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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 000-          

BRUKER AXS INC.
(Exact name of Registrant as specified in its charter)

5465 East Cheryl Parkway
Madison, WI 53711
(Address of principal executive offices, including zip code)

(608) 276-3000
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark 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 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 Rule 12b-2 of the Act.)  o No ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was $18,214,604 (based on the last reported sale price on the Nasdaq National Market on that date). This amount excludes an aggregate of 44,037,269 shares of common stock held by officers and directors and each person known by the registrant to own 10% or more of the outstanding common stock of the registrant. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

        The number of shares outstanding of the registrant's Common Stock as of March 17, 2003 was 56,180,338.

BRUKER AXS INC.
Annual Report on Form 10-K
Table of Contents

        This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including without limitation those discussed in the "Factors Affecting Our Business, Operating Results and Financial Condition" section herein. Such forward-looking statements speak only as of the date on which they are made, and we caution readers not to place undue reliance on such statements.

        References to "we," "us," "our," the "Company" or "Bruker AXS" refer to Bruker AXS Inc. and, in some cases, its subsidiaries, as well as all predecessor entities.

        Our principal executive offices are located at 5465 East Cheryl Parkway, Madison, Wisconsin 53711, and our telephone number is (608) 276-3000. Information about Bruker AXS is available at www.bruker-axs.com. The information on our website is not incorporated by reference into and does not form a part of this report. All trademarks, tradenames or copyrights referred to in this report are the property of their respective owners.

PART I

ITEM 1. BUSINESS

Overview

        Bruker AXS is a leading worldwide developer and provider of advanced integrated X-ray systems which provide solutions for molecular and elemental analysis by X-ray diffraction and X-ray fluorescence. Our products, which have particular application in the drug discovery and materials science fields, provide our customers with the ability to determine the structure of specific molecules, such as proteins, and to characterize and determine the composition of materials. Our customers include biotechnology and pharmaceutical companies, semiconductor companies, raw material manufacturers, chemical companies, academic institutions and other businesses involved in materials analysis.

        Our X-ray systems are sophisticated devices that use extremely short wavelengths of energy to determine the characteristics of matter. Depending on the customer-specific application, our X-ray systems incorporate one of three core technology applications: single crystal X-ray diffraction, known as SCD or X-ray crystallography; polycrystalline X-ray diffraction, known as XRD or X-ray diffraction; and X-ray fluorescence, known as XRF. Using our modular platform approach, we often combine each of these three technology applications with sample preparation tools, automation, consumables and data analysis software. Our systems offer integrated solutions for applications in multiple existing and emerging markets, including:

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drug discovery and development;



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structural proteomics;



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advanced materials research; and



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industrial process control.

        Bruker AXS was incorporated in Massachusetts in September 1997 as Bruker AXS, Inc. and acquired the X-ray business of Siemens AG, our predecessor, in October 1997. In March 2000, we reincorporated in Delaware as Bruker AXS Inc.

Market Opportunity

Drug discovery and development—Proteomics

        Our X-ray systems address key needs in two related fields of drug discovery and development: protein structure determination and small molecule drug development. The need for more effective and efficient methods of drug discovery is becoming increasingly important for a variety of reasons. Historically, drugs were discovered either through trial and error, through application of detailed knowledge of a disease process, or by modifying known drugs. These discovery processes are expensive, labor intensive and susceptible to failure at any stage. According to the Pharmaceutical Industry Profile 2002, or PIP, the average cost of developing a new drug is over $800 million, takes 10 to 15 years to develop and, could require evaluation of over 10,000 compounds. Even though PIP estimates that the pharmaceutical industry spent over $30 billion in 2001 for drug discovery research, there are still a significant number of major diseases that do not currently have safe, effective treatments. Additionally, many diseases that had been successfully treated by drugs now require the development of new drugs, as bacterial strains are becoming more resistant to previously effective drugs.

        The recent sequencing of the human genome is leading to a new era of therapeutic research, providing opportunities for shorter, less expensive drug discovery cycles as well as for development of more effective drugs with fewer side effects. Shortening the drug discovery cycle could aid in getting effective drugs to people who need them more quickly, reduce research and development costs, enable

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a company to obtain a drug patent more quickly than a competitor and increase the useful life of a drug patent. The sequencing of the human genome also provides opportunities for treating diseases for which there are currently no available drugs.

        The amount of information available as a result of the sequencing of the human genome is enormous. A human gene contains the information or instructions necessary to create one or more proteins, which are the molecules that carry out a cell's biological function. An estimated 100,000 to 300,000 human proteins arise from the estimated 35,000 human genes. Further, most proteins are substantially more complex than genes, both chemically and physically. Proteins consist of strings of building blocks known as amino acids, the sequence of which can be determined by analyzing the gene responsible for encoding the protein. The biological activity of the protein is derived from the highly specific three-dimensional folds or loops in which the sequence of amino acids is arranged. To perform functions within the body, proteins interact with other molecules, including other proteins, at the surface of these folds or loops in specific amounts, in specific ways and at specific times. Abnormalities in the amount, shape or function of proteins within cells disrupt these interactions and can result in disease. Consequently, biotechnology and pharmaceutical companies attempt to develop drugs that will bind to a desired protein and alter the cell's biological function.

        The study of proteins, or proteomics, involves the isolation, identification, expression and characterization of structure and function of proteins. Proteomics offers opportunities to improve the drug development process by:

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identifying additional proteins to act as potential drug targets, which could lead to viable new drugs;



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determining protein expression levels, or the amount of protein in a cell or tissue, which may enable researchers to learn more about the role proteins play in disease;



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assisting researchers in determining the cause of disease, which can provide researchers with better insights into intervention; and



•

enabling the rapid determination of a protein's structure, which will assist researchers in predicting which potential drug compounds can bind to a protein, increasing both the ability to design drugs with fewer side effects and a drug candidate's probability of clinical success.

        A critical step in the characterization of proteins is the determination of their three-dimensional structure. A new field of research known as structural proteomics has emerged which involves the determination of the structure of large numbers of proteins on an industrialized scale. Knowledge of a protein's three-dimensional structure is essential to:

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determine how potential drugs bind to proteins and change the behavior of the protein;



•

design chemical compounds to bind to a protein;



•

understand how disease or variations in drug response in different people result from specific changes in the gene that determine a protein's structure and activity; and



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understand how a protein functions or interacts with other proteins.

        In order to determine the three-dimensional structure of a protein or other molecule, researchers use one of the following technologies:

•

X-ray crystallography involves producing highly purified protein samples, creating solid crystals of the protein and then bouncing, or diffracting, X-rays off the crystallized protein to provide a unique pattern of X-rays, called a diffraction pattern. Computational, or mathematical, techniques then convert the diffraction data into high resolution structures that indicate the position of every atom in the protein.

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Nuclear magnetic resonance, or NMR, is a complex process in which a protein in liquid form is exposed to an external magnetic field. The atoms of the protein emit characteristic microwave energy frequencies that are measured in a spectrum. Interpretation and analysis of the spectrum indicate the location of the various atoms within the protein being studied, allowing the determination of the protein's structure.



•

In silico structure prediction is a computational method by which a protein structure determined by use of either X-ray crystallography or NMR is compared to an unknown but similar protein structure in order to predict the structure of the unknown protein.

        These techniques, while functionally different, provide complementary information. For example, researchers can use X-ray crystallography to analyze a protein in solid form and NMR to analyze the same protein in liquid form. Since proteins exhibit different characteristics in solid and liquid forms, combining these techniques allows researchers to get as much information, and ideally a structural solution, as quickly as possible. Additionally, researchers can use in silico structure prediction to obtain a large number of protein structure models. These structures, however, are not as accurate as those produced by X-ray crystallography and NMR.

        Knowledge of protein structure has facilitated the pursuit by biotechnology and pharmaceutical companies of a rapidly developing drug discovery method called structure-based drug design. This method combines structural biology with computational and medicinal chemistry in order to rationally analyze the molecular structure of a target to design drugs. Structure-based drug design has significant potential to reduce the costs and time commitments associated with traditional drug discovery methods.

        The demand for more efficient drug discovery, as well as the increased interest in structure-based drug design including the use of proteomics and small molecule drug development, is causing a shift in the drug discovery research and development process and significant investment by both government and private entities.

•

With the sequencing of the human genome, significant research focus has turned to the study of the products of these genes, proteins. This emphasis on proteomic research is expected to consume far greater time and money than the decade-long genomic effort because of the increased complexity of the structure and function of the number of human proteins.



•

An international initiative for structural proteomics, similar to the Human Genome Project, is currently underway. The U.S. portion of the initiative is being led by the National Institute of General Medical Sciences.

        Some examples of effective, FDA-approved drugs developed using structure-based drug design include several HIV-1 protease inhibitors such as Merck's Crixivan, Vertex's Agenerase, which is marketed in the U.S. by GlaxoSmithKline, and Pfizer subsidiary Agouron's Viracept. Other successes include two recently approved drugs to treat influenza: GlaxoSmithKline's Relenza and Gilead Science's/Roche's Tamiflu.

Materials science and research

        Our X-ray technology is also vital in the research of the properties and structure of materials and the determination and analysis of the composition of elements. These fields, known as materials science, involve the discovery of catalysts and the characterization of materials used in the manufacture of chemicals, petrochemicals, pharmaceuticals, semiconductors, steel, cement, plastics and rubber. The market for X-ray products for materials science can be separated into:

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research, which requires systems with great flexibility and sensitivity; and



•

production, quality assurance and quality control, which require systems with high throughput and immediate affirmative or negative results for rapid decision-making ability.

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        Traditional materials discovery has relied on an often expensive and time-consuming process of trial and error for the discovery and development of new catalysts and chemical processes: making one material; testing it; then slightly modifying the material or making an entirely different one; re-testing it; and so on. These inefficient methods, which often do not result in the desired outcome, are slow and often cannot keep pace with current product life cycles and expectations of product line growth. Chemicals and materials companies have generally lagged behind other industries' investment in novel methods or technologies to improve materials discovery and development. This has been due to the low-margin nature of these industries and strong earnings pressure. Despite these factors, the large amount of capital required to develop new products continually forces these traditional chemicals and materials companies to find ways to improve the discovery and development of materials.

        For decades, materials scientists employed relatively low throughput experimentation using X-ray technology. More recently, researchers in the field of materials discovery have been able to employ a high throughput, combinatorial approach to experimentation. This approach enables the investigation and screening of up to thousands of new product formulations obtained from simultaneous variations of multiple process parameters. Unlike traditional discovery methods, high throughput combinatorial experimentation focuses on producing large numbers of discrete chemicals in small quantities, testing the chemicals simultaneously and analyzing the test results in order to find the candidates that best meet the desired criteria. Combining the speed of high throughput, combinatorial screening with the depth and accuracy of information provided using X-ray diffraction greatly improves this process, enabling scientists to discover novel materials and chemical processes more efficiently. In addition, these technologies allow companies to reduce costs, increase technology innovation and develop new products based on proprietary materials.

        We believe that combinatorial materials research is fueling significant growth in advanced materials markets such as:

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polymers;



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nanomaterials;



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electronic/photonic materials; and



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catalysts.

        High throughput combinatorial screening using X-ray diffraction, together with combinatorial analysis, can provide cost-effective, non-destructive solutions to accelerate materials discovery.

        X-ray technology is also used in the materials science market for quality control. X-ray diffraction and X-ray fluorescence are the leading complementary technologies used for the quality control of elemental and compound composition. Industrial customers, who use these technologies to determine the composition of raw materials such as cement, steel, copper and aluminum, are increasingly seeking complete laboratory and process automation solutions.

Limitations of Current Alternative Approaches

        Many of the technologies available today have limitations when used for applications involving drug discovery, matter characterization and materials composition.

