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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART IV

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2002
Commission File Number 000-30833

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

40 Manning Road
Billerica, MA 01821
(Address of principal executive offices, including zip code)

(978) 663-3660
(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.) Yes o No ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was approximately $45,329,730 (based on the last reported sale price on the Nasdaq National Market on that date).

        The number of shares outstanding of the registrant's Common Stock as of March 21, 2003 was 55,007,931.

BRUKER DALTONICS 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 "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 Daltonics" refer to Bruker Daltonics Inc. and, in some cases, its subsidiaries, as well as all predecessor entities.

        Our principal executive offices are located at 40 Manning Road, Billerica, Massachusetts 01821, and our telephone number is (978) 663-3660. Information about Bruker Daltonics is available at www.BDAL.com. The information on our website is not incorporated by reference into and does not form a part of this report. Daltonics and the Daltonics logo are trademarks of Bruker Daltonics. All other trademarks, tradenames or copyrights referred to in this report are the property of their respective owners.

PART I

ITEM 1. BUSINESS

Overview

        Bruker Daltonics is a leading developer and provider of innovative life science tools based on mass spectrometry and develops a broad range of field analytical systems for substance detection and pathogen identification. Our substantial investment in research and development allows us to design, manufacture and market a broad array of products intended to meet the rapidly growing needs of our diverse customer base. Our customers include pharmaceutical companies, biotechnology companies, agricultural biotechnology companies, proteomics companies, molecular diagnostics companies, academic institutions and government agencies.

        Mass spectrometers are sophisticated devices that measure the mass or weight of a molecule and provide highly accurate information about the structure of materials. Our mass spectrometry-based systems often combine advanced mass spectrometry instrumentation; automated sampling and sample preparation robots; reagent kits and other disposable products, called consumables, used in conducting tests, or assays, and powerful bioinformatics software. Our systems offer integrated solutions for applications in multiple existing and emerging markets including genomics and proteomics, metabolic and biomarker profiling, drug discovery and development, molecular assays and diagnostics, molecular and systems biology and basic medical research.

        We market our life science systems both through our direct sales force and through strategic distribution arrangements with Agilent Technologies, Sequenom, Biacore and others. We are also a worldwide leader in supplying mass spectrometry-based systems for substance detection and pathogen identification in security and defense applications.

        Bruker Daltonics was incorporated in Massachusetts, as Bruker Federal Systems Corporation. In February 2000, we reincorporated in Delaware as Bruker Daltonics Inc.

Industry Background

        We design our products to address the rapidly evolving needs of the life science industry. Public and private efforts to sequence the entire human genome have led to advances that are fueling further investment in the discovery and identification of single nucleotide polymorphisms, or SNPs, and other forms of genetic variation. These developments, combined with advances in combinatorial chemistry, which is the creation of libraries of chemical compounds, and in basic molecular biology and medical research, are spurring growth in the following rapidly developing and emerging areas:

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pharmacogenomics, which compares the genetic information of an individual to the average human genome to predict the response of individual patients and patient populations to drugs;



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personalized medicine, which seeks to apply inexpensive, rapid molecular diagnostic tests, or assays, to profile a patient's genetic composition and enable the prescription of individualized drug therapy;



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proteomics, which involves the large-scale separation, identification and characterization of proteins in order to understand how proteins are created based on the information contained in genes;



•

new methods of drug discovery, which are based on the rapid measurement, or high-throughput screening, of large numbers of small organic compounds synthesized through combinatorial chemistry against large numbers of disease pathways, or targets, identified by genomics and proteomics;

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biomarker detection, or bio-barcoding, which develops rapid and sensitive assays for a broad range of cell and tissue types for applications including infectious disease detection, human tissue assessment, the identification of specific agricultural characteristics and pathogen identification, even when the molecular mechanisms are not understood or the genomic sequence is not available; and



•

metabolic profiling, or metabolomics, which analyzes the levels of substances produced by the metabolism, called metabolites, present in a cell or in biological fluids to draw correlations between disease states, genetic modifications and variations in metabolite levels.

        In addition, increased levels of funding for basic medical research have fueled demand by universities, medical schools and government agencies for sophisticated bioanalytical systems, such as mass spectrometers. Funding has also increased for substance detection and pathogen identification systems for security and defense applications.

Limitations of Alternative Life Science Tools

        Many of the bioanalytical tools available today based on technologies other than mass spectrometry, including those described in the next paragraph, have significant limitations when used for applications including the detection of genetic variation, pharmacogenomics, proteomics, drug discovery and biomarker detection. These limitations include lack of throughput to accommodate the volume of analysis required, lack of automation, time-consuming sample preparation and insufficient accuracy of the resulting data. For example, the two leading methods traditionally used for DNA sequencing and expression profiling are electrophoresis and hybridization. The error rate of these techniques can increase the cost, complexity and time involved in completing more demanding analyses.

        Traditional protein science tools, including Edman sequencing and two-dimensional gel separations are time consuming, relatively inaccurate and labor intensive. Additionally, many alternative life sciences tools can only be utilized by expert scientists. Other, newer bioanalytical tools, like biological chips that can be read by fluorescence readers, may be highly automated. However, these instruments are often less flexible or less accurate than mass spectrometers. For other emerging applications including metabolic profiling and rapid biomarker detection, we believe there presently are no automated, sensitive and accurate alternative tools available other than mass spectrometry-based systems.

        Increasingly, life science companies are looking to solutions that address the limitations inherent in these alternative tools.

Mass Spectrometry

        Mass spectrometers are devices for measuring the mass, or weight, of a molecule. Mass spectrometry systems employ an ionization source which creates charged molecules, and a mass separation/detection component which separates these charged molecules on the basis of mass to detect their presence and quantity. Mass spectrometry has been used in physics and chemistry for over fifty years. Over the past fifteen years, mass spectrometry has emerged as a powerful research tool in the life sciences. For example, mass spectrometers can determine the identity, amount, structure, sequence and other biological properties of small molecules, like drug candidates and metabolites, as well as large biomolecules, like proteins or DNA.

        While highly accurate, mass spectrometers historically have been limited by the time and skill required to prepare samples, conduct each measurement and analyze the data.

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Our Solutions

        Our product lines integrate sophisticated mass spectrometers with automated sample preparation and measurement, and, where appropriate, bioinformatics software to address many of the bioanalytical and bioinformatics needs of the life sciences industry across a broad range of applications. Our products have particular application to:

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genetic variation analysis, including such evolving areas as pharmacogenomics and personalized medicine;



•

proteomics;



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metabolomics;



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drug discovery based on high-throughput screening and combinatorial chemistry; and



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drug development.

        Automated high-throughput mass spectrometry systems offer significant advantages over other bioanalytical tools, including Edman sequencing and two-dimensional gel separations, in these emerging and rapidly changing markets. Our automated systems allow our customers to generate and evaluate large volumes of accurate, high-quality data on a cost-effective basis. We believe that this enhanced throughput and high-quality data improves our customers' ability to apply bioinformatics to validate lead disease pathways, or targets, understand disease pathways and analyze lead compounds. Our customers also use our products in molecular biology and other basic medical research. In addition, our automated, integrated mass spectrometry technology forms the basis of our substance detection and pathogen identification products used in security and defense markets.

        Our life science systems are based on four core mass spectrometry technologies. Building on these core technologies, we offer a wide range of systems that address key analytical needs in multiple applications across the life sciences industry. We believe that our products offer the following advantages to our customers:

        High Degree of Automation.    Our automated sample preparation and measurement technology and sophisticated bioanalytic software allow our customers to process high sample volumes with reduced reliance on highly-trained scientific personnel.

        Integrated Solutions.    We provide our customers with complete bioanalytical solutions by integrating our mass spectrometry products with front-end sample preparation, a sample preparation technology that conditions samples before they are analyzed, with purification and separation methods that clean and separate components of sample mixtures, chemicals and other disposable materials used in conducting assays and with bioinformatics software that interprets and analyzes data after it has been generated.

        Accurate Results.    Our automated mass spectrometry systems generate large volumes of highly accurate data with the selectivity and sensitivity our customers demand. The high sensitivity of our products enables our customers to pursue miniaturization and analysis of smaller samples. The accuracy of the results reduces the need for repeat analysis to eliminate errors.

        Increased Productivity.    Our high-throughput products are designed to allow our life science customers to increase productivity by generating more results in a shorter time period.

        Cost Efficiency.    We have achieved performance advances with our products that are designed to result in increased information per analysis at a significantly lower cost per analysis for our customers.

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Our Strategy

        Our strategy is to continue to be a leading provider of mass spectrometry and related systems for use in life sciences, as well as in substance detection and pathogen identification. Key elements of our strategy include:

        Providing a Broad Array of Tools for a Wide Range of Applications.    In life sciences, our strategy is to offer a broad range of products that provide integrated solutions, including sample preparation, sample analysis and data interpretation, for applications in existing and emerging life science markets. Our longer term strategy is to expand our enabling life science tools beyond our current mass spectrometry-based product lines and to extend our position as a leading provider of enabling tools for the life science industry. We plan to selectively evaluate new life science markets to which we may apply our core technologies and to continue to develop and market our mass spectrometry systems for substance detection and pathogen identification.

        Developing New Platforms, Enhanced Products and New Applications.    We plan to continue our substantial investment in internal research and development, although at a gradually declining percentage of revenue. As a result of this investment, throughout 2000, 2001 and 2002 we introduced entirely new technology platforms, nine next generation mass spectrometers, three new consumable product lines and three bioinformatics software packages. We expect our collaborations with key industrial and academic customers to continue to play a strategic role in our research and development efforts and to assist us in identifying and anticipating opportunities for enhanced products and emerging applications.

        Building Alliances and Pursue Acquisitions.    We plan to continue to co-develop selected products with strategic partners, especially when these alliances expand our product lines and extend our marketing reach. As an example, our collaboration with Agilent resulted, in early 2000, in the introduction of two ion trap instruments designed to be installed on top of a laboratory bench. We also intend to pursue strategic acquisitions to extend our technology base. For example, at the end of 1999, we acquired Viking to expand our substance detection technologies. Similarly, in 2000, we entered into a strategic alliance with GeneProt whereby it purchased 51 of our systems as well as consumables and support over time for use in industrial-scale proteomics research. In 2001, we entered into strategic alliances with Affinium Pharmaceuticals, Inc. (formerly Integrative Proteomics, Inc.) as well as GeneFormatics, Inc. in the area of structural proteomics. In 2002, we announced an expanded alliance with Roche in the field of proteomics. The resulting collaboration focuses on the development of highly efficient methods for mass spectrometric protein analysis. Similarly, in 2002, our research and development collaboration with Biacore resulted in the introduction of a complete commercial system for SPR/MS.

