis testing. Our ability to strategically identify and assume leadership roles in new markets was most recently evidenced by our entrance into the blood screening market. We successfully developed the first FDA-approved NAT assay for HIV-1/ HCV detection, our Procleix HIV-1/HCV assay, which is currently used to screen over 80% of the United States donated blood supply. In addition, our WNV assay, which is available for use by United States blood centers to begin clinical testing of the virus in freshly donated human blood, is currently being used to screen approximately 80% of the United States blood supply. We currently are exploring opportunities and expect to develop new products for emerging NAT markets. We have developed our first cancer-related product, a TMA-based assay for the detection of chronic myelogenous leukemia, or CML, that has been approved in Japan. Our license and collaboration agreement with DiagnoCure could represent an innovative application of our NAT technology to detect a new, highly specific genetic marker for prostate cancer. In the industrial market, we have developed a NAT assay for Listeria monocytogenes, a food pathogen, that is used by the dairy industry in Europe, and a NAT assay for mycoplasma that is used by tissue culture facilities to detect for contamination of cell lines. We also are evaluating additional product opportunities in bioterrorism, pharmacogenomics, food and industrial water testing.

      We will continue to develop instruments that complement our established product lines in clinical diagnostics and blood screening. For example, we have developed, and received FDA approval for STD testing on, the TIGRIS instrument, which we believe is the world’s first fully automated, integrated, high-throughput, NAT instrument system. The TIGRIS instrument should significantly reduce the time, labor costs, risk of contamination and complexity associated with performing NAT assays and blood screening. We believe that the increased utility of this platform will lead to significant advances in both the clinical diagnostics and blood screening markets. The automation and increased throughput of the TIGRIS instrument will enable blood collection centers to process the large testing volumes necessary to screen each individual unit of donated blood for the presence of life-threatening viruses. In addition to the TIGRIS instrument, we currently are developing other next-generation systems to meet customers’ needs for increased productivity. Ultimately, we believe this approach of providing our customers with the latest generation of systems solutions will allow us to sustain and reinforce our market position and brand recognition.

      We will continue to use a systems approach to product development, which involves combining elements of our core technologies to create products that best meet our customers’ needs. For example, our APTIMA Combo 2 assay, which was launched in August 2001, integrates over 20 of our proprietary technologies. The Procleix Ultrio assay, which we developed in collaboration with Chiron, adds an assay for HBV to the previously approved Procleix HIV-1/ HCV assay and is designed to detect the presence of all known HIV-1 groups and subtypes and HCV and HBV genotypes in human plasma during the very early stages of infection, when those agents are present but cannot be detected by immunodiagnostic tests. We commenced clinical trials of the Procleix Ultrio assay in the United States in December 2003. By understanding how our

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      We historically have supplemented our internal research and development efforts by obtaining licenses to new technologies. To maintain our leadership position in NAT testing, we intend to selectively obtain rights to new complementary technologies through licenses and acquisitions. For us to enter emerging NAT markets such as pharmacogenomics, industrial testing and cancer testing, we may need to obtain rights to new technologies and genetic markers for diseases as these markers are discovered and clinically validated by third parties. For example, in August 2003, we acquired a majority of the outstanding shares of Molecular Light Technology Limited and its subsidiaries, providing us with a base for operations in Europe and an entryway for our products in the industrial testing markets. In addition, in November 2003, we signed a license and collaboration agreement with DiagnoCure under which we agreed to develop in collaboration with DiagnoCure, and we agreed to market, an innovative urine test to detect a new gene marker for prostate cancer.

      We will pursue collaborative relationships that enable us to implement our strategies, particularly with respect to the development of new products and entry into new markets. We seek to partner with industry leaders who can offer access to intellectual property or who can complement our commercialization capabilities by distributing co-developed products through their sales organizations. For example, our collaboration with Chiron for the blood screening market has allowed us to combine our NAT technology with Chiron’s patent portfolio relating to HCV and to leverage Chiron’s distribution and sales resources.

      We have developed technologies that make NAT assays practical and effective for commercial use, thereby overcoming many of the limitations of previous DNA probe assays that restricted their use to research laboratories. Our products incorporate a combination of patented technologies that have significantly advanced NAT assays, making them more specific, more sensitive, easier to use and faster than products based on competing technologies. These technologies include the following:

	•	targeting of ribosomal RNA, or rRNA
	•	target capture/nucleic acid extraction technology,
	•	Transcription-Mediated Amplification technology, and
	•	chemiluminescent detection using Hybridization Protection Assay and Dual Kinetic Assay technologies.

      Together, these technologies have allowed us to commercialize new diagnostic tools that provide results in hours instead of days or weeks. This has led to quicker time to result and diagnosis, thereby making a difference in patient treatment and outcome.

      Targeting Ribosomal RNA. We have developed and patented a technique that detects and identifies organisms by targeting their rRNA. The major benefits in targeting rRNA include the following:

	•	Each cell contains up to 10,000 copies of rRNA, as compared with only a few copies of DNA. Most NAT assays target DNA, which is present in only one or two copies in each target organism cell. Therefore, by using a probe that hybridizes to rRNA, the sensitivity of the test is increased thousands of times. This has allowed us to develop indirect and direct probe tests that are used with cultured samples or samples drawn directly from the patient. Because of our patented rRNA technology, we are

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		the only company able to offer convenient and sensitive non-amplified NAT assays for the detection of non-viral microorganisms.
	•	The high number of rRNA targets also offers significant advantages when target-amplified assays are used. When very small numbers of organisms are present in a sample, they may not be present in the portion of the sample used for the assay, despite being present in the sample. This would result in a negative test result. By breaking open the organisms prior to sampling, the multiple copies of rRNA targets are dispersed throughout the sample volume and the likelihood of detecting them is increased many fold. Thus, the likelihood of obtaining a false negative result is significantly less than is the case when single-copy DNA targets are used.
	•	rRNA molecules naturally exist as single strands that can directly hybridize with our chemiluminescent labeled DNA probes. This is in contrast to most DNA targets, which exist as double strands that must be separated before a probe can bind. These separated DNA strands tend to hybridize to each other rather than to the DNA probe, thus limiting the amount of DNA probe that can bind and the overall sensitivity of the test.
	•	rRNA molecules are present in all bacteria, fungi and parasites. This gives us the ability to design diagnostic products for any emerging infectious diseases caused by these pathogens.

      Target Capture/ Nucleic Acid Extraction Technology. Detection of target organisms that are present in small numbers in a large-volume clinical sample requires that target organisms be concentrated to a detectable level. One way to accomplish this is to isolate the particular nucleic acid of interest by binding it to a solid support, which allows the support, with the target bound to it, to be removed from the original sample. We refer to such techniques as “target capture.”

      We have developed target capture techniques to immobilize nucleic acids on magnetic beads by the use of a “capture probe” that attaches to the bead and to the target nucleic acid. We use a magnetic separation device to concentrate the target by drawing the magnetic beads to the sides of the sample tube, while the remainder of the sample is washed away and removed from the reaction tube. We use these techniques in conjunction with our patented amplification methods in our current generation of amplified assays. When used in conjunction with our patented amplification methods, target capture techniques concentrate the target organisms and also remove materials in the sample that might otherwise interfere with amplification.

      Target capture offers the following benefits:

	•	Concentration of target organisms from large volume samples, without the need for centrifugation steps,
	•	Elimination of potential inhibitors of amplification,
	•	Increased ability to test a variety of clinical samples, including urine and blood,
	•	Capture of multiple targets by using capture probes that hybridize to one or more specific nucleic acid sequences, and
	•	Enhanced specificity through selective capture of target and removal of contaminants that may produce a false positive signal.

      Transcription-Mediated Amplification. The goal of amplification technologies is to produce millions of copies of the target nucleic acids that are present in samples in small numbers, which can then be detected using DNA probes. Amplification technologies can yield results in only a few hours versus the several days or weeks required for traditional culture methods.

      Most amplification-based NAT assays utilize a technology known as Polymerase Chain Reaction, or PCR, to amplify DNA. With additional steps, PCR also can be used to amplify RNA. Since most organisms contain only one or two copies of DNA, there are fewer target molecules to initiate amplification when DNA targets are used, and sometimes amplification does not begin at all. In such cases, assays using PCR can fail to produce results. PCR also uses repeated heating and cooling steps requiring complex and expensive thermocyclers. Because PCR produces large amounts of DNA, which is a stable molecule, there is an increased risk of cross-contamination from one PCR assay to another, potentially leading to a high number of

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      Our patented TMA technology is designed to overcome the many problems faced with other target amplification methods such as PCR. TMA is a transcription-based amplification system that uses two different enzymes to drive the process. The first enzyme is a reverse transcriptase that creates a double-stranded DNA copy from an RNA or DNA template. The second enzyme, an RNA polymerase, makes thousands of copies of the complementary RNA sequence, known as the “RNA amplicon,” from the double-stranded DNA template. Each RNA amplicon serves as a new target for the reverse transcriptase and the process repeats automatically, resulting in an exponential amplification of the original target that produces over a billion copies of amplicon in less than 30 minutes.

      TMA offers the following benefits:

	•	The TMA process takes place in one tube at one temperature without the need of expensive thermocyclers required by PCR. All reagents are added to the tube and nothing is removed. This makes the test simpler to use and suitable for automation, and it minimizes the possibility of carry-over contamination and false positive test results,
	•	TMA is very robust and often can be used with clinical samples with little or no purification,
	•	The RNA nucleic acid that is synthesized in the TMA reaction is much more labile when outside the reaction tube and in the lab environment than the DNA that is produced in the PCR method. This reduces the possibility of carry-over contamination,
	•	TMA is able to amplify RNA and DNA targets, whereas PCR requires additional reagents and steps to amplify RNA, and
	•	TMA can be used in “real time” qualitative and quantitative assays.

      Chemiluminescent Technologies and Hybridization Protection Assay. Our DNA probes use chemiluminescent acridinium esters, or AE molecules, that generate light as a label for detection. The AE technology is much more sensitive than fluorescence or absorbance techniques used by our competitors. When AE-labeled DNA probes are mixed with chemical activators, a light signal is produced. Many DNA probe assays and immunoassays use enzyme or radioisotope labels. Assays that use enzyme-labeled DNA probes are complex and can be inhibited by contaminants present in the sample. Radioisotopes offer a strong signal but are difficult to handle, difficult to dispose of and dangerous because they give off harmful radiation.

      We have simplified testing, further increased test sensitivity and specificity and increased convenience with our patented Hybridization Protection Assay, or HPA, technology. With HPA, we introduced the first NAT assay that did not require the cumbersome wash steps needed with conventional probe tests and immunoassays. In the HPA process, the AE molecule is protected within the double-stranded helix that is formed when the probe binds to its specific target. Prior to activating the AE molecule, known as “lighting off,” a chemical is added that destroys the AE molecule on any unbound probes, leaving the label on the bound probes unaffected. When the “light off” reagent is added to the specimen tube, only the label attached to the hybridized probe produces a signal indicating the target organism’s DNA or RNA is present. All of these steps occur in a single tube or microtiter plate and without any wash steps.

      Our Dual Kinetic Assay, or DKA, technology uses two types of AE molecules — one that “flashes” and another one that “glows.” By using DKA, we have created NAT assays that can detect two separate targets simultaneously.

      APTIMA Technology. We have combined target capture, TMA and DKA together into an integrated family of technologies known as APTIMA. APTIMA assays represent the latest generation of nucleic acid amplification testing, simplifying sample handling, minimizing contamination and allowing for the simultaneous detection of two analytes in one tube. APTIMA thereby increases assay performance, reduces laboratory costs and improves laboratory efficiency. APTIMA assays offer the only single-tube testing approach for modern clinical laboratories. We believe APTIMA technology will accommodate true walk-away automation, allowing hundreds of specimens to be tested by an individual technician in a single run.

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Our Products

      We have applied our core technologies to develop multiple product lines, all of which utilize our expertise in NAT probes, sample collection and processing. We categorize our products into clinical diagnostic products and blood screening products.

      Within our clinical diagnostic product group, we have developed products for the detection of non-viral and viral microorganisms.

      Clinical Diagnostic Products for the Detection of Non-Viral Microorganisms. We have developed FDA-approved amplified and non-amplified NAT assays that detect non-viral microorganisms. We have established a market-leading position in non-amplified NAT assays, particularly with respect to assays for the detection of chlamydia and gonorrhea, and we have obtained FDA approval for an amplified STD test to compete in that market segment.

      Our principal products for the detection of non-viral microorganisms include our non-amplified AccuProbe and non-amplified PACE family of products and our amplified Mycobacterium Tuberculosis Direct Test and amplified APTIMA Combo 2 product, as set forth below.

Clinical Diagnostic Products for the Detection of Non-Viral Microorganisms

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      AccuProbe Products. Our AccuProbe Culture Identification products are powerful tools for the identification of mycobacterial, fungal and bacterial pathogens, with sensitivities and specificities approaching 100% in most cases. These products allow for the detection of target organisms from primary cultures, eliminating the additional labor of purifying secondary cultures. All AccuProbe Culture Identification assays are based on our HPA technology.

      All of our AccuProbe Culture Identification tests follow a standard format, use common reagents and do not require highly trained technical personnel. Results are obtained utilizing our luminometers, which are easy to use and offer precise readings. In addition, the convenient packaging provides extended stability and shelf life.

      As part of our AccuProbe Culture Identification product line, we also have developed a procedure to detect Group B Streptococcus, or GBS, from broth culture. The assay demonstrates near 100% sensitivity and specificity when testing broth samples after 24 hours of incubation. Our products address the market need for a more rapid, direct test procedure for GBS that can be used to effectively screen women during pregnancy and to provide prompt results when testing is performed just before delivery.

      Group A Streptococcus Direct. The Group A Streptococcus Direct Test, or GASDirect, assay is a rapid NAT assay for the direct detection of Streptococcus pyogenes in one hour from a throat swab. Sensitivity and specificity are equivalent to culture methods taking 72 hours to complete and are higher than the rapid membrane antigen tests often used in physician offices. The test provides fast and accurate results, eliminates subjective interpretation by the laboratory technician, and aids physicians in making more informed treatment decisions. The product’s ease of use enables efficient batch testing. An automatic pipetting option offers greater workflow economies and laboratory productivity.

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      PACE Product Family. In 2003, our STD products accounted for approximately 57% of the United States market for chlamydia and gonorrhea testing. Our NAT assays have proven to be more sensitive and specific than traditional enzyme immunoassay methods. The PACE 2 System currently is the major clinical diagnostic product line we manufacture and sell. Our PACE 2C is the first advanced NAT product to offer the convenience of testing for both chlamydia infections and gonorrhea from a single patient specimen. This feature eliminates the need to collect separate specimens and the need to transport the specimens under different conditions. The PACE 2C continues to meet the needs of today’s clinical laboratories that prefer a cost-effective, non-amplified NAT assay for routine screening for chlamydia infections and gonorrhea. Other products in the PACE 2 product line include individual tests to detect and confirm both chlamydia infections and gonorrhea. The PACE product family also includes the PACE Specimen Collection kits for endocervical and urethral specimens.

      Sales of our PACE family of assays accounted for 29% of our total revenues in 2003, 44% of our total revenues in 2002 and 57% of our total revenues in 2001. The decrease in the percentage of total revenues represented by our PACE family of assays is attributable to two factors. First, our total revenues are increasing primarily due to increases in our blood-screening segment, which lowers the overall contribution of the clinical diagnostic revenues as a percentage of total revenues. Second, we are actively converting our PACE customers over to our amplified APTIMA Combo 2 product line which, while partially decreasing PACE family revenues, ultimately contributes to total clinical diagnostic product sales growth.

      Mycobacterium Tuberculosis Direct Test. Amplification is particularly important when detecting pathogens present at low levels, as is often the case with tuberculosis. Culture tests for TB can take 6 to 8 weeks for a preliminary result, often resulting in a patient not receiving appropriate treatment on a timely basis or receiving unnecessary treatment. Our amplified Mycobacterium Tuberculosis Direct, or MTD, test has sensitivity similar to a culture test but can detect the TB pathogen within a few hours. The test is performed directly on a patient sample, and can be used to quickly differentiate between TB and other mycobacteria, resulting in quicker isolation and treatment of an infected patient. Our amplified MTD assay was initially approved by the FDA in December 1995. Additional applications of the test were subsequently approved. Our MTD assay was the first amplified NAT assay for obtaining same day results from sputum samples.

      APTIMA Combo 2. To meet market demand for amplified STD assays, we have developed our APTIMA Combo 2 assay, which received FDA approval in May 2001 and was launched commercially in August 2001. Acceptance of first generation amplified tests has been adversely affected by the complexity of the methodology and the lack of a format adequate for use in the average laboratory. We believe APTIMA Combo 2, which uses second generation amplification technologies, will allow us to overcome these barriers. The test offers superior performance and ease of use, including its use of a piercable cap that eliminates the need to uncap samples prior to testing and a sample transport medium that preserves the integrity of the sample for weeks at room temperature. We also believe it currently is the only NAT assay that can be used to accurately screen urine samples for chlamydia infections and gonorrhea with the same sensitivity as seen from cervical and urethral samples.

      We believe the assay is ideally suited to test specimens from both symptomatic and asymptomatic individuals. Symptomatic individuals typically have large amounts of the microorganism present at the infection site, while patients who are asymptomatic typically have much lower levels of the microorganism present at the infection site. APTIMA Combo 2 has the sensitivity and specificity to detect chlamydia infections and gonorrhea from both symptomatic and asymptomatic individuals.

      In addition to amplification technology, our APTIMA Combo 2 assay utilizes the latest versions of our core technologies, including target capture, HPA and DKA. APTIMA Combo 2 will qualitatively detect and differentiate rRNA from Chlamydia trachomatis and Neisseria gonorrhoeae bacteria. This continues the “one test, two results” advantage we first provided with our PACE 2C non-amplified assay for chlamydia infections and gonorrhea. We believe we are in a unique position to provide both amplified and non-amplified assays for these infections. This allows us to compete in all segments of the STD testing market and to provide the appropriate NAT solution to meet the needs of many different customers.