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Drug discovery and development—Proteomics

        Protein structure determination methods currently have the following limitations:

        For the determination of molecular structure, X-ray crystallography is the method of choice for obtaining unambiguous and complete three-dimensional representation of crystallizable proteins and chemical compounds. There are currently 15,000 protein structures in the global database repository known as the Protein Database Bank. Over 80% of those proteins structures have been identified using X-ray diffraction or X-ray crystallography. Within X-ray crystallography itself there are competing technologies, primarily involving detector technology. For example, CCD detectors compete with imaging plate technology. In imaging plate technology, imaging plates, which work like photographic film, are exposed to X-rays and then read with a laser scanner which produces the diffraction pattern in electronic format. Although they typically provide a large image capture area and are relatively inexpensive, imaging plates cannot provide the required high-throughput capabilities due to their lengthy readout process. Also, due to the nature of the film plate and the readout process, imaging plates have relatively low X-ray sensitivity. On the other hand, CCD detectors, which can provide the high-speed readout capabilities and increased sensitivity demanded for high throughput proteomics applications, have traditionally been limited by their high cost and small image capture area.

Materials science and research

        In materials analysis, there is no current technology, other than X-ray technology, which can adequately provide the necessary research and industrial process control results. Electron microscopy is generally used in parallel with X-ray diffraction; however, electron microscopy provides detailed information about only a very small, specific area of a sample. Atomic absorption and inductively coupled plasma, two methods also used to determine the elemental composition of materials, are not ideal as they require lengthy sample preparation. Although X-ray technology may be more expensive than other technologies, we believe it provides the most expansive, accurate results.

Our Solutions

        Our X-ray systems integrate powerful detectors with advanced X-ray sources, computer-controlled positioning systems, sample handling devices and data collection and analysis software to acquire, analyze and manage elemental and molecular information. These integrated solutions address many of the matter characterization and structure needs of the life science, pharmaceutical, raw material and research industries across a broad range of applications. We provide high speed, sensitive systems for a

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variety of areas, including three-dimensional structure determination, protein crystal screening and molecular structure determination for the emerging structural proteomics market as well as the small molecule drug discovery market. Additionally, we provide high speed, automated systems for elemental analysis as well as high throughput, cost-effective systems for other areas, including combinatorial screening.

        All of our X-ray systems incorporate one or more of our three core technology applications, X-ray crystallography, X-ray diffraction or X-ray fluorescence, to provide our customers with the most efficient, highly-accurate solutions available. We provide our proteomics customers with integrated systems based on X-ray crystallography, which we believe to be the most efficient method for obtaining precise, static molecular structures. X-ray crystallography allows scientists to analyze large proteins, obtain a high-resolution, precise molecular structure, collect data quickly, interpret data automatically and determine a molecular structure with minimal operator expertise. Additionally, X-ray crystallography offers highly accurate three-dimensional structure information and can be used to determine the structure of unique proteins as well as proteins for which there is no known closely related structure.

        Our X-ray diffraction systems allow our materials science customers to combine high throughput combinatorial experimentation with X-ray technology for greater efficiency at lower costs. Our X-ray diffraction and X-ray fluorescence-based systems enable our industrial customers to achieve results quickly with little sample preparation time and with a high degree of automation throughout the process.

        Our dedication to innovation enables us to provide our customers with innovative systems based on these three core technology applications. For example, in 1994 we dramatically changed the molecular structure determination market when we introduced the first CCD detector for use in X-ray diffraction. Our novel technology substantially reduced sample analysis time while greatly improving the quality of the data gathered. We continue to improve the capabilities of CCD detectors and many of our detectors incorporate the largest scientific-grade chip available, which increases the image capture area of the detector. We developed our new generation detectors jointly with Fairchild Imaging, Inc., formerly Lockheed Martin Fairchild Systems, who supplies us with the latest large-size chip technology. See "Business—Strategic Collaborations." We have the exclusive right to use this chip technology in various X-ray diffraction fields.

        For structural proteomics applications, the latest innovation in CCD detectors has been the development of high-speed optical lenses coupled to a CCD detector. We have developed such a lens with a proprietary design, which replaces expensive magnifying fiber optic technologies and extends the detector field of view further than the magnifying fiber optics do. Although CCD detectors are generally more expensive than imaging plates and have a smaller field of view, with our proprietary lens-coupled CCD detector design, we believe we can provide some of the largest, fastest, most sensitive CCD detectors on the market.

        CCD detectors have begun to replace imaging plate technology at synchrotron beam lines, substantially improving data collection efficiency. Synchrotron beam lines are X-ray beam lines located at large research facilities which produce some of the world's most brilliant, intense X-ray beams, allowing for extremely fast data collection. Because the synchrotrons produce X-ray beams that are more intense than those traditionally produced in laboratories, scientists travel to the beam lines, bringing their samples for testing. We have been selling our CCD detectors for use at these synchrotron facilities since 1995. We recently introduced a new generation technology, which further increases the speed of data collection at the beam lines.

        In order to increase X-ray beam intensity for laboratory-based systems, we introduced high-intensity optics, which significantly improve X-ray beam intensity and quality. Since our introduction of these optics in 1994, they have been widely used by material scientists and protein

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crystallography X-ray diffraction researchers. Additionally, as a result of our continuing research and development efforts, we recently introduced the third generation of these optics, which have again improved the brightness and quality of X-ray beams. Through our acquisition of Nonius, we acquired a rotating anode generator technology, which provides extremely high-power X-ray beams that can be used in laboratories. More intense X-ray beams allow for faster collection of data and enable researchers to determine X-ray structure in their own laboratories rather than at central facilities utilizing synchrotron beam lines. Combining our X-ray optics with our rotating anode generators provides our customers with what we believe to be the ideal solution for high throughput structural proteomics.

        In addition to the specific technological advances discussed above, we believe that our products offer the following advantages to our customers:

        Integrated solutions.    We provide many of our customers with complete solutions by integrating our X-ray systems with everything from front-end sample handling to back-end analysis software. We also increasingly provide these complete solutions in smaller, more compact designs to take up less space in laboratories. Our systems also interface easily with other hardware and software in a customer's lab to allow our customers maximum flexibility in creating customized solutions.

        Increased productivity.    Our products, incorporating advanced detectors, X-ray optics, sample handling robots and sophisticated analysis software, allow our customers to increase productivity by generating better results in a shorter time period. Our automated sample and measurement technology and user-friendly software interfaces allow our customers to process high sample volumes with reduced reliance on highly-trained scientific personnel.

        High quality results.    Our automated X-ray systems generate highly accurate data with the speed, selectivity and sensitivity our customers demand. The high sensitivity of our products enables some of our customers to analyze smaller quantities of samples as well as samples of increasingly smaller size. Our systems provide customers with extremely accurate results, providing novel research information while reducing the need for repeat analysis to eliminate errors.

        Cost efficiency.    Our systems, which enable rapid collection and interpretation of highly accurate data, often require minimal operator expertise and involvement and employ modular, integrated technology, offering our customers cost efficiency. Our technological advances serve to reduce our customers' costs of labor, costs of repeating erroneous experiments, costs of longer experiment time, costs of replacing incompatible machinery or components and costs of traveling to synchrotrons; we believe these cost efficiencies serve to off-set the often substantial cost of system acquisition. We believe we provide our customers with large volumes of highly accurate information at a relatively low cost.

Our Strategy

        Our strategy is to continue to be a leading provider of X-ray systems for use in the life science, pharmaceutical, chemical, electronics and raw material industries as well as for general research. Key elements of our strategy include:

        Maintaining our position as a technology leader and innovator.    We are a recognized leader and innovator in X-ray technology. We plan to continue to invest in research and development, collaborations and strategic acquisitions in order to develop new and enhanced products, just as our prior efforts led to the development and advancement of CCD detector and X-ray optics technologies. We intend to focus our business on technology particularly applicable to the life science market and to extend our advances to the materials science and other markets.

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        Providing integrated solutions.    Our goal is to continue to focus on the overall needs of our customers, providing them with complete solutions for the analysis of molecular structure and elemental composition, from sample preparation through analysis of results. Our focus will be not only to provide technologically advanced X-ray components, but also to provide the components as part of systems that are fast, easy-to-use and compatible with a customer's overall data collection and analysis systems. Our plan includes providing turnkey systems with open architecture that permits our systems to interface with other hardware and software components in the customer's lab.

        Focusing on new and expanding markets.    We intend to aggressively market a broad range of innovative products for applications in new and expanding markets. For example, our current research and development, marketing and acquisition initiatives have been aimed at creating technologies and systems suited to the technology-driven life sciences market, which we believe will continue to expand in the post-genomic era and represent an increasing part of our business. We intend to continue to identify other market opportunities and apply our resources appropriately, as we recently did with small molecule material research applications.

        Generating recurring revenue and customer loyalty through world-class customer support.    We will continue to provide world-class support to our customers as part of our strategy to enhance the Bruker AXS brand and maintain customer loyalty. The importance we place on customer support is evidenced by the fact that our highly-educated, well-trained customer support personnel comprise approximately 27% of our work force. In addition to the benefits in brand enhancement and customer loyalty, customer support generates significant recurring revenues. As our installed base of systems increases, we expect that the high-margin revenue generated from post-warranty customer service will expand as well. We also plan to increase our recurring revenues as our installed base of systems increases by selling more consumables and replacement parts.

        Providing complementary technologies.    In life science and other areas, we plan to offer complementary X-ray technologies to meet the full range of our customers' matter characterization needs. Our three core X-ray technology applications (SCD, XRD and XRF) complement each other, and we plan to expand our customers' ability to use the various technologies in an integrated manner within the same laboratory.

        Capitalizing on the benefits of our modular platform technology.    We plan to continue to offer our customers a modular technology approach. Our modular approach permits us to provide individual customers with a customized application through varied combinations of already existing product modules. By taking advantage of the modular capabilities of our technology, we can respond quickly to the changing technological needs of the market and of our customers without having to incur significant development expenses or delays.

        Pursuing acquisitions and building alliances.    We plan to continue to pursue acquisitions and build alliances with strategic partners in order to expand our technology base and product offerings, increase our market share and strengthen other key corporate competencies. For example, through our recent MAC Science acquisition, we gained high-powered rotating anode technology, high-quality research and development talent, and access to the Japanese market. See "Business—Strategic Collaborations."

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Our Products

X-ray systems

        We base our systems on the following three core X-ray technology applications:

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single crystal X-ray diffraction, or SCD, and often referred to as crystallography;



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polycrystalline X-ray diffraction, or XRD, and often referred to using the term X-ray diffraction; and



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X-ray fluorescence, or XRF, and also called X-ray spectrometry.

        SCD systems determine the three-dimensional structures of molecules in the chemical, mineral or biological substance being studied. SCD systems have the capability to determine structure in both small chemical molecules and larger biomolecules. SCD systems direct an X-ray beam at a solid, single crystal sample. The atoms in the crystal sample scatter the X-rays to create a precise diffraction pattern recorded by an electronic detector. Software then reconstructs a model of the structure and provides the unique arrangement of the atoms in the sample. This information on the exact arrangement of atoms in the sample is a critical part of molecular analysis and can provide insight into a variety of areas, including how a protein functions or interacts with a second molecule.

        Our SCD systems combine high sensitivity and rapid data collection to quickly generate accurate structures for use in the life sciences industry, academic research and a variety of other applications. Additionally, using our modular platform approach, we combine elements from our basic APEX and PROTEUM products to provide our synchrotron customers with systems tailored for their particular applications.

        The following chart summarizes our SCD product line:

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        XRD systems direct single wavelength X-rays at a polycrystalline sample. The atoms in the polycrystalline sample scatter the X-rays to create a unique diffraction pattern recorded by a detector. Computer software processes the pattern and produces many different types of information, including stress, texture, qualitative and quantitative phase composition, crystallite size, percent crystallinity and layer thickness, composition, defects and density of thin films and semiconductor material.

        Our XRD systems combine modular, high precision and high quality ergonomic designs with broad applications for use in basic research and industrial process control. They contribute to a reduction in the development cycles for new products in the catalyst, polymer, electronic, optical material and semiconductor industries. Customers also use our XRD systems for analyses in a variety of other fields, including forensics, art and archaeology.