        Generating Recurring Revenue.    Our consumables and product service and support provide an opportunity to generate recurring revenue. We seek to develop additional consumables, which enhance the ease of use and productivity of our tools. For example, our reagents and assay kits make sample preparation easier for our customers. We seek to increase recurring revenue from post-warranty service to our growing industrial customer base as well as from training and applications support.

        Leveraging Our Intellectual Property.    We expect to continue to pursue an intellectual property strategy of obtaining extensive patent protection. We have a substantial patent portfolio, and it is our strategy to build and protect our patent portfolio. We believe that maintaining extensive intellectual property rights allows us to maintain a competitive advantage through protecting access to key technologies. Where appropriate, we may pursue an active licensing program to generate recurring revenue or to gain access to the intellectual property of others.

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Our Products

Mass Spectrometry

        We base our life science solutions on four core mass spectrometry technology platforms which include:

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matrix-assisted laser desorption ionization, or MALDI, time-of-flight mass spectrometry; (MALDI-TOF), including tandem time-of-flight systems (MALDI-TOF/TOF);



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electrospray ionization, or ESI, time-of-flight mass spectrometry (ESI-TOF), including tandem mass spectrometry systems based on ESI-quadrupole-TOF mass spectrometry (ESI-Q-q-TOF);



•

Fourier transform mass spectrometry (FTMS); and



•

ion trap mass spectrometry (ITMS).

        Time-of-flight mass spectrometers measure mass based on the time it takes for charged molecules to travel from the ionization source to the detection component. With the ability to analyze as many as 30,000 samples per day, these mass spectrometers currently have the highest sample throughput and can analyze the broadest range of masses of any mass spectrometer for use in the fields of genomics and proteomics. Our time-of-flight mass spectrometry solutions make full use of this potential for increased speed by automating various steps of the analysis. Our time-of-flight solutions combine high sensitivity, accuracy and throughput to generate large volumes of accurate raw data for SNP detection and proteomics.

        MALDI Time-of-Flight Mass Spectrometers utilize an ionization process to analyze solid samples using a laser that combines large volume sample throughput with high mass range and significant sensitivity. Our MALDI-TOF mass spectrometers are useful for: (a) SNP analysis; (b) genotyping; (c) personalized medicine; (d) forensics; (e) proteomics and protein function analysis; (f) drug discovery and development; and (g) fast cell and tissue biomarker detection. We offer five MALDI time-of-flight instruments:

        ultraflex™ TOF/TOF.    The ultraflex incorporates a MALDI source coupled with a tandem Time of Flight mass analyzer. This allows for high-throughput protein identification by MALDI-TOF using peptide mass fingerprinting, followed by more detailed protein characterization via further fragmentation and secondary TOF detection.

        ultraflex™ TOF.    Our top-of-the-line MALDI time-of-flight instrument offers modular flexibility that allows various configurations in the research laboratory and automated sampling combined with high sensitivity, resolution and accuracy.

        autoflex™.    Our first MALDI time-of-flight instrument is specifically designed for industrial biology. The autoflex can be used in SNP analysis and proteomics. Sequenom uses this system in its industrial genomics MassArray system.

        OmniFLEX™.    Our first MALDI time-of-flight instrument which can be installed on a laboratory bench can be used in general-purpose mass spectrometry laboratories. The OmniFLEX combines sensitivity, resolution and accuracy, for a wide variety of routine and higher-end applications, with a lower price than our other three products described above.

        OmniFLEX LT™.    Our easy-to-use and affordable linear bench-top MALDI time-of-flight instrument is designed as a biologist-friendly molecular mass measurement tool. We introduced this product in March 2002. The OmniFLEX LT combines sensitivity, resolution and accuracy, for a wide variety of routine and lower-end applications, with a lower price than our basic OmniFLEX.

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        These products utilize our proprietary AnchorChip microarrays which prepare samples for analysis. These microarrays employ patented microfluidics technology that improves sensitivity and reduces analysis time per sample by concentrating the sample in a defined location.

        ESI Time-of-Flight Mass Spectrometers utilize an ionization process to analyze liquid samples. This process, which does not destroy the sample, allows for rapid data acquisition and analysis of large biological molecules. ESI time-of-flight mass spectrometers are useful for: (a) identification, protein analysis and functional complex analysis in proteomics and protein function; (b) molecular identification in metabolomics and drug metabolite analysis; (c) combinatorial chemistry high-throughput screening, or HTS; and (d) fast liquid chromatography mass spectrometry, or LC/MS, in drug discovery and development. We offer three ESI time-of-flight instruments:

        BioTOF™III.    The BioTOF III is the next generation of our leading performance floor-standing ESI-TOF system. It is especially useful for the analysis of high molecular weight materials such as proteins and other biologically active complexes.

        BioTOF™III Q.    The BioTOF III Q adds a high performance quadrupole mass analyzer and a collision multipole to the BioTOF III. This type of tandem mass spectrometry using Q-q-TOF geometry permits the sensitive and highly accurate determination of molecular fragment ions. It is particularly useful in de novo peptide sequencing as it can eliminate ambiguities in the assignment of amino acid sequences by high accuracy fragment analysis.

        microTOF™.    The microTOF utilizes new state-of-the-art high-speed analog-to-digital converter (ADC) technology, which in contrast to older time-to-digital converters (TDC) permits reliable quantitative measurements, and can produce high-fidelity undistorted isotopic patterns.

        Fourier Transform Mass Spectrometers utilize high-field superconducting magnets to offer the highest resolution, selectivity and accuracy currently achievable in mass spectrometry. Our systems based on this technology often eliminate the need for time-consuming separation techniques in complex mixture analyses. In addition, our systems can fragment molecular ions to perform exact mass analysis on all fragments to determine molecular structure. Fourier transform mass spectrometers are useful for: (a) the study of the structure and function of biomolecules including proteins, DNA and natural products; (b) complex mixture analysis including combinatorial libraries; (c) high-throughput proteomics and metabolomics; and (d) high-throughput drug screening. We offer two Fourier Transform mass spectrometer instruments:

        APEX IV™.    In the spring of 2002, we introduced our new APEX IV instrument, a powerful and compact commercial Fourier transform mass spectrometer. This system allows a wide range of research capabilities while maintaining simplicity of operation. Our APEX IV system is available with several magnetic field strengths which can be tailored to meet a customer's analytical needs. An increase in field strength improves resolution, selectivity and accuracy.

        APEX-Q™.    In March of 2003, we introduced the APEX-Q hybrid Q-q-FTMS. The APEX-Q hybrid Q-q-FTMS is an innovative research instrument offering ultra high performance for proteomics research. In development for over two years, the APEX-Q platform represents the combination of both a Q-q- "front-end" and a high field FTMS magnet (9.4 or 12 Tesla) for the ultimate resolution proteomics mass spectrometer.

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        Ion Trap Mass Spectrometers measure all ions simultaneously which improves sensitivity relative to older quadrupole mass spectrometers. Ion trap mass spectrometers are useful for: (a) sequencing and identification based on structural analysis; (b) quantitative liquid chromatography mass spectrometry; (c) identification of combinatorial libraries; and (d) generally enhancing the speed and efficiency of the drug discovery and development process. In addition to ion trap mass spectrometers that we sell via Agilent Technologies, we offer three ion trap mass spectrometer instruments via our direct sales channels:

        esquire2000™.    The esquire2000 is an affordable compact tandem mass spectrometer. It offers better sensitivity than previous analytical- grade ion trap LC/MS/MS systems, and features a mass range up to 2200m/z. The esquire2000 provides higher LC/MS/MS specificity than single quadrupole LC/MS systems at only an incremental cost increase.

        esquire3000plus™.    Our esquire3000plus ion trap mass spectrometer combines our patented ion trap technology with ion source and liquid chromatography technology from Agilent. It offers performance benefits over other ion trap systems, including software integration with Agilent separation systems, faster scan rates, higher sensitivity, a wider mass range and a simple Windows NT user interface. We also co-manufacture (with Agilent) a related product, the LC/MSD-trap, which is distributed by Agilent.

        esquire HCT™.    The esquire HCT is a novel high performance ion trap mass spectrometer for faster and more sensitive analysis in proteomics and metabolomics. This new high capacity trap (HCT) combines substantially higher ion storage capacity with a proprietary high-performance scan mode for even higher ion trap research performance.

        Automated Sample Preparation.    We provide versatile automated sample preparation robots specifically designed to enhance throughput of genomics and proteomics analysis.

        MAP™ II and MAP II/8.    Our customized liquid handler for automated MALDI sample preparation is available in 1 and 8 channel configurations for optimum throughput. MAP systems use standard microtiter plates for optimum throughput and integration with existing laboratory techniques.

        Proteineer™ SP Spot Picker.    The Proteineer™ SP Spot Picker enables automated spot picking from 2-D gels into 96 and 384 micro well plates. The SP is based on our successful MAP II liquid handler customized for MALDI applications and thus smoothly fits into our Proteineer suite.

        Proteineer™ DP Digest & Prep.    Similar to the SP, the DP automates digestion of proteins separated by 2-D gels and sample preparation for subsequent mass spectrometric analysis.