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      Our APTIMA Combo 2 assay is the first clinical diagnostic assay approved for use on the fully automated TIGRIS instrument. Our APTIMA Combo 2 assay is also performed on our existing instrumentation, including our semi-automated DTS instruments. In January 2004, we received FDA approval for the APTIMA Vaginal Swab Specimen Collection Kit, the first kit that enables patients to self-collect vaginal swab specimens to be tested for Chlamydia trachomatis and Neisseria gonorrhoeae using the APTIMA Combo 2 assay.

      APTIMA CT ASR and APTIMA GC ASR. We also have developed individual analyte specific reagents, or ASRs, to separately detect the presence of Chlamydia trachomatis and Neisseria gonorrhoeae. ASRs comprise a category of in vitro diagnostic reagents to bridge the gap between research and assays that have received FDA approval. The FDA has created a series of regulations governing these reagents. ASRs use a collection of specific reagents that, when combined with general purpose reagents, give clinical diagnostic testing laboratories the ability to build diagnostic tests often referred to as “home-brew” tests. ASRs allow diagnostic companies to deliver reagents to the market rapidly, as most ASRs are exempt from FDA submissions. Our APTIMA CT ASR and APTIMA GC ASR are currently under review by the FDA for clearance as stand-alone test kits.

      Clinical Diagnostic Products for the Detection of Viral Microorganisms. In 1996, we were selected by the National Heart, Lung and Blood Institute of the National Institutes of Health, or NIH, to develop reagents and instrumentation for the blood donor screening market using our core technologies. We completed our development of the NAT assays for HIV-1 and HCV for blood screening contemplated by the NIH contract in February 2002. Our work under the NIH contract also launched us into development of products for the detection of viral microorganisms in the clinical diagnostic market. We produce qualitative diagnostic tests that can determine whether the virus is present, and quantitative tests that can determine the amount of the virus. We received FDA approval of our qualitative HCV assay in November 2002.

Clinical Diagnostic Products for the Detection of Viral Microorganisms

      Qualitative HCV Test. We have developed an amplified TMA assay for the qualitative detection of HCV based on the same technology used in our FDA-approved Procleix HIV-1/HCV assay for screening donated blood. In collaboration with Bayer Corporation, we completed clinical trials in the United States for this assay in February 2002, and in November 2002, we received pre-market approval from the FDA. Bayer currently distributes this assay under the trademark VERSANT in the United States and other international markets under our collaboration agreement.

      ASR for Quantitative HCV Test. We also have developed, through our collaboration with Bayer, ASRs to quantitatively determine the amount of HCV present in a sample. Our ASRs currently are provided by Bayer to Quest Diagnostics Incorporated, a leading national diagnostics company. If we determine that there is sufficient demand for these reagents, we will consider the development of a fully FDA-approved product in the future.

      Our viral diagnostic assays currently are run on our semi-automated instruments incorporating components of our DTS system.

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      In 1996, the National Heart, Lung and Blood Institute of the NIH selected us to develop reagents and instrumentation for the blood donor screening market based on our core technologies. Under our agreement with the NIH, we developed our NAT assay for the simultaneous detection of HIV-1 and HCV, incorporating our core technologies of target capture, TMA and DKA.

Blood Screening Products

      In 1998, in collaboration with Chiron, we were selected by The American Red Cross to provide it with an HIV-1/ HCV assay for testing pooled blood samples under an IND filed with the FDA. The Red Cross is the largest supplier of blood, plasma and tissue products in the world. The Red Cross provides almost half of the nation’s entire blood supply of 6 million units by working with more than 4.5 million donors and 3,000 hospitals through its 38 region national network. The Gen-Probe/ Chiron collaboration subsequently entered into similar arrangements with America’s Blood Centers and American Independent Blood Centers. As a result of these and other implementations, approximately 99% of the nation’s blood supply is being screened with NAT and over 80% of this screening is being done with the Gen-Probe/ Chiron Procleix HIV-1/HCV assay. The Procleix HIV-1/HCV assays supplied under the IND were delivered on a cost recovery basis.

      Testing by these organizations under the IND started in June 1999 and pivotal clinical trials were completed in 2000. The completion of these trials allowed us to submit a Biologics License Application, or BLA, to the FDA for the Procleix HIV-1/HCV assay, which the FDA-approved in February 2002. As a result of FDA approval, Chiron began in the second quarter of 2002 to sell the assay at commercial prices to United States customers, which resulted in our recognizing increased revenues. The Procleix HIV-1/HCV assay has received approval in the United States, some European countries, and in Asia. Regulations adopted by the European Union, or EU, required all imported in vitro diagnostic products, including our existing blood screening assays, to be registered and receive “CE” mark approval by December 7, 2003 or before further distribution after that date. Products already in the EU supply chain on that date are permitted to remain in distribution for two additional years. We received CE mark approval for our initial Procleix HIV-1/HCV blood screening assay in February 2003.

      As noted above, blood collection centers currently screen donated blood by taking samples from separate units and then conducting a probe-based test on the pooled samples. The Procleix system, which currently is performed on a version of our DTS instrumentation, provides sufficient throughput for screening pooled samples of donor blood. However, we believe that the FDA will ultimately require testing of each unit of blood individually. Testing each unit individually is currently impractical without fully automated instrumentation. Accordingly, we have invested in the development of the TIGRIS instrument, which we believe will provide the automation necessary to facilitate the adoption of individual donor testing.

      In collaboration with Chiron, we have developed an assay for the simultaneous detection of HIV-1, HCV and HBV, the Procleix Ultrio assay, which we believe will further drive demand for our blood screening products. In December 2003, we commenced clinical trials of the Procleix Ultrio assay in the United States. The test, which will be distributed and marketed by Chiron, adds an assay for HBV to the previously approved Procleix HIV-1/HCV assay. The Procleix Ultrio assay is designed to detect the presence of all known HIV-1 groups and subtypes and HCV and HBV genotypes in human plasma during the very early stages of infection, when those agents are present but cannot be detected by immunodiagnostic tests. The HBV component of the assay has the potential to reduce the window period between infection and detection of HBV from 59 to

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      In June 2003, we announced that our WNV assay was available for use by United States blood centers to begin clinical testing of the virus in freshly donated human blood. The WNV assay currently is being used to screen approximately 80% of the United States blood supply. The test will be distributed by Chiron and is the first such test to prospectively screen the United States blood supply under an IND. The prospective protocol was accepted by the FDA in May 2003. The development of the WNV assay was partially funded by the National Heart, Lung and Blood Institute of the NIH. We plan to submit a BLA to the FDA to permit commercial sales of that assay by the end of the first quarter of 2005.

      We believe that our NAT technology and our instrumentation are well suited for numerous emerging applications. We have developed our first cancer-related product, a TMA-based assay for the detection of chronic myelogenous leukemia, or CML, that has been approved in Japan. In the United States, we have developed the product as an ASR reagent to allow clinical diagnostic laboratories to build their own assays for CML. We have also entered into a license and collaboration agreement with DiagnoCure to apply our NAT technology in the detection of a new, highly specific genetic market for prostate cancer. We believe that the sensitivity and specificity provided by our technologies will allow us to develop additional products that can be used for detecting and monitoring the expression of genes associated with cancer.

      In the industrial market, we have developed a NAT assay to detect the bacterium Listeria monocytogenes from a cultured sample. We received FDA approval for this product in June 1990. Listeria is a food pathogen, and our assay is used by the dairy industry in Europe to monitor for Listeria contamination. We also have developed a test for mycoplasma that is used by tissue culture facilities in the industrial and research markets to detect contamination of cell lines and culture media. We are also evaluating additional product opportunities in bioterrorism, food and water testing.

      In addition, we also are conducting research studies to demonstrate the feasibility of our technology to detect genetic markers that might be useful as indicators of a patient’s predisposition to some disease states and also in the prediction of a patient’s responsiveness to a particular therapy. We are evaluating the market potential of these new products.

Instrumentation

      We have developed and continue to develop instrumentation and software that are designed specifically for performing our NAT assays. We also provide technical support and instrument service to maintain these systems in the field. Historically, we have provided our instrumentation to laboratories and hospitals without requiring them to purchase the equipment or enter into an equipment lease. Instead, we recover the cost of providing the instrumentation in the amounts we charge for our diagnostic assays. We have begun to implement multi-year sales contracts that have an equipment factor set forth in them. By placing our proprietary instrumentation systems in laboratories and hospitals, we can establish a platform for future sales of our assays.

      For instruments that will be used for blood screening or in connection with our clinical diagnostic collaboration with Bayer, we sell the instrumentation to Chiron and Bayer, and they are responsible for the placement, maintenance and repair of the units with their laboratory and hospital customers. We record the revenue associated with the delivery of our proprietary integrated instrument platforms to customers in product sales. The costs associated with the instrument are charged to cost of sales on a straight-line basis over the estimated life of the instrument, which ranges from three to five years. The costs to maintain these systems in the field are charged to operations as incurred.

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      We first introduced the LEADER series of luminometers, designed in conjunction with MGM Instruments, Inc., for use with our PACE and AccuProbe products and, more recently, the APTIMA product line. Utilizing advanced chemiluminescent detection, our luminometers provide high sensitivity, speed, accuracy and ease-of-use. Currently there is an installed base of over 4,000 of our luminometers worldwide. The LEADER series can accommodate the throughput needs of low-volume testing laboratories. We have no firm, long-term commitments from MGM Instruments to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order. No FDA or foreign governmental approval is required to sell our current LEADER series of luminometers in the clinical diagnostic market.

      Now more than ever, laboratories need nucleic acid testing solutions that are accurate, efficient and economical. To meet this demand, we have developed the family of DTS Systems. The DTS family of systems uses direct tube sampling (DTS) technology consisting of an exclusive penetrable cap on the sample collection tube to minimize contamination and achieve safer, more convenient sample removal. DTS simplifies sample transport, minimizes handling and greatly reduces laboratory cross-contamination. These instrument systems include the DTS 400, DTS 800 and DTS 1600. This is a full line of automated solutions for low, medium and high-volume laboratories to be used with the our latest generation of NAT assays, including the APTIMA Combo 2 assay. The instrument platforms can also be adapted to perform the PACE family of assays, GASDirect Test, and AccuProbe Group B Strep assay.

      The DTS 400 instrument system is a fully-integrated modular system that includes a magnetic particle separation and washing system (target capture system), temperature controlled incubators, a luminometer, software, on board bar code readers and computers. The DTS 1600 system adds the additional capabilities of an automated pipetting station and can process up to 800 specimens per day, resulting in 1,600 chlamydia and gonorrhea assay results per day for the APTIMA Combo 2 assay.

      Chiron markets a version of the DTS 1600 system, which was formerly known as eSaS, for use in blood screening under the Procleix trademark. The version of the DTS system that Chiron markets has received FDA approval and foreign governmental approval in the countries where our blood screening products are sold. Bayer markets systems comprised of components of the DTS system for HCV clinical diagnostic assays. The systems that Bayer markets do not require FDA or foreign governmental approval.

      We have developed the TIGRIS DTS instrument system, or TIGRIS instrument, which we believe is the first high-throughput instrument to completely automate NAT testing, for use in both the clinical diagnostic and blood screening markets. The TIGRIS instrument integrates and automates all of the steps associated with our latest amplified NAT assays, including, sample preparation, sample processing, amplification and detection. It has the ability to process approximately 500 samples in an eight-hour shift and up to 1,000 samples in approximately 13 hours.

      The TIGRIS instrument is expected to reduce the time, labor costs, risk of contamination and complexity associated with performing NAT assays and blood screening. The throughput of the TIGRIS instrument should be sufficient to allow high volume testing of individual blood donations, rather than pooled donor samples. In addition, we intend to develop additional NAT assays that can be performed on the TIGRIS instrument. We believe the TIGRIS instrument will be utilized in clinical diagnostic laboratories and blood banks throughout the world.

      We successfully completed beta tests, which are customer evaluations, of the TIGRIS instrument for clinical diagnostic applications at the University of Alabama (Birmingham) in August 2002 and for blood screening applications with The American Red Cross in November 2002 and again with the Procleix Ultrio assay in September 2003. Clinical trials for clinical diagnostic testing on the TIGRIS instrument using our

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      In December 2003, we filed an amended IND with the FDA to initiate clinical trials of the Procleix Ultrio blood screening assay on the TIGRIS instrument. We initiated clinical trials of our Procleix Ultrio assay on the TIGRIS instrument for a blood screening application in January 2004. We anticipate completing the clinical trials by the end of the third quarter of 2004 and filing a BLA with the FDA for the TIGRIS instrument in blood screening applications and the semi-automated system prior to year end. In 2004, we plan to begin to amortize the capitalized software costs associated with the TIGRIS instrument.

Marketing and Sales

      We market our products to laboratories in the United States and Canada through our direct sales force. As of January 31, 2004, our direct sales force consisted of a staff of approximately 35 sales representatives. We also support our sales efforts through a staff of 16 field technical representatives. Our sales representatives average over 15 years of selling experience, with an average of 6 years focused on sales of NAT products. Sales representatives principally focus on large accounts including large reference laboratories, public health laboratories and hospitals throughout the United States and generally do not focus on physicians at this time. We continually educate our sales representatives on the technical, clinical and economic merits of our products. We use sales meetings, technical on-line sales training and in-the-field training to ensure our sales representatives are properly informed about all areas of our product lines and selling processes.

      The focus of our marketing strategy is to solidify awareness of the superiority of our technology, illustrate the cost effectiveness of this technology and continue to differentiate our products from those of our competitors. We intend to continue targeting our marketing efforts to various levels of laboratory and hospital management through research publications, print advertisements, conferences and the Internet. We attend various national and regional conferences throughout the year. Our web site is used for educating existing and potential customers about our assays and contains our entire directory of products, on-line technical materials and links to related medical sites.

      We concentrate our selling efforts on the management teams of laboratories and hospitals. Our sales representatives are able to recommend the appropriate business solution to meet the needs of our customers by presenting multiple NAT technology and instrumentation options. Sales representatives are trained to find new market opportunities, provide diagnostic solutions to address unmet customer needs, and to provide comprehensive after-sale product support. In addition, our field technical support group provides thorough training and ongoing technical support for all of our NAT products.

Distribution

      We have entered into a agreement for distribution of our microbial non-viral diagnostic products in Europe and various countries in Asia (other than Japan), Australia, South America and Mexico with bioMérieux. We have entered into an agreement for distribution of our microbial non-viral diagnostic products in Japan with Chugai Diagnostics Science, which was acquired by Fujirebio in 2002. Fujirebio renamed the company Rebio Gen, Inc. In other countries, we utilize independent distributors with experience and expertise in clinical diagnostic products.

      The viral diagnostic products we manufacture under our collaboration agreement with Bayer and the blood screening products we manufacture under our collaboration agreement with Chiron are marketed and distributed by those companies.

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Customers

      The primary customers for our clinical diagnostic products include large reference laboratories, public health laboratories and hospitals. Our blood screening collaboration with Chiron accounted for 42% of our total revenues in the year ended December 31, 2003 and 30% of our total revenues for the year ended December 31, 2002. Our blood screening collaboration with Chiron is largely dependent on two large customers in the United States, The American Red Cross and America’s Blood Centers, but we did not receive any revenues directly from these entities. Chiron was our only customer that accounted for greater than 10% of our total revenues for the year ended December 31, 2003. In addition, Quest Diagnostics, Laboratory Corporation of America Holdings and various state and city public health agencies accounted for an aggregate of 21% of our total revenues for the year ended December 31, 2003 and 26% of our total revenues for the year ended December 31, 2002. Although state and city public health agencies are legally independent of each other, they tend to act similarly with respect to their purchasing decisions.

Corporate Collaborations and Strategic Arrangements

      In June 1998, we entered into a strategic alliance with Chiron to develop and market NAT-based products for the blood screening and clinical diagnostic markets. Chiron subsequently assigned the clinical diagnostics portion of the agreement to Bayer. The Gen-Probe/ Chiron alliance initially is developing, manufacturing and marketing the combination HIV-1/ HCV assay for qualitative screening of blood and blood products under the Procleix name. Additional blood screening assays may be developed through the collaboration. In the event that any third-party technology is needed to continue development under the collaboration agreement, costs for obtaining such third-party technology will be allocated among the parties.

      Under the agreement, our share of revenues from the initial Procleix HIV-1/ HCV assay ranged from 43% to 47.5% in 2003. In November 2003, we amended the agreement to adopt permanent, fixed revenue shares for each party with respect to assays that include a test for HCV. Effective January 1, 2004, our share is set at 45.75% of net revenues for assays that include a test for HCV. For commercial assays that do not test for HCV, such as the prospective West Nile test, the agreement remains unchanged, with each party retaining 50% of the net revenues after deduction of appropriate expenses. The amendment also eliminates the possibility of Chiron appointing a third party distributor in the United States to sell these products. From inception through December 31, 2003, we recognized a total of $190.2 million in revenue under this collaboration agreement and have recorded $6.3 million in deferred license revenues.

      The collaboration agreement has an initial term of 10 years from the first commercial sale of blood screening assays, which occurred in the first quarter of 2000. The agreement may be extended by the development of new products under the agreement, so that it will expire upon the later of the end of the initial term or five years after the first commercial sale of the last new product developed during the initial term. The agreement can be terminated by a party earlier if the other party materially breaches the agreement and does not cure following 90 days’ notice or if the other party becomes insolvent or declares bankruptcy.

      All rights and title to inventions discovered under the collaboration agreement belong to the party who developed the invention, or to both parties, if both parties developed the invention. However, if one party uses confidential information relating to the core technology of the other party to develop an invention that improves on, and whose use would infringe on, the core technology of the other party, then the other party will have the exclusive option to acquire all rights and title to the invention on commercially reasonable terms, except in certain situations where the invention will be jointly owned.