        The following chart summarizes our XRD product line:

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        XRF systems determine the elemental composition of a material and provide a full qualitative and quantitative analysis. These systems direct X-rays at a sample, and the atoms in the sample absorb the X-ray energy. The elements in the sample then emit characteristic X-rays which are unique for each element. The system collects the X-rays, and its software analyzes the resulting data to determine the elements which are present.

        Our XRF products provide complete analysis automation solutions on a turn-key basis in response to the industrial marketplace demand for automated, controlled production processes that reduce product and process cost, increase output and improve product quality. Our XRF products cover substantially all of the periodic table and can analyze solid, powder or liquid samples. In addition, our XRF products require minimal sample preparation.

        The following chart summarizes our XRF product line:

Service, consumables and related products

        In addition to new system sales, we generate revenues from sales of service, consumables and related products. We believe our high-quality customer service gives us a competitive advantage by enhancing the Bruker AXS brand and customer loyalty. Approximately 27% of our employees are highly-trained customer support personnel.

        Given the demands our products face in the field, general maintenance and replacement of consumables such as X-ray tubes and other parts is routine. We supply a large quantity of replacement X-ray tubes to customers over the lives of our systems. Following our standard twelve-month warranty, we also generate service revenues from our customers through service contracts, repair calls, training and other support services. Service revenue is generated either through post-warranty service contracts or on-demand service calls. The number of customers entering into service contracts varies by geographic region.

        In addition to providing service, consumables and replacement parts, we generate recurring revenue through the sale to our customers of a variety of accessory items, including sample handling devices, temperature and pressure control devices, enhanced X-ray optics and software packages.

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Finally, we provide system upgrades to customers who desire to upgrade, rather than replace, older systems.

Research and Development

        We commit substantial capital and resources to internal and collaborative research and development in order to provide innovative solutions to our customers. We have a highly skilled research and development group; almost half of our 78 employees devoted to research and development have advanced degrees.

        The value of our investment in research and development is evident in many ways, but perhaps most obvious in our development and introduction of the first CCD detector for use in X-ray diffraction, an innovation which dramatically changed the molecular structure determination market. We have also achieved a significant increase in X-ray beam intensity and quality with our development of high-intensity optics. The following are examples of some of our recent technology research and development accomplishments, all of which have been successfully incorporated into our systems:

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we introduced a new generation SCD detector, the SMART APEX CCD area detector, which has a number of unique features, including high speed parallel data readout, high sensitivity and direct imaging, which makes use of expensive magnifying fiber optics unnecessary;


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we developed a proprietary X-ray phosphor which converts X-rays to visible light with maximum efficiency in order to further increase the speed of our CCD detector-based systems;


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we created pre-formed multi-layered optics to provide for improved X-ray beam quality in our SCD and XRD products; and


•

we developed the PRO4 detector for our S4 spectrometer, a joint development with MOXTEK, Inc., which allows customers to operate the X-ray spectrometer at a high sensitivity level without a costly external detector gas supply.

        We intend to continue to stress our research and development activities, particularly for developments in the life science field and for items including robotic solutions, software programs and next generation detectors. We plan to use these life science developments for our other markets as well. We have and will keep in place a strong focus on software development, as over 25% of our research and development personnel devote their time to the software field.

        Our acquisitions of Nonius and MAC Science also have improved our research and development capabilities, giving us access to rotating anode generator technology as well as additional high quality research and development talent. Thirteen of our research and development personnel joined us through the Nonius and MAC Science acquisitions.

        We spent $9.9 million in fiscal 2002, $7.7 million, excluding in-process research and development, in fiscal 2001, and $5.9 million in fiscal 2000, on research and development.

Strategic Collaborations

        We have several key technical collaborations and alliances for the development and distribution of new or existing products. These collaborations include:

        Fairchild Imaging, Inc.    In 1998, we commenced collaboration with Fairchild Imaging, Inc. for the development of CCD array detectors for use in chemical and biological crystallography. While Fairchild Imaging owns the chip included in the detector, we have exclusive rights for use of the chip in the SCD and XRD fields, subject to minimum purchase requirements. We also own the rights to the camera in which the chip is placed.

        Siemens AG.    We have a collaboration with the Siemens AG X-ray tube division (now Siemens Medical Solutions Vacuum Technology Division) in Germany for the development of X-ray tubes. We are also cooperating with Siemens for the supply of varying types of high power X-ray tubes.

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Additionally, we have a joint development with Siemens for a lower-power high performance XRF X-ray tube. We have the exclusive right to purchase these lower-power tubes until December 2006.

        Affinium Pharmaceuticals.    In March 2001, we entered into a strategic alliance with Affinium Pharmaceuticals, formerly known as Integrative Proteomics, Inc. Affinium Pharmaceuticals is a leader in high-throughput structural proteomics. During the three-year term of our strategic alliance, we will sell to Affinium Pharmaceuticals X-ray protein crystallography tools required by Affinium Pharmaceuticals for its proteomics facilities and collaborate in the development of higher-throughput proteomics tools. As part of this alliance, in June 2001, we invested in the Series IIA financing of Affinium Pharmaceuticals.

        GeneFormatics Incorporated.    In October 2001, we entered into a strategic alliance with GeneFormatics Incorporated. GeneFormatics is a leader in structural proteomics and offers an integrated approach to the determination and confirmation of the function and structure of genomically-derived protein targets. We have agreed that during the three-year term of our strategic alliance, we will sell to GeneFormatics X-ray crystallography systems and support needed to incorporate X-ray crystallography into its business. As part of this alliance, in October 2001, we invested in the Series C financing of GeneFormatics.

        Incoatec GmbH.    In February 2002, we entered into a joint venture with four former scientists of the GKSS Research Center for the research, development and production of X-ray optics based on coating technologies. As part of this joint venture, we hold a 51% stake in Incoatec GmbH, a German limited liability company.

        We also have collaborations with non-profit institutions as well as with individual experts in the X-ray field, including Professor B.C. Wang at the University of Georgia and Professor George Sheldrick at the University of Göttingen.

Customers

        We have a broad and diversified global customer base that included over 4,500 customers with over 7,000 installed systems as of March 1, 2003. Our molecular structure customer base includes a variety of biotechnology, pharmaceutical and chemical companies, as well as various research institutes. We sell our materials research products to academic institutions as well as to a number of semiconductor, polymer, automotive and combinatorial materials design companies. Cement, steel, aluminum and related industries are large purchasers of our elemental analysis products.

        Some examples of customers who have purchased multiple systems from us for use in either life sciences, materials research or elemental analysis applications include:

        We also sell our systems to other industrial, academic and government customers. We believe our diverse categories of customers serve to moderate the effect of economic downturns, which may occur in one or more of the markets we serve. In fiscal 2002, no single customer accounted for greater than 3% of our revenue.

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Sales and Marketing

Marketing activities

        Our primary marketing strategy is to provide our customers X-ray systems that enable them to perform their desired activities. Cultivating strong customer relationships to build future recurring sales is a key part of our marketing program. We emphasize our solutions and technology platforms, rather than simply the provision of instruments. We pursue an active marketing program through a large number of activities during the year. Our key marketing vehicles include trade shows, scientific conferences, advertising, our website, direct mail and related activities.

Direct sales channels

        We have extensive sales and distribution capabilities. We generate over 80% of our revenues through our direct sales force of over 60 individuals, approximately 40% of whom have advanced degrees. During the last three years, we have committed significant resources to upgrade and expand our direct sales force and our distribution channels worldwide. We now have direct sales coverage throughout most of the European Union and North America, as well as in China, Japan, South Africa, Brazil and Singapore.

        In addition to our direct sales force, we have well-equipped application and demonstration facilities and qualified application personnel who assist customers and provide product demonstrations in specific application areas. The interaction of customers with our marketing specialists and research and development scientists at these facilities enables us to get feedback on products and customer needs directly from the customers, aiding in the effectiveness and efficiency of our product development. We maintain our primary demonstration facilities in the United States (Madison, Wisconsin), the Netherlands (Delft), Germany (Karlsruhe) and Japan (Yokohama). Demonstration systems and support facilities are also available in other locations.

Indirect sales channels

        We have determined that for some of our smaller geographical markets it is not cost effective to have a direct sales force in place. For these countries, we use various international distributors, our affiliates and independent sales representatives.

Sales Cycle

        The typical sales cycle for our products is six to twenty-four months. The sales cycle is twelve to twenty-four months for academic products and six to twelve months for industrial products. The length of our sales cycles is primarily dependent on the budgeting cycles of our customers.

Manufacturing

        We perform high-level assembly, system integration and testing for the majority of our products in our principal facilities located in the U.S., Germany, the Netherlands and Japan. We have considerable flexibility at our various facilities, and each facility can handle multiple product lines at the same time. Our facility in Germany also includes a machine shop for the machining of precision parts, and employees in our facility in the U.S. assemble detectors using proprietary methods. Generally, we purchase the components of our systems from third parties and maintain preferred suppliers and secondary sources for key components that we do not manufacture in-house.

Intellectual Property

        Our intellectual property consists of patents, copyrights, trade secrets, know-how and trademarks. We license our patent rights where appropriate. Our patents generally relate to discrete aspects of our

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products and not to any product as a whole. We do not believe that any one of our patents is material to our business on an enterprise-wide basis.

        Protection of our intellectual property is a strategic priority for our business, and we will enforce our patent rights against all infringers as necessary. While we believe our patent portfolio provides us with a competitive advantage, the patent positions of companies like ours involve complex legal and factual questions. As a result, we cannot predict the enforceability of our patents with certainty. In addition, we are aware of the existence of patents in certain countries that, if valid, could impair our ability to manufacture and sell our products in these countries. We have received letters from third parties inquiring whether or not certain of our components infringe upon certain of their patents. We do not believe we infringe upon any valid claims of these patents.

        We also rely upon trade secrets, know-how, trademarks, copyright protection and licensing to develop and maintain our competitive position. We generally require the execution of confidentiality agreements by our employees, consultants and other scientific advisors. These agreements provide that all confidential information made known during the course of a relationship with us will be held in confidence and used only for our benefit. In addition, these agreements provide that we own all inventions generated during the course of the relationship.

Competition

        Our markets are highly competitive, and we expect the competition to increase. Currently, we have competitors for most of our product lines. We believe that the principal competitive factors in our markets are technological applications expertise, product functionality, quality after market service and support, marketing expertise, distribution capability, proprietary patent portfolios, cost and cost effectiveness.

        Our existing products and any products that we develop may compete in multiple, highly competitive markets. Other companies may offer or succeed in developing products that would render our products or those of our strategic partners obsolete, uneconomical or noncompetitive. In addition, some of these competitors have significantly greater experience in the life sciences market. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive, or more cost effective, than other currently marketed products. Current competitors or other companies may possess or develop technologies and products that are more effective than ours.

Employees

        As of March 1, 2003, we employed over 560 full-time employees, with approximately 140 employees in the U.S. and more than 350 employees located primarily in Europe. Over 75 of these employees hold doctorates in biology, chemistry, physics or other scientific areas.

Government Regulation

        We possess low-level radiation materials licenses from the Nuclear Regulatory Commission for our facility in Madison, Wisconsin, from the local radiation safety authority, Gewerbeaufsichtsamt Karlsruhe, for our facility in Karlsruhe, Germany, from the local radiation safety authority, Ministerie van Volkshuisvesting, Ruimtelijke Ordening en Miliuebeheer, for our facility in Delft, the Netherlands, and from the local radiation safety authority, Kanagawa Prefecture, for our facility in Yokohama, Japan, as well as from various other countries in which we sell our products. The U.S. Nuclear Regulatory Commission also has regulations concerning the exposure of our employees to radiation.