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Consumables

        We sell consumables for processing, purifying and preparing samples prior to mass spectrometric analyses. Additionally, our systems for substance detection and pathogen identification use consumables for sample collection. Consumables will provide an increasing recurring revenue stream as our installed systems base grows. Our consumables include:

Automation and separation products, training and services

        We sell a broad array of related products and services with our initial system sales and during a product's lifetime. For substance detection and pathogen identification systems, we have developed training products, including complete system simulator installations. We offer post-warranty service on either a pre-paid or per-call basis and sell repair and replacement parts for our growing installed systems base. Our related products include:

Bioinformatics and Software

        We have introduced automated control software to integrate separation devices and robotics into our solutions. In addition, we provide bioinformatics software to generate useable information from

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large volumes of raw data. Finally, we offer intuitive data acquisition and analysis software on a Windows NT platform to make our systems accessible to non-experts. Our related products include:

Substance Detection and Pathogen Identification

        We sell a wide range of portable analytical and bioanalytical detection systems and related products. Our customers use these devices for nuclear, biological pathogen and chemical defense applications, anti-terrorism, law enforcement and process and facilities monitoring. Our substance detection and pathogen identification products use many of the same technology platforms as our life sciences products. For example, we developed our esquire products using the same ion trap technology used in our chemical and biological mass spectrometers. We also provide integrated, comprehensive detection suites which include our multiple detection systems, consumables, training and simulators. Our related products include:

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Research and Development

        Product and Applications Development.    We commit substantial capital and resources to internal and collaborative research and development in order to provide innovative life science solutions to our customers. In 2000, 2001 and 2002, we spent $20.0 million, $18.5 million and $20.7 million, respectively, for research and development purposes. The following are a few examples of our recent research and development accomplishments:

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After a four-year development effort, we created a new technology platform for orthogonal time-of-flight mass spectrometry. In January 1998, we introduced our first commercial system using this technology platform, the BioTOF. In March 2000, we offered our second generation product derived from this ESI time-of-flight platform, the BioTOF II. In May 2001, we introduced the BioTOF Q which adds a high performance quadrupole mass analyzer to the BioTOF II. In March 2003, we introduced the microTOF, which is an innovative next-generation benchtop ESI-TOF system with higher performance for research and exacting analytical requirements, as well as the BioTOF III which replaces the BioTOF II.



•

In March 2000, we introduced various next-generation systems based on our existing mass spectrometry technology platforms including the Apex III Series Fourier transform mass spectrometer, the esquire3000 ion trap mass spectrometer, the OmniFLEX MALDI time-of-flight mass spectrometer and the MAP II/8 sample preparation robot. These new systems typically had two-year development and engineering cycles. In the first half of 2002, we introduced two additional next-generation systems; the Apex IV Series Fourier transform mass spectrometer and the OmniFLEX LT MALDI time-of-flight mass spectrometer.



•

In the second quarter of 2000, we commercialized our AnchorChip microarrays. These products incorporate our patented microfluidics technology which achieves greater sensitivity in MALDI analyses. We also developed our ion source, known as ZeroAdjust Nanospray™, to solve ease of use and throughput constraints associated with traditional ESI sources at low flow rates. This development increases throughput for proteomic applications.



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In the second half of 2000, we introduced the autoflex, the first MALDI time-of-flight system designed to analyze over 30,000 samples without operator intervention. The autoflex is the first MALDI time-of-flight system designed for high sample through put including fast, automatic analysis and maximum reliability for millions of sample analysis without service.



•

In the second half of 2001, we introduced the ultraflex™ TOF/TOF. The ultraflex incorporates a MALDI source coupled with a tandem time-of-flight mass analyzer. This allows for high-throughput protein identification by MALDI-TOF using peptide mass fingerprinting, followed by more detailed protein characterization via further fragmentation and secondary TOF detection. In addition, during the first half of 2002, we introduced the ultraflex™ TOF which is upgradeable to a full ultraflex™ TOF/TOF.

        Grants.    Historically, we have been the recipient of various government grants. In early 2000, we completed a five-year Advanced Technology Program grant from the National Institute of Standards and Technology for the development of a Mass Tag DNA Diagnostic Mass Spectrometer. We also currently have three ongoing, multi-year research grants from the German Federal Government for the development of new spectrometers and new applications for analysis. We have generally retained at least non-exclusive rights to any items or improvements we develop under these grants. The U.S. government generally retains the right to use technology developed under grants. The German government requires that we use and market technology developed under grants in order to retain our rights to the technology. In 2000, 2001 and 2002, we received research and development grants in the aggregate amounts of $1.8 million, $1.0 million and $218,000, respectively. We expect grant revenue to represent a decreasing portion of our revenue.

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Customers

        We have a broad and diversified global life science customer base that includes over 1,800 customers with our installed products. Our life science system sales accounted for approximately 70% of our product revenue for the year ended December 31, 2002. Our life science customer base is composed primarily of end-users and includes pharmaceutical, biotechnology, proteomics, agricultural biotechnology, molecular diagnostics and fine chemical companies, as well as commercial laboratories, university laboratories, medical schools and other not-for-profit research institutes and government laboratories. Our customers generally do not have a need to buy numerous systems at one time, and historically we have not depended on any single customer in the sale of our life science systems. In 2002, no single customer accounted for more than 10% of our revenue.

        We sell our substance detection and pathogen identification products and services to allied defense departments and law enforcement and emergency response professionals. For the year ended December 31, 2002, our substance detection and pathogen identification system sales represented approximately 15% of our product revenue. Our substance detection and pathogen identification customers are primarily military and government end-users. Our after-market products, including consumables, software and services, accounted for the remaining 15% of our product revenue for the year ended December 31, 2002.

        Financial Information about our geographic areas required by Item 1 of Form 10-K may be found in Footnote 9 to our Financial Statements included in 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 included in this report.

Strategic Collaborations

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

        Agilent Technologies, Inc.    In 1996, we commenced a collaboration with Agilent (formerly an operating unit of Hewlett Packard) to develop and distribute ion trap liquid chromatography mass spectrometry instrumentation. We jointly manufacture two different models of ion trap mass spectrometers. One model is branded and distributed by Agilent, and the other model, the esquire3000plus, is branded and distributed by us. Under our agreement with Agilent, neither party can conduct joint ion trap development with any other party, and each party has agreed not to develop products that would compete with the products of the other party that are the subject of this agreement.

        Sequenom Inc.    In 1997, we began an alliance with Sequenom to develop industrial genomics tools for high-throughput SNP analysis. Under this agreement, Sequenom purchases MALDI time-of-flight mass spectrometers from us, and they include these spectrometers in their products. Our BIFLEX was the basis for a co-labeled system called SpectroScan™ which is an important component of the Sequenom MassARRAY system. Recently, Sequenom has adopted our autoflex MALDI-TOF. In late 2001, we announced a broadening of our collaboration with Sequenom for which we intend to develop a medium-throughput genotyping solution based on MALDI-TOF analysis for distribution by Sequenom.

        GeneProt, Inc.    In September 2000, we entered into a strategic alliance with GeneProt pursuant to which we will collaborate with GeneProt and share technologies for industrial-scale proteomics. As a part of this alliance, GeneProt initially purchased 51 of our mass spectrometry systems. Additionally, in November 2000, we made a strategic equity investment, in both cash and stock, in GeneProt. We financed this equity investment with cash and newly issued shares of our common stock. Each party owns any development it makes as a part of this agreement, and any developments made jointly shall

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be owned jointly by the parties. In November 2001, we entered into an agreement with GeneProt to deploy novel MALDI-TOF/TOF mass spectrometry technology at GeneProt's planned new U.S. proteomics facility in North Brunswick, N.J. Under the agreement, GeneProt was initially to purchase a total of seven ultraflex TOF/TOFs. In December 2001, GeneProt received one ultraflex TOF/TOF instrument from us for its Geneva proteomics research laboratory. In 2002, GeneProt decided not to pursue an expansion of its organization into the United States but to concentrate its existing resources in Geneva, Switzerland. As a result, GeneProt converted its November 2001 order for the remaining six ultraflex TOF/TOF instruments for its planned North Brunswick, New Jersey facility into an order to upgrade all of its 45 existing ion trap mass spectrometers to the latest esquire3000plus performance level in order to bring its existing Geneva proteomics facility to state-of-the-art performance. This upgrade dramatically increased the sensitivity and lowered the minimum detection levels for low-abundance proteins by up to an order of magnitude.

        Affinium Pharmaceuticals, Inc. (formerly Integrative Proteomics, Inc.) In March 2001, we, along with Bruker AXS Inc. and Bruker BioSpin Inc., entered into a strategic alliance and technology development collaboration with Affimium Pharmaceuticals pursuant to which we will collaborate with Affinium Pharmaceuticals on multidisciplinary proteomics technologies based on mass spectrometry. Pursuant to this agreement, Affinium Pharmaceuticals will procure MALDI-TOF mass spectrometry systems from us. The terms of our strategic alliance agreement provide that we own any development of instrumentation products, such as instrumentation, probes and general software, that we make, and Affinium Pharmaceuticals owns any development of discovery products, such as methods, reagents and compositions of matter, that Affinium Pharmaceuticals makes. If we solely or jointly make any development relating to discovery products as a part of a joint collaboration pursuant to this agreement, we will assign the intellectual property rights to Affinium Pharmaceuticals at no charge, and Affinium Pharmaceuticals will grant a royalty free, irrevocable and non-exclusive license to us to make use of the discovery products. In addition, if Affinium Pharmaceuticals solely or jointly makes any development relating to instrumentation products as a part of a joint collaboration pursuant to this agreement, Affinium Pharmaceuticals will assign the intellectual property rights to us at no charge, and we will grant a royalty free, irrevocable and non-exclusive license to Affinium Pharmaceuticals to make use of the instrumentation products. Additionally, in March 2001, we made a strategic equity investment in Affinium Pharmaceuticals with both cash and shares of our common stock.

        GeneFormatics, Inc.    In October 2001, we, along with Bruker AXS and Bruker BioSpin, entered into a strategic alliance with GeneFormatics pursuant to which we will collaborate in the development of technology for the experimental analysis of three-dimensional protein structures. Under this agreement, we will sell mass spectrometry systems and related equipment to GeneFormatics. Each party owns any development it makes as a part of this agreement, and any developments made jointly shall be owned jointly by the parties. Additionally, in October 2001, we made a strategic equity investment in GeneFormatics with both cash and shares of our common stock.

        We have a number of other collaborations, including a collaboration with Matrix Sciences for technology enhancements. We own all developments we make under these collaborations.

Sales and Marketing

        Marketing Activities.    Our primary marketing theme is "Enabling Life Science Tools Based on Mass Spectrometry." 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 throughout the year. Our key marketing vehicles include trade shows, advertising, our websites, newsletters and related activities.

        Direct Sales Channels.    During the last three years, we have committed significant resources to upgrade and expand our direct sales force and our distribution channels worldwide. We have direct

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sales coverage throughout most of the European Union, North America and much of the Pacific Rim. During the three years ending December 31, 2002, we more than doubled our sales and marketing staff.