      In February 2001, we commenced an arbitration proceeding against Chiron in connection with the blood screening collaboration. The arbitration related primarily to the propriety of various deductions from gross revenues made by Chiron prior to calculating Gen-Probe’s share of revenues and the parties’ respective shares of revenues received from The American Red Cross prior to FDA approval of the Procleix HIV-1/ HCV blood screening assay. Other disputed items included the parties’ respective obligations in connection with clinical trials of the Procleix HIV-1/ HCV blood screening assay and future assays, Chiron’s obligation to purchase

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      In 1998, following the execution of our agreement with Chiron, Chiron assigned the clinical diagnostic portion of the agreement to Bayer. Under the terms of our collaboration with Bayer, we will develop, manufacture and market NAT assays for viral targets and cancer markers in the clinical diagnostic market with Bayer. The collaboration initially is developing, manufacturing and marketing quantitative and qualitative assays for HCV. In the event that any third-party technology is needed to continue development under the collaboration agreement with Bayer, costs for obtaining such third-party technology will be allocated among the parties. In addition, either party has the right to separately pursue obtaining rights to cancer markers necessary for the development of NAT assays.

      Under the terms of this agreement, Bayer will pay us a combination of transfer prices and royalties on product sales. From inception through December 31, 2003, we recognized a total of $8.7 million in revenue under our collaboration agreement with Bayer.

      The collaboration agreement has an initial term of 10 years from the first commercial sale of a clinical diagnostic assay subject to the agreement, which occurred in the second quarter of 2000. The agreement may be extended by the development of new products under the agreement, so that it will expire upon the later of the end of the initial term or five years after the first commercial sale of the last new product developed during the initial term. The agreement can be terminated earlier if a party materially breaches the agreement and does not cure following 90 days’ notice from the non-breaching party or if a party becomes insolvent or declares bankruptcy.

      All rights and title to inventions discovered under the collaboration agreement belong to the party who developed the invention, or to both parties, if both parties developed the invention. However, if one party uses confidential information relating to the core technology of the other party to develop an invention that improves on, and whose use would infringe on, the core technology of the other party, then the other party will have the exclusive option to acquire all rights and title to the invention on commercially reasonable terms, except in certain situations where the invention will be jointly owned.

      In November 2002, we initiated an arbitration proceeding against Bayer in connection with the clinical diagnostic collaboration. Under the terms of the collaboration agreement, Bayer acquired the exclusive right to distribute nucleic acid diagnostic tests designed and developed by us for the detection of HIV, hepatitis and other specified viruses, subject to certain conditions. In the arbitration, we are seeking to prove that Bayer has failed to fulfill the conditions required to maintain its exclusive distribution rights. Accordingly, we are seeking confirmation that the agreement grants us, in the present circumstances, a co-exclusive right to directly distribute the viral diagnostic tests that are the subject of the agreement. Our arbitration demand also seeks money damages due to Bayer’s failure to use commercially reasonable efforts to promote, market and sell viral diagnostic assays developed by us. In November 2003, Bayer filed a counterclaim for money damages based on alleged delays in the development of the TIGRIS instrument and certain assays, and other claims. The matter has been set for hearing beginning on September 13, 2004. We intend to vigorously pursue this matter. There can be no assurances as to the final outcome of the arbitration.

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      In 1996, we were awarded a $7.7 million contract by the National Heart, Lung and Blood Institute, a part of the NIH, to develop NAT assays for screening donor blood for HIV-1 and HCV. Effective January 1998, the contract was modified with the addition of $0.6 million for the development of a semi-automated system for the detection of HIV-1/ HCV in pooled plasma. Effective September 1998, the contract was further modified with the addition of $4.3 million for the development of HIV-2 and HBV tests. All payments due to us under this reimbursement contract have been received, and we completed our development work under this NIH agreement in February 2002.

      In January 2000, we began work on a three-year $13.4 million cost sharing contract with the NIH to modify the Procleix HIV-1/ HCV assay to incorporate HBV detection capability and make it simpler for organ donation centers to test the blood of organ donors. The NIH will reimburse us $7.8 million of this cost, and we and Chiron will share equally the remaining costs to complete the project. Through December 31, 2002, NIH had reimbursed us 100% of the cost-sharing portion for which they were responsible.

      In October 2002, we received a $1.0 million contract extension from the NIH to develop a NAT assay for the detection of the West Nile virus. The NIH allocated an additional $2.5 million to the contract extension in February 2003.

      In November 2003, we received $4.3 million of supplemental contract funding from the NIH. This contract extension supports our pursuit of clinical studies and submission of a BLA for our nucleic acid test for the detection of WNV in donated human blood. We have initiated the development of this assay and will recognize collaborative research revenue under the contract extension as reimbursable costs are incurred. Contract revenues for the year ended December 31, 2003 were $4.8 million.

      In September 1998, we entered into a distribution agreement with Chugai Diagnostics Science Co., Ltd., a subsidiary of our parent corporation at that time, for the distribution of our non-viral diagnostic products in Japan. During 2002, Chugai Pharmaceutical sold Chugai Diagnostics Science Co., Ltd. to Fujirebio Inc., a Japanese life sciences company, which re-named the company Rebio Gen, Inc. We do not believe that the sale of Chugai Diagnostics Science to Fujirebio will have a material effect on the performance of the distribution agreement. From inception through December 31, 2003, we recognized $15.6 million in sales revenue under this distribution agreement. The distribution agreement with Rebio Gen terminates on December 31, 2005. Prior to that, this agreement may be terminated by either party upon a material breach of this agreement that is not cured following 60 days’ written notice, unless the material breach relates to an obligation to make payments under the agreement, in which case a 30 day cure period applies. This agreement may also be terminated if a party becomes insolvent or declares bankruptcy, ceases to be actively engaged in business, or engages in or is charged with unethical or illegal behavior that jeopardizes the reputation and goodwill of either party.

Technology Licenses

      Agreements with bioMérieux. In May 1997, we entered into collaborative research agreements with bioMérieux Vitek, Inc., which created a worldwide relationship between bioMérieux and us. The collaboration involved research and development activities, as well as the transfer to bioMérieux, pursuant to separate distribution agreements with bioMérieux S.A., of product distribution rights in international markets, excluding Japan. As part of these agreements, we licensed our NAT technology to bioMérieux to jointly develop NAT assays and adapt and develop instrumentation during a five-year and ten-year term. In return, bioMérieux paid us $6.0 million of license and prepaid royalty fees in 1997 and an additional $6.0 million of license fees in 1998.

      In August 2000, we entered into amended agreements with bioMérieux, Inc. that transitioned the relationship from a collaborative arrangement to a royalty-bearing arrangement that covers semi-automated

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      In March 2003, bioMérieux verbally informed us that it was terminating all development work on probe assays for the semi-automated probe instrument. We have not received formal notification that bioMérieux has elected to terminate the applicable license agreement, but expect such confirmation in the future. Minimum royalties under the applicable bioMérieux license agreement are $750,000 for 2003 and $1.0 million for 2004. bioMérieux may terminate the agreement after December 30, 2004 without obligation for minimum royalties other than those payable for 2003 and 2004.

      License Agreement with Rebio Gen. In July 2001, we entered into a license agreement with Chugai Diagnostics Science Co., Ltd., a subsidiary of our parent corporation at that time. As noted above, in September 2002, Chugai Diagnostics Science Co., Ltd. was acquired by Fujirebio, which re-named the company Rebio Gen, Inc. The license agreement has an initial term of 10 years, with automatic renewal for consecutive one year terms unless one party gives the other party notice 90 days prior to the end of the current term. Under the terms of this agreement, we granted Chugai Diagnostics Science Co., Ltd. a non-exclusive license for Japan in the field of human clinical diagnostics to various of our proprietary technologies, including TMA and HPA technology. All rights and title to any discovery, invention or improvement made by Rebio Gen as a result of access to our patent rights licensed under the agreement belong solely to Rebio Gen. We received a license fee and a royalty payment for sales made prior to the effective date of the agreement and will receive royalty payments from any products incorporating the licensed technology, including those developed and commercialized by Rebio Gen, until the expiration of our patents incorporated in these products, which is expected to occur in December of 2020. From inception through December 31, 2003, we have recognized a total of $2.5 million in revenue under this agreement. This agreement may be terminated by either party upon breach of the agreement that is not cured following 60 days’ written notice. We also received rights to distribute outside of Japan products developed by Rebio Gen under the license.

      Non-Exclusive License with Becton Dickinson and Company. In September 1995, we granted Becton Dickinson a non-exclusive worldwide license to make, have made, use, sell and import products that utilize rRNA for the diagnosis of vaginosis and vaginitis in humans. Becton Dickinson paid an up front license fee and has agreed to pay royalties for the life of the licensed patents. From inception through December 31, 2003, we have recognized a total of $2.8 million in revenue under this agreement. Becton Dickinson’s obligations to make royalty payments under this agreement terminate when the patents that are the subject of this agreement expire, which is expected to occur in March of 2015. Becton Dickinson can terminate the agreement at any time on 30-days prior written notice.

      Cross Licensing Agreements with Tosoh. In December 2003, we entered into agreements with Tosoh Corporation to cross-license intellectual property covering certain NAT technologies. The licenses, which were effective January 1, 2004, cover products in clinical diagnostics and other related fields. Under the agreements, Tosoh will receive non-exclusive rights to our proprietary TMA and rRNA technologies in exchange for two payments totaling $7.0 million in 2004. Additionally, Tosoh will pay us royalties on worldwide sales of products that employ our technologies licensed by Tosoh. We will gain access, in exchange for royalties, to Tosoh’s patented TRC amplification and INAF detection technologies for use with our real time TMA. The agreements terminate at various times commencing in July 2010 through the expiration of the

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      Co-Exclusive License from Stanford University. In August 1988, we obtained a license from Stanford University granting us rights under specified patent applications covering nucleic acid amplification methods related to TMA. This license was amended in April 1997. Under the amended license agreement, we are the co-exclusive worldwide licensee of the Stanford amplification technology, with Organon Teknika as the only other permitted Stanford licensee. We paid a license fee and are obligated to make royalty payments to Stanford based on net sales of products incorporating the licensed technology, subject to a minimum annual royalty payment. From inception through December 31, 2003, we incurred a total of $1.6 million in expenses under this agreement. Our obligation to make royalty payments under this agreement terminates when the patents constituting the Stanford amplification technology expire, which is expected to occur in July of 2017. This agreement may be terminated by Stanford upon a material breach of the agreement by us that is not cured following 60 days’ written notice.

      Non-Assertion Agreement with Organon Teknika B.V. In February 1997, we entered into a non-assertion agreement with Organon Teknika. Both parties possessed certain rights regarding transcription-based amplification methods. The agreement allows both parties to practice their respective amplification methods with immunity from legal action from the other party for actually or allegedly infringing each other’s patent rights. The agreement terminates upon the expiration of the last of the patent rights that are subject to the agreement, which is expected to occur in February 2016. This agreement also may be terminated by Organon Teknika upon a material breach of the agreement by us that is not cured following 90 days’ written notice. In July 2001, Organon Teknika merged with bioMérieux. We do not believe the merger will have a material effect on the bioMérieux license or the Organon Teknika non-assertion agreement.

      License from University of Wales College of Medicine. Our consolidated subsidiary, Molecular Light Technology Limited and its subsidiaries, referred to as MLT, have exclusive rights, with rights to sublicense, under a license from the University of Wales College of Medicine, or UWCM, to patents covering chemiluminescence technology for use in NAT assays. In 1986, we entered into an agreement with UWCM pursuant to which we obtained an exclusive sublicense to the technology. This technology is an important component of our products and is used to reveal when a probe has bound to its target sequence. We will own all improvements to the chemiluminescence technology that we develop. Our agreement terminates upon the expiration of the last of the patent rights that are subject to the agreement, which is expected to occur in August 2007. The agreement with UWCM may also be terminated by either party upon breach of the agreement that is not cured following specified notice provision.

      Non-Exclusive License from Vysis, Inc. In June 1999, we obtained a non-exclusive license from Vysis granting us rights under certain patents covering methods which combine target capture technology with certain nucleic acid amplification methods. In December 2001, Vysis was acquired by Abbott Laboratories, Inc., one of our principal competitors. We paid a license fee and are obligated to make royalty payments based on sales of products incorporating the licensed technology. From inception through December 31, 2003, we incurred a total of $5.7 million in expenses under this agreement. The agreement terminates upon the expiration of the last of the patent rights that are subject to this agreement, which is expected to occur in July 2015. This agreement may be terminated by Vysis upon breach of the agreement by us that is not cured. The agreement may be terminated by us on written notice to Vysis.

      In December 1999, we initiated litigation in which we sought a declaratory judgment that our products were not covered by the Vysis patents that are the subject of this license and that the patents are invalid and unenforceable. The case was submitted to trial by jury in May 2002, and the jury returned alternative verdicts in favor of Gen-Probe, finding the subject patents do not cover Gen-Probe’s products and that they are invalid on the grounds of obviousness and lack of enablement. Following post-trial motions, judgment was entered on August 5, 2002 in our favor. Vysis appealed the judgment and has obtained amended patent claims from the Patent and Trademark Office. In October 2002, we filed a second lawsuit to challenge the scope and validity of

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      Non-Exclusive License with the Public Health Research Institute of The City of New York, Inc. In June 1997, we entered into a royalty bearing non-exclusive license with the Public Health Research Institute of The City of New York, or PHRI, to utilize PHRI’s fluorescently labeled NAT technology. Under this agreement, we have worldwide rights to develop, use and market kits in the field of human in vitro diagnostics and food testing. We paid a license fee and agreed to make milestone payments and annual license fee payments, and to pay royalties on the net sales price of products incorporating the licensed technology, subject to a minimum annual royalty fee and a reduction in the royalties based on the quantity of sales. From inception through December 31, 2003, we incurred a total of $1.4 million in license fees and $0.1 million in milestone payments under this agreement. We anticipate that we will pay up to an additional $375,000 in milestone payments over the remaining term of the agreement. This agreement terminates upon the expiration of the last of the patent rights that are subject to this agreement, which is expected to occur in April 2017. This agreement may be terminated by PHRI upon a material breach of the agreement that is not cured following 30 days’ written notice, or by us for any reason following 30 days’ written notice.

      Exclusive License with DiagnoCure. In November 2003, we entered into a license and collaboration agreement with DiagnoCure under which we agreed to develop in collaboration with DiagnoCure, and we agreed to market, a test to detect a new gene marker for prostate cancer. The diagnostic test is expected to detect a recently described gene called PCA3(DD3) that has been shown by studies to date to be over-expressed in malignant prostate tissue. Under the terms of the agreement, we agreed to pay DiagnoCure an upfront fee of $3.0 million, and future fees and contract development payments of up to $7.5 million over the next three years. We will receive exclusive worldwide distribution rights to any products for the diagnosis of prostate cancer resulting from the agreement, and agreed to pay DiagnoCure royalties of 8% on cumulative net product sales of up to $50.0 million, and royalties of 16% on cumulative net sales above $50.0 million. This agreement expires, on a country-by-country basis, on the expiration of our obligation to pay royalties to DiagnoCure. We may terminate the agreement for any reason following 30 days’ written notice to DiagnoCure, or following 30 days’ written notice to DiagnoCure in the event a licensed product fails to produce a certain level of results in any clinical trial.

Patents and Proprietary Rights

      To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade secrets laws, as well as confidentiality provisions in our contracts.

      We have implemented a patent strategy designed to maximize our intellectual property rights. We have obtained and are currently pursuing patent coverage in the United States and those foreign countries that are home to the majority of our anticipated customer base. We currently own or have rights to more than 344 issued United States and foreign patents. In addition, our patent portfolio includes pending patent applications in the United States and corresponding international and foreign filings in major industrial nations.

      United States utility patents issued from applications filed prior to June 8, 1995 have a term of the longer of 20 years from the earliest priority date or 17 years from issue. United States utility patents issued from applications filed on or after June 8, 1995 have a term of 20 years from the earlier of the application filing date or earlier claimed priority date of a regular application. 119 of our United States patents issued from applications filed prior to June 8, 1995. Our remaining 63 United States patents issued from applications filed on or after June 8, 1995. Two of our United States patents which issued from applications filed on or after June 8, 1995 are design patents which have a term of 14 years from the date of issue. Patents in most foreign countries have a term of 20 years from the date of filing of the patent application. Because the time from filing to issuance of patent applications is often several years, this process may result in a shortened period of patent protection, which may adversely effect our ability to exclude competitors from our markets. The last of our

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      On January 9, 2004, our basic patents covering detection of organisms using probes to ribosomal nucleic acid (the Kohne patents) expired in countries outside North America. While we have additional patents relating to ribosomal nucleic acid detection that remain in effect outside North America, there can be no assurance that these patents will provide sufficiently broad protection to prevent competitors from selling products based on ribosomal nucleic acid detection in markets outside North America. In the United States, the last-to-expire of the Kohne patents remains in effect until March 3, 2015.

      We also rely in part on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. The source code for our proprietary software is protected both as a trade secret and as copyrighted work. Our employees also sign agreements requiring that they assign to us their interests in inventions and original expressions and any corresponding patents and copyrights arising from their work for us. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, there may not be an adequate corrective remedy available.

Competition

      The medical diagnostics and biotechnology industries are subject to intense competition. Our competitors in the United States and abroad are numerous and include, among others, diagnostic, health care, pharmaceutical and biotechnology companies. Our major competitors in the market for NAT diagnostics include F. Hoffmann-La Roche Ltd. and its subsidiary Roche Molecular Diagnostics, Abbott Laboratories and Becton Dickinson and Company and bioMerieux S.A. All of these companies are manufacturers of laboratory-based tests and instruments for the NAT market, and we believe that all of these companies are developing automated systems similar to our TIGRIS instrument. We believe the primary competitive factors in the market for NAT diagnostics are sensitivity, specificity, ease of use, potential for automation, cost, proprietary position, regulatory approvals and compliance and availability of appropriate reimbursement.