        Prior to introducing a product in the U.S., we provide notice to the Food and Drug Administration, or FDA, in the form of a Radiation Safety Abbreviated Report, which provides identification information and operating characteristics of the product. If the FDA finds that the report

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is complete, it provides us approval in the form of what is known as an accession number. We may not market a product until we have received an accession number. In addition, we submit an annual report to the FDA that includes, among other things, the radiation safety history of all products we sell in the U.S. We are required to report to the FDA incidents of accidental exposure to radiation arising from the manufacture, testing or use of any of our products. We also report to state governments products which we sell in their states. For sales in Germany, we register each system with the local authorities. In some countries where we sell systems, we use the license we obtained from the federal authorities in Germany to assist us in obtaining a license from the country in which the sale occurs. In addition, as indicated above, we are subject to various other foreign and domestic environmental, health and safety laws and regulations in connection with our operations. Apart from these areas, we are subject to the laws and regulations generally applicable to businesses in the jurisdictions in which we operate.

Scientific Advisory Board

        We have established an international Scientific Advisory Board to advise us on strategic research and development and strategic marketing issues. The members of the Board include:

•

George M. Sheldrick, Ph.D., Professor, University of Göttingen;



•

Rüdiger Bormann, Ph.D., Professor, GKSS Research Center and Technical University;



•

Elspeth Garman, D.Phil., Researcher, University of Oxford;



•

Manfred Schuster, Dr., Research Manager, Siemens AG;



•

Anthony Spek, Ph.D., Professor, University of Utrecht; and



•

B.C. Wang, Ph.D., Professor, University of Georgia.

        We provide members of our Scientific Advisory Board a fee of $6,000 per year and options at fair market value for 1,500 shares of our common stock. These options vest after three years. We also reimburse Scientific Advisory Board members for expenses reasonably incurred related to the services they provide us.

Financial Information about Geographic Areas

        Financial Information about our geographic areas required by Item 1 of Form 10-K may be found in Note 23 to our Financial Statements in this Form 10-K, included as part of Item 8 to this report. Financial information about our revenues from external customers, measure of profit and total assets required by Item 1 of Form 10-K is included in our Financial Statements in this Form 10-K included as part of Item 8 to this report.

ITEM 2. PROPERTIES

        Our four principal facilities incorporate manufacturing, research and development, application and demonstration, marketing and sales and administration functions. These are:

•

an owned 43,000 square foot facility in Madison, Wisconsin;



•

an owned 97,000 square foot facility in Karlsruhe, Germany;



•

a leased 57,000 square foot facility in Delft, The Netherlands; and



•

a leased 15,000 square foot facility in Yokohama, Japan.

        We lease additional centers for sales, applications and service support in: Congleton, United Kingdom (Bruker AXS Ltd.); Paris, France (Bruker AXS SA); Salzburg, Austria (Bruker AXS GmbH); Milano, Italy (Bruker AXS S.r.L.); Johannesburg, South Africa (Bruker AXS (Pty) Ltd.); São Paulo,

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Brazil (Bruker AXS do Brasil Ltda.); Singapore (Bruker AXS Pte Ltd.); Geesthacht, Germany (Incoatec GmbH) and Beijing, People's Republic of China (Bruker AXS Representative Office).

ITEM 3. LEGAL PROCEEDINGS

        We may, from time to time, be involved in legal proceedings in the ordinary course of business. We are not currently involved in any pending legal proceedings that, either individually or taken as a whole, could materially harm our business, prospects, results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock has been traded on the Nasdaq National Market since December 2001. Prior to that time, there was no public market for our common stock. The following table sets forth, for the period indicated, the high and low sale prices for the common stock as reported on the Nasdaq National Market.

        As of March 17, 2003, there were approximately 30 holders of record of our common stock. This number does not include the individual beneficial owners of shares held in nominee name or within clearinghouse positions of brokerage firms and banks. The closing price per share of our common stock on March 17, 2003, as reported by the Nasdaq National Market, was $1.56.

        We have never declared or paid cash dividends on our capital stock. We currently anticipate that we will retain all available funds for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

        In January 2001, we issued and sold 5,625,000 shares of Series A convertible preferred stock for an aggregate purchase price of approximately $22.5 million, or $4 per share, to a total of eleven investors. Upon consummation of the initial public offering of our Common Stock, all outstanding shares of preferred stock were converted into 6,923,077 shares of common stock. In June 2001, we issued 83,333 shares of common stock, at a price of $6 per share, to Affinium Pharmaceuticals in connection with our $1 million investment in Affinium Pharmaceuticals' Series IIA financing. In October 2001, we issued 71,428 shares of common stock, at a price of $7 per share, to GeneFormatics Incorporated in connection with our $1 million investment in GeneFormatics' Series C financing. These shares of our common stock were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(2) of this act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering.

        On December 13, 2001, a registration statement on Form S-1 (No. 333-66066) was declared effective by the Securities and Exchange Commission, pursuant to which 9,000,000 shares of our common stock were offered and sold by us at a price of $6.50 per share, generating gross offering proceeds of approximately $58.5 million. On January 11, 2002, the managing underwriters exercised their over-allotment option to purchase an additional 1,350,000 shares, generating gross proceeds of approximately $8.8 million. The managing underwriters were UBS Warburg, Thomas Weisel Partners LLC, CIBC World Markets, SG Cowen and Robert W. Baird. In connection with the offering, we incurred expenses of approximately $4.7 million in underwriting discounts and commissions and approximately $1.8 million in other related expenses. The net proceeds from the offering, after deducting the foregoing expenses, were approximately $60.7 million. We have used a portion of the net proceeds of the offering to fund our continuing research and development activities and for working capital and other general corporate purposes. Additionally, we have used $7.9 million of the net proceeds to pay off a portion of our outstanding related party debt, $3.0 million to pay off a portion our outstanding bank debt, approximately $2.6 million to finance the acquisition of our Karlsruhe, Germany facility, approximately $1.7 million on leasehold improvements and other capital expenditures, approximately $0.7 million on the purchase and implementation of computer software and $0.3 million on the acquisition of MAC Science Ltd.

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ITEM 6. SELECTED FINANCIAL DATA

(1)

This information includes the operations of MAC Science Ltd. since May 13, 2002, the date of acquisition.

(2)

This information includes the operations of Nonius Group since April 1, 2001, the date of acquisition and reflects the initial public offering which occurred on December 14, 2001.

(3)

Reflects a three-month fiscal period resulting from a change in fiscal year from September 30 to December 31 in 1999.

(4)

The financial statements for 1999 and 1998 are presented on a combined basis due to the common ownership of Bruker AXS Inc. and Bruker AXS GmbH, the latter of which was formally acquired by the former in June 1999.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations together with "Selected financial data" and our financial statements and related notes appearing elsewhere in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under "Factors Affecting Our Business, Operating Results and Financial Condition" and elsewhere in this annual report on Form 10-K.

OVERVIEW

        We are a leading worldwide developer and provider of advanced integrated X-ray systems which provide solutions for molecular and elemental analysis by X-ray diffraction and X-ray fluorescence. Our products, which have particular application in the drug discovery and materials science fields, provide our customers with the ability to determine the structure of specific molecules, such as proteins, and to characterize and determine the composition of materials. Our customers include biotechnology and pharmaceutical companies, semiconductor companies, raw material manufacturers, chemical companies, academic institutions and other businesses involved in materials analysis.

        Our new product introduction goal is to focus on the overall needs of our customers, providing them with complete solutions. Our plan includes providing turnkey systems with open architecture that permits our systems to interface with other hardware and software components in the customer's lab. A major strategy to accomplish this goal is to offer our customers a modular technology approach. Our modular approach permits us to provide individual customers with a customized application through varied combinations of existing product modules. By taking advantage of the modular capabilities of our technology, we can respond quickly to the changing technological needs of the market and of our customers without having to incur significant development expenses or delays. As we bring on systems with these new modular technologies, they typically replace systems with old technologies. Accordingly, this modular approach to introducing new systems helps sustain our revenue growth rates.

        We have experienced substantial fluctuations in our quarterly and annual results of operations, and we expect these fluctuations to continue. The amount and timing of our revenues and operating expenses may fluctuate significantly in the future as a result of a variety of factors. We face a number of risks and uncertainties encountered by early stage companies, particularly those in rapidly evolving markets such as the life science industry. We may not be able to successfully address these risks and difficulties. In addition, we are subject to foreign currency fluctuations.

        We are not affected by seasonal factors. Our systems sales are high-cost capital expenditures for customers, and the selling cycle may take from 6 to 24 months. The order fulfillment cycle also may take up to six months to design and build a system.

ACQUISTIONS

        Prior to September 1997, we did not engage in any significant business operations. In October 1997, Bruker BioSpin Corporation and Bruker Physik, two of our affiliates, purchased the analytical X-ray business of Siemens AG. Bruker BioSpin Corporation purchased the assets and assumed the liabilities of Siemens' U.S. business, which then became Bruker AXS Inc., and Bruker Physik purchased the stock of Siemens' German business, which business then became Bruker AXS GmbH.

        In June 1999, all of our shares were transferred from Bruker BioSpin Corporation to five individuals who were members of the controlling family of all of the Bruker companies. We then

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acquired all of the shares of Bruker AXS GmbH from Bruker Physik. The transaction represented an exchange between entities under common control and, accordingly, the assets acquired and liabilities assumed have been accounted for at historical cost in a manner similar to that of pooling-of-interests accounting. As a result of this acquisition, for periods prior to June 1999, our financial statements reflect the combined accounts of us and Bruker AXS GmbH. All significant intercompany transactions have been eliminated in the combined statements.

        In April 2001, we acquired Nonius B.V. and four of its affiliates ("Nonius") from Delft Instruments N.V., a Dutch company, for approximately $6.6 million in cash plus the assumption of approximately $1.8 million of debt and additional liabilities of $4.3 million. Nonius and its affiliates specialize in the development, production and marketing of products and services for single crystal X-ray diffraction. Accordingly, the Nonius operations were consolidated in the results since the date of the acquisition. As part of the acquisition, we entered into a services agreement with Delft Instruments to continue to provide various services to the acquired business. As of December 31, 2002, all of the services agreements were terminated.

        In conjunction with the acquisition of Nonius, we acquired certain in-process research and development ("IPR&D") projects. These projects included next generation high brilliancy optics and microsources, high brilliance rotating anode generator successors for biological crystallography, high sensitivity large area detector systems and next generation software for data acquisition and processing. At the time of the acquisition, these projects were in various stages of completion, ranging from 50% to 70%. The projects were expected to be completed during 2002 at an estimated cost of $0.6 million.

        The following table provides information regarding the current status of the acquired IPR&D projects as of December 31, 2002 (in thousands):

(1)

The microsouces portion of the project was ceased.

        Although we believed these IPR&D projects, when completed, would provide value, we determined there was an absence of technological feasibility and alternative future use for this IPR&D at the time of acquisition. As such, we utilized a discounted probable future cash flows analysis to prepare a valuation of the fair value of IPR&D. We performed this cash flow analysis on a project by project basis and applied adjusted discount rates of 40%-45% to the projects' cash flow. We used financial assumptions based on pricing, margins and expense levels from those historically realized by Nonius and consistent with industry standards. Material net cash inflows from these projects were expected to begin in 2003. We were primarily responsible for estimating the fair value of the purchased in-process research and development. This valuation resulted in an estimate of the fair value of $3.6 million ($2.1 million, net of tax), which was charged to research and development expense immediately following the close of the transaction in the second quarter of 2001.

        We believe the projections used in performing the valuations are still appropriate; however, there can be no assurance that the projected results will be achieved. Failure to successfully develop and market these projects would result in the loss of the expected economic return inherent in the fair value allocation.

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        In May 2002, we acquired substantially all of the assets and certain liabilities of MAC Science Ltd., a Yokohama, Japan company focused on X-ray analysis instrumentation, for $3.4 million including $0.3 million of cash plus the assumption of liabilities of $3.1 million. We believe this acquisition will result in both new product introductions as well as further penetration in the Japanese life science and advanced materials research markets. The results of the MAC Science operations have been included in our consolidated financial statements since the date of acquisition.