        We have well-equipped application and demonstration facilities and qualified application personnel who assist customers and provide product demonstrations in specific application areas. We maintain our primary demonstration facilities in the United States (Massachusetts and California), Germany (Bremen and Leipzig), the United Kingdom (Coventry) and Japan (Yokohama). Demonstration systems and applications scientists are also available in Australia, France, Italy, Switzerland, China, Taiwan and Singapore.

        Indirect Sales Channels.    We have various international distributors and independent sales representatives, including affiliated companies and various representatives in the countries of South Korea, Portugal and Israel and in the regions of Latin America and Eastern Europe. We have adopted a distribution business model where we engage in strategic distribution alliances with other companies to address certain market segments. Our primary distribution alliances are:

•

We manufacture for Agilent an ion trap mass spectrometer, which Agilent incorporates into its liquid chromatography mass spectrometry systems for distribution into various industrial markets; and



•

We sell high-throughput MALDI time-of-flight mass spectrometers through Sequenom into emerging industrial genomics markets for high-throughput SNP analysis.

Sales Cycle

        The typical time between our first customer contact and our receipt of a customer's order for our life science systems is three to six months for most product lines. However, this sales cycle can be in excess of a year when a customer must budget the product into an upcoming fiscal year. Substance detection and pathogen identification products can have multi-year sales cycles for large production contracts.

Manufacturing

        We manufacture and test the majority of our products in our three principal ISO 9001 registered manufacturing facilities located in the United States and Germany. We have considerable manufacturing flexibility at our various facilities, and each facility can manufacture multiple products at the same time. We maintain in-house key manufacturing know-how, technologies and resources. Our facilities incorporate environmental chambers, CE mark compliance test centers, clean room manufacturing for vacuum components, licensed facilities for handling closed radioactive sources, computer-aided laser cutting and vacuum welding. We maintain multiple suppliers for key components that are not manufactured in-house.

Intellectual Property

        Our intellectual property consists of patents, copyrights, trade secrets, know-how and trademarks. Protection of our intellectual property is a strategic priority for our business. We have a substantial patent portfolio, and it is our strategy to build and protect our patents. We believe our owned and licensed patent portfolio provides us with a competitive advantage. This portfolio permits us to maintain access to a number of key technologies. We license our owned patent rights where appropriate. We will enforce our patent rights against infringers if necessary.

        The patent positions of life science tool companies 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

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the existence from time to time of patents in certain countries which, if valid, could impair our ability to manufacture and sell our products in these countries.

        We are party to an agreement dated as of August 10, 1998 with Indiana University's Advanced Research and Technology Institute (IU-ARTI), which is the technology transfer arm of Indiana University, pursuant to which we have been granted an exclusive license to specified patent rights and products including three patents that relate to time-of-flight mass spectrometry. We pay IU-ARTI royalties under this agreement and have agreed to allow IU-ARTI to utilize any improvements that we make to the licensed products for research and educational purposes on a non-exclusive, royalty-free basis. IU-ARTI may terminate the agreement if we default on our obligations or become bankrupt. We may terminate the agreement with six months notice. The license granted by the agreement expires at the later of August 10, 2008 or expiration of the licensed patent rights. Additionally, we have entered into a collaboration agreement with IU-ARTI that ended in 2002 under which IU-ARTI will continue to perform experiments that are useful to us in exchange for a flat fee and a percentage fee of any sales of products developed for us by IU-ARTI.

        We are also a party to an agreement with Applied Biosystems Group, an Applera Corporation business, and IU-ARTI. The agreement is for the licensing of a portfolio of significant mass spectrometry patents. As part of the agreement, we have been appointed the exclusive agent for licensing this combined intellectual property to the life-science industry. These patent portfolios relate to MALDI-TOF mass spectrometry and cover the significant technology called Space-Velocity Correlation Focusing (SVCF), or Delayed Extraction. This technology improves both accuracy and sensitivity, and is implemented in most modern MALDI-TOF systems. As licensing agent for IU-ARTI's SVCF patents, we have granted Applied Biosystems a sub-license in exchange for multi-year royalty payments. Bruker Daltonics and Applied Biosystems also have cross-licensed each other on their respective patent portfolios related to this technology.

        We had been involved in patent litigation with a competitor, Finnigan, a subsidiary of Thermo Electron Corporation since December 31, 1996. In August 2001, we entered into a comprehensive settlement agreement for this litigation that provided for the dismissal of all pending suits, the waiving of all damages, and a framework of licensing and arbitration for potential future disputes between the companies in the field of ion trap mass spectrometry.

        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.

        Our management considers Daltonics and the Bruker Daltonics logo to be our material trademarks, both of which are registered in the United States.

        We are a party to various government contracts. Under some of these government contracts, the government may receive license or similar rights to intellectual property developed under the contract. However, under government contracts we enter we receive no less than non-exclusive rights to any items or technologies we develop.

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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:

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Jean Futrell, Ph.D., Director of the Department of Energy's Environmental Molecular Sciences Laboratory in Richmond, Washington; former Chairman of Chemistry and Biochemistry at the University of Delaware;



•

Steven A. Hofstadtler, Ph.D., Director of Drug Discovery Technology, ISIS Pharmaceuticals, Inc., Carlsbad, California;



•

Joachim R. Wesener, Ph.D., Head of Mass Spectrometry at Bayer Central Research, Leverkusen, Germany; Board Member of German Society for Mass Spectrometry;



•

Professor Helmut Meyer, University of Bochum, Germany; President of Protagen AG, Bochum, Germany;



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Professor Peter Derrick, University of Warwick, United Kingdom; Director of University of Warwick's Institute for Mass Spectrometry; Professor and Chairman of the Department of Chemistry; and



•

Günther Heinrich, Ph.D., CEO and President of EPIDAUROS AG, Bernried, Germany.

        We provide members of our Scientific Advisory Board a fee of $6,000 per year, and we provided options to the members for 1,500 shares of our common stock at fair market value during their first year serving on the board. These options vest in equal annual increments over the course of their three-year tenure. We also reimburse Scientific Advisory Board members for expenses reasonably incurred related to the services they provide us.

Competition

        Our markets are highly competitive, and we expect the competition to increase. Currently, we compete with a variety of companies that offer mass spectrometry-based systems along each of our product lines. Our competitors in the life sciences include Applied Biosystems, Amersham Biosciences, Waters, ThermoElectron (which includes Finnigan), Shimadzu/Kratos, Ciphergen, Hitachi, JEOL and various automation companies. Our substance detection and pathogen identification markets are highly fragmented, and we compete with a number of companies in this area. Our most significant competitor is Smiths Detection (UK). Other competitors produce products based on some of the technology platforms that we utilize; however, none of them produce products utilizing all of our major technology platforms. Some of them have a greater market share than we have in particular technology platform areas. We also compete with other companies that provide analytical or automation tools based on other technologies. These technologies may prove to be more successful in meeting demands in the markets that our products serve. In addition, other companies may choose to enter our field in the future. We believe that the principal competitive factors in our markets are technology base applications expertise, product specifications and functionality, 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. Many of our potential competitors in these markets have substantially greater financial, technical and marketing resources than we do. They may offer or succeed in developing products that would render our products or those of our strategic partners obsolete or noncompetitive. In addition, many 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

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may possess or develop technologies and products that are more effective than ours. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors.

Employees

        As of March 21, 2003, we employed over 670 full-time employees, with approximately 110 employees in the United States and more than 500 employees outside the United States, located primarily in Europe. Over 120 of these employees hold doctorates in biology, chemistry or physics.

Government Regulation

        We possess low-level radiation licenses for our facilities in Billerica, Massachusetts and Leipzig, Germany. Some of our products, particularly in the detection area, are subject to enhanced levels of export controls from the United States and Germany. Apart from these two areas, we are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate.

ITEM 2. PROPERTIES

        Our three principal facilities are located in Billerica, Massachusetts, Bremen, Germany and Leipzig, Germany. These facilities incorporate manufacturing, research and development, application and demonstration, marketing and sales and administration functions.

•

We own a 90,000 square foot facility in Billerica, Massachusetts.



•

We own an existing 60,000 square foot facility in Bremen, Germany, and in early 2002 we completed a 120,000 square foot extension of our Bremen facility.



•

We own a 60,000 square foot facility in Leipzig, Germany.

        We lease additional centers for sales, applications and service support in Fremont, California; Coventry, United Kingdom (Bruker Daltonics Ltd.); Wissembourg, France (Bruker Daltonique S.A.); Stockholm, Sweden (Bruker Daltonics Scandinavia A.B.); Faellanden, Switzerland (Bruker Daltonics GmbH); Yokohama, Japan (Nihon Bruker Daltonics K.K.); Beijing, People's Republic of China, Taipei, Taiwan; Ontario, Canada (Bruker Daltonics Ltd.); Milan, Italy (Bruker Daltonics Italiana SRL); Alexandria, Australia (Bruker Daltonics Pty Ltd.); Johannesburg, South Africa (Bruker Daltonics Pty LTD); Singapore (Bruker Daltonics Pte LTD); Bruxelles, Belgium (Bruker Daltonics NV) and Wormer, Netherlands (Bruker Daltonics BV).

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

        No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2002.

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PART II

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

        Our common stock has been quoted on the Nasdaq National Market since August 4, 2000. Prior to that time, there was no public market for the 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.

        On March 21, 2003, the last sale price of the common stock on the Nasdaq National Market was $2.99. As of March 21, 2003, we had approximately 35 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.

        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.

        On August 3, 2000, a registration statement on Form S-1 (No. 333-34820) was declared effective by the Securities and Exchange Commission, pursuant to which 9,200,000 shares of our common stock were offered and sold by us at a price of $13 per share, generating gross offering proceeds of approximately $119.6 million. The managing underwriters were UBS Warburg LLC, CIBC World Markets and Thomas Weisel Partners LLC. In connection with the offering, we incurred $8.4 million in underwriting discounts and commissions, and approximately $1.5 million in other related expenses. The net proceeds from the offering, after deducting the foregoing expenses, were approximately $110.0 million. No payments or expenses were paid to directors, officers or affiliates of the Company or 10% owners of any class of equity securities of the Company. We have used a portion of the net proceeds of the offering to fund our continuing research and development activities, for working capital purposes, facility expansions and other general corporate purposes. Additionally, we have used approximately $7.0 million of the net proceeds to pay off a portion of our outstanding bank debt. The balance is invested in a variety of interest-bearing instruments including investment-grade corporate bonds, commercial paper and money market accounts.