      Many of our competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Moreover, many of our competitors offer broader product lines and have greater brand recognition than we do, and offer price discounts as a competitive tactic. In addition, there can be no assurance that competitors, many of which have made substantial investments in competing technologies, will not prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

      In the markets for clinical diagnostic products, a number of competitors, including F. Hoffmann-La Roche Ltd. and its subsidiary Roche Molecular Diagnostics, Abbott Laboratories, Becton Dickinson and bioMérieux, compete with us for product sales, primarily on the basis of technology, quality, reputation, accuracy, ease of use, price, reliability, the timing of new product introductions and product line offerings. In markets outside of the United States, other factors, including local distribution systems, complex regulatory environments and differing medical philosophies and product preferences, influence competition as well. In the areas of NAT diagnostics for STDs, Roche Molecular Systems, Abbott Laboratories and Becton Dickinson currently have FDA-approved tests for chlamydia infections and gonorrhea utilizing amplification technology. Although we believe that the APTIMA Combo 2 test has commercial advantages over the competing tests from Roche Molecular Systems, Abbott Laboratories and Becton Dickinson, these competitors and potential competitors may be able to develop technologies that are as effective as, or more effective, or easier to interpret or less expensive than, those offered by us, which would render our products uncompetitive or obsolete.

      In the market for blood screening products, our primary competitor is Roche Molecular Diagnostics, which received FDA approval of its PCR-based NAT tests for blood screening in December 2002. We also compete with assays developed internally by blood collection centers and laboratories based on PCR

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      Chiron, with whom we have entered into a collaboration for our blood screening products, retains certain rights to grant licenses of the patents related to HCV to third parties. Chiron has granted a license to Roche Molecular Diagnostics in the blood screening field and has granted licenses to other companies in the clinical diagnostic field. To the extent that Chiron grants additional licenses, further competition may be created for sales of HCV assays and such licenses may affect the prices that can be charged for our products.

Government Regulation

      Our clinical diagnostic products generally are classified in the United States as “devices” and are regulated by the FDA’s Center for Devices and Radiological Health. Our blood screening products generally are classified in the United States as “biologics” and are regulated by the FDA’s Center for Biologics Evaluation and Research. The FDA also has the authority to revoke previously granted marketing authorizations. To date, we have received FDA approvals for more than 60 products that detect a wide variety of infectious microorganisms, including initial FDA approval in February 2002 of our BLA for our Procleix HIV-1/ HCV blood screening assay.

      For us to market our clinical diagnostic product kits as medical devices in the United States, we generally must first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA. If we modify our products that already have received FDA clearance, the FDA may require us to submit a separate 510(k) or premarket approval application, or PMA, for the modified product before we are permitted to market it in the U.S. In addition, if we develop products in the future that are not considered to be substantially equivalent to a legally marketed device, we will be required to obtain FDA approval by submitting a PMA.

      By regulation, the FDA is required to respond to a 510(k) within 90 days of submission of the application. As a practical matter, final clearance often takes longer. The FDA may require further information, including additional clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not “substantially equivalent,” the device sponsor must then fulfill much more rigorous premarketing requirements.

      The PMA process is more demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is safe and effective, must be supported by extensive data, including data from preclinical studies, human clinical trials and existing research material, and must contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing, and proposed labeling. The FDA has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time, up to several years. In approving a PMA application or clearing a 510(k) application, the FDA also may require some form of post-market surveillance, whereby the manufacturer follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

      When FDA approval of a clinical diagnostic device requires human clinical trials, and if the device presents a “significant risk” (as defined by the FDA) to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to FDA is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is required.

      Clinical trials must be conducted in accordance with Good Clinical Practice under protocols submitted to the FDA. Our clinical department has comprehensive experience with clinical trials of NAT products.

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      After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include:

	•	the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process,
	•	labeling regulations,
	•	the FDA’s general prohibition against promoting products for unapproved or “off-label” uses, and
	•	the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur.

Failure to comply with the applicable United States medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications, and criminal prosecution.

      Our blood screening products also are subject to extensive pre- and post-market regulation as biologics by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, and promotion of the products under the FFDCA and the Public Health Services Act, and by comparable agencies in most foreign countries. The process required by the FDA before a biologic may be marketed in the United States generally involves the following:

	•	completion of preclinical laboratory testing,
	•	submission of an IND, which must become effective before biologic clinical trials may begin, and
	•	performance of adequate and well controlled human clinical trials to establish the safety and effectiveness of the proposed biologic’s intended use.

The FDA requires approval of a BLA before a licensed biologic may be legally marketed in the United States. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which we will have exclusive rights to exploit them.

      Our clinical trial programs for blood screening products were developed in conjunction with our primary end users, The American Red Cross, America’s Blood Centers and American Independent Blood Centers. Pivotal clinical trials of the Procleix HIV-1/HCV assay were completed in 2000, and our BLA was approved in February 2002. Clinical trials of the Procleix Ultrio blood screening assay commenced in December of 2003 in the United States.

      The results of product development and human studies are submitted to the FDA as part of the BLA. The BLA also must contain extensive manufacturing information. The FDA may approve or disapprove a BLA if applicable FDA regulatory criteria are not satisfied or it may require additional clinical data. Once approved, the FDA may withdraw the product approval if compliance with post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals.

      Satisfaction of FDA pre-market approval requirements for biologics typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be

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      With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote biologics, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has broad enforcement authority under the FFDCA, and failure to abide by applicable FDA regulations can result in penalties including the issuance of a warning letter directing the entity to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.

      We and all of our contract manufacturers are subject to periodic inspection by the FDA and other authorities where applicable, and are required to comply with the applicable FDA current Good Manufacturing Practice regulations. Good Manufacturing Practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation, and provide for manufacturing facilities inspected by the FDA. Manufacturers of biologics also must comply with the FDA’s general biological product standards. Failure to comply with the statutory and regulatory requirements would subject the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary recall of a product. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.

      Outside the United States, our ability to market our products is contingent upon receiving marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, we apply for foreign marketing authorizations at a national level, although within the European Union registration procedures are now in effect under the IVD directive to companies wishing to market a product in more than one European union member state. We have taken the necessary actions to register our products for sale into the European Economic Community following a new requirement which became effective in December 2004.

      We are also subject to various state and local laws and regulations in the United States relating to laboratory practices and the protection of the environment. In each of these areas, as above, regulatory agencies have broad regulatory and enforcement powers, including the ability to levy fines and civil and criminal penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect upon us. In addition, in the course of our business, we handle, store and dispose of chemicals. The environmental laws and regulations applicable to our operations include provisions that regulate the discharge of materials in the environment. Usually these environmental laws and regulations impose “strict liability,” rendering a person liable without regard to negligence or fault on the part of, or conditions caused by, others. We have not been required to expend material amounts in connection with our efforts to comply with environment requirements. Because the requirements imposed by these laws and regulations frequently change, we are unable to predict the cost of compliance with these requirements in the future, or the effect of these laws on our capital expenditures, results of operations or competitive positions.

Manufacturing and Raw Materials

      We have two state-of-the-art manufacturing facilities. Our manufacturing facility in San Diego, California is dedicated to producing our clinical diagnostic products and provides us with highly flexible and cost effective manufacturing capabilities. In 1999, we completed a manufacturing facility located in Rancho Bernardo, California for the manufacture of our blood screening products. This facility meets the strict standards set by the FDA’s Center for Biologics Evaluation and Research for the production of blood

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      We store our finished products at our warehouses in our manufacturing facilities. Some of our products must be stored in industrial refrigeration or freezer units which are on site. We ship our products under ambient, refrigerated or frozen conditions, as necessary, through third-party service providers.

      We rely on one contract manufacturer for the production of each of our instrument product lines. For example, KMC Systems is our only manufacturer of the TIGRIS instrument, and MGM Instruments is our only manufacturer of our LEADER series of luminometers. We have no firm long-term commitments from KMC Systems, MGM Instruments or any of our other manufacturers to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order.

      We use a diverse and broad range of raw materials in the design, development and manufacturing of our products. Although we produce some of our materials on site at our manufacturing facilities, we purchase most of the materials and components used in manufacturing our products from external suppliers. In addition, we purchase many key raw materials from single source suppliers. For example, our current supplier of key raw materials for our amplified NAT assays, pursuant to a fixed-price contract, is the Roche Molecular Biochemicals Division of Roche Diagnostics GmbH, an affiliate of Roche Molecular Diagnostics, which is one of our primary competitors. We work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. Although we generally consider and identify alternative suppliers, we do not typically pursue alternative sources due to the strength of our existing supplier relationships.

Quality Systems

      We have implemented modern quality systems and concepts throughout the organization. Our regulatory, quality and government affairs department supervises our quality systems and is responsible for assuring compliance with all applicable regulations, standards and internal policies. Our senior management team is actively involved in setting quality policies and managing internal regulatory and monitoring external quality performance.

      Our regulatory, quality and government affairs department has successfully led us through multiple quality and compliance audits by the FDA, foreign governments and customers. This department also coordinated an audit by The British Standards Institute, leading to our initial ISO 9001 certification. We have subsequently employed TUV North America for ISO 9001, EN 46001, EN 13485 and Diagnostic “CE” marking activities.

Research and Development

      As of January 31, 2004, we had 228 full-time and temporary employees in research and development. Our research and development expenses were $63.2 million in 2003, $46.7 million in 2002 and $54.0 million in 2001.

Employees

      As of January 31, 2004, we had 735 full-time employees, of whom 167 hold advanced degrees, 202 were in research and development, 93 were in regulatory, clinical and quality systems, 125 were in sales and marketing, 117 were in general and administrative and 198 were in operations. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with our employees to be good. In addition, as of January 31, 2004 we had 78 temporary employees.

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Factors That May Affect Future Performance

      Our operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues are unpredictable and may fluctuate due to changes in demand for our products, the timing of the execution of customer contracts and the initiation or termination of corporate collaboration agreements. A significant portion of our costs also can vary substantially between quarterly or annual reporting periods. For example, the total amount of research and development costs in a period often depends on the amount of research and development costs we incur in connection with manufacturing developmental lots and clinical trial lots. We incurred substantial costs of manufacturing these lots in 2003 and will continue to incur expense in 2004 and beyond as we seek FDA approval of our Procleix Ultrio assay and the WNV assay. Moreover, a variety of factors may affect our ability to make accurate forecasts regarding our operating results. For example, our blood screening products and some of our clinical diagnostic products, such as APTIMA Combo 2, have a relatively limited sales history, which limits our ability to project future sales accurately. Our share of revenue from commercial sales of assays that test for HCV under our blood screening collaboration with Chiron decreased to 45.75% of net revenues as of January 1, 2004, as a result of the recent amendment to our collaboration agreement with Chiron. In addition, we base our internal projections of our international sales on projections prepared by our distributors of these products. Because of all of these factors, our operating results in one or more future quarters may fail to meet or exceed financial guidance we may provide from time to time and the expectations of securities analysts or investors, which could cause our stock price to decline.

      We rely on Chiron to distribute our blood screening products and Bayer to distribute some of our viral clinical diagnostic products. Commercial product sales by Chiron accounted for 37% of our total revenues for 2003 and 24% of our total revenues for 2002. Our agreements with Chiron and Bayer will terminate in 2010 unless extended. Both the Chiron and Bayer agreements can be extended by the development of new products under the agreements, in which case they will expire upon the later of the end of the original term or five years after the first commercial sale of the last new product developed during the original term.

      In February 2001, we commenced an arbitration proceeding against Chiron in connection with our blood screening collaboration. The arbitration related primarily to the propriety of various deductions from gross revenues made by Chiron prior to calculating Gen-Probe’s share of revenues and the parties’ respective shares of revenues received from The American Red Cross prior to FDA approval of the Procleix HIV-1/HCV blood screening assay. Other disputed items included the parties’ respective obligations in connection with clinical trials of the Procleix HIV-1/HCV blood screening assay and future assays, Chiron’s obligation to purchase blood screening assays in compliance with its forecasts and the parties’ respective obligations with respect to royalties to be paid on a patent license from a third party. By December 2001, we negotiated a resolution to most of the disputed items, and in January 2002, we received $6.9 million in partial settlement of the claims. In the event that we or Chiron commence arbitration against each other in the future under the collaboration agreement, proceedings could delay or decrease our receipt of revenue from Chiron or otherwise disrupt our collaboration with Chiron, which could cause our revenues to decrease and our stock price to decline.

      In November 2002, we initiated an arbitration proceeding against Bayer in connection with our clinical diagnostic collaboration. Under the terms of the collaboration agreement, Bayer acquired the exclusive right to distribute nucleic acid diagnostic tests designed and developed by us for the detection of HIV, hepatitis virus and other specified viruses, subject to specific conditions. Our demand for arbitration stated that Bayer has failed to fulfill the conditions required to maintain exclusive distribution rights. Accordingly, we are seeking confirmation that the agreement grants us, in the present circumstances, a co-exclusive right to directly distribute the viral diagnostic tests that are the subject of the agreement. Our arbitration demand also seeks

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      We rely upon bioMérieux for distribution of some of our products in most of Europe, Rebio Gen, Inc. for distribution of some of our products in Japan and various independent distributors for distribution of our products in other regions. Our distribution agreement with bioMérieux terminates on May 1, 2006, although it may terminate earlier under certain circumstances. The distribution rights revert back to Gen-Probe upon termination. Our distribution agreement with Rebio Gen, terminates on December 31, 2005.

      If any of our distribution or marketing agreements is terminated, particularly our agreement with Chiron, and we are unable to enter into an alternative agreement or if we elect to distribute new products directly, we would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. We may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all. If we fail to enter into acceptable distribution or marketing agreements or fail to market successfully our products, our product sales would decrease.

      We rely, to a significant extent, on our corporate collaborators for the joint development and marketing of our products. If any of our corporate collaborators were to breach or terminate its agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner, the pre-clinical or clinical development or commercialization and subsequent marketing of the products contemplated by the collaboration could be delayed or terminated. We cannot control the amount and timing of resources our corporate collaborators devote to our programs or potential products. In addition, we expect to rely on our corporate collaborators for the commercialization of some of our products.

      The continuation of any of our collaboration agreements may depend on the periodic renewal of our corporate collaborations. Our agreements with Chiron and Bayer will terminate in 2010 unless extended by the development of new products under the agreements, so that they will expire upon the later of the original term or five years after the first commercial sale of the last new product developed during the original term. Both collaboration agreements are also subject to termination prior to expiration upon a material breach by either party to the agreement.

      If any of our collaboration agreements is terminated, or if we are unable to renew those collaborations on acceptable terms, we would be required to devote additional internal resources to product development or marketing or to terminate some development programs or seek alternative corporate collaborations. We may not be able to negotiate additional corporate collaborations on acceptable terms, if at all, and these collaborations may not be successful.

      Products as complicated as the TIGRIS instrument frequently require operating enhancements following their initial introduction. Delivery of products with defects, or reliability or quality problems, could require significant expenditures of capital and other resources and could significantly delay delivery to our customers or hinder market acceptance of this product. Any such capital expenditures or delays could harm our operating results, materially damage our reputation and prevent us from retaining our existing customers and attracting new customers. Our ability to support the TIGRIS instrument for blood screening and diagnostic markets depends on the ultimate reliability of the instrument in the field. This product, which incorporates

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      The clinical diagnostics industry is highly competitive. Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by large reference laboratories, public health laboratories and hospitals. We expect that these laboratories will compete vigorously to maintain their dominance in the diagnostic testing market. In order to achieve market acceptance of our products, we will be required to demonstrate that our products provide accurate, cost-effective and time saving alternatives to tests performed by traditional laboratory procedures and products made by our competitors.

      In the markets for clinical diagnostic products, a number of competitors, including F. Hoffmann-La Roche Ltd. and its subsidiary, Roche Molecular Diagnostics, Inc., Abbott Laboratories, Becton Dickinson and Company and bioMérieux S.A., compete with us for product sales, primarily on the basis of technology, quality, reputation, accuracy, ease of use, price, reliability, the timing of new product introductions and product line offerings. In markets outside of the United States, other factors, including local distribution systems, complex regulatory environments and differing medical philosophies and product preferences, influence competition as well. Some of our competitors have, and in the future these and other competitors may have, significantly greater financial, marketing, sales, manufacturing, distribution and technological resources than us. Moreover, these companies may have substantially greater expertise in conducting clinical trials and research and development, greater ability to obtain necessary intellectual property licenses and greater brand recognition than we do. In addition, we have licensed some of our proprietary technology relating to certain clinical diagnostic and food pathogen applications for use on specific instruments to bioMérieux, and we may license other technologies to potential competitors in the future. As a result, we may in the future compete with bioMérieux and these other licensees for sales of products incorporating our technology. Our competitors may be in a stronger position to respond quickly to new or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt more aggressive pricing policies and may be more successful in attracting potential customers, employees and strategic partners than we are. We believe that our competitors are developing “real time” or kinetic nucleic acid assays and are developing semi-automated instrument systems to perform real time assays. Our competitors may be further in the development process with respect to such assays and instrumentation then we are.

      In the market for blood screening products, our primary competitor is Roche Molecular Systems, which received FDA approval of its Polymerase Chain Reaction, or PCR, based NAT tests for blood screening in December 2002. We also compete with assays developed internally by blood banks and laboratories based on PCR technology, an HCV antigen assay marketed by Ortho Clinical Diagnostics, a subsidiary of Johnson & Johnson, and immunoassay products from Abbott Laboratories. In the future, our blood screening products also may compete with viral inactivation technologies and blood substitutes.