INITIAL PUBLIC OFFERING

        In December 2001, we completed an initial public offering of 9,000,000 shares of our common stock to the public, at a price per share of $6.50. We received net proceeds of $52.6 million. Upon the closing of the initial public offering, 5,625,000 shares of redeemable preferred stock converted into 6,923,077 shares of common stock (See "Notes to Financial Statements"). In January 2002, the underwriters of the initial public offering exercised an over-allotment option to purchase an additional 1,350,000 shares at $6.50 per share. We received net proceeds of $8.1 million.

RESULTS OF OPERATIONS

Year ended December 31, 2002 compared to year ended December 31, 2001

Net sales

        Net sales for the year ended December 31, 2002 increased $21.7 million, or 26.3%, to $104.3 million compared to $82.6 million for the year ended December 31, 2001. Approximately $8.3 million of the increase was related to our X-ray diffraction systems; specifically, the market's acceptance of the D8 DISCOVER CC and D4 ENDEAVOR accompanied by strong sales of our existing D8 ADVANCE. In addition, the S4 PIONEER, an X-ray fluorescence system, was introduced in the fourth quarter of 2001 and has resulted in an increase in sales of $4.7 million. Approximately $4.7 million of the increase in sales related to our acquisition of MAC Science. The remainder of the increase was due primarily to a $3.2 million increase in aftermarket and other sales. Aftermarket and other sales consist of extended warranty and service agreements, replacement parts, accessories, software packages, upgrades, repair calls, support services and training. Currency fluctuations on net sales for the year ended December 31, 2002 had a favorable impact of $3.4 million, or 4.1%, on our revenues.

Cost of sales

        Cost of sales for the year ended December 31, 2002 increased $12.0 million, or 23.6%, to $63.1 million compared to $51.1 million for the year ended December 31, 2001. The cost of sales increase was due to the overall growth in system sales. In addition, approximately $2.8 million of this increase was due to the acquisition of MAC Science. Further, currency fluctuations increased our cost of sales by approximately $2.1 million as compared to the prior year. The gross margin on sales was 39.5% in 2002 compared to 38.2% in 2001. The improvement in gross margin was driven particularly by improved performance in our APEX and PROTEUM single crystal diffraction product lines. In addition, our redesign to cost initiatives improved our margins in our X-ray diffraction systems, particularly our D8 products.

Research and Development

        Research and development expenses for the year ended December 31, 2002 increased $2.2 million, or 27.9%, to $9.9 million from $7.7 million for the year ended December 31, 2001. Approximately $1.7 million of the increase was due to the expansion of research and development projects, specifically material purchases for these projects. In addition, research and development expenses increased by $0.5 million due to the acquisition of MAC Science. Currency fluctuations increased research and

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development expenses by $0.3 million. As a percentage of net sales, research and development expenses increased to 9.5% for the year ended December 31, 2002 from 9.4% for the year ended December 31, 2001.

        For the year ended December 31, 2001, there was a $3.6 million charge resulting from the write-off of in-process research and development costs related to the acquisition of Nonius in April 2001. There were no such charges in the year ended December 31, 2002.

General and Administrative

        General and administrative expenses for the year ended December 31, 2002 increased $3.0 million, or 56.0%, to $8.3 million from $5.3 million for the year ended December 31, 2001. Approximately $1.7 million of the increase was due to costs related to being a public company, including insurance, legal fees, filing fees and other costs. In addition, approximately $0.5 million of this increase related to the acquisition of MAC Science. Currency fluctuations increased general and administrative expenses by $0.2 million. As a percentage of net sales, general and administrative expenses were 7.9% for the year ended December 31, 2002 compared to 6.4% for the year ended December 31, 2001.

Marketing and Selling

        Marketing and selling expenses for the year ended December 31, 2002 increased $4.5 million, or 27.1%, to $21.3 million from $16.8 million for the year ended December 31, 2001. The increase was due primarily to an increase in sales commissions and employee costs due to higher sales levels. In addition, approximately $0.9 million of this increase related to the acquisition of MAC Science. Currency fluctuations increased marketing and selling expenses by $0.8 million. As a percentage of net sales, marketing and selling expenses were 20.5% for the year ended December 31, 2002 compared to 20.3% for the year ended December 31, 2001.

Restructuring Charge

        In the third quarter of 2002, we implemented a restructuring program to reduce costs and improve productivity by eliminating redundant positions, streamlining production and initiating cost reduction programs in all operating areas. As a result, we recorded a restructuring charge of approximately $1.8 million ($1.0 million, net of tax).

        Of the total restructuring charge, approximately $0.5 million related to involuntary and voluntary employee termination benefits for personnel reductions in all operating areas. Under the restructuring program, we reduced our workforce by approximately 19 employees, or approximately 5% of the total workforce in the United States, Germany and United Kingdom. The restructuring charge also included approximately $0.7 million for the write-off of property and equipment as a result of ceasing production at a facility located in the United Kingdom. Beginning in the fourth quarter of 2002, all products that were produced in the United Kingdom are being produced at the production facility in Germany. In addition, approximately $0.5 million of the restructuring charge consisted of penalties for terminating contracts for outsourced inventory and information technology services which we now provide internally. The remaining $0.1 million consisted of engineering inventory that was written off as a result of the termination of a research and development project.

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        The following table summarizes the restructuring charge activity and the balance of the restructuring accrual as of December 31, 2002 (in thousands):

        We expect the remaining accrual for the contractual obligations to be paid by the end of 2004. Due to the impact of certain German regulatory requirements applicable to the benefits of our German employees, the workforce reduction accrual will not be fully paid until 2008.

Interest (income) expense

        Interest income for the year ended December 31, 2002 increased $0.3 million, or 55.8%, to $0.8 million compared to $0.5 million for the year ended December 31, 2001. The increase was due to higher investment balances derived from proceeds of our initial public offering, although this was partially offset by lower interest rates. Additionally, interest expense for the year ended December 31, 2002 decreased by $0.2 million, or 24.8%, to $0.5 million compared to $0.6 million for the year ended December 31, 2001. The decrease was due to a reduction of our related party debt through use of the proceeds from our initial public offering, although the decrease was partially offset by increased third party debt with higher interest rates.

Other (income) expense

        Other income for the year ended December 31, 2002 increased $1.9 million to income of $1.6 million compared to expense of $0.3 million for the year ended December 31, 2001. The increase was primarily due to the weakening of the U.S. dollar against the euro. As a result, we recorded $1.1 million in foreign currency gains on our euro denominated intercompany lines of credit for the year ended December 31, 2002 compared to a $0.2 million foreign currency loss for the year ended December 31, 2001. In addition, gains on foreign currency transactions increased $0.9 million. The increases in other income were offset by interest rate and currency fluctuations on our derivative financial instruments resulting in a decrease of $0.1 million in other income.

        In July 2002, we restructured our euro denominated intercompany lines of credit given that settlement is not anticipated in the foreseeable future. As a result, the impact of foreign exchange rate fluctuations is no longer recorded in other expense (income) within that statement of operations, but instead is recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity. We recorded a gain of $0.4 million within accumulated other comprehensive income (loss) between July and December 2002 for euro denominated intercompany lines of credit.

Write-down of investments in other companies

        In the fourth quarter of 2002, we recorded an impairment loss of $1.3 million on investments in two unaffiliated proteomics companies. We believe that these investments have been negatively impacted by the continued decline in the capital markets and the economic environment in which the investees operate. As these investments are not publicly traded, we performed valuations on both of the investments. The valuations were based on the Black-Scholes option pricing theory to determine the fair value of the investees' equity. The valuations were then adjusted to reflect market conditions and equity values of comparable companies.

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Income tax expense (benefit)

        Income tax for the year ended December 31, 2002 increased by $1.7 million, or 174.1%, to $0.7 million compared to a tax benefit of $1.0 million for the year ended December 31, 2001. Our effective tax rate was 137.8% for the year ended December 31, 2002 and 41.3% for the year ended December 31, 2001. The increase in our effective tax rate was primarily due to recording a valuation allowance on our deferred tax assets for the write-down of investments in other companies and foreign tax credits. Excluding the write-down of investments in other companies our effective tax rate would have been 39.4% for the year ended December 31, 2002. In addition to the valuation allowance, the difference between the statutory tax rate and the effective tax rate was primarily due to research and development credits and state income taxes for the year ended December 31, 2002.

Minority interest

        In February 2002, we contributed $22,000 of cash to Incoatec GmbH, a German entity, which resulted in a 51% ownership. The $59,000 increase in minority interest in subsidiary represents the minority shareholders' proportionate share of net income for the year ended December 31, 2002.

Change in accounting principle

        We adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles," in the first quarter of 2002. Under the transitional provisions of SFAS No. 142, we tested goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002 pursuant to the method prescribed by SFAS No. 142. We completed the transitional impairment tests in the third quarter of 2002, which resulted in recording an impairment loss of $1.0 million ($0.6 million, net of tax). In accordance with the transition provisions of SFAS No. 142, the impairment loss has been recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle.

        The goodwill impairment loss related to our Nonius subsidiary, which was acquired in April 2001. Changes in the market and economic conditions since the date of acquisition have resulted in an impairment of goodwill allocated to Nonius.

Year ended December 31, 2001 compared to year ended December 31, 2000

Net sales

        Net sales for the year ended December 31, 2001 increased $14.5 million, or 21.3%, to $82.6 million compared to $68.1 million for the year ended December 31, 2000. Approximately $6.5 million of this increase related to the acquisition of Nonius. Approximately $1.6 million of this increase related to the introduction of our new APEX and D4 products which were favorably received by the market. The remainder of the net sales increase was attributable to increased market acceptance of existing products. Furthermore, the addition of new sales offices and increased marketing efforts in newer regions also favorably impacted net sales. The increase in net sales was mitigated by currency fluctuations experienced in 2001, which effectively reduced our U.S. reporting revenues by approximately $2.6 million. Although third quarter net sales were negatively affected from general business interruption immediately following the September 11, 2001 terrorist attacks, all sales which had been delayed were recognized by December 31, 2001.

Cost of sales

        Cost of sales for the year ended December 31, 2001 increased $7.8 million, or 18.1%, to $51.1 million compared to $43.3 million for the year ended December 31, 2000. Approximately $5.0 million of this increase was due to the addition of Nonius' operations in 2001. The increase in cost of sales also includes approximately $0.6 million of additional costs. The introduction of new

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automation products accounted for approximately $0.2 million of additional cost and scrap accounted for approximately $0.1 million. We also incurred $0.3 million of unfavorable variances for labor underabsorption due to travel restrictions subsequent to the September 11, 2001 terrorist attacks; some of our labor force was not fully utilized because they were unable to travel to customers to install and service our products. The remainder of the cost of sales increase was due primarily to the overall growth of the number of system sales. The gross margin on sales was 38.2% in 2001 compared to 36.5% in 2000. The increase in gross margin was primarily driven by product mix changes and cost reductions. Specifically, we sold more single crystal diffraction and materials science systems, which have higher margins. The cost reductions were the result of standardizing production processes at all manufacturing locations.

Research and development

        Research and development expenses for the year ended December 31, 2001 increased $5.4 million, or 91.6%, to $11.3 million (including in-process research and development costs) compared to $5.9 million for the year ended December 31, 2000. Approximately $3.6 million of this increase was due to the write-off of in-process research and development costs related to the acquisition of Nonius. As a percentage of net sales, research and development expenses increased to 13.7% for the year ended December 31, 2001 from 8.7% for the year ended December 31, 2000. If we eliminate the effect of the Nonius acquisition, the research and development expenses as a percentage of net sales in the year ended December 31, 2001 would have been 9.0%. This increase in research and development expenses as a percentage of net sales was due to an expansion of research and development projects, which included increases in personnel, materials and supplies.

General and administrative

        General and administrative expenses for the year ended December 31, 2001 increased $2.6 million, or 94.6%, to $5.3 million compared to $2.7 million for the year ended December 31, 2000. Approximately $0.5 million of this increase related to the Nonius acquisition. Approximately $0.3 million related to the addition of four new sales distribution subsidiaries. As a percentage of net sales, general and administrative expenses were 6.4% for the year ended December 31, 2001 compared to 4.0% for 2000. This increase in general and administrative expenses as a percentage of net sales was due to an expansion of administrative functions, additional systems consulting costs and increased executive management expense.