        On November 22, 2000, we issued 79,218 shares of our common stock, par value $.01 per share, to GeneProt, Inc. in exchange for shares of GeneProt valued at a total of approximately $2.2 million. The 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.

        On March 12, 2001, we issued 28,425 shares of our common stock, par value $.01 per share, to Affinium Pharmaceuticals, Inc. (formerly Integrative Protemonics, Inc.) in exchange for shares of Affinium Pharmaceuticals, Inc. valued at a total of approximately $428,000. The 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.

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        On October 2, 2001, we issued 30,693 shares of our common stock, par value $.01 per share, to GeneFormatics, Inc. in exchange for shares of GeneFormatics valued at a total of approximately $609,000. The 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.

        On November 28, 2002, we issued 109,800 shares of our restricted common stock, par value $0.01 per share, to Dr. Dieter Koch, Managing Director of Bruker Daltonik GmbH and a Director of Bruker Daltonics Inc., valued at approximately $593,000 and cash of $593,000, in exchange for his minority interest in Bruker Saxonia Analytik GmbH, a majority-owned subsidiary of Bruker Daltonik GmbH. The 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.

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ITEM 6. SELECTED FINANCIAL DATA

        The consolidated statements of operations data for each of the years ended December 31, 2000, 2001 and 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002 have been derived from our audited financial statements included elsewhere in this report. The combined statement of operations data for the year ended December 31, 1998 and 1999 and the consolidated and combined balance sheet data as at December 31, 1998, 1999 and 2000 have been derived from our audited financial statements not included in this report. The financial statements for 1998 are presented on a combined basis due to the common ownership of the Company and its affiliated company in Germany, which was formally acquired in December 1998. Historical results are not necessarily indicative of future results. The data presented below have been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read with the consolidated and combined financial statements, including the notes, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

        In 2002, the Company took a $9.6 million charge due to the write-down of investments in other companies.

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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 report. 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 report.

Overview

        We are a leading developer and provider of innovative life science tools based on mass spectrometry. We are also a worldwide leader in supplying mass spectrometry-based systems for substance detection and pathogen identification in security and defense applications. We maintain technical centers in Europe, North America and Japan, as well as customer support facilities in many industrialized and developing countries. We allocate substantial capital and resources to research and development and are party to various collaborations and strategic alliances. Our diverse customer base includes pharmaceutical companies, biotechnology companies, proteomic companies, academic institutions and government agencies.

Significant Accounting Policies

        Inventories.    Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out ("FIFO") method. We maintain an allowance for excess and obsolete inventory to reflect the expected un-saleable or un-refundable inventory based on an evaluation of slow moving products.

        Investments in Other Companies.    We have investments in other companies which consist of equity securities of privately-held companies that are accounted for at cost. Our ownership interest in each of these individual companies is less than 20%. We periodically evaluate the carrying value of these investments for potential impairment. If our evaluation identifies an impairment that we deem to be other than temporary, the investments are written down to their estimated fair value through a charge to current earnings.

        Customer Deposits.    Under the terms and conditions of contracts with many of our customers, we require a portion of the purchase price in the form of an advance deposit. We record these deposit amounts as a liability until the associated revenue is recognized at the time of acceptance of the system.

        Warranty Costs.    We provide a one-year parts and labor warranty with the purchase of equipment. The anticipated cost for this one-year warranty is accrued upon recognition of the sale and is included as a current liability on the accompanying balance sheets. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase resulting in a decreased gross profit.

        Contingencies.    We are subject to proceedings, lawsuits and other claims related to patents, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

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        Revenue Recognition.    We recognize revenue from system sales, including hardware with embedded software, when a product is accepted by the customer, except when sold through an independent distributor, a strategic distribution partner or an unconsolidated affiliated distributor which assumes responsibility for installation, in which case the system sale is recognized when the products are shipped to the distributor and title has transferred to the distributor. Our distributors do not have price protection rights or rights to return; however, our products are warranted to be free from defect for a period of, typically, one year. Revenue from accessories and parts is recognized upon shipment, and revenue from services when performed.

        Cost of Product Revenue.    Cost of product revenue includes direct costs, such as materials, direct labor, and benefits, as well as indirect costs related to generating revenue. These indirect costs include indirect labor, materials and supplies, equipment rental and depreciation of production equipment, test equipment and facilities as related to production space revenue.

        Sales and Marketing.    Sales and marketing expenses include salaries, sales commissions, benefits, travel, occupancy costs and related expenses for our direct sales force, sales support and marketing functions. We have expanded our sales and marketing organization substantially since 1997, adding subsidiaries and sales representatives in China, France, Japan, Scandinavia, Switzerland, the United Kingdom, Canada, Italy, Australia, Singapore, South Africa, Belgium, Netherlands and Taiwan. Sales and marketing expenses also include costs associated with supporting our distribution channel partners for our time-of-flight and ion trap mass spectrometry products. We expect that sales and marketing expenses will continue to increase in the future as we further expand our global distribution capabilities and introduce new products.

        General and Administrative.    General and administrative expenses include salaries, benefits and expenses for our executive, finance, legal, human resources and internal systems support personnel. In addition, general and administrative expenses include occupancy costs, fees for professional services and depreciation of office equipment. We expect general and administrative expenses to increase as we continue to expand our administrative infrastructure to support the anticipated growth of our business, and continue to incur costs associated with being a public company.

        Research and Development.    Research and development expenses include costs for the development of new technologies and products. These expenses include materials, salaries, benefits, occupancy costs and related expenses for development personnel. We expense research and development costs as incurred. We expect to increase spending on research and development in order to develop new products and applications but, as a percentage of revenues, spending should decrease over time.

        Special Charges (Credit).    Special charges (credit) include actual and estimated charges for specific events that have occurred during the year. During 2002 this included an increase in an accrual for our U.K. Ministry of Defense contract, restructuring charges and the reversal of patent litigation accruals. Patent litigation costs (credit) include actual and estimated legal fees and anticipated assessments associated with litigation in connection with our intellectual property, particularly the Finnigan litigation.

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Results of Operations

        The following table sets forth certain items included in our results of operations for the three years ended December 31, 2002, expressed as a percentage of our net revenue for these periods.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        Product Revenue.    Total product revenue increased $24.4 million, or 26.6%, to $116.2 million in 2002 compared to $91.8 million in 2001. Our top-line product revenue growth rate for the year was approximately 21.6% before favorable currency effects. Life science systems revenue, substance detection systems revenue and aftermarket revenue as a percentage of product revenue were 70%, 15% and 15%, respectively, in 2002 as compared to 74%, 10% and 16%, respectively, in 2001. The increase in total product revenue is related to continuing growth of all our life science product lines. During 2002, we also saw significant growth in our substance detection system sales due to a large CBMS contract, in excess of $10.0 million, for the U.S. Army.

        Other Revenue.    Other revenue decreased $708,000, or 76.5%, to $218,000 in 2002 compared to $926,000 in 2001. This decrease was due to the completion of certain projects for early-stage research and development, which were funded by grants from the German and United States governments. Other revenues can fluctuate from year to year depending on the timing and completion of certain governmental funded grants.

        Cost of Product Revenue.    Cost of product revenue increased $12.3 million, or 28.2%, to $55.9 million in 2002 compared to $43.6 million in 2001. The cost of product revenue as a percentage of product revenue was 48.1% in 2002 as compared to 47.5% in 2001. During the second quarter of 2002, we increased our inventory reserve by approximately $700,000. The increase in the reserve mainly related to items within our slower growth product lines, including the substance detection business. Excluding this charge, our 2002 cost of product revenue would have been approximately 47.5%.

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        Sales and Marketing.    Sales and marketing expenses increased $5.1 million, or 23.5%, to $26.8 million in 2002 compared to $21.7 million in 2001. Sales and marketing expenses as a percentage of product revenues were 23.1% in 2002 and 23.7% in 2001. The overall dollar increase relates to significant new product introductions during the first and second quarters of 2002 and the cost associated with the rollout of these products and a general increase in our business. The decline as a percentage of product revenues is related to our increasingly effective leveraging of our selling and marketing expenses against the increase in product revenues

        General and Administrative.    General and administrative expenses increased $1.0 million, or 16.7%, to $7.0 million in 2002 compared to $6.0 million in 2001. General and administrative expenses as a percentage of product revenues were 6.0% in 2002 and 6.5% in 2001. Although general and administrative expenses as a percentage of product revenue decreased, general and administrative expenses have remained relatively consistent with the overall increased sales growth of the Company. The increase in the total amount of general and administrative expenses relates to an increase in costs incurred in 2002 associated with several business development projects.

        Research and Development.    Research and development expenses increased $2.3 million, or 12.3%, to $20.7 million in 2002 compared to $18.5 million in 2001. As a percentage of product revenues, research and development expenses were 17.9% in 2002 compared to 20.1% in 2001. The overall dollar increase relates to the development of certain new projects, which will be incorporated into our product line throughout 2003, but the decline in expense as a percentage of product revenues continues as a result of decreasing research and development expenses as a percentage of product revenue.

        Special Charges (Credit).    Special charges (credit) were $200,000 in 2002 compared to $(400,000) in 2001. The charges (credits) for 2002 consist of a $700,000 charge to increase a contract reserve for the cost of completing an existing contract with the U.K. Ministry of Defense as well as a $500,000 charge related to a restructuring charge which was primarily related to a workforce reduction of approximately 50 employees. The charge consisted primarily of employee severance, professional fees and outplacement services. During the second quarter of 2002, the Company booked approximately $1.5 million for these anticipated costs, and then recorded a credit of approximately $1.0 million against this reserve during the third and fourth quarters of 2002 to reflect a revised estimate for the actual employee severance costs. In 2002, there was also a $1.0 million credit relating to a reversal of a previously established reserve from our patent litigation with Finnigan. The reserve was reduced by $1.0 million during 2002 as a result of the final settlement of this litigation.

        As noted above, we incurred a special charge during the fourth quarter of 2002 in connection with a contract our German and Swiss subsidiaries have with the U.K. Ministry of Defense. It consisted of an additional reserve in the amount of $700,000, which represents the projected further increase in cost for rework and retesting under the contract due to various technical problems associated with meeting the contract requirements. We previously incurred a charge of $1.1 million on this same contract in the fourth quarter of 2000, as we were required to make considerable design changes to our product at that time, and this increased the cost of contract performance. This earlier reserve from the fourth quarter of 2000 is still on our books at $800,000.