      Chiron, with whom we have entered into a collaboration agreement for our blood screening products, retains certain rights to grant licenses of the patents related to HCV and HIV to third parties in blood screening. Chiron has granted HIV and HCV licenses to Roche Molecular Systems in the blood screening and clinical diagnostics fields. Chiron has granted HIV and HCV licenses in the clinical diagnostic field to Bayer Healthcare LLC, which also has the right to grant certain additional HIV and HCV sublicenses in the field to third parties. Chiron has granted an HCV license to Abbott and an HIV license to Organon Teknika (now bioMeriuex). To the extent that Chiron grants additional licenses in blood screening or Bayer grants additional licenses in clinical diagnostics, further competition will be created for sales of HCV and HIV assays and these licenses could affect the prices that can be charged for our products.

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      We currently receive revenues from the sale of the Procleix HIV-1/HCV blood screening assay for use with pooled donor samples. In pooled testing, multiple donor samples are initially screened by a single test, however, Chiron sells our Procleix HIV-1/HCV assay to blood collection centers on a per donation basis. We expect the blood screening market to ultimately transition from pooled testing to individual donor testing. A greater number of tests will be required for individual donor testing than are now required for pooled testing. Under our collaboration agreement with Chiron, we bear the cost of manufacturing our Procleix HIV-1/HCV assay. The greater number of tests required for individual donor testing will increase our variable manufacturing costs, including costs of raw materials and labor. If the price per donor or total sales volume does not increase in line with the increase in our total variable manufacturing costs, our gross profit margins from sales of the blood screening assay may decrease upon the adoption of individual donor testing. We are not able to accurately predict the extent to which our gross profit margin may be negatively affected as a result of individual donor testing because we do not know the ultimate selling price that Chiron would charge to the end user if individual donor testing were implemented.

      Historically, a limited number of customers has accounted for a significant portion of our total revenues, and we do not have any long-term commitments with these customers other than our collaboration agreement with Chiron. Our blood screening collaboration with Chiron accounted for 42% of our total revenues for 2003 and 30% of our total revenues for 2002. Our blood screening collaboration with Chiron is largely dependent on two large customers in the United States, The American Red Cross and America’s Blood Centers, although we did not receive any revenues directly from those entities. Chiron was our only customer that accounted for greater than 10% of our total revenues for the year ended December 31, 2003. In addition, Quest Diagnostics Incorporated, Laboratory Corporation of America Holdings and various state and city public health agencies accounted for an aggregate of 21% of our total revenues for 2003 and 26% of our total revenues for 2002. Although state and city public health agencies are legally independent of each other, they tend to act similarly with respect to their product purchasing decisions. We anticipate that our operating results will continue to depend to a significant extent upon revenues from a small number of customers. The loss of any of our key customers, or a significant reduction in sales to those customers, could significantly reduce our revenues.

      Our success will depend in part on our ability to obtain patent protection for, or maintain the secrecy of, our proprietary products, processes and other technologies for development of blood screening and clinical diagnostic products and instruments. Although we have 184 United States patents and 160 foreign patents, these patents, or any patents that we may own or license in the future, may not afford meaningful protection for our technology and products. The pursuit and assertion of a patent right, particularly in areas like nucleic acid diagnostics and biotechnology, involve complex determinations and, therefore, are characterized by substantial uncertainty. In addition, the laws governing patentability and the scope of patent coverage continue to evolve, particularly in biotechnology. As a result, patents might not issue from certain of our patent applications or from applications licensed to us. In addition, all of our existing patents will expire by May 1, 2021, and the patents we may obtain in the future also will expire over time.

      The scope of any of our issued patents may not be broad enough to offer meaningful protection. In addition, others may challenge our current patents or patents we may obtain in the future and, as a result, these patents could be narrowed, invalidated or rendered unenforceable, or we may be forced to stop using the technology covered by these patents or to license technology from third parties. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any patents issued to us or our strategic partners may not provide us with any competitive advantages, and the

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      In addition to patent protection, we also rely on copyright and trademark protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants, advisors and others to whom we disclose confidential information to execute confidentiality and proprietary information agreements. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, there may not be an adequate corrective remedy available. Furthermore, like many companies in our industry, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all confidential information of previous employers, we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market and execute our business strategies.

      The diagnostic products industry has a history of patent and other intellectual property litigation, and these lawsuits likely will continue. Because we produce and provide many different products and services in this industry, we have faced in the past, are currently facing, and may face in the future, patent infringement suits by companies that control patents for similar products and services or other suits alleging infringement of their intellectual property rights. In order to protect or enforce our intellectual property rights, we may have to initiate legal proceedings against third parties. Legal proceedings relating to intellectual property typically are expensive, take significant time and divert management’s attention from other business concerns. The cost of this litigation could adversely affect our results of operations, making us less profitable. Further, if we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, including treble damages, and we could be required to stop the infringing activity or obtain a license to use the patented technology.

      Recently, we have been involved in a number of patent disputes with third parties, a number of which remain unresolved. For example, we are in litigation with Enzo Biochem Inc. which claims that genetic sequences used in certain of our gonorrhea testing products infringe one of its patents. We are also in litigation with Vysis, Inc. regarding the validity of a Vysis’ patent that Vysis asserts covers the target capture technology that we employ in some of our amplified NAT assays.

      While there is a federal preemption defense against product liability claims for medical products that receive premarket approval from the FDA, we believe that no such defense is available for our products that we market under a 510(k) clearance. As such, we are subject to potential product liability claims as a result of the design, development, manufacture and marketing of our clinical diagnostic products. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates. In addition, we would have to pay any amount awarded by a court in excess of our policy limits. Our insurance policies have various exclusions, and thus we may be subject to a product liability claim for which we have no insurance coverage, in which case, we may have to pay the entire amount of any award. In addition, insurance varies in cost and can be difficult to obtain, and we may not be able to obtain insurance in

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      In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” which we adopted effective on January 1, 2002. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. As of December 31, 2003, we had goodwill and intangible assets valued at approximately $50.1 million, including $24.9 million of capitalized software relating to the TIGRIS instrument currently under development and $6.6 million of capitalized patents and purchased intangibles that have been included in “Other assets” on the face of the balance sheet. We performed our annual impairment tests of goodwill and indefinite lived intangible assets to determine if an impairment charge should be recognized under SFAS 142 and determined that there had been no impairments. In the future, we will continue to test for impairment at least annually. These tests may result in a determination that the assets have been impaired. If at any time we determine that an impairment has occurred, we will be required to reflect the impaired value as a charge, resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in our net asset value. A material reduction in earnings resulting from such a charge could cause us to fail to be profitable in the period in which the charge is taken or otherwise to fail to meet the expectations of investors and securities analysts, which could cause the price of our stock to decline.

      The market for our products is characterized by rapidly changing technology, evolving industry standards and new product introductions, which may make our existing products obsolete. Our future success will depend in part upon our ability to enhance existing products and to develop and introduce new products, such as our NAT assay to detect WNV. For example, we believe that we will need to continue to provide new products that can detect a greater number of organisms from a single sample. We also believe that we must develop new assays that can be performed on automated instrument platforms, such as the TIGRIS instrument.

      The development of new or enhanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends as well as precise technological execution. In addition, the successful development of new products will depend on the development of new technologies. We will be required to undertake time-consuming and costly development activities and to seek regulatory approval for these new products. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the FDA or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized.

      In recent years, we have incurred significant costs in connection with the development of our blood screening products and the TIGRIS instrument. We expect our expense levels to remain high in connection with our research and development as we continue to expand our product offerings and continue to develop products and technologies in collaboration with our strategic partners. As a result, we will need to continue to generate significant revenues to maintain profitability. Although we expect our research and development expenses as a percentage of revenue to decrease in future periods, we may not be able to generate revenues and

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      Although historically our cash flow from operations has been sufficient to satisfy working capital, capital expenditure and research and development requirements, in the future we may need to incur additional debt or issue equity in order to fund these requirements as well as to make acquisitions and other investments. If we cannot obtain additional debt or equity financing on acceptable terms or are limited with respect to incurring additional debt or issuing equity, we may be unable to address gaps in our product offerings or improve our technology, particularly through strategic acquisitions or investments.

      We may need to raise substantial amounts of money to fund a variety of future activities integral to the development of our business, including but not limited to the following:

	•	for research and development to successfully develop our new technologies and products,
	•	to conduct clinical trials,
	•	to obtain regulatory approval for new products,
	•	to file and prosecute patent applications and defend and assert patents to protect our technologies,
	•	to retain qualified employees, particularly in light of intense competition for qualified scientists and engineers,
	•	to manufacture additional products ourselves or through third parties,
	•	to market different products to different markets, either through building our own sales and distribution capabilities or relying on third parties, and
	•	to acquire new technologies, products or companies.

If we raise funds through the issuance of debt or equity, including without limitation through the issuance of equity or debt securities pursuant to our Form S-3 shelf registration statement that we filed on August 29, 2003 with the Securities and Exchange Commission relating to the possible future sale of up to an aggregate of $150 million of debt or equity securities, any debt securities or preferred stock issued will have rights, preferences and privileges senior to those of holders of our common stock in the event of a liquidation and may contain other provisions that adversely effect the rights of the holders of our common stock. The terms of the debt securities may impose restrictions on our operations. If we raise funds through the issuance of equity or debt convertible into equity, this issuance would dilute your ownership interest in us.

      We expect to fund future acquisitions in part by issuing additional equity. If the price of our equity is unacceptably low or volatile due to market volatility or other factors, we may not be able to acquire other companies.

      We have one third-party manufacturer for each of our instrument product lines. KMC Systems is our only manufacturer of the TIGRIS instrument. MGM Instruments, Inc. is the only manufacturer of our LEADER series of luminometers. We are dependent on these third-party manufacturers, and this dependence exposes us to increased risks associated with delivery schedules, manufacturing capability, quality control, quality assurance and costs. We have no firm long-term commitments from KMC Systems, MGM Instruments or any of our other manufacturers to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order. If KMC Systems, MGM Instruments or any of our other third-party manufacturers experiences delays, disruptions, capacity constraints

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      Further, our business would be harmed if we fail to manage effectively the manufacturing of our products. Because we place orders with our manufacturers based on our forecasts of expected demand for our products, if we inaccurately forecast demand, we may be unable to obtain adequate manufacturing capacity or adequate quantities of components to meet our customers’ delivery requirements, or we may accumulate excess inventories.

      We may in the future need to find new contract manufacturers to increase our volumes or to reduce our costs. We may not be able to find contract manufacturers that meet our needs, and even if we do, qualifying a new contract manufacturer and commencing volume production is expensive and time consuming. For example, qualifying a new manufacturer of our TIGRIS instrument would take approximately twelve months. If we are required or elect to change contract manufacturers, we may lose revenues, and our customer relationships may suffer.

      We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Significant additional work will be required for scaling-up manufacturing of each new product prior to commercialization, and we may not successfully complete this work. Manufacturing and quality control problems have arisen and may arise as we attempt to scale-up our manufacturing of a new product, and we may not achieve scale-up in a timely manner or at a commercially reasonable cost, or at all. In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these newerproducts may require the development of new manufacturing technologies and expertise.

      In addition, the amplified NAT tests that we are producing are significantly more expensive to manufacture than our non-amplified products. As we continue to develop new amplified NAT tests in response to market demands for greater sensitivity, our product costs will increase significantly. We sell our products in a number of cost-sensitive market segments, and we may not be able to manufacture these more complex amplified tests at costs that would allow us to maintain our historical gross margins. In addition, new products that detect more than one target organism will contain significantly more complex reagents, which will increase the cost of our manufacturing processes and quality control testing. We or other parties we engage to help us may not be able to manufacture these products at a cost or in quantities that would make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, we will not be able to conduct pre-clinical and clinical testing on these product candidates, which will prevent or delay regulatory clearance or approval of these product candidates and the initiation of new development programs.

      Our blood screening products must be manufactured in compliance with guidelines set forth by the FDA’s Center for Biologics Evaluation and Research, and our clinical diagnostic products must be manufactured in compliance with the guidelines set forth by the FDA’s Center for Devices and Radiological Health. Maintaining compliance with more than one division of the FDA adds complexity and cost to our overall manufacturing processes. In addition, our manufacturing facilities and those of our contract manufacturers are subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies, and these facilities are subject to Quality System Regulations requirements of the FDA. We or our contractors may fail to satisfy these regulatory requirements in the future, and any failure to do so may prevent us from selling our products.

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      The FDA and similar governmental authorities in other countries have the authority to require the recall of our products if we fail to comply with relevant regulations pertaining to laboratory practices, product manufacturing, labeling, advertising, or promotional activities, or if new information is obtained concerning the safety of a product. A government-mandated recall, or a voluntary recall by us, could divert managerial and financial resources and harm our reputation with customers.

      In the past, we have had three voluntary recalls. The first product recall occurred in September 1999, when we responded to customer complaints about an increase in the number of our Mycobacterium Tuberculosis Direct, or MTD, assays demonstrating inhibition by test specimens. The formulation problem was identified and corrected. The second recall occurred in February 2000 when we recalled our MTD product due to decreased stability of a reagent in certain kit lots. The problem was identified and rectified through a voluntary field correction. The third recall occurred in July 2002 following the discovery of an error in the Chiron Procleix System software used with the Procleix HIV-1/HCV blood screening assay and instruments. A review of prior test results determined that the defect did not cause any inaccurate results. The problem was rectified in a subsequent software update, which was submitted to and approved by the FDA. Our products may be subject to additional recalls in the future.

      Sales of our products outside the United States accounted for 13% of our total revenues for 2003 and 14% of our total revenues for 2002. Sales by Chiron outside of the United States accounted for 58% of our international revenues for 2003 and 41% of our international revenues for 2002. Chiron has responsibility for the international distribution of our blood screening products, which includes sales in France, Australia, Singapore, New Zealand, Italy and other countries. Our sales in France and Japan that were not made through Chiron accounted for 16% and 10%, respectively, of our international sales for 2003 and 19% and 14%, respectively, for 2002.

      We expect a significant portion of our sales growth, especially with respect to our blood screening products, to come from expansion in international markets. Accordingly, we encounter risks inherent in international operations. Other than Canada, our sales are currently denominated in United States dollars, if the value of the United States dollar increases relative to foreign currencies, our products could become less competitive in international markets. Our international sales also may be limited or disrupted by:

	•	the imposition of government controls,
	•	export license requirements,
	•	economic and political instability,
	•	price controls,
	•	trade restrictions and tariffs,
	•	differing local product preferences and product requirements, and
	•	changes in foreign medical reimbursement and coverage policies and programs.

In addition, we may have difficulty introducing new products in international markets. For example, we do not believe our blood screening products will be widely adopted in Germany until we are able to offer an assay that screens for HBV, HAV, and parvo B19, as well as HIV-1 and HCV, or in Japan until we are able to offer an assay that screens for HBV, HIV-1 and HCV. Whenever we seek to enter a new international market, we will be dependent on the marketing and sales efforts of our international distributors.

      We believe that the international market for our products is important, and therefore we seek patent protection for our products in foreign countries where we feel such protection is needed. Because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the United States.

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      We sell our products primarily to large reference laboratories, public health laboratories and hospitals, substantially all of which receive reimbursement for the health care services they provide to their patients from third-party payors, such as Medicare, Medicaid and other domestic and international government programs, private insurance plans and managed care programs. Most of these third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for experimental procedures and devices.

      Third-party payors’ reimbursement policies also may affect sales of our products that screen for more than one pathogen at the same time, such as our APTIMA Combo 2 product for screening for the causative agents of chlamydial infections and gonorrhea in the same sample. Third-party payors may choose to reimburse our customers on a per test basis, rather than on the basis of the number of results given by the test. This may result in laboratories and hospitals electing to use separate tests to screen for each disease so that they can receive reimbursement for each test they conduct. In that event, laboratories and hospitals likely would purchase separate tests for each disease, rather than our products that test for more than one microorganism.

      In addition, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which would cause our revenues to decline.

      We purchase some key raw materials used in the manufacture of our products from single-source suppliers. We may not be able to obtain supplies from replacement suppliers on a timely or cost-effective basis. For example, our current supplier of key raw materials for our amplified NAT assays, pursuant to a fixed-price contract, is the Roche Molecular Biochemicals division of Roche Diagnostics GmbH, an affiliate of Roche Molecular Systems, which is one of our primary competitors and the purchaser of Boehringer-Mannheim GmbH, with whom we had originally contracted for supplies. A reduction or stoppage in supply while we seek a replacement supplier would limit our ability to manufacture our products, which could result in a significant reduction in sales and profitability. In addition, an impurity or variation in a raw material, either unknown to us or incompatible with our products, could significantly reduce our ability to manufacture products. Our inventories may not be adequate to meet our production needs during any prolonged interruption of supply. We have products under development which, if developed, may require us to enter into additional supplier arrangements. Failure to obtain a supplier for our future products, if any, on commercially reasonable terms, would prevent us from manufacturing our future products and limit our growth.

      We are dependent on licenses from third parties for some of our key technologies. For example, our patented Transcription-Mediated Amplification technology is based on technology we have licensed from Stanford University and the chemiluminescence technology we use in our products is based on technology licensed by our consolidated subsidiary, Molecular Light Technology Limited, from the University of Wales College of Medicine. If our license with respect to any of these technologies is terminated for any reason, we will not be able to sell products that incorporate the technology. In addition, although our research staff seeks

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      Competition for top management personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of any one of our management personnel, particularly Henry L. Nordhoff, our Chairman, President and Chief Executive Officer, or our inability to identify, attract, retain and integrate additional qualified management personnel, could make it difficult for us to manage our business successfully, attract new customers, retain existing customers and pursue our strategic objectives. Although we have employment agreements with our executive officers, we may be unable to retain our existing management. We do not maintain key person life insurance for any of our executive officers.

      Similarly, competition for skilled sales, marketing, research, product development, engineering, and technical personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of the services of any key sales, marketing, research, product development, engineering, and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers or manage our business effectively.

      We may not be able to hire or retain qualified personnel if we are unable to offer competitive salaries and benefits, or if our stock does not perform well.