Marketing and selling

        Marketing and selling expenses for the year ended December 31, 2001 increased $2.7 million, or 19.0%, to $16.8 million compared to $14.1 million for the year ended December 31, 2000. Approximately $0.1 million of this increase was due to the addition of new sales distribution subsidiaries. Approximately $1.3 million was due to the addition of Nonius' operations. The remainder of the increase was due primarily to additional advertising and trade show expense related to product promotions. As a percentage of net sales, marketing and selling expenses were 20.3% for the year ended December 31, 2001 compared to 20.7% for the year ended December 31, 2000.

Interest expense (income)

        Interest expense decreased $0.8 million, or 85.5%, to $0.1 million for the year ended December 31, 2001 compared to $0.9 million for the year ended December 31, 2000. The decrease was due to our reduction of $16.9 million of debt using the proceeds from our sale of preferred stock and common stock. Additionally, we recognized interest income of $0.5 million and $0.1 million for the year ended December 31, 2001 and 2000, respectively. The increase in interest income was primarily the result of cash received from our preferred stock and common stock offerings.

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Other expense (income)

        We recognized $0.3 million of other expense for the year ended December 31, 2001 and $0.1 million of other income for the year ended December 31, 2000. The decrease in 2001 of $0.4 million was primarily due to the effect of foreign currency fluctuations.

Income tax (benefit) expense

        Income tax for the year ended December 31, 2001 was a tax benefit of $1.0 million compared to a tax expense of $0.5 million for the year ended December 31, 2000. Our effective tax rate was 41.3% for the year ended December 31, 2001 and 41.4% for the year ended December 31, 2000. The difference between the statutory tax rate and the effective tax rate was primarily due to research and development credits and state income taxes for the years ended December 31, 2001 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

        As of December 31, 2002, we had cash and cash equivalents of $52.7 million and working capital of $72.4 million. Historically, we have financed our growth through a combination of debt financing and the issuance of our common and preferred stock.

        During the year ended December 31, 2002, we generated $0.7 million of cash from operating activities. This was primarily due to our accounts receivable and inventories growing at a slower rate than our sales volume. We have made improvements in our cash collection efforts for accounts receivable and have more efficiently managed our inventories by reducing our lead times. During the latter half of 2002 and as part of our restructuring, we focused on inventories on a facility-by-facility basis. Inventory management will continue to be an area of focus in 2003 as we look at inventory management on a global basis. Our improvements in accounts receivable and inventories were offset by decreases in other current liabilities, primarily customer advances. During the year ended December 31, 2001, we used $2.1 million of cash in operating activities. Our use of cash was primarily due to increases in accounts receivable and inventories related to sales growth. These increases were partially offset by increases in current liabilities, primarily comprised of customer advances. During the year ended December 31, 2000, we generated $1.2 million in cash flow from operations. This was due to increased current liabilities and the elimination of restricted cash. Specifically, accrued warranty increased due to an increased number of systems in the field and compensation liabilities increased due to the growth of our business. Restricted cash decreased due to a reduction in the number of customers requiring bank guarantees. These increased current liabilities and the elimination of restricted cash were partially offset by increased accounts receivable and decreased accounts payable.

        Cash flows used for investing activities totaled $13.1 million for the year ended December 31, 2002, $9.7 million for the year ended December 31, 2001 and $2.0 million for the year ended December 31, 2000. Investing activities include capital expenditures, acquisitions and investments in other companies.

        Cash used for capital expenditures was $12.8 million for the year ended December 31, 2002, $2.4 million for the year ended December 31, 2001 and $2.0 million for the year ended December 31, 2000. We made these capital expenditures to improve productivity and expand manufacturing capacity. In February 2002, we purchased our Karlsruhe, Germany facility, land and adjacent lot for approximately $7.0 million. Following the purchase of this facility, we expended approximately $0.6 million to expand this facility. In addition, we moved our operations in the Netherlands and Japan to new facilities which resulted in approximately $1.4 million and $0.5 million of capital expenditures, respectively. The remaining capital expenditures consisted primarily of computer equipment and software purchases and development costs. In addition to capital expenditure during 2002, we acquired MAC Science for net cash of $0.3 million. During 2001, we acquired Nonius for $6.2 million, net of cash acquired and made cash investments of $1.0 million in connection with two strategic alliances. No

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material capital expenditure commitments were outstanding as of December 31, 2002. We expect to continue to make capital investments focused on enhancing the efficiency of our operations and to support our growth.

        For the year ended December 31, 2002, cash flow provided from financing activities totaled $15.5 million and included primarily net proceeds from the issuance of common stock and long-term debt. In 2002, the underwriters of our initial public offering exercised an over-allotment option. As a result, we issued and sold 1,350,000 shares of our common stock for $8.1 million, net of issuance costs. We also issued $8.2 million of long-term debt for the purchase of our Karlsruhe, Germany facility and for operating needs at our facilities in Japan and our majority-owned subsidiary, Incoatec. Further, we received $0.9 million of borrowings from our lines of credit. We used cash in financing activities of $1.1 million for purchases of our common stock, $0.3 million for the repayment of related party debt and $0.4 million for the repayment of long-term debt. For the year ended December 31, 2001, cash flows provided by financing activities totaled $58.2 million and included primarily net proceeds from the issuance of preferred stock and common stock of $22.3 million and $52.6 million, respectively, as discussed below. These cash inflows from financing activities were partially offset by net debt repayments of $16.7 million. On January 16, 2001, we authorized and sold 5,625,000 shares of Series A convertible preferred stock generating proceeds of $22.3 million, net of issuance costs. We used these proceeds for working capital needs, retirement of approximately $5.8 million of debt and the purchase of Nonius. On December 14, 2001, we issued and sold 9,000,000 shares of our common stock for $52.6 million, net of issuance costs in conjunction with our initial public offering. Upon the closing of the offering, all 5,625,000 shares of our redeemable preferred stock converted into 6,923,077 shares of common stock.

        Currently, we have both long-term and short-term debt outstanding. As of December 31, 2002, our long-term debt from banks in the U.S., Germany and Japan totaled $10.6 million. The interest rates on our long-term debt ranges for 1.19% to 4.90%. As of December 31, 2002, we also had short-term borrowings of $1.8 million on our lines of credit. We had unused borrowings under our lines of credit of approximately $3.7 million. The interest rate on our short-term borrowings outstanding ranged from 1.50% to 6.50%.

        In connection with some of our outstanding debt, we are required to maintain a financial ratio and other criteria. Additionally, we are subject to some restrictive covenants that require bank consent. As of December 31, 2002, the latest measurement date, we were in compliance with all covenants. If we were in default on any of these provisions, it could require repayment of the amounts outstanding (approximately $2.2 million as of December 31, 2002). We also have bank guarantees on our customer advances which impact the availability on our lines of credit.

        Presently, we anticipate that our existing capital resources will meet our operating and investing needs through at least the end of 2004. Our future capital uses and requirements depend on numerous factors, including our success in selling our existing products, our progress in research and development, our ability to introduce and sell new products, our sales and marketing expenses, our need to expand production capacity, costs associated with possible acquisitions, expenses associated with unforeseen litigation, regulatory changes and competition and technological developments in the market.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

        Our obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under contingent commitments are included in the following table as of December 31, 2002 (in thousands).

        Disclosures regarding these obligations are located in our Financial Statements included in this Annual Report on Form 10-K.

TRANSACTIONS WITH RELATED PARTIES

        We are affiliated, through common shareholders, with several other entities which use the Bruker name. We have entered into a sharing agreement with our affiliates which provides for the sharing of specified intellectual property rights, services, facilities and other related items.

        Sales to related parties which are not subsidiaries of Bruker AXS Inc. are included in the consolidated financial statements. Such related parties are affiliated sales offices in countries in which we do not have our own distribution network. As such, these sales were primarily for resale of our products only. Sales to related parties are at commercially reasonable arm's length conditions and pricing. These sales amounted to $10.8 million, $5.2 million and $14.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

        We share various general and administrative expenses for items including umbrella insurance policies, accounting services and leases with various related parties. These general and administrative expenses amounted to $0.3 million, $0.6 million and $0.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.

DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES

        Our accounting policies are disclosed in our Notes to Financial Statements in this Annual Report on Form 10-K. There have been no material changes to these policies during the year ended December 31, 2002. The more critical of these policies are described in the following paragraphs.

        Revenue Recognition—We continued to recognize revenues primarily when products are accepted by our customers, except when sold through a non-consolidated affiliate or distributor that assumes responsibility for installation, in which case the system sale is recognized upon shipment. Revenue from accessories and parts is recognized upon shipment, and revenue from services is recognized when performed. Our revenue recognition policies are in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." In addition, warranty costs are estimated and accrued at the time of sale, as appropriate.

        Customer Advances—We require an advance deposit under the terms and conditions of contracts with certain customers. These deposits are recorded as a liability until revenue is recognized on the specific contract. We continued to apply the same policy at December 31, 2002 as we have in the past.

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However, the realization of revenue is dependent on our ability to satisfy customer needs and our ability to continue manufacturing operations.

        Cash and Cash Equivalents—We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents primarily include cash on hand, money market funds, municipal notes and time deposits. Time deposits represent amounts on deposit in banks and temporarily invested in instruments with maturities of 90 days or less at time of purchase. Certain of these investments represent off-shore deposits which are not insured by the FDIC or any other United States government agency. Cash and cash equivalents are carried at cost, which approximates fair market value. Our portfolio of investment grade, liquid debt securities limits the amount of credit exposure to any one issue or issuer.

        Inventories—We value inventories primarily at standard cost or average cost which approximates the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Valuing inventories at the lower of cost or market requires the use of estimates and judgment. As discussed later under "Factors Affecting Our Business, Operating Results and Financial Condition," our inventories are subject to rapid technological change. Any of these factors, or certain additional actions, could impact the valuation of our inventory. We continued to use the same techniques to value our inventory as we have in the past. Any technological changes potentially impacting the value of our inventory are considered when determining the lower of cost or market valuations. In addition, we evaluate our ending inventories for estimated excess quantities. This evaluation includes analyses on the historical and projected movement of the inventory-on-hand.

        Accounts Receivable—We value accounts receivable net of an allowance for uncollectible accounts. This allowance is based on our estimate of the portion of the receivables that will not be collected in the future. We continued to apply the same techniques to compute this allowance at December 31, 2002 as we have in the past. These techniques include recording a specific allowance when we become aware of circumstances that may impair a specific customer's ability to meet its financial obligations to us. For other customers, we may recognize an allowance based on the length of time the receivables are past due. However, the ultimate collectibility of a receivable is dependent upon the financial condition of an individual customer which could change rapidly and without advance warning.

        Investments in Other Companies—We have investments in privately-held companies that are recorded at cost. We evaluate these investments for other-than-temporary impairment. This process of assessing whether the investments' net realizable value is less than its carrying cost requires a significant amount of judgment. We consider the investees' cash position, projections, financing needs and the current economic and industry environments. This evaluation is based on the information that we request from these privately-held companies. We may also have a third-party perform a valuation on the investees.

        Goodwill—We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002. This standard requires that goodwill no longer be amortized, and instead be tested for impairment annually. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of our reporting units with goodwill, for the purposes of our 2002 financial statements, we made estimates and judgments about the future cash flows of these reporting units. Our cash flow forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage our company. When our estimated fair value is less than our carrying value, we are required to estimate the fair value of all identifiable assets and liabilities in a manner similar to a purchase price allocation for an acquired business.