        In addition, as we reported for the third quarter of 2001, we also have on our books a reserve of $1.7 million in connection with the possible imposition of liquidated damages pursuant to this contract. We established this reserve even though we strongly dispute the applicability of liquidated damages. At this time, both our German and Swiss subsidiaries are making strong efforts to deliver product which is deemed acceptable by the U.K. Ministry of Defense, and further tests are currently occurring under the auspices of the Ministry of Defense. Management will continue to closely monitor the situation.

        Interest and Other (Expense) Income, Net.    Interest and other (expense) income, net was $(9.9) million in 2002, as compared to $2.7 million in 2001. The increase in expenses relates to a

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$9.6 million write-down of our investments in three non-affiliated proteomics companies as well as a foreign currency exchange loss for the year of $(379,000). During the year, we earned interest income of approximately $1.4 million and paid approximately $(1.2) million in interest expense. Our interest income on our short-term investments declined in 2002 due to the use of cash to complete the expansion of our United States and Germany facilities as well as due to a reduced rate of return.

        Provision for Income Taxes.    Provision for income taxes was $2.1 million in 2002 as compared to $2.4 million in 2001. The effective tax rate in 2002, excluding capital losses, was 37.5% as compared to an effective rate of 39.4% in 2001. The effective tax rates reflect a blended tax rate from the various countries in which we operate.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

        Product Revenue.    Total product revenue increased $17.0 million, or 22.7%, to $91.8 million in 2001 compared to $74.8 million in 2000. Our top-line product revenue growth rate for the year was approximately 26.5% before unfavorable currency effects. Life science systems revenue, substance detection systems revenue and aftermarket revenue as a percentage of product revenue were 74%, 10% and 16%, respectively, in 2001 as compared to 66%, 22% and 12%, respectively, in 2000. The increase in total product revenue is related to continuing growth of all our life science product lines and significant growth in our aftermarket sales.

        Other Revenue.    Other revenue decreased $904,000, or 49.4%, to $926,000 in 2001 compared to $1.8 million in 2000. This decrease was due to the completion of certain projects for early-stage research and development, which were funded by grants from the German and United States governments.

        Cost of Product Revenue (including special charges).    Cost of product revenue increased $8.4 million, or 23.0%, to $45.1 million in 2001 compared to $36.7 million in 2000. The cost of product revenue as a percentage of product revenue was 49.1% in 2001 as compared to 49.0% in 2000. The increase in costs of product revenue as a percentage of product revenue relates to the product mix of sales directly to third party customers and the sales through strategic alliances. The special charges increased $431,000, or 40.0%, to $1.5 million in 2001 compared to $1.1 million in 2000. This special charge relates to an existing contract within our substance detection and pathogen identification business. The reserve is for estimated cost overruns, legal fees and liquidated damages related to this contract.

        Sales and Marketing.    Sales and marketing expenses increased $7.9 million, or 57.3%, to $21.7 million in 2001 compared to $13.8 million in 2000. Sales and marketing expenses as a percentage of product revenues were 23.7% in 2001 and 18.5% in 2000. The increase relates to significant new product introductions during the first and second quarters of 2001 and the cost associated with the rollout of these products. The increase was also attributed to higher sales commissions earned by our direct sales force as well as the addition of four distribution subsidiaries, which were not in operation for the full year 2000.

        General and Administrative.    General and administrative expenses increased $1.0 million, or 18.8%, to $6.0 million in 2001 compared to $5.0 million in 2000. General and administrative expenses as a percentage of product revenues were 6.5% in 2001 and 6.8% in 2000. Although general and administrative expenses as a percentage of product revenue decreased, general and administrative expenses have remained relatively consistent with the overall increased sales growth of the Company. The increase in total amount of general and administrative expenses relates to an increase in costs incurred in 2001 associated with several business development projects.

        Research and Development.    Research and development expenses decreased $1.6 million, or 7.8%, to $18.5 million in 2001 compared to $20.0 million in 2000. As a percentage of product revenues,

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research and development expenses were 20.1% in 2001 compared to 26.8% in 2000. The decrease relates to the completion of certain new projects, the results of which have now been incorporated into our existing product line.

        Litigation (Credit) Costs.    The litigation reserve was reduced by $2.2 million during the third quarter of 2001 as a result of the settlement of certain ongoing litigation from 1997.

        Interest and Other Income, Net.    Interest and other income, net was $2.7 million in 2001, as compared to $1.6 million in 2000. The increase relates to the fact that we earned interest income on our short-term investments throughout the full year 2001 as compared to earning interest for only four months in 2000.

        Provision for Income Taxes.    Provision for income taxes was $2.4 million in 2001 as compared to $254,000 in 2000. The effective tax rate in 2001 was 39.4% as compared to an effective rate of 10.9% in 2000. The lower effective rate in 2000 reflected a one-time benefit on the revaluation of net deferred tax liabilities as a result of a reduction in enacted tax rates in Germany as well as a reduction in a valuation allowance based on forecasted taxable income in the United States. The effective tax rates reflect a blended tax rate from the various countries in which we operate.

Liquidity and Capital Resources

        Presently, we anticipate that our existing capital resources will meet our operating and investing needs through the end of 2003. Historically, we have financed our growth through a combination of cash provided from operations, debt financing and issuance of common stock. During 2002, net cash used in operating activities was $11.4 million, which was consistent with net cash used in operating activities in 2001.

        We used $15.9 million of cash during 2002 for capital expenditures, which were principally related to expenditures for the expansion of our existing facility in Germany and the construction of our new production, demonstration, and research and development facility in the United States. We expect to continue to make capital investments which will focus on enhancing the efficiency of our operations and supporting our growth.

        In December 2002, we entered into a demand revolving line of credit with Citizens Bank in the United States in the amount of $2.5 million. This line, which is secured by portions of our inventory, receivables and equipment in the United States, is used to support working capital and has no expiration date. We also maintain revolving lines of credit of approximately $14.2 million with German banks and $4.7 million with Japanese banks. As of December 31, 2002, there were approximately $5.3 million and $4.7 million outstanding on our German and Japanese lines of credit, respectively. Both of the German and Japanese lines of credits are unsecured.

        We have one short-term note payable and two long-term notes payable with outstanding balances aggregating $13.4 million as of December 31, 2002. One note ($5.4 million), with an interest rate of 5.10%, is payable in full in 2003. The other two notes ($8.0 million in the aggregate) have an interest rate of 4.65%, and are payable in full in 2008. Interest is due monthly, and all obligations are collateralized by the land and buildings of Bruker Daltonik GmbH.

        In 2002, we repurchased 457,200 shares of our common stock, at an average price per share of $5.10, in accordance with the terms of our stock repurchase plan. Our stock repurchase plan, announced August 26, 2002, authorizes us to repurchase up to one million shares of our common stock.

        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

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associated with possible acquisitions, expenses associated with unforeseen litigation, regulatory changes, competition and technological developments in the market.

Other Information

        In March 2000, we began a strategic alliance with Perkin Elmer Instruments in order to leverage Perkin Elmer's global distribution capability to co-market our OmniFLEX time-of-flight products. In September 2002, both Bruker Daltonics and Perkin Elmer, for various commercial reasons, terminated this strategic alliance and have settled all outstanding issues surrounding this alliance.

Inflation

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

Impact of Foreign Currencies

        We sell our products in many countries, and a substantial portion of our sales and a portion of our costs and expenses are denominated in foreign currencies, especially in Euro. Historically, our realized foreign exchange gains and losses have not been significant. Accordingly, we have not hedged our foreign currency position in the past. However, as we expand our sales internationally, we plan to evaluate our currency risks, and we may enter into foreign exchange contracts from time to time to mitigate foreign currency exposure.

Related-Party Transactions

        We are affiliated, through common stockholders, 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.

        We recognized sales to affiliated entities of approximately $9.4 million in 2000, $4.1 million in 2001 and $5.8 million in 2002 and purchases from affiliated entities of approximately $5.6 million in 2000, $3.5 million in 2001 and $5.3 million in 2002.

        In 2000, 2001 and 2002, various Bruker affiliates provided administrative and other services (including office space) to the Company at a cost of approximately $443,000, $894,000 and $939,000, respectively, based on its assessment of the estimated fair market value of such services.

        We have investments in three non-affiliated companies. We recognized sales to these companies, GeneProt, Inc., GeneFormatics, Inc. and Affinium Pharmaceuticals Inc., of approximately $1.4 million, $0 and $0, respectively, in 2000, $6.0 million, $0.3 million and $0, respectively, in 2001 and $510,000, $0 and $194,000, respectively, in 2002. These sales were recorded at arm's length conditions and in the normal course of business. There were no purchases from any of these companies in 2000, 2001 or 2002.

        On November 28, 2002, we issued 109,800 shares of our restricted common stock, par value $0.01 per share, to Dr. Dieter Koch, Managing Director of Bruker Daltonik GmbH and a Director of Bruker Daltonics Inc., valued at approximately $593,000 and cash of $593,000, in exchange for his minority interest in Bruker Saxonia Analytik GmbH, a majority-owned subsidiary of Bruker Daltonik GmbH. The 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.

        In 2000, we purchased land from a principal shareholder for $742,000, the estimated fair market value.

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Recent Accounting Pronouncements

        In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. Statement No. 146 nullifies 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)." Statement No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit or disposal plan. We adopted the provisions of Statement No. 146 effective January 1, 2003. Statement No. 146 will not impact the accounting for any restructuring plan approved and announced as of December 31, 2002; however, the pronouncement will impact the accounting for any future exit or disposal activities.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. The disclosure provisions of Interpretation No. 45 are effective for us as of December 31, 2002. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. We do not expect the recognition provisions of Interpretation No. 45 to materially impact our consolidated financial statements.

        In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." Statement No. 148 amends Statement No. 123, to provide alternative methods of transition to Statement No. 123's fair value method of accounting for stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement No. 123 and APB Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has adopted the disclosure provisions of Statement No. 148.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We are currently evaluating the effect that the adoption of FIN 46 will have on our results of operations and financial condition.

Quantitative and Qualitative Disclosures of Market Risk

        Part of the information called for by this item is provided under the captions "Liquidity and Capital Resources" and "Impact of Foreign Currencies" under this Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.