      As part of our business strategy, we intend to pursue acquisitions of other complementary businesses and technology licensing arrangements. We also intend to pursue strategic alliances that leverage our core technology and industry experience to expand our product offerings and geographic presence. We have limited experience with respect to acquiring other companies and with respect to the formation of collaborations, strategic alliances and joint ventures. If we make future acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we could assume unknown or contingent liabilities. Any future acquisitions by us also could result in large and immediate write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. Integration of an acquired company also may require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license or strategic alliance.

      To finance any acquisitions, we may choose to issue shares of our common stock as consideration, which would dilute your interest in us. If the price of our equity is low or volatile, we may not be able to acquire other companies. Alternatively, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stockholders.

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      The clinical diagnostic and blood screening products we design, develop, manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory approvals, particularly from the FDA and some foreign governmental authorities, to market our products can be costly and time consuming, and approvals might not be granted for future products on a timely basis, if at all. For example, we were prohibited from commercially marketing our blood screening products in the United States until we obtained approval of our Biologics License Application from the FDA’s Center for Biologic Evaluation and Research. We generally are prohibited from marketing our clinical diagnostic products in the United States unless we obtain either 510(k) clearance or premarket approval from the FDA. Delays in receipt of, or failure to obtain, clearances or approvals for future products could result in delayed, or no, realization of product revenues from new products or in substantial additional costs which could decrease our profitability.

      In addition, we are required to continue to comply with applicable FDA and other material regulatory requirements once we have obtained clearance or approval for a product. These requirements include, among other things, the Quality System Regulation, labeling requirements, the FDA’s general prohibition against promoting products for unapproved or “off-label” uses and adverse event reporting regulations. Failure to comply with applicable FDA product regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications and criminal prosecution. Any of these actions, in combination or alone, could prevent us from selling our products.

      Outside the United States, our ability to market our products is contingent upon receiving marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, we apply for foreign marketing authorizations at a national level, although within the European Union, registration procedures are available to companies wishing to market a product in more than one European union member state. We are currently taking action to have our products registered for sale into the European Economic Community following a new requirement that becomes effective in December 2004. Failure to receive, or delays in the receipt of, relevant foreign qualifications could prevent us from selling our products in foreign countries.

      As both the FDA and foreign government regulators have become increasingly stringent, we may be subject to more rigorous regulation by governmental authorities in the future. Our products and operations also are often subject to the rules of industrial standards bodies, such as the International Standards Organization. Complying with these rules and regulations could cause us to incur significant additional expenses, which would harm our operating results.

      The use of our diagnostic products is also affected by the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and related federal and state regulations which provide for regulation of laboratory testing. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality and inspections. Current or future CLIA requirements or the promulgation of additional regulations affecting laboratory testing may prevent some clinical laboratories from using any or all of our diagnostic products.

      We manufacture all of our products in our two manufacturing facilities located in San Diego, California. These facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantial lead time to repair or replace. The facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes and fires, and in the event they were affected by a

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      Our research and development activities and our manufacturing activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury, and we could be held liable for damages that result from such contamination or injury. In addition, we are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The damages resulting from any accidental contamination and the cost of compliance with environmental laws and regulations could be significant.

      Provisions of our amended and restated certificate of incorporation and amended and restated bylaws also may discourage, delay or prevent a merger or other change of control that stockholders may consider favorable or may impede the ability of the holders of our common stock to change our management. The provisions of our amended and restated certificate of incorporation and amended and restated bylaws, among other things:

	•	divide our board of directors into three classes, with members of each class to be elected for staggered three-year terms,
	•	limit the right of stockholders to remove directors,
	•	regulate how stockholders may present proposals or nominate directors for election at annual meetings of stockholders, and
	•	authorize our board of directors to issue preferred stock in one or more series, without stockholder approval.

In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law, this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliate crosses the 15 percent stock ownership threshold.

      We also adopted a rights plan that could discourage, delay or prevent an acquisition of us under certain circumstances. The rights plan provides for preferred stock purchase rights attached to each share of our common stock, which will cause substantial dilution to a person or group acquiring 15% or more of our stock if the acquisition is not approved by our Board of Directors.

      In August 2003, we acquired a majority of the outstanding shares of Molecular Light Technology Limited and its subsidiaries and in the future, we may acquire additional businesses or technologies, or enter into strategic transactions. Managing these acquisitions and any future acquisitions will entail numerous operational and financial risks, including:

	•	the inability to retain key employees of any acquired businesses or hire enough qualified personnel to staff any new or expanded operations;

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	•	the impairment of relationships with key customers of acquired businesses due to changes in management and ownership of the acquired businesses;
	•	the exposure to federal, state, local and foreign tax liabilities in connection with any acquisition or the integration of any acquired businesses;
	•	the exposure to unknown liabilities;
	•	higher than expected acquisition and integration costs that would cause our quarterly and annual operating results to fluctuate;
	•	increased amortization expenses if an acquisition results in significant goodwill or other intangible assets;
	•	combining the operations and personnel of acquired businesses with our own, which would be difficult and costly; and
	•	integrating or completing the development and application of any acquired technologies, which would disrupt our business and divert our management’s time and attention.

      Growth in our business has placed and may continue to place a significant strain on our personnel, facilities, management systems and resources. We will need to continue to improve our operational and financial systems and managerial controls and procedures and train and manage our workforce. We will have to maintain close coordination among our various departments. If we fail to effectively manage our growth and address the foregoing concerns, it could adversely affect our ability to pursue business opportunities and expand our business.

      A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the United States that, if implemented, would require us to record charges to earnings for employee stock option grants. This pending requirement would negatively impact our earnings. For example, recording a charge for employee stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” would have reduced our net income by $3.1 million and $0.8 million for fiscal 2003 and 2002, respectively.

      Portions of our information technology infrastructure may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. In particular, we plan to implement a new general ledger information system and data warehouse to replace our current systems over the next two years. As a part of this effort, we are rationalizing various legacy systems and upgrading existing hardware and software applications and implementing new data management applications to administer our business information. We may not be successful in implementing the new system, and transitioning data and

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      Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. These investments may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities.

Item 2.     Properties

      Our worldwide headquarters are located in a 262,000 square-foot facility located in San Diego, California. We currently own this facility, and as a result of the merger of Gen-Probe Holding Company, Inc., (formerly known as Chugai Pharma U.S.A., Inc.), into us, we own the land on which it sits and an adjacent 23-acre parcel. We are currently planning to develop a 291,000 square-foot facility on our adjacent 23-acre parcel to support our company-wide growth. Approximately 131,000 square feet of the new facility will be left vacant for future expansion and will primarily be used for office space with a small warehouse component. We anticipate that development of the facility will be complete in early 2006 and will cost approximately $35 to $40 million.

      We also lease the following additional facilities:

Leased Facilities

Item 3.     Legal Proceedings

      We are a party to the following litigation and are currently participating in other litigation in the ordinary course of business. We intend to vigorously defend our interests in these matters. We expect that the resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings. If any of these matters were resolved in a manner unfavorable to us, our business, financial condition and results of operations would be harmed.

      In June 1999, we were sued by Enzo Biochem, Inc. in the United States District Court for the Southern District of New York. Enzo alleged that we and our former affiliates, as well as Becton Dickinson and bioMérieux have willfully infringed United States patent no. 4,900,659, or the “ ‘659 patent,” through the

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      In December 1999, we initiated litigation in the United States District Court for the Southern District of California against Vysis, now a subsidiary of Abbott Laboratories, seeking a declaratory judgment that our products were not covered by a Vysis patent that is the subject of our license with them and that the patent is invalid and unenforceable. In August 2002, following a jury trial, the District Court entered judgment in our favor, finding the Vysis patent invalid and finding that the patent does not cover our products. In September 2002, Vysis filed a notice of appeal with the District Court. Further, in October 2002, while Vysis’ appeal was pending, the United States Patent & Trademark Office reissued the Vysis patent with amended claims. In October 2002, we filed a second lawsuit in District Court to challenge the validity and scope of the reissued patent. On March 5, 2004, the Court of Appeals vacated the District Court’s August 2002 judgment in our favor and directed the District Court to dismiss the case, on the ground of lack of subject matter jurisdiction. We intend to petition the Court of Appeals for rehearing and rehearing en banc. There can be no assurances as to the final outcome of this litigation. We have at all times maintained the license with Vysis in full force and continued to make royalty payments under the license, pending final resolution of the litigation.

      In November 2002, we filed a demand for arbitration against Bayer Corporation, or Bayer, in the Judicial Arbitration & Mediation Services, Inc., or JAMS, office in San Diego, California related to our collaboration with Bayer for nucleic acid diagnostic tests for viral organisms. Under the terms of the collaboration agreement, Bayer acquired the exclusive right to distribute nucleic acid diagnostic tests designed and developed by us for the detection of HIV, hepatitis viruses and other specified viruses, subject to certain conditions. Our demand for arbitration states that Bayer has failed to fulfill the conditions required to maintain exclusive distribution rights. The arbitration demand seeks confirmation that the agreement grants us, in the present circumstances, a co-exclusive right to directly distribute the viral diagnostic tests that are the subject of the agreement. Our arbitration demand also seeks money damages due to Bayer’s failure to use commercially reasonable efforts to promote, market and sell viral diagnostic assays developed by us. In November 2003, Bayer filed a counterclaim for money damages based on alleged delays in the development of the TIGRIS instrument and certain assays, and other claims. The matter has been set for hearing beginning on September 13, 2004. There can be no assurances as to the final outcome of the arbitration.

      No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

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PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

      Our common stock has been traded on the Nasdaq National Market since September 16, 2002 under the symbol GPRO. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low sale prices for our common stock as reported on the Nasdaq National Market for the periods indicated.

      As of March 1, 2004, there were approximately 49,020,004 holders of record of our common stock. We have not paid any cash dividends to date and do not anticipate any being paid in the foreseeable future.

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SELECTED FINANCIAL INFORMATION

      The selected financial data set forth below with respect to our statements of operations for the years ended December 31, 2003, 2002, and 2001 and, with respect to our balance sheets, at December 31, 2003 and 2002 are derived from our consolidated financial statements that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this report. The statement of operations data for the years ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000, and 1999 are derived from our audited consolidated financial statements that are not included in this report. The selected financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this report.

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(1)	All share and per share amounts reflect the 2-for-1 stock split implemented as a 100% stock dividend in September 2003, the .366153-for-1 reverse stock split effective in 2002 and the 650,000-for-1 stock split effective in August 2000.

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      This report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for these types of statements. To the extent statements in this report involve, without limitation, our expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, level of activity, performance or achievements expressed or implied by any forward-looking statement. These risks and uncertainties include those included herein under the caption “Risk Factors” in “Item 1. Business.” We assume no obligation to update any forward-looking statements. The audited financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the years ended December 31, 2003, 2002 and 2001 in this Annual Report on Form 10-K.

Overview

      We are a global leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid probe-based products used for the clinical diagnosis of human diseases and for the screening of donated human blood. We have over 21 years of nucleic acid detection research and product development experience, and our products, which are based on our patented nucleic acid testing, or NAT, technology, are used daily in clinical laboratories and blood collection centers in major countries throughout the world.

      In September 2002, our common stock began trading on the Nasdaq National Market immediately after our former parent company, Chugai Pharmaceutical Co., Ltd. distributed all of its shares of our common stock to its shareholders. Since our spin-off into an independent, publicly traded company, we have achieved strong growth in both revenues and earnings due principally to the success of our blood screening products which are used to detect the presence of human immunodeficiency virus (type 1), or HIV-1, and hepatitis C virus, or HCV. Under our collaboration agreement with Chiron Corporation, or Chiron, we are responsible for the research, development, regulatory process and manufacturing of our blood screening products while Chiron is responsible for marketing, sales, distribution and service.

Revenues

      We derive revenues from three primary sources: product sales, collaborative research revenue and royalty and license revenue. The majority of our revenues come from product sales, which consist primarily of sales of our NAT assays tested on the proprietary instruments that serve as the analytical platform for our assays. We recognize as collaborative research revenue payments we receive from Chiron for the products we provided under our collaboration agreements with Chiron prior to regulatory approval and the payments we receive from Chiron, Bayer Corporation, or Bayer, and other collaboration partners, including the National Institutes of Health, or NIH, for research and development activities. Our royalty and license revenues reflect fees paid to us by third parties for the use of our proprietary technology. For the year ended December 31, 2003, product sales, collaborative research revenues and royalty and license revenues equaled 91%, 7% and 2%, respectively, of our total revenues of $207.2 million.

      Historically, our primary source of revenue has been the sale of clinical diagnostic products in the United States. Our primary clinical diagnostic products include our PACE 2, AccuProbe, Amplified Mycobacterium Tuberculosis Direct Test, and APTIMA Combo 2 product lines. We currently manufacture and ship approximately 22 million tests per year for the diagnosis of a wide variety of infectious microorganisms, including those causing sexually transmitted diseases, or STDs, tuberculosis, strep throat, pneumonia and fungal infections. The principal customers for our clinical diagnostics products include large reference laboratories, public health laboratories and hospitals located in North America, Europe and Japan. Sales of

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      In 1999, we began to supply NAT assays for use in screening blood donations intended for transfusion. Our first blood screening assay detects HIV-1 and HCV in donated human blood. Our blood screening assays and instruments are marketed through our collaboration with Chiron under the Procleix trademark. We recognize product sales from the manufacture and shipment of tests for screening donated blood through our collaboration with Chiron to blood bank facilities located in the countries where our products have obtained governmental approvals. Blood screening product sales are then adjusted monthly upon payment by Chiron to us of amounts reflecting our ultimate share of net revenue from sales by Chiron to the end user, less the transfer price revenues previously paid. Net sales are ultimately equal to the sales of the assays by Chiron to third-parties, less freight, duty and certain other adjustments specified in our agreement with Chiron, multiplied by our share of the net revenue, which was 43.0% with respect to sales of assays that include a test for HCV beginning the second quarter of 2002 after implementation of commercial pricing, through April 6, 2003, after which our share of net revenues from sales of assays that include a test for HCV was adjusted to 47.5%. Effective January 1, 2004, our share of net revenues from commercial sales of assays that include a test for HCV, such as the Procleix HIV-1/ HCV assay and the Procleix Ultrio (HIV-1/HCV/ HBV) assay, which received its Community European, or CE, mark in January 2004, was permanently changed to 45.75% under our agreement with Chiron. With respect to commercial sales of blood screening assays under our collaboration with Chiron that do not include a test for HCV, such as possible future commercial tests for West Nile virus, or WNV, we will continue to receive reimbursement for our manufacturing costs plus 50% of net revenues. Our costs related to these products primarily include manufacturing costs.

      In February 2002, the Food and Drug Administration, or FDA, approved our Biologics License Application, or BLA, for our assay used to screen donated blood for HIV-1 and HCV. Accordingly, we began to recognize product sales revenue for tests shipped in the United States in the second quarter of 2002. Outside the United States, the Procleix HIV-1/HCV assay has received CE marking and approval in a number of other countries.

      Product sales also include the sales or rental revenue associated with the delivery of our proprietary integrated instrument platforms to customers for performing our NAT assays. We provide multiple instrument rental options to our customers depending on the types and volumes of products purchased. Instruments are manufactured by third-party contractors, but we generally provide technical support and instrument service to maintain these systems in the field. Chiron is responsible for placement and servicing of instruments used in connection with our blood screening business and Bayer and other international distributors are primarily responsible for placement and servicing of instruments used in our clinical diagnostics business outside the United States. Direct sales of our instrument platforms to customers accounted for approximately 3% of our product sales for both the years ended December 31, 2003 and 2002. However, we generally retain title to the instruments and recover our instrument costs in connection with the sale of the assays. The costs associated with the instruments are charged to cost of products sold on a straight-line basis over the estimated life of the instrument, which ranges from three to five years. The costs to maintain these systems in the field are charged to cost of product sales as incurred.

      We have developed a NAT assay to detect HIV-1 and HCV in donated human blood and have also developed a semi-automated instrument system to conduct the test. These assays and instruments are marketed through our collaboration with Chiron under the Procleix name. The Procleix HIV-1/HCV assays and instrumentation were used in clinical trials, under an IND from early 1999 through 2002. In February 2002, the FDA approved the Procleix HIV-1/HCV assays. FDA approval of the Procleix HIV-1/HCV assays has allowed Chiron to implement commercial pricing for sales of the Procleix HIV-1/HCV assays to United States customers, which resulted in a significant increase in the revenues we received from such sales in the third and fourth quarters of 2002 and all of 2003.

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      In March 2003, we signed a definitive agreement with Chiron for the development and commercialization of the Procleix Ultrio assay. For the year ended December 31, 2003, we recognized $4.2 million in reimbursements for expenses incurred related to the development of this assay. We have also developed a NAT assay to detect WNV, which is currently being used in clinical trials under an IND application. We expect to receive further reimbursement for certain costs incurred during the development of the Procleix Ultrio and WNV assays from Chiron and separately from the National Heart, Lung, and Blood Institute, a part of the NIH.

      We have recorded revenues related to use of our blood screening products in the United States and other countries in which the products have not received regulatory approval as collaborative research revenue because price restrictions applied to these products prior to FDA license approval in the United States and similar approval in foreign countries. We began deliveries of the commercially approved Procleix HIV-1/HCV products to the United States customers in the second quarter of 2002. Accordingly, we began to classify revenues associated with these products as product sales in our financial statements beginning in that period. Collaborative research revenue for the use of our Procleix HIV-1/HCV blood screening products for the year ended December 31, 2002 was $7.1 million. All sales of this assay in 2003 have been classified as product sales. In addition, for the year ended December 31, 2003, we recognized $6.0 million in collaborative research revenue through our collaboration with Chiron from deliveries of WNV tests on a “cost recovery” basis. We expect to continue recognizing these sales as collaborative research revenue until such time as FDA approval has been received.