        Pension Plan—We have a pension plan for our Bruker AXS GmbH employees. Our benefit obligation under this plan is dependent on certain assumptions used by actuaries in calculating such amount. These assumptions include salary growth, discount rates and other factors. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions could increase or decrease our pension obligation.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are potentially exposed to market risk associated with changes in foreign exchange and interest rates for which we selectively use financial instruments to reduce related market risks. An instrument will be treated as a hedge if it is effective in offsetting the impact of volatility in our underlying exposure. We have also entered into instruments which are not effective derivatives under the requirements of SFAS No. 133 and therefore such instruments are not designated as hedges. All transactions are authorized and executed pursuant to policies and procedures. Analytical techniques used to manage and monitor foreign exchange and interest rate risk include market valuation.

Impact of Foreign Currencies

        We sell products in many countries, and a substantial portion of sales, costs and expenses are denominated in foreign currencies, principally in the euro. In the first three months of 2002, the U.S. dollar continued to strengthen against the euro. However, this trend reversed as the U.S. dollar weakened against the euro during the remaining three quarters. This had a significant impact on our consolidated revenue growth rate of $3.4 million, or 4.1%, as expressed in U.S. dollars. In 2001, the U.S. dollar was moderately strong against the euro and thus had minimal impact on the consolidated revenue growth rate. In addition, the currency fluctuations resulted in accumulated foreign currency translation gains (losses) of $1.5 million and ($0.5) million at December 31, 2002 and 2001, respectively. These gains (losses) are included as a component of accumulated other comprehensive income (loss).

        While we may, from time to time, hedge specifically identified cash flows in foreign currencies using forward contracts, this foreign currency activity historically has not been material. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. At December 31, 2002 and 2001, there were no foreign currency forward contracts outstanding. There also were no material non-functional currency denominated financial instruments, which would expose us to foreign exchange risk, outstanding at December 31, 2002 or 2001.

        Historically, realized foreign exchange gains and losses have been material. Realized foreign exchange (gains) losses were ($1.9) million, $0.2 million and ($0.2) million, for the years ended December 31, 2002, 2001 and 2000, respectively. As we expand internationally, we will evaluate currency risks and may continue to enter into foreign exchange contracts from time to time to mitigate foreign currency exposure.

        We have entered into foreign-denominated debt obligations. The currency effects of the debt obligations are reflected in the accumulated other comprehensive income (loss) account within shareholders' equity. A 10% increase or decrease of the respective foreign exchange rate would result in a change in accumulated other comprehensive income (loss) of approximately $1.1 million or ($0.9) million, respectively.

        During the first half of 2002, we also had euro denominated intercompany lines of credit that impacted transaction gains and losses. However, on July 12, 2002, we restructured our intercompany debt given that settlement of the loans is not anticipated in the foreseeable future. As a result, the impact of foreign exchange rate fluctuations is no longer recorded in other expense (income) within the statement of operations but instead is recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity. We recorded a gain of $0.4 million within accumulated other comprehensive income (loss) for euro denominated intercompany lines of credit between July and December 2002. A 10% increase or decrease of the respective foreign exchange rate would result in a change in accumulated other comprehensive income (loss) of approximately $1.3 million or ($1.0) million, respectively.

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Impact of Interest Rates

        Our exposure related to adverse movements in interest rates is derived primarily from outstanding floating rate debt instruments that are indexed to short-term market rates and from our cash equivalents. Our objective in managing our exposure to interest rates is to decrease volatility that interest rate fluctuations might have on earnings and cash flows. To achieve this objective, we use a fixed rate agreement to adjust a portion of our debt, as determined by management, that is subject to variable interest rates.

        In the U.S., we entered into an interest rate swap arrangement which is designated as a cash flow hedge. The effect of this arrangement was to limit the interest rate exposure on our $2.2 million industrial revenue bond to a fixed rate of 4.60%. We pay a 4.60% fixed rate of interest and receive a variable rate of interest based on the Bond Market Association Municipal Swap Index on a $2.2 million notional amount. Net interest payments or receipts are recorded as adjustments to interest expense. In addition, the instrument is recorded at fair market value as an adjustment to accumulated other comprehensive income (loss). The fair value of the instrument was a liability of $133,000 and $42,000, net of tax, at December 31, 2002 and 2001, respectively.

        In Germany, we have entered into financial instruments currently not designated as hedges. In April 2002, the Company entered into two derivative financial instruments, a cross currency interest rate swap and an interest rate swap, which are currently not designated as hedges. The cross currency interest rate swap of 2 million euro secures a fixed rate of 1.75% per annum payable in Japanese yen until January 4, 2012. The interest rate swap of 3 million euro reduces the 6-month EURIBOR rate by 1.80% per annum until January 4, 2007. The Company entered into the financial instruments to manage its exposure to interest rates and foreign exchange risk. During the fiscal year ending September 30, 1999, the Company entered into three financial instruments, an interest rate cap, an interest rate swap and a cross currency interest rate swap, which are currently not designated as hedges. In addition, the Company acquired a financial instrument, which terminated in the fourth quarter of 2001, with its acquisition of Nonius. By entering into these speculative contracts the Company obtained the right to borrow money at low rates of interest. The Company continues to hold these speculative contracts until it elects to exercise the options to borrow the money.

        The notional amount of the financial instruments not designated as hedges was approximately $13.6 million and $7.3 million at December 31, 2002 and 2001, respectively. Until the instruments become an effective hedge, the instruments are considered speculative and are marked-to-market. The fair value of the instruments depreciated $264,000, $164,000 and $147,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The fair value of the instruments was a (liability) asset of ($315,000) and $1,000 as of December 31, 2002 and 2001, respectively.

        A 10% increase or decrease in the average cost of our variable rate debt would not result in a material change in pre-tax interest expense.

Inflation

        We do not believe inflation has had a material impact on our business or operating results during the periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related

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asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. We believe SFAS No. 143 will not have a material effect on the results of operations or financial position.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for the Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit plan or disposal plan. This statement replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002, with early application encouraged. We elected not to early adopt SFAS No. 146. The adoption of this statement will not have a material effect on the results of operations or financial position.

        In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provision apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not affect our historical financial statements and we believe that this interpretation will not have a material effect on our results of operations or financial position.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of this statement are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We adopted the annual disclosure provisions of SFAS No. 148 in 2002. We will continue to apply the disclosure only provisions of both SFAS No. 123 and SFAS No. 148.

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FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

        The following risk factors should be considered in conjunction with the other information included in this report. This report may include forward-looking statements that involve risks and uncertainties. In addition to those risk factors discussed elsewhere in this report, we identify the following risk factors which could affect our actual results and cause actual results to differ materially from those in the forward-looking statements.

If our products fail to achieve and sustain sufficient market acceptance, our business may be significantly harmed.

        The commercial success of our products depends on market acceptance of our products by biotechnology and pharmaceutical companies and research laboratories. We have only recently commercially launched a number of our current products, and many of these products have achieved only limited sales. We may fail to achieve market acceptance of our newer products or sustain substantial market acceptance of our already established products. Any failure of this nature could materially harm our business. In order to expand, we must convince substantial numbers of pharmaceutical and biotechnology companies and other laboratories to replace their existing X-ray or other techniques with the X-ray technologies employed by our systems. Our systems utilize sophisticated instruments, and many have significant purchase prices. Limited funding available for capital acquisitions by our customers, as well as our customers' own internal purchasing approval policies, could hinder market acceptance of our products. Our intended customers may be reluctant to make the substantial capital investment generally needed to acquire our products or to incur the training and other costs associated with replacing their existing systems with our products. We also may not be able to convince our customers that our systems are an attractive and cost-effective alternative to other technologies and systems. Because of these and other factors, our products may fail to gain or sustain market acceptance.

If we are not able to respond to the rapid technological change characteristic of our industry, we may fail to maintain market share and our business may suffer.

        Rapid technological change and frequent new product introductions characterize the market for life science and related discovery tools. Rapidly changing technology could make some or all of our product lines obsolete. Because substantially all of our products are based on X-ray technologies, we are particularly vulnerable to any technological advances that would make X-ray technologies obsolete in any of our markets. In addition, we may have difficulty in keeping abreast of the rapid changes affecting each of the different markets we serve or intend to serve. If we fail to develop and introduce products in a timely manner in response to changing technology, market demands or the requirements of our customers, our business, results of operation and financial condition could be materially harmed.

If we are unable to recover significant development costs of one or more of our products or product lines, our business, results of operations and financial condition may suffer.

        We offer and plan to offer a broad product line and incur and expect to incur substantial expenses for the development of new products and enhanced versions of our existing products. To meet the evolving needs of our customers, we must rapidly and continually enhance our products and services and develop new products and services. Our business model calls for us to derive a significant portion of our revenues each year from products that did not exist in the previous two years. However, we may experience difficulties which may delay or prevent the successful development, introduction and marketing of new products or product enhancements. The speed of technological change in life science and other related markets we serve may prevent us from successfully marketing some or all of our products for the length of time required to recover their often significant development costs. If we fail

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to recover the development costs of one or more products or product lines, our business, results of operations and financial condition could be harmed.

If the proteomics market does not grow as expected, we may not meet our growth expectations.

        We expect the proteomics market to fuel the growth of a significant portion of our business. We have invested and expect to continue to invest significant time and resources in the development of new products for this market. If this new and still evolving market does not grow and become established, we may not realize the expected profit from these research and development expenditures. If this market for our products does not grow, our expected growth rate could decline substantially, which could have a material adverse impact on our business, results of operations or financial condition. If we do not address our substantial competitive pressures, our revenues and profitability may suffer. In each market, for each of our products, we face substantial competition from competitors who offer products based on X-ray technology as well as from those employing alternative technologies. We expect that competition in our markets will increase significantly, especially as more biotechnology and pharmaceutical companies adopt automated high throughput instruments as tools for drug discovery, drug development and related areas. Our competitors may develop or market products that are more effective or more commercially attractive than our current or future products or that may render our products obsolete. Many of our competitors have substantially greater financial, operational, marketing and technical resources than we do. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

Our success depends on our ability to operate without infringing or misappropriating the proprietary rights of others.

        Our commercial success depends on avoiding the infringement of other parties' patents and proprietary rights as well as avoiding the breach of any licenses relating to our technologies and products. Given that there may be patents of which we are unaware, particularly in the U.S. where patent applications are confidential, avoidance of patent infringement may be difficult. Various third-parties hold patents which may relate to our technology, and we may be found in the future to infringe these or other patents or proprietary rights of third parties, either with products we are currently marketing or developing or with new products which we may develop in the future. If a third party holding rights under a patent successfully asserts an infringement claim with respect to any of our current or future products, we may be prevented from manufacturing or marketing our infringing product in the country or countries covered by the patent we infringe, unless we can obtain a license from the patent holder. We may not be able to obtain the license on commercially reasonable terms, if at all, especially if the patent holder is a competitor. In addition, even if we can obtain the license, it may be non-exclusive, which will permit others to practice the same technology licensed to us. We also may be required to pay substantial damages to the patent holder in the event of an infringement. Under some circumstances in the U.S., these damages could include damages equal to triple the actual damages the patent holder incurs. If we have supplied infringing products to third parties for marketing by them or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or license payments they are required to make to the patent holder. Any successful infringement action brought against us may also adversely affect marketing of the infringing product in other markets not covered by the infringement action, as well as our marketing of other products based on similar technology. Furthermore, we will suffer adverse consequences from a successful infringement action against us even if the action is subsequently reversed on appeal, nullified through another action or resolved by settlement with the patent holder. The damages or other remedies awarded, if any, may be significant. As a result, any successful infringement action against us may harm our business.

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We may be involved in lawsuits to protect or enforce our patents that are brought by us which could be expensive and time consuming.

        In order to protect or enforce our patent rights, we may initiate patent litigation against third parties; and we may be similarly sued by others. We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual property suits, interference proceedings and related legal and administrative proceedings is costly and diverts our technical and management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

        Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our common stock.

If we are unable to effectively protect our intellectual property, third parties may use our technology, which could impair our ability to compete in our markets.