        We do not use derivative financial instruments for trading or speculative purposes. However, we regularly invest excess cash in overnight repurchase agreements, interest-bearing investment-grade securities and short-term partnership funds all of which are subject to changes in short-term interest rates. We believe that the market risk arising from holding these financial instruments is minimal.

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        Our exposure to market risks associated with changes in interest rates relates primarily to the increase or decrease in the amount of interest income earned on its investment portfolio since our long-term debt has a fixed rate. We ensure the safety and preservation of invested funds by limiting default risks, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest-sensitive financial instruments at December 31, 2002. Declines in interest rates over time have and will, however, reduce our interest income.

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 across their broad intended range of applications in the life sciences, we will not generate expected revenue.

        Our business strategy depends on our ability to successfully commercialize a broad range of products based on mass spectrometry for use in a variety of life science applications. We have only recently commercially launched many of our current products for sale to these markets, and many of our products have achieved only limited sales. The commercial success of our life science products depends on our obtaining continued and expanding market acceptance of our mass spectrometry tools by pharmaceutical, biotechnology and proteomics companies and academic and government research laboratories across the wide range of applications covered by our product offerings. We may fail to achieve or sustain substantial market acceptance for our products across the full range of our intended life science applications or in one or more of our principal intended life science applications. Any such failure could decrease our sales and revenue. To succeed, we must convince substantial numbers of pharmaceutical and biotechnology companies and other laboratories to replace their existing techniques with mass spectrometry techniques employing our systems. 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 life science customers may be reluctant to make the substantial capital investment generally needed to acquire our products or to incur the training and other costs involved with replacing their existing systems with our products. We also may not be able to convince our intended life science customers that our systems are an attractive and cost-effective alternative to other technologies and systems for the acquisition, analysis and management of molecular information. Because of these and other factors, our products may fail to gain or sustain market acceptance.

Our products compete in markets that are subject to rapid technological change, and most of our products are based on a range of mass spectrometry technologies one or more of which could be made obsolete by new technology.

        The market for life science discovery tools is characterized by rapid technological change and frequent new product introductions. Rapidly changing technology could make some or all of our life science product lines obsolete unless we are able to continually improve our existing products and develop new products. Because substantially all of our life science products are based on mass spectrometry, we are particularly vulnerable to any technological advances that would make mass spectrometry obsolete as the basis for bioanalytical systems in any of our life science markets. To meet the evolving needs of our customers, we must rapidly and continually enhance our current and planned

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products and services and develop and introduce 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 year. However, we may experience difficulties which may delay or prevent the successful development, introduction and marketing of new products or product enhancements. In addition, our product lines are based on complex technologies which are subject to rapid change as new technologies are developed and introduced in the marketplace. 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 product sales may decline, and we could experience significant losses. We offer and plan to offer a broad product line and have incurred and expect to continue to incur substantial expenses for development of new products and enhanced versions of our existing products. The speed of technological change in our life science markets may prevent us from being able to successfully market some or all of our products for the length of time required to recover their often significant development costs. Failure to recover the development costs of one or more products or product lines could decrease our profitability or cause us to experience significant losses. Furthermore, failure to develop successful products and capitalize on our research and development investment would negatively influence our profits and financial position.

We face substantial competition.

        In each market, for each of our life science products, we face substantial competition from major competitors, including competitors who offer mass spectrometry-based systems along each of our product lines and competitors who offer technology alternatives to mass spectrometry. We expect that competition in our life science markets will increase significantly as more biotechnology and pharmaceutical companies adopt automated high-throughput bioanalytical instruments as tools for drug discovery, drug development, proteomics, genomics and metabolomics. Currently, our principal competition comes from established companies providing products using existing technologies, including mass spectrometry and other technologies, which perform many of the same functions for which we market our products. In addition, other companies may choose to enter our field in the future. Our competitors may develop or market products that are more effective or commercially attractive than our current or future products or that may render our products obsolete. Many of our competitors have more experience in the life sciences market and substantially greater financial, operational, marketing and technical resources than we do which could give them a competitive edge in areas such as research and development, production, marketing and distribution. Our ability to compete successfully will depend, in part, on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to, less expensive than, or more cost-effective than, other currently marketed products.

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' valid patents and proprietary rights as well as the breach of any licenses relating to our technologies and products. There are various third-party patents which may relate to our technology. 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 such a license on commercially reasonable terms, if at all, especially if the patent holder is a competitor. In addition, even if we can obtain such a license, it may be non-exclusive, which will permit others to practice the same technology licensed to

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us. We may also be required to pay substantial damages to the patent holder. Under certain circumstances in the United States, these damages may include damages equal to triple the actual damages experienced by the patent holder. 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 are 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 of 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 could prevent us from selling some or all of our products or cause us to experience significant losses or both.

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

        In order to protect or enforce our patent rights, we may initiate patent litigation against third parties. 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. For example, 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 stock.

Our inability to achieve acceptance of certain products under a contract with one of our customers could expose us to potential significant liability.

        A subsidiary of ours is a party to a contract for the supply of certain equipment. We have experienced difficulties in achieving acceptance of the equipment under the contract, and, pursuant to a provision in the contract relating to late delivery, we have been assessed certain liquidated damages, a portion of which we have paid. Although we have made claims resulting in the suspension of the imposition of additional liquidated damages and are in discussions regarding settlement of the matter, there is no guarantee that this matter will be settled without litigation. An adverse determination in any such litigation could have a significant adverse effect on our business and results of operations. Additionally, regardless of the ultimate result, any such litigation would likely divert management's attention and resources from other matters, which could also adversely affect our business.

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

        Our continued success will depend in significant part on our ability to obtain and maintain meaningful patent protection for our products throughout the world. We rely on patents to protect a significant part of our intellectual property and to enhance our competitive position. However, our

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presently pending or future patent applications may not issue as patents, and any patent previously 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 similar to our 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 United States. Failure to obtain adequate patent protection for our proprietary technology could materially impair our ability to be commercially competitive.

        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 affect on our operating results, financial condition and future growth prospects. Furthermore, others may have, or may in the future independently develop, substantially similar or superior know-how and technology.

We have agreed to share our name, portions of our intellectual property rights and distribution channels with other entities under common control which could result in the loss of our name and to lock in the price of products we may sell to these entities which may not be the best price available for these products.

        We maintain a sharing agreement with 13 affiliated entities that requires us to share portions of our intellectual property as it existed on February 28, 2000 and our distribution channels with these affiliated companies and their affiliates. We also share the Bruker name with many of these affiliates. We could lose the right to use the Bruker name if (a) we declare bankruptcy, (b) we interfere with another party's use of the name, (c) we take a material action which materially detracts from the goodwill associated with the name, or (d) 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. In addition, we have agreed to maintain the price of some products purchased from and sold to these affiliates for a period of up to twelve years, subject to yearly adjustments equal to the increase in the Consumer Price Index.

Our manufacture and sale of products could lead to product liability claims for which we could have substantial liability.

        The manufacture and sale of our products exposes us to product liability claims if any of our products cause injury or are found otherwise unsuitable during manufacturing, marketing, sale or customer use. In particular, if one of our substance detection and pathogen identification products malfunctions, this could lead to civilian or military casualties in this time of unrest, exposing the Company to increased potential for high-profile liability. A successful product liability claim brought against us in excess of, or outside the coverage of, our insurance coverage could have a material adverse effect on our business, financial situation and results of operations. We may not be able to maintain product liability insurance on acceptable terms, if at all, and insurance may not provide adequate coverage against potential liabilities.

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Our business could be harmed if our collaborations fail to advance our product development.

        Demand for our products will depend in part upon the extent to which our collaborations with pharmaceutical, biotechnology and proteomics companies are successful in developing, or helping us to develop, new products and new applications for our existing products. In addition, we collaborate with academic institutions on product development. 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 some of our new products, which could materially impede our ability to generate revenue.

If we lose our strategic partners, it could impair our marketing efforts.

        A substantial portion of our sales of selected products consists of sales to third parties who incorporate our products in their systems. These third parties are responsible for the marketing and sales of their systems. We have little or no control over their marketing and sales activities or how they use their resources. Our present or future strategic partners may or may not purchase sufficient quantities of products from us or perform appropriate marketing and sales activities. These failures by our present or future strategic partners, or our inability to maintain or enter into new arrangements with strategic partners for product distribution, could materially impede the growth of our business and our ability to generate sufficient revenue.

Any reduction in the capital resources or government funding of our customers could reduce our sales and impede our ability to generate revenue.

        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 among various types of equipment, policies regarding spending during recessionary periods 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 research and development expenditures by our life science customers could significantly decrease our sales. In addition, we make a substantial portion of our sales to non-profit and government entities which are dependent on government support for scientific research. Any decline in this support could decrease the ability of these customers to purchase our products.

If general health care spending patterns decline, our ability to generate revenue may suffer.

        We are dependent, both directly and indirectly, upon general health care spending patterns, particularly in the research and development budgets of the pharmaceutical and biotechnology industries, as well as upon the financial condition of various governments and government agencies. Since our inception, both we and our academic collaborators have benefited from various governmental contracts and research grants. Whether we or our academic collaborators will continue to be able to attract these grants depends not only on the quality of our products, but also on general spending patterns of public institutions. There exists the risk of a potential decrease in the level of governmental spending allocated to scientific and medical research which could substantially reduce or even eliminate our grants. Our status as a public company is likely to eliminate our ability to obtain research grants from the German government in the future because the German government focuses on funding small or private companies with limited access to capital.

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

        We need to expand our direct marketing and sales force as well as our service and support staff. Our future revenue and profitability will depend on our ability to expand our team of marketing and service personnel. Because our products are technical in nature, we believe that our marketing, sales and support staff must 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, then 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. Our failure to manage this growth effectively could impair our ability to generate revenue or could cause our expenses to increase more rapidly than revenue, resulting in operating losses.

In addition to the risks applicable to our life science products, our substance detection and pathogen identification products are subject to a number of additional risks, including lengthy product development and contract negotiation periods and certain risks inherent in long-term government contracts.

        Our substance detection and pathogen identification products are subject to many of the same risks associated with our life science products, including vulnerability to rapid technological change, dependence on mass spectrometry technology and substantial competition. In addition, our substance detection and pathogen identification products are generally sold to government agencies under long-term contracts. These contracts generally involve lengthy pre-contract negotiations and product development. We may be required to devote substantial working capital and other resources prior to obtaining product orders. As a result, we may incur substantial costs before we recognize revenue from these products. Moreover, in return for larger, longer-term contracts, our customers for these products often demand more stringent acceptance criteria. Their criteria may also cause delay in our ability to recognize revenue from sales of these products. Furthermore, we may not be able to accurately predict in advance our costs to fulfill our obligations under these long-term contracts. If we fail to accurately predict our costs, due to inflation or other factors, we could incur significant losses. Any single long-term contract for our substance detection and pathogen identification products may represent a material portion of our total business volume, and the loss of any such contract could have a material adverse effect on our results of operations. In December 2002, we completed a production contract with the United States government that accounted for less than 10% of our revenue in 2001 and 2002. Failure to increase other business or to obtain another government contract such as this one would cause our revenue to decline. Also, the presence or absence of such contracts may cause substantial variation in our results of operations between fiscal periods and, as a result, our results of operations for any given fiscal period may not be predictive of our results for subsequent fiscal periods. The resulting uncertainty may have an adverse impact on our stock price.

We are subject to existing and potential additional regulation, which can impose burdens on our operations and narrow the markets for our products.

        We are subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. For example, exportation of our products,

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particularly our substance detection and pathogen identification products, is subject to strict regulatory control in a number of jurisdictions. The failure to satisfy export control criteria or obtain necessary clearances could delay or prevent shipment of products, which could adversely affect our revenues and profitability. Moreover, the life sciences industry, which is the market for our principal products, has historically been heavily regulated. There are, for example, laws in several jurisdictions restricting research in genetic engineering, which can operate to narrow our markets. Given the evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulation that adversely affects our market opportunities. Additionally, if ethical and other concerns surrounding the use of genetic information, gene therapy or genetically modified organisms become widespread, we may have less demand for our products. Our business is also directly affected by a wide variety of government regulations applicable to business enterprises generally and to companies operating in the life sciences industry in particular. Failure to comply with these regulations or obtain or maintain necessary permits and licenses could result in a variety of fines or other censures or an interruption in our business operations which may have a negative impact on our ability to generate revenues.

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. Our chief executive officer also is and has been chairman of the board of directors of an affiliated company and a management officer of another affiliate, which may reduce 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 and contract manufacturers.

        We currently purchase components used in our mass spectrometry systems from a limited number of outside sources. The reliance on a limited number of suppliers could result in time 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. Any interruption in the supply of components could have an adverse effect on our business, results of operations and financial condition.

        Because of the scarcity of some components, we may be unable to obtain an adequate supply of components, or we may be required to pay higher prices or to purchase components of lesser quality.

        The market is experiencing a shortage of electrical components, critical components in many of our products. Any delay or interruption in the supply of these or other components could impair our ability to manufacture and deliver our products, harm our reputation and cause a reduction in our revenues. In addition, any increase in the cost of the components that we use in our products could make our products less competitive and lower our margins. We may not be able to obtain sufficient quantities of required components on the same or substantially the same terms. Additionally, consolidations among our suppliers could result in other sole source suppliers for us in the future.

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We must integrate our global operations.

        Our U.S. headquarters is located in Billerica, Massachusetts. Our European headquarters is located in Bremen, Germany. Our principal manufacturing facilities are located in Billerica, Massachusetts, Bremen, Germany and Leipzig, Germany. Operating in diverse geographic locations imposes a number of risks and burdens on us, including the need to manage employees and contractors from diverse cultural backgrounds and who speak different languages, and difficulties associated with operating in a number of time zones. We may encounter unforeseen difficulties or logistical problems in operating in diverse locations.

We derive a significant portion of our revenue from international sales and are subject to the risks of doing business in foreign countries.

        International sales account and are expected to continue to account for a significant portion of our total revenues. For the fiscal year ended December 31, 2002, international sales totaled $80.0 million, or 68.7% of our net revenue. We intend to substantially increase our international operations. International expansion will require that we hire additional personnel. If we fail to hire additional personnel or develop and maintain relationships with foreign customers and partners, we may not be able to expand our international sales and would suffer decreased profits. Our international operations are, and will continue to be, subject to a variety of risks associated with conducting business internationally, many of which are beyond our control. These risks, which may adversely affect our ability to achieve and maintain profitability and our ability to sell our products internationally, include:

•

changes in regulatory requirements;



•

legislation and regulation, including tariffs, relating to the import or export of high technology products;



•

the imposition of government controls;



•

political and economic instability or, including international hostilities, acts of terrorism and governmental restrictions, inflation, trade relationships and military and political alliances;



•

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.

        While the impact of these factors is difficult to predict, any one or more of these factors could adversely affect our operations in the future.

We may lose money 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, which is our reporting currency. As a result, currency fluctuations among the U.S. dollar and the 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. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates.

Various international tax risks could adversely affect our earnings.

        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

35

operating or are formed. If 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 with 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.

Current armed hostilities could constrain our ability to conduct business internationally and could also disrupt our U.S. operations.

        The current world unrest, or United States responses, may lead to further acts of terrorism and civil disturbances in the United States or elsewhere, which may further contribute to the economic instability in the United States. These attacks or armed conflicts may affect our physical facilities or those of our suppliers or customers and could have an impact on our domestic and international sales, our supply chain, our production capability, our insurance premiums or the ability to purchase insurance and our ability to deliver our products to our customers. The consequences of these risks are unpredictable, and their long-term effect upon the Company is uncertain.

Responding to claims relating to improper handling, storage or disposal of hazardous chemicals and radioactive and biological materials which we use could be time consuming and costly.

        We use controlled hazardous and radioactive materials in our business and generate wastes that are regulated as hazardous wastes under United States federal and Massachusetts state environmental and atomic energy regulatory laws and under equivalent provisions of law in those jurisdictions in which our research and manufacturing facilities are located. Our use of these substances and materials is subject to stringent, and periodically changing, regulation that can impose costly compliance obligations on us and have the potential to adversely affect our manufacturing activities. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be held liable for any damages that result, in addition to incurring clean-up costs and liabilities, which can be substantial. Additionally, an accident could damage our research and manufacturing facilities resulting in delays and increased costs.

The unpredictability and fluctuation of our quarterly results may adversely affect the trading price of our common stock.

        Our revenues and results of operations have in the past and may in the future vary from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following:

•

the timing of sales of our products and services;



•

the timing of recognizing revenue and deferred revenue under U.S. GAAP;



•

changes in our pricing policies or the pricing policies of our competitors;



•

increases in sales and marketing, product development or administration expenses;



•

the mix of services provided by us and third-party contractors;



•

our ability to attain and maintain quality levels for our products; and



•

costs related to acquisitions of technology or businesses.

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        Historically, we have experienced a decrease in revenue in the first quarter of each fiscal year relative to the prior fourth quarter, which we believe is due to our customers' budgeting cycles. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is likely that in some future quarters, our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

We face potential volatility of our stock price.

        There has only been a public market for our common stock since August 2000.

        The market price of our common stock may fluctuate substantially in response to various factors, many of which are beyond our control, including quarterly fluctuations in results of operations, as described above; our ability to successfully commercialize our products; technological innovations or new commercial products by us or our competitors; developments concerning government regulations or proprietary rights which could affect the potential growth of our customers; material changes in our relationships with, or the viability of, strategic business partners; market reaction to trends in revenues and expenses, especially research and development; changes in earnings estimates by analysts; volatility and uncertainty in the capital markets in general; loss of key personnel; changes in accounting principles; lack of trading volume in our stock; fluctuation within the life science sector; sales of common stock by existing stockholders, particularly large institutional investors who cannot hold stock traded at less than $5 per share; and economic and political conditions.

        The market price for our common stock may also be affected by our ability to meet analysts' expectations. Any failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the stock market, and the NASDAQ National Market and the market for life science stocks in particular, has been and is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, companies that have experienced volatility in the market price of their securities have been the subjects of securities class action litigation. Any such litigation instigated against us could result in substantial costs and a diversion of managements' attention and resources, which could significantly harm our business, financial condition and operating results.

If we are unable to make successful acquisitions as contemplated by our growth strategy or integrate any such acquisitions, our business development may suffer.

        Our Company strategy involves expanding our technology base through strategic acquisitions. If we fail to effect acquisitions, our technology base may not expand as quickly and efficiently as we have anticipated. Without such expansion, our ability to keep up with the evolving needs of the market and to meet our future performance goals will be adversely affected. Additionally, if we fail to effectively integrate any acquired businesses or technologies into our existing business, such failure could adversely affect 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

Index to Financial Statements

38

Report of Independent Auditors

The Board of Directors and Shareholders

Bruker Daltonics Inc.

        We have audited the accompanying consolidated balance sheets of Bruker Daltonics Inc. (the Company) as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(d). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bruker Daltonics Inc. at December 31, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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BRUKER DALTONICS INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except for share data)

The accompanying notes are an integral part of these statements.

40

BRUKER DALTONICS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

The accompanying notes are an integral part of these statements.

41

BRUKER DALTONICS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(amounts in thousands)

The accompanying notes are an integral part of these statements.

42

BRUKER DALTONICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts are in thousands)

The accompanying notes are an integral part of these statements.

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BRUKER DALTONICS INC.

NOTES TO FINANCIAL STATEMENTS

1.    Description of Business

        Bruker Daltonics Inc. and its wholly-owned subsidiaries (the "Company") design, manufacture and market proprietary life science systems based on their mass spectrometry core technology platforms. The Company also sells a broad range of field analytical systems for substance detection and pathogen identification. The Company maintains major technical centers in Europe, North America and Japan. The Company allocates substantial capital and resources to research and development and is party to various collaborations and strategic alliances. The Company's diverse customer base includes pharmaceutical companies, biotechnology companies, proteomic companies, academic institutions and government agencies.

        These financial statements include the accounts of Bruker Daltonics Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

2.    Summary of Significant Accounting Policies

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying footnotes. Actual results could differ from those estimates.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with original maturities of 90 days or less at date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair market value at year end.

Short-Term Investments

        The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments, which are carried at fair value, consist of funds comprised of short-term money market and bond instruments and have been classified as available-for-sale at December 31, 2001 and 2002. At December 31, 2000, 2001 and 2002, there were $0, $0 and $90,000 realized losses, respectively, and no realized gains. The basis for the cost of securities sold was determined by the specific identification method.

Concentration of Credit Risk