      Under the strategic alliance agreement we entered into with Chiron in June 1998, we have responsibility for research, development and manufacturing of the blood screening products covered by the agreement while Chiron has responsibility for marketing, distribution and service of the blood screening products worldwide. We received a $10.0 million up-front license fee from Chiron in connection with the agreement in 1998 and an additional payment of $8.5 million upon achieving an agreed upon contract milestone in 1999. Additional payments of up to $15.8 million are due to us in the future under the agreement if we achieve certain other specified milestones relating to the development of what we believe to be the world’s first fully automated, integrated, high throughput NAT instrument system known as the TIGRIS instrument. Our costs to develop and commercialize the blood screening assays and associated instruments have been substantial and have had a significant impact on our operating results and financial position since 1998. We completed beta evaluations of the TIGRIS instrument for clinical diagnostic applications and undertook initial beta trials for blood screening applications in the third quarter of 2002 and completed a clinical trial of the TIGRIS instrument for diagnostic application in June 2003. We received FDA clearance to run our APTIMA Combo 2 assay on the TIGRIS instrument in December 2003 and, in January 2004, commenced clinical trials of our Procleix Ultrio assay on the TIGRIS instrument for a blood screening application.

      In February 2001, we commenced an arbitration proceeding against Chiron in connection with our blood screening collaboration. During the fourth quarter of 2001, we negotiated a resolution to most of the disputed items and, in January 2002, we received $6.9 million in partial settlement of the claims. During the first quarter of 2002, we recognized $2.4 million of the settlement in other income primarily for services provided in prior periods. Additionally, $3.9 million of the settlement was a prepayment for inventory, all of which was recorded into revenues during the first nine months of 2002. The remaining $0.6 million primarily represents the collection of an outstanding receivable. The arbitration proceedings did not result in any disruption in service to our blood screening customers. We are confident that any future disputes that arise between the companies will be resolved equitably through the dispute resolution procedures contained in the collaboration agreement.

      In 1996, we were awarded a $7.7 million contract by the National Heart, Lung and Blood Institute, a part of the NIH, to develop NAT assays for screening donor blood for HIV-1 and HCV. In 1998, the contract was modified with the addition of $0.6 million for the development of a semi-automated system for the detection of HIV-1/HCV in pooled plasma and $4.3 million for the development of HIV-2 and hepatitis B virus, or HBV, tests. In January 2000, we began work on a three-year $13.4 million cost sharing contract with the NIH to modify the Procleix HIV-1/HCV assay to incorporate HBV detection capability and make it simpler for organ donation centers to test the blood of organ donors. The NIH reimbursed us $7.8 million of this cost, and we

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      We received a $1.0 million contract extension from the NIH in October 2002 to develop a NAT assay for the detection of the WNV. The NIH allocated an additional $2.47 million to the contract extension in February 2003. Billings under these contract extensions were completed in September 2003. In addition, in February 2003, our initial IND application for the WNV assay was accepted by the FDA. Testing on archived blood samples for WNV began in April 2003. We commenced WNV testing on current donated samples in June 2003. We initiated the development of this assay and have recognized collaborative research revenue under the contract extension as reimbursable costs were incurred. In November 2003, we received an additional $4.3 million contract extension from the NIH for the development of the WNV assay.

      In 1998, following the execution of our agreement with Chiron, Chiron assigned the clinical diagnostic portion of the agreement to Bayer. Under the terms of our collaboration with Bayer, we agreed to develop, manufacture and market NAT assays for viral targets and cancer markers in the clinical diagnostic market with Bayer. We record product sales of the assays to Bayer for use in clinical diagnostic applications at agreed upon transfer prices upon shipment to Bayer.

      We recognize collaborative research revenue over the term of our strategic alliance agreement with Chiron as reimbursable costs are incurred. The costs associated with the reported collaborative research revenue are reflected in our statements of income under the captions “Research and development,” “Marketing and sales” and “General and administrative” based on the nature of the costs. We do not separately track the costs applicable to the blood screening development collaboration with Chiron and therefore are not able to quantify the direct costs associated with the collaborative research revenue.

      In November 2002, we initiated an arbitration proceeding against Bayer in connection with the clinical diagnostic collaboration. Under the terms of the collaboration agreement, Bayer acquired the exclusive right to distribute nucleic acid diagnostic tests designed and developed by Gen-Probe for the detection of HIV, hepatitis and other specified viruses, subject to certain conditions. In the arbitration, we are seeking to prove that Bayer has failed to fulfill the conditions required to maintain its exclusive distribution rights. Accordingly, we are seeking confirmation that the agreement grants us, in the present circumstances, a co-exclusive right to directly distribute the viral diagnostic tests that are the subject of the agreement. Gen-Probe’s arbitration demand also seeks money damages due to Bayer’s failure to use commercially reasonable efforts to promote, market and sell viral diagnostic assays developed by Gen-Probe. In November 2003, Bayer filed a counterclaim for money damages based on alleged delays in the development of the TIGRIS instrument and certain assays, and other claims. The matter has been set for hearing beginning on September 13, 2004. There can be no assurances as to the final outcome of the arbitration.

      We recognize non-refundable up-front license fees over the performance period of the applicable agreement or at the time that we have satisfied all substantive performance obligations under such agreement. We also receive milestone payments for successful achievement of contractual development activities. Milestone payments are recognized as revenue upon achievement of the milestone only if there are no remaining substantive performance obligations under such agreement and the amounts are non-refundable.

      In May 1997, we entered into a worldwide collaboration with bioMérieux, Vitek, Inc. The collaboration involved research and development activities, as well as the transfer to bioMérieux, pursuant to separate distribution agreements with bioMérieux S.A., of product distribution rights in international markets, excluding Japan. As part of these agreements, we licensed our NAT technologies to bioMérieux to jointly develop NAT assays and adapt and develop instrumentation during a five-year and ten-year term. In return, bioMérieux paid us $6.0 million of license and prepaid royalty fees in 1997 and an additional $6.0 million of license fees in 1998.

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      In August 2000, we entered into amended agreements with bioMérieux, Inc. that transitioned the relationship from a collaborative arrangement to a royalty-bearing arrangement that covers semi-automated probe assays and advanced, fully-automated probe assays for the diagnosis of infectious diseases and detection of food pathogens. Under the terms of the amended agreements, bioMérieux will pay us royalties based on sales of products incorporating the licensed technologies, subject to a minimum annual royalty payment, which began in January 2002 with respect to the semi-automated probe assays and are scheduled to begin in 2006 with respect to the fully automated probe assays. We will also receive a reduction in the royalties based on the amount of cumulative royalties that have been paid to us. In addition, we transferred to bioMérieux all information, trade secrets, procedures, methods, data and processes necessary for bioMérieux to assume development of the products that are the subject of the agreement in exchange for the prepaid royalties paid under the original agreement. Accordingly, we recognized $0.3 million and $0.8 million in royalty fees related to this agreement in 2001 and 2002, respectively. In addition, we recognized $0.5 million and $0.8 million in minimum annual royalties in 2002 and 2003, respectively, in connection with this license agreement. We amortized previously received license fees in an amount equal to $1.9 million annually through the period ended December 31, 2002.

      Cost of product sales includes direct material, direct labor, and manufacturing overhead associated with the production of inventory on a standard cost basis. Indirect cost elements, which include manufacturing variances, purchase price variances, and allowances for scrap, etc., are also included as a component of cost of product sales, as well as certain related expenses, such as royalties, warranty, and instrument amortization.

      In addition, we manufacture significant quantities of raw materials, development lots, and clinical trial lots of product prior to receiving FDA approval for commercial sale. During the blood screening development process for the Procleix HIV-1/HCV assays for the United States market, we also manufactured and delivered equivalent products for sale in international markets where governmental approvals had been obtained. However, due to the relatively low initial sales volumes for these products in markets outside of the United States, we continued to charge the costs of manufacturing blood screening products to research and development expense, except for an amount equal to the product sales revenues recorded for international commercial sales, which was charged to cost of product sales and approximates the costs applicable to those product sales. Beginning in 2002, the sales volume for the approved products shipped equaled or exceeded the estimated cost applicable to those product sales, and we ceased the allocation of the costs of manufacturing blood screening products to research and development expense. As a result of the implementation of commercial pricing for our Procleix HIV-1/HCV blood screening assays in the United States, we have classified these costs as costs of product sales rather than research and development expenses. During 2003, our manufacturing facilities produced three WNV development lots and four Procleix Ultrio development lots. Additionally, several smaller scale WNV and Procleix Ultrio development lots were produced in our pilot manufacturing facility located at Genetic Center Drive. The costs associated with these development lots were classified as research and development expense.

      During 2003 and 2002, our blood screening manufacturing facility operated below its potential capacity and will continue to operate below its potential capacity for the foreseeable future. This available capacity, as well as available capacity at our clinical diagnostics manufacturing facility, provides us with the opportunity to expand the manufacturing of both our own products and the products of other companies on a contract basis, without adding substantial fixed manufacturing costs. During 2003, a portion of this available capacity was utilized for development activities, as new product offerings are being identified for commercialization. The costs associated with this excess capacity are included as a component of inventory and cost of product sales except to the extent that available capacity was utilized in the production of pre-commercial development lots. Certain operating costs of our blood screening facility, together with other manufacturing costs for the production of assays that are delivered under the terms of an IND application are classified as research and development expense prior to FDA approval.

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      In recent years, we have invested significantly in research and development as part of our ongoing efforts to accelerate the development of new products and technologies, particularly our TIGRIS instrument and our Procleix Ultrio assay for screening donated blood. Our research and development expenses consist of expenses associated with the development of proprietary products and instrument platforms, as well as expenses related to the co-development of new products and technologies in collaboration with our strategic partners. Research and development costs in total are expected to increase in the future due to new product development, clinical trial costs and clinical manufacturing costs; however, we expect our research and development expenses as a percentage of total revenues to decline in future periods. The timing of clinical trials and development manufacturing costs is variable and is affected by product development activities and the regulatory process.

      In connection with our research and development efforts, we have various license agreements, which provide us with rights to develop and market products using certain technologies and patent rights maintained by third parties. These agreements generally provide for a term that commences upon execution of the agreement and continues until expiration of the last patent related to the technologies covered by the license.

Critical accounting policies and estimates

      Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the collectibility of accounts receivable, valuation of inventories, long-lived assets including patent costs and capitalized software and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

      We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

      We recognize revenue from product sales when the product is shipped and title and risk of loss has passed and when collection of the resulting receivable is reasonably assured. We record revenue from product sales on our blood screening products shipped to countries where regulatory approval has been received based on a contracted transfer price with our third-party collaboration partner, Chiron. Blood screening product sales are then adjusted monthly upon payment by Chiron to us of amounts reflecting our ultimate share of net revenue from sales by Chiron to the end user, less the transfer price revenues previously paid.

      We record revenues related to use of our blood screening products in the United States and other countries in which the products have not received regulatory approval as collaborative research revenue. We do this because price restrictions apply to these products prior to FDA approval in the United States and in certain foreign countries. As commercial pricing was implemented in the United States, we classified domestic sales of these products as product sales in our financial statements. Chiron began to implement commercial pricing in the United States for the blood screening products in the second quarter of 2002. Commercially approved products that we began shipping in the second quarter of 2002 have been recorded as product sales based on the contracted transfer price with Chiron. Based on the terms of our agreement with Chiron, our ultimate share of the net revenue from sales to the end user will not be known until reported by Chiron to us. Blood screening product sales are adjusted upon payment by Chiron to us of amounts reflecting our ultimate share of net revenue from sales by Chiron of these products, less the transfer price revenues initially paid.

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      Product sales also include the sales or rental value associated with the delivery of our proprietary integrated instrument platforms performing our NAT assays. Historically, we have provided our instrumentation to laboratories and hospitals without requiring them to purchase the equipment or enter into an equipment lease. Instead, we recover the cost of providing the instrumentation in the amounts we charge for our diagnostic assays. The costs associated with an instrument are charged to costs of goods sold on a straight-line basis over the estimated life of an instrument, which ranges from three to five years. The costs to maintain these systems in the field are charged to operations as incurred.

      We also recognize collaborative research revenue over the term of various collaboration agreements as negotiated monthly contractual payments are earned or we incur reimbursable costs related to the applicable agreement and when collection of the resulting receivable is reasonably assured. Negotiated monthly contracted amounts are earned in relative proportion to the performance required under the contracts. Non-refundable license fees are recognized over the related performance period or at the time that we have satisfied all performance obligations related to the agreement. Milestone payments related to a particular milestone are recognized as revenue upon the achievement of specified milestones when (1) we have earned the milestone payment, (2) the milestone is substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement, and (3) the fees are non-refundable. Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue in our balance sheet.

      We recognize royalty revenue related to the manufacture, sale or use of our products or technologies under license agreements with third parties. For those arrangements where royalties are reasonably estimable, we recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following period. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of royalty statements from the licensee.

      We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Credit losses historically have been minimal and within management’s expectations. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

      We record valuation adjustments to our inventory balances for estimated excess and obsolete inventory equal to the difference between the cost of such inventory and the estimated market value based upon assumptions about future product demand and the shelf-life and expiration dates for finished goods and materials used in the manufacturing process. We operate in an environment that is regulated by the FDA and other governmental agencies that may place restrictions on our ability to sell our products into the marketplace if certain compliance requirements are not met. We have made assumptions that are reflected in arriving at our net inventory value based on the information currently available to us. If future product demand, regulatory constraints or other market conditions are less favorable than those projected by management, additional inventory valuation reserves may be required.

      We also manufacture products to conduct developmental evaluations and clinical trials and to validate our manufacturing practices prior to receiving regulatory clearance or for commercial sale of our products. In these circumstances, uncertainty exists regarding our ability to sell these products until the FDA or the other governing bodies commercially approves them. Accordingly, the manufacturing costs of these items in inventory are charged to research and development. In cases where we manufacture products that are sold into approved markets and also maintained for further development evaluations for other markets, we may also provide valuation allowances for this inventory due to the historical uncertainties associated with regulated product introductions. To the extent any of these previously manufactured products are sold to end users, we realize revenues, subject to any applicable adjustments in royalty rates under our collaboration agreements with Chiron and others and reduce any inventory reserves that are directly applicable to such products.

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      We assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is reviewed at least annually in the fourth quarter of each year.

      Factors we consider important which could trigger an impairment, include the following:

	•	Significant underperformance relative to historical or projected future operating results;
	•	Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	Significant negative industry or economic trends;
	•	Significant declines in our stock price for a sustained period; and
	•	Decreased market capitalization relative to net book value.

      When there is an indication that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators, an impairment loss is recognized if the carrying amount exceeds its fair value.

      We capitalize the costs incurred to file and prosecute patent applications. We amortize these costs over the lesser of the remaining useful life of the related technology or eight years. At December 31, 2003, capitalized patent costs, which have been included in “Other assets” on the face of the balance sheet, totaled approximately $1.7 million, net of accumulated amortization. We expense all costs related to abandoned patent applications. Historically, our expense related to abandoned patent costs has not been material but, if we elect to abandon any of our currently issued or unissued patents, the related expense could be material to our operations in the period of abandonment.

      We capitalize costs incurred in the development of computer software related to products under development after establishment of technological feasibility. These capitalized costs are recorded at the lower of unamortized cost or net realizable value and will be amortized over the estimated life of the related product beginning when the product is available for sale. At December 31, 2003, capitalized software development costs related to our TIGRIS instrument totaled $24.9 million. We completed beta evaluations of this instrument for clinical diagnostic applications and undertook initial beta trials for blood screening applications in the third quarter of 2002 and we completed a clinical trial for a diagnostic application in June 2003. We initiated clinical trials of our Procleix Ultrio assay on the TIGRIS instrument for a blood screening application in January 2004. If we are not able to successfully deliver this instrument to the marketplace and attain customer acceptance, the asset could be impaired and an adjustment to the carrying value of this asset would be considered by management at that time. We plan to begin to amortize the capitalized software costs in 2004 on a straight-line basis over 120 months during the second half of 2004.

      Through December 31, 2002, we were included in the consolidated federal and in various combined state income tax returns of our former parent company, Gen-Probe Holding Company, Inc. (formerly known as Chugai Pharma U.S.A., Inc.). Pursuant to a tax sharing agreement with Gen-Probe Holding Company, we generally were allocated an amount of the consolidated tax liability equal to the tax that would have been applicable if computed separately. At December 31, 2003, we had net deferred tax assets of $4.1 million that are more likely than not to be realized. Other than a $2.8 million deferred tax asset and an offsetting $2.8 million tax valuation for assets acquired in the 2002 reorganization, no additional valuation is deemed necessary. In connection with the merger of Gen-Probe Holding Company into us, we recorded approximately

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Results of Operations

      The following table sets forth operating data as a percentage of total revenues:

      Product sales increased $48.7 million, or 35%, to $188.6 million in 2003 from $139.9 million in 2002. The increase was primarily the result of a $38.6 million increase in commercial sales of Procleix blood screening products, both in the United States and international markets, and a $10.3 million increase in STD product sales. Procleix blood screening product sales represented $76.6 million, or 41% of product sales for the year ended December 31, 2003, compared to $38.0 million, or 27% of product sales, for the year ended December 31, 2002.

      We expect competitive pressures related to our STD and blood screening products to continue into the foreseeable future, primarily as a result of the introduction of competing products into the market and continuing pricing pressure, particularly with our STD products.

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      Collaborative research revenue increased $4.4 million, or 40%, to $15.4 million in 2003, from $11.0 million in 2002. The increase was primarily the result of a $4.2 million increase in revenue for reimbursement from Chiron of our development costs incurred on the Procleix Ultrio assay. Additionally, revenues increased by $1.8 million in 2003 due to additional funds received from the NIH in November 2003 to develop a NAT assay for the detection of WNV. These increases were partially offset by a $1.1 million decrease in firm support commitment payments in connection with Procleix tests provided to United States customers through our collaboration with Chiron.

      Collaborative research revenue tends to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones. Due to the nature of our collaborative research revenues, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional collaborative research revenues depends, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners. These relationships may not be established or maintained and current collaborative research revenue may decline.

      Royalty and license revenue decreased $1.5 million, or 32%, to $3.1 million in 2003, from $4.6 million in 2002. The decrease was primarily the result of $2.6 million in prepaid license fees and royalties from bioMérieux which were fully amortized as of December 31, 2002, partially offset by a $0.8 million increase in net license income from Bayer for the licensing of rights to certain patented technology and a $0.3 million increase in minimum annual royalties from bioMérieux.

      Royalty and license revenue may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license revenues may depend, in part, on our ability to market and capitalize on our technologies. We may not be able to do so and future royalty and license revenue may decline.

      Cost of product sales decreased $7.9 million to $45.5 million, or 24% of product sales revenues in 2003, from $53.4 million, or 38% of product sales revenues in 2002. The $7.9 million decrease in cost of sales principally consisted of a $15.6 million reduction in manufacturing costs related to costs absorbed by research and development for the production of pre-commercial development lots partially offset by a $7.0 million increase in cost of sales attributable to increases in sales volume. Cost of product sales may fluctuate significantly in future periods based on changes in production volumes for both commercially approved products and products under development or in clinical trials. Cost of product sales are also affected by manufacturing efficiencies, allowances for scrap or obsolete materials, additional costs related to initial production quantities of new products after achieving FDA approval, and contractual adjustments, such as instrumentation costs, instrument service costs and royalties.

      Our gross profit margin on product sales increased to 76% in 2003, from 62% in 2002. The gross profit margin benefited by approximately $32.0 million, or 17%, of product sales, primarily from the implementation of commercial pricing in the United States for Procleix blood screening products, as well as an increase in our revenue sharing percentage with Chiron in the second quarter of 2003. Additionally, our margin benefited from certain manufacturing costs absorbed by research and development for the production of pre-commercial development lots. Effective January 1, 2004, we will have a decrease in our revenue sharing percentage with Chiron, from 47.5% to 45.75%. This change, combined with lower planned levels of development lots and higher instrument costs, including the amortization of our capitalized software development costs, and related service costs, attributed to the commercial launch of our TIGRIS instrument, should result in lower future gross margin percentage levels compared to 2003. In addition, currently our non-military customers utilize pooled blood screening samples for testing. We anticipate that requirements for smaller pool sizes or ultimately individual donor testing, if and when implemented, could result in lower gross margin rates as

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      Our research and development expenses include salaries and other personnel-related expenses, temporary personnel expenses, outside services, laboratory and manufacturing supplies, pre-commercial development lots and clinical evaluation trials. Research and development expenses increased $16.5 million to $63.2 million, or 31% of total revenues, in 2003, from $46.7 million, or 30% of total revenues, in 2002. The increase was primarily the result of a $12.9 million increase in the production of pre-commercial development lots built and expensed during the year, including three WNV and four Procleix Ultrio development lots, and a $2.3 million increase in salaries and temporary labor resulting from higher staffing levels.

      Our marketing and sales expenses include personnel costs, promotional expenses, and outside services. Marketing and sales expenses increased $4.4 million to $22.6 million, or 11% of total revenues, in 2003, from $18.2 million, or 12% of total revenues, in 2002. The increase in expenses was primarily related to a $1.5 million increase in professional consulting and personnel costs in our marketing and sales force to support increases in sales for our clinical diagnostic products.

      Our general and administrative expenses include personnel costs for finance, legal, public relations, human resources and business development, as well as professional fees, such as expenses for legal, patents and auditing services. General and administrative expenses increased $2.2 million to $23.2 million, or 11% of total revenues, in 2003 from $21.0 million, or 13% of total revenues, in 2002. The increase was principally the result of a $2.2 million increase in salaries and benefits resulting from higher staffing levels, including the acquisition of the majority ownership of Molecular Light Technology Limited, partially offset by a $1.1 million decrease in professional fees primarily attributed to last year’s spin-off from Chugai Pharmaceutical.

      Other income (expense) generally consists of investment and interest income offset by interest expense on borrowing, minority interest, and other items. The net other income of $2.7 million in 2003 represented a $0.4 million increase over the prior year. During 2003, we reclassified a $1.25 million charge associated with the early repayment of debt, which was previously recorded as an extraordinary loss. In addition, there was a $1.5 million increase in interest income from our short-term investments, a portion of which was from interest earned on Molecular Light Technology Limited investment balances. Partially offsetting these net increases to other income, in 2002 we received in cash and recognized other income from settlements of outstanding contractual issues with Chiron in the amount of $2.4 million and from a former vendor in the amount of $1.2 million.

      The expense for income taxes amounted to $19.8 million in 2003, compared to $5.2 million in 2002. The tax expense increase in 2003 was attributable to the pre-tax profit of $55.1 million for 2003, compared to $18.2 million in the prior year. The 2003 tax expense includes the benefit of Federal and state research and investment credits which reduced the combined Federal and state statutory tax rate of approximately 41% to the effective tax rate of 36% in 2003.

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      Product sales increased $35.7 million, or 34%, to $139.9 million in 2002 from $104.2 million in 2001. The increase was primarily a result of a $33.1 million increase in commercial sales of Procleix blood screening products, both in the United States and international markets. Procleix blood screening product sales represented $38.0 million or 27% of product sales for the year ended December 31, 2002, compared to $4.9 million, or 5%, of product sales for the year ended December 31, 2001.

      In February 2002, the FDA approved our Procleix HIV-1/HCV assay for screening donated human blood. Chiron began implementing commercial pricing for the sale of these products in the United States in the second quarter of 2002. Revenues from the sale of these products are now classified as product sales in our financial statements. We record revenues related to use of our blood screening products in the United States and other countries in which the products have not received regulatory approval as collaborative research revenues.

      Collaborative research revenue decreased $9.2 million, or 45%, to $11.0 million in 2002 from $20.2 million in 2001. The decrease in 2002 was primarily the result of a $7.4 million decrease in firm support commitment payments recorded in 2002 in connection with tests provided to United States customers through our collaboration with Chiron for pooled blood sampling under the terms of the IND application. In addition, revenues from the NIH organ donor program decreased $1.1 million, to $3.1 million in 2002, from $4.2 million in 2001, reflecting the completion of this contract award in 2002.

      Royalty and license revenue decreased $0.7 million, or 13%, to $4.6 million in 2002 from $5.3 million in 2001. The decrease in 2002 was primarily the result of the receipt in the third quarter of 2001 of $2.0 million in license and royalty fees from Chugai Diagnostics Science Co., Ltd. for the licensing of rights to certain patented property and royalties, partially offset by $1.0 million in increased royalties from our collaboration with bioMerieux.

      Cost of product sales increased $14.4 million to $53.4 million, or 38% of product sales revenues in 2002 from $39.0 million, or 37% of product sales revenues, in 2001. The increase in cost of sales was primarily attributable to increased sales volume in 2002 and from recording a greater portion of costs associated with the operation of our blood screening manufacturing facility to cost of product sales in 2002 compared to 2001. A substantial portion of the costs associated with our blood screening product manufacturing facility was classified as research and development expenses prior to receiving FDA approval for our Procleix HIV-1/HCV assay in the United States. The amount included in research and development expense in 2001 was $13.2 million, which includes costs associated with our blood screening product manufacturing facility, as well as scrap charges associated with the production of developmental lots for the assay. The amount included in research and development expense in 2002 was $1.6 million. As a result, cost of product sales increased as a percentage of product sales in 2002 compared to 2001. Our gross profit margin on product sales decreased to 62% in 2002 from 63% in 2001. Gross profit in 2002 benefited by approximately $2.1 million, or 1.5% of product sales, through the delivery to customers of blood screening products that had previously been charged to expense during development.

      Research and development expenses decreased $7.3 million to $46.7 million, or 30% of total revenues, in 2002 from $54.0 million, or 42% of total revenues, in 2001. The decrease was primarily the result of an

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      Marketing and sales expenses increased $2.0 million to $18.2 million, or 12% of total revenues, in 2002 from $16.2 million, or 13% of total revenues, in 2001. The increase in expenses was primarily related to a $0.9 million increase in personnel costs in our marketing and sales force in 2002 to support increases in sales for our clinical diagnostic products, a $0.2 million increase in professional fees and a $0.9 million increase in other marketing and sales expenses.

      General and administrative expenses increased $5.4 million to $21.0 million, or 13% of total revenues, in 2002 from $15.6 million, or 12% of total revenues, in 2001. The increase in 2002 was the result of a $2.7 million increase in spending for legal and other professional fees primarily related to Gen-Probe’s spin-off from Chugai Pharmaceutical, a $1.1 million increase in salaries and benefits resulting from higher staffing levels and a $0.6 million increase in printing and public relations expenses, primarily relating to the registration of our common stock.

      Amortization of intangible assets decreased $0.6 million to $0.3 million in 2002, from $0.9 million in 2001. Annual amortization of $0.6 million was associated with the goodwill applicable to Gen-Probe Holding Company’s purchase of Gen-Probe in 1989. The goodwill is no longer amortized following our implementation of SFAS 142.

      Other income (expense) generally consists of investment and interest income offset by interest expense on borrowing and other items. The net other income of $2.3 million in 2002 is a $2.8 million increase over the net expense of $0.5 million in 2001. The increase in 2002 was due to the receipt in cash and recognition of income from settlements of outstanding contractual issues with Chiron in the amount of $2.4 million and from a former vendor in the amount of $1.2 million. In addition, we adopted SFAS No. 145 in 2003 and reclassified the $1.25 million prepayment premium and the deferred financing fees associated with the early pay-off of debt recorded in the third quarter of 2002 from an extraordinary loss, net of tax benefit, to interest expense on the statement of income. The tax benefit has been reflected as a component of income tax expense.

      The expense for income taxes amounted to $5.2 million in 2002, compared to a $1.1 million benefit in 2001. The 2002 tax expense was attributable to the pre-tax profit of $18.2 million in 2002, less the benefits of Federal and state research and investment credits which reduce the combined Federal and state statutory tax rate of approximately 39% to the effective tax rate of 29% in 2002. The tax benefit of $1.1 million in 2001 reflected an increased level of Federal and state tax credits for research and development in 2001 and the effect of the revisions made to increase our 2000 estimate for research and development tax credits.

Liquidity and capital resources

      Historically, we have financed our operations through cash from operations, cash received from collaborative research agreements, royalty and license fees, the private placement of debt and cash from capital contributions. At December 31, 2003, we had $156.3 million of cash and cash equivalents and short-term investments.

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      For the year ended December 31, 2003, net cash provided by operating activities was $52.6 million, compared to $42.2 million for the year ended December 31, 2002. The increase was primarily the result of net income of $35.3 million plus depreciation and amortization of $15.8 million in 2003, compared to net income of $13.0 million plus depreciation and amortization of $17.8 million in 2002.

      Our investing activities used cash of $74.8 million for the year ended December 31, 2003, compared to $80.7 million for the year ended December 31, 2002. During 2003, we paid $4.1 million, net of cash acquired, for the acquisition of a majority interest in Molecular Light Technology Limited. In addition, our investing activities consisted of purchases, net of proceeds of $52.7 million for short-term investments and $12.2 million for capital expenditures. Our expenditures for capital additions vary based on the stage of certain development projects and may increase in the future related to the timing of development of new product opportunities and to support expansion of our facilities in connection with those opportunities. However, the average age of our property, plant and equipment is approximately five years, which gives us flexibility in planning capital expenditures.

      Net cash provided by financing activities was $14.9 million for the year ended December 31, 2003, compared to $63.9 million for the year ended December 31, 2002. During 2002, cash provided by investing activities consisted of $75.9 million in cash received from our merger with Gen-Probe Holding Company, Inc., partially offset by $12.0 million in payments made on our long term debt during 2002. During the year ended December 31, 2003, we received $14.9 million from the proceeds of stock option exercises and purchases made through our Employee Stock Purchase Plan, or ESPP. On a going-forward basis, cash from financing activities will be affected by receipts from sales of stock under our ESPP and from the exercise of stock options. We expect fluctuations to occur throughout the year, as the amount and frequency of stock-related transactions are dependent upon the market performance of our common stock, along with other factors.

      We have an unsecured bank line of credit agreement with Wells Fargo Bank, N.A., which expires in July 2005, under which we may borrow up to $10.0 million, subject to a “borrowing base formula,” at the bank’s prime rate, or at LIBOR plus 1.0%. We have not taken advances against the line of credit since its inception. The line of credit agreement requires us to comply with various financial and restrictive covenants. Financial covenants include requirements as to tangible net worth, liabilities as a percentage of tangible net worth, the ratio of current assets to current liabilities, required minimum levels of earnings before interest, taxes, depreciation and amortization, the ratio of funded debt to earnings before interest, taxes, depreciation and amortization, and maximum levels of pre-tax and after tax losses. At December 31, 2003, we were in compliance with all covenants.

      In 2004, we expect to commence the construction of an additional building at our Genetic Center Drive location. This new building will consist of an approximately 291,000 square foot outside shell, with approximately 160,000 square feet built out with interior improvements. The additional space that will not initially be built out will allow for future expansion. The project is estimated to take two years for completion and is currently estimated to cost approximately $35.0 to $40.0 million. These costs will be capitalized as incurred and deprecation will commence upon our completion and use, which is planned for early 2006.

      We plan to implement a new Enterprise Resource Planning, or ERP, software system effective in 2005, which is currently estimated to represent an approximate $6.0 to $7.0 million expenditure; the majority of these costs are expected to be incurred during 2004.

      Further, we expect to incur approximately $10.0 million to purchase TIGRIS instruments that will be added to our installed base during 2004.

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      Our contractual obligations due to lessors for properties that we lease as well as other amounts due for purchase commitments as of December 31, 2003 were as follows (amounts in thousands):

(1)	Reflects obligations on facilities under operating leases in place as of December 31, 2003. Future minimum lease payments are included in the table above.
(2)	Amounts represent our minimum purchase commitments from two key vendors for raw materials used in manufacturing and instrumentation.
(3)	Does not include amounts relating to our obligations under our collaboration with Chiron, pursuant to which both parties have obligations to each other. We are obligated to manufacture and supply our blood screening assay to Chiron, and Chiron is obligated to purchase all of the quantities of this assay specified on a 90-day demand forecast, due 90 days prior to the date Chiron intends to take delivery, and certain quantities specified on a rolling 12-month forecast.

      In connection with the joint development of the Procleix HIV-1/HCV assay, and as a condition for Chiron’s agreement to pay for most of the clinical trial costs related to approval of that assay, we agreed to pay the costs related to the clinical trial for the next joint development project with Chiron. Our obligation is limited to the cost incurred for the previous joint clinical trial, which was approximately $4.1 million. As of December 31, 2003, we had incurred approximately $1.0 million of clinical trial expenses and we anticipate these costs will continue through the end of 2005.

      Our primary short-term needs for capital, which are subject to change, are for continued research and development of new products, costs related to commercialization of blood screening products and purchases of the TIGRIS instrument for placement with our customers. Certain research and development costs are funded under collaboration agreements with partners or agencies of the United States government. We anticipate additional funds from these sources as reimbursable costs are incurred, but these funds may not materialize and these relationships may not continue.

      We believe that our available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy our operating needs for the foreseeable future. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, we may in the future be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.

      We may from time to time consider the acquisition of businesses and/or technologies complementary to our business. We could require debt financing if we were to engage in a material acquisition in the future. In August 2003, we filed a Form S-3 shelf registration statement with the SEC relating to the possible future sale of up to an aggregate of $150 million of debt or equity securities.

      In September 2002, we repaid the remaining principal on the fixed rate financing of our headquarters building. Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Our risk associated with fluctuating interest income is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage this exposure to interest rate changes. We seek to ensure the safety and preservation of our invested principal by limiting default risk, market risk,

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      We are exposed to foreign exchange risk for expenditures in certain foreign countries, but the total receivables and payables denominated in foreign currencies at December 31, 2003 were not material. We believe that our business operations are not exposed to market risk relating to commodity price risk.

      See Contents to Consolidated Financial Statements on page F-1 below for a list of the financial statements being filed with this Annual Report.

      Not applicable.

      As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the year ended December 31, 2003.

      An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART III

      The information required by this Item will be set forth in the section headed “Proposal 1 — Election of Directors” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of our Stockholders (the “Proxy Statement”), which is expected to be

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      We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer or controller) and employees, known as the Code of Ethics. The Code of Ethics is available on our website at http://www.gen-probe.com. Stockholders may request a free copy of the Code of Ethics from:

	Gen-Probe Incorporated
	Attention: Investor Relations
	10210 Genetic Center Drive
	San Diego, CA 92121-4362
	(858) 410-8000
	http://www.gen-probe.com

      The information required by this Item will be set forth in the section headed “Executive Compensation and Other Information” in the Proxy Statement and is incorporated in this report by reference.

      The information required by this Item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement and is incorporated in this report by reference.

      Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is set forth in the section entitled “Executive Compensation — Equity Compensation Plan Information” in our Proxy Statement and is incorporated in this report by reference.

      The information required by this Item will be set forth in the section headed “Certain Relationships and Related Transactions” in the Proxy Statement and is incorporated in this report by reference.

      The information required by this Item will be set forth in the section headed “Independent Auditors Fees” in the Proxy Statement, and is incorporated in this report by reference.

PART IV

      (a) Documents filed as part of this report.

	1. The following financial statements of Gen-Probe Incorporated and Report of Ernst & Young LLP, independent auditors, are included in this report:

	Report of Ernst & Young LLP, Independent Auditors
	Consolidated balance sheets at December 31, 2003 and 2002
	Consolidated statements of income for each of the three years ended December 31, 2003, 2002, 2001
	Consolidated statements of stockholders’ equity for each of the three years ended December 31, 2003, 2002, 2001

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	Consolidated statements of cash flows for each of the three years ended December 31, 2003, 2002, 2001
	Notes to consolidated financial statements