        Our success will depend in part on our ability to obtain and maintain meaningful patent protection for our products throughout the world. We seek patents to protect our intellectual property and to enhance our competitive position. However, our presently pending or future patent applications may not issue as patents, and any patent issued to us may be challenged, invalidated, held unenforceable or circumvented. Furthermore, the claims in patents which have been issued, or which may be issued to us in the future, may not be sufficiently broad to prevent third parties from producing competing products. In addition, the laws of various foreign countries in which we compete may not protect our intellectual property to the same extent as do the laws of the U.S. If we fail to obtain adequate patent protection for our proprietary technology, our ability to compete would be impaired.

        In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and strategic partners upon the commencement of a relationship with us. However, we may not obtain these agreements in all circumstances. In the event of unauthorized use or disclosure of this information, these agreements, even if obtained, may not provide meaningful protection for our trade secrets or other confidential information. In addition, adequate remedies may not exist in the event of unauthorized use or disclosure of this information. The loss or exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. Furthermore, others may have developed, or may develop in the future, substantially similar or superior know-how and technology.

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We have agreed to share our name and distribution channels with other entities under common control; if we lose the right to use our name or if our distribution channels are disrupted, our business could be materially harmed.

        We maintain a sharing agreement with 13 affiliated entities that allows us to share the Bruker name with these affiliated companies and their subsidiaries. We could lose the right to use the Bruker name if:

•

we declare bankruptcy;



•

we interfere with another party's use of the name;



•

we take a material action which materially detracts from the goodwill associated with the name; or



•

we suffer a major loss of our reputation in our industry or marketplace.

        The loss of the Bruker name could result in a loss of goodwill, brand loyalty and sales of our products. We also share some distribution channels with many of these affiliates, primarily in secondary markets. Although we have dedicated X-ray sales and service staff in each of the distribution channels we share with affiliates, if we lose this dedicated service staff and if our affiliates' products receive distribution priority over our products, our distribution process could be impaired, resulting in lost sales which could harm our business.

We may be subject to substantial liability if our products malfunction or are misused.

        Due to the high-power, complex nature of our machines, malfunction or misuse of the machines could result in serious damage to property or injury to people. For example, our products utilize X-ray beams which could cause serious damage to biological tissue. While our systems contain protective devices designed to prevent harmful exposure to X-rays, our service personnel often override these protective devices to service and maintain the systems. In addition, some of our customers require the ability to avoid these protective devices. As a result, our personnel or our customers' personnel could be injured by exposure to X-ray beams and could sue us. Additionally, some of our products operate at very high electrical voltage. Misuse of these products could lead to damaging accidents such as fires. Lawsuits filed against us for personal or property damage could result in substantial liability which could harm our financial results.

If we fail to enter into and maintain effective collaborations, our product development may be stunted and our business may suffer.

        We collaborate with other companies and academic institutions on new technology and product development. Demand for our products will depend in part upon the extent to which these collaborations are successful in developing, or helping us to develop, new products and new applications for our existing products. We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. If we fail to enter into or maintain appropriate collaboration agreements, or if any of these events occur, we may not be able to develop new products as planned, which could harm our business.

Any reduction in the capital resources or government funding of our customers could reduce our sales and harm our business.

        A significant portion of our sales are capital purchases by our customers. The spending policies of our customers could have a significant effect on the demand for our products. These policies are based on a wide variety of factors, including the resources available to make purchases, the spending priorities

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among various types of equipment, unfavorable economic conditions and changes in the political climate. Any changes in capital spending or changes in the capital budgets of our customers could significantly reduce demand for our products. The capital resources of our biotechnology and other corporate customers may be limited by the availability of equity or debt financing. Any significant decline in capital expenditures by our customers could harm our business.

        We are dependent, both directly and indirectly, on the research and development spending patterns of the pharmaceutical, biotechnology, chemical and other industries, as well as upon the funding policies of various governments and government agencies. In addition, we make a substantial portion of our sales to non-profit entities, which are dependent on continued high levels of government support for scientific research. Any decline in this support could harm our business.

We may not be able to expand our sales and service staff to meet demand for our products and services.

        Our future revenue and profitability will depend on our ability to expand our marketing and sales force as well as our service and support team. Because our products are technical in nature, we believe that it is important in many cases for our marketing, sales and support staff to have scientific or technical expertise and experience. Competition for employees with these skills is intense. We may not be able to continue to attract and retain sufficient qualified sales and service people, and we may not be able to grow and maintain an efficient and effective sales, marketing and support department. If we fail to continue to attract or retain qualified people, our business could suffer.

We plan significant growth, and there is a risk that we will not be able to manage this growth.

        Our success will depend on the expansion of our operations. Effective growth management will place increased demands on our management, operational and financial resources. To manage our growth, we must expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel. Any new systems which we implement to facilitate our growth may have problems which could result in disruptions in our operations, financial or management systems. If we fail to manage our growth effectively, our business, results of operations and financial condition will be harmed.

We are dependent upon various key personnel and must recruit additional qualified personnel for a number of management positions.

        Our success is highly dependent on the continued services of key management, technical and scientific personnel. Our management and other employees may voluntarily terminate their employment with us at any time upon short notice. The loss of the services of any member of our senior management, technical or scientific staff may significantly delay or prevent the achievement of product development and other business objectives. The chairman of our board of directors also is and has been chief executive officer and chairman of the board of directors of an affiliated, publicly traded company and a management officer of several affiliates, which reduces the time and attention he can devote to our management. Our future success will also depend on our ability to identify, recruit and retain additional qualified scientific, technical and managerial personnel. Competition for qualified personnel is intense, particularly in the areas of information technology, engineering and science, and the process of hiring suitably qualified personnel is often lengthy. If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.

We are dependent in our operations upon a limited number of suppliers.

        We currently purchase key components used in our X-ray systems from several preferred suppliers. Although we maintain secondary suppliers, our reliance on the preferred suppliers could result in

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delays associated with redesigning a product due to an inability to obtain an adequate supply of required components and reduced control over pricing, quality and timely delivery. In particular, we obtain a very sophisticated chip for use in our CCD detectors from Fairchild Imaging, which to our knowledge is the only source of a chip of this size and quality. See "Business—Strategic Collaborations." Although we have secondary chip sources, we do not believe that any of these sources would currently be able to provide us with a similar chip of comparable quality. Any interruption in the supply of components could have an adverse effect on our business, results of operations and financial condition.

If we fail to expand our international presence, our revenue may not grow as expected.

        International sales account for, and are expected to continue to account for, a significant portion of our total revenues. International expansion will require that we hire additional personnel. If we fail to hire additional personnel or to develop and maintain relationships with foreign customers and partners, we may not be able to expand our international sales and could suffer decreased profits.

        International sales and operations are and will remain subject to a number of additional risks not typically present in domestic operations, including:

•

changes in regulatory requirements;



•

the imposition of government controls;



•

political and economic instability or conflicts;



•

the costs and risks of deploying systems in foreign countries;



•

limited intellectual property rights; and



•

the burden of complying with a wide variety of complex foreign laws and treaties.

        Our international operations are and will remain subject to the risks associated with the imposition of legislation and regulation relating to the import or export of high technology products or other similar areas. We cannot predict whether tariffs or restrictions upon the importation or exportation of our products will be implemented by the U.S. or other countries. If these tariffs or restrictions are imposed, our revenues or profits could suffer. We are also subject to the risks inherent in managing geographically distributed operations and personnel with disparate cultures.

Our results of income may be adversely affected when we exchange foreign currency received from international sales into U.S. dollars.

        A significant portion of our business is conducted in currencies other than the U.S. dollar, our reporting currency. As a result, currency fluctuations among the U.S. dollar and the foreign currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses. We recognize foreign currency gains or losses arising from our operations in the period incurred. Due to the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we cannot predict the effects of exchange rate fluctuations upon our future operating results. To date, we have engaged in only limited hedging activities to reduce this risk.

Because we have subsidiaries and operations in countries outside the U.S., we are subject to various international tax risks which could adversely affect our earnings.

        We have numerous subsidiaries and operations outside the U.S., and we are subject to international tax risks. Distributions of earnings and other payments received from our subsidiaries may be subject to withholding taxes imposed by the countries where they are operating or are formed. If

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these foreign countries do not have income tax treaties with the United States or the countries where our subsidiaries are incorporated, we could be subject to high rates of withholding taxes on these distributions and payments. We could also be subject to being taxed twice on income related to operations in these non-treaty countries. Because we are unable to reduce the taxable income of one operating company by losses incurred by another operating company located in another country, we may have a higher foreign effective income tax rate than that of other companies in our industry. The amount of the credit that we may claim against our U.S. federal income tax for foreign income taxes is subject to many limitations which may significantly restrict our ability to claim a credit for all of the foreign taxes we pay.

If we make acquisitions, we may fail to successfully integrate technologies, personnel and operations, which could impede revenue growth and harm our business.

        If appropriate opportunities become available, we may acquire additional technologies, products or businesses to expand our existing and planned product lines and technologies. These acquisitions would expose us to risks including:

•

the assimilation of new technologies, operations, sites and personnel;



•

the diversion of resources from our existing business and technologies; and



•

the inability to generate revenues to offset associated acquisition costs.

        Acquisitions may also result in the issuance of dilutive equity securities, the incurrence or assumption of debt or additional expenses associated with the amortization of acquired intangible assets or potential business. Additionally, we recently acquired Nonius, a Dutch company, and are in the process of integrating its operations with ours. Integrating such a large acquisition presents logistical issues and can result in short-term disruption to our business. Our failure to successfully address these risks could harm our business, results of operations and financial condition. Also, there is no assurance that the benefits we expect to gain from the Nonius acquisition or from other acquisitions will be achieved.

Damages to our manufacturing facilities could adversely affect our ability to effectively operate our business.

        We maintain manufacturing facilities in Madison, Wisconsin, Delft, the Netherlands and Karlsruhe, Germany. Damage to any of these facilities due to fire, weather, earthquake or other natural disaster, power loss, unauthorized entry or other events could cause an interruption in the production of our products. A prolonged interruption in our manufacturing operations could have a material adverse impact on our ability to effectively operate our business. The insurance we have purchased may not be sufficient to cover any losses incurred.

Our operating results may fluctuate significantly, and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our common stock price.

        Our operating results have fluctuated in the past, and we expect that they will fluctuate in the future. Factors that could cause our operating results to fluctuate include, among other things, the timing of release and competitiveness of our products, disputes regarding patents or other intellectual property rights and currency fluctuations.

        If revenue declines in a period our earnings may decline because many of our expenses are relatively fixed in the short term. In particular, research and development and selling, general and administrative expenses are not directly affected by variations in revenue in a period.

        Due to volatile and unpredictable revenues and operating expenses, we believe that period-to-period comparisons of our results of operations may not be a good indication of our future

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performance. It is possible that, in some future periods, our operating results may be below the expectations of securities analysts or investors. In such event, the market price of our common stock could fluctuate significantly or decline.

Claims relating to improper handling, storage or disposal of hazardous or radioactive materials present at our facilities or properties could result in liabilities and be time consuming and costly to defend.

        We handle hazardous and radioactive materials in our business which are subject to federal, state, local and foreign environmental, health and safety laws and regulations. In addition, hazardous materials may have been released in the past at properties which we own or lease or may be released at properties to which we send waste for disposal. If we fail to comply with applicable laws and regulations, regulatory authorities could impose on us sanctions and penalties, which could be substantial. Moreover, we could be held strictly liable for damages relating to releases of hazardous or radioactive material, including the cost of cleanup and personal injury or property damages, and we may incur delays and increased costs in manufacturing our products and otherwise conducting our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information required by this item is incorporated by reference from the section labeled "Quantitative and Qualitative Disclosures of Market Risk" in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Report of Independent Accountants

To the Board of Directors and Shareholders
of Bruker AXS Inc:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows present fairly, in all material respects, the financial position of Bruker AXS Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 11, to the consolidated financial statements, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002.

/s/ PricewaterhouseCoopers LLP

Milwaukee, Wisconsin
February 25, 2003

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BRUKER AXS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

The accompanying notes are an integral part of these financial statements.

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BRUKER AXS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

The accompanying notes are an integral part of these financial statements.

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BRUKER AXS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share data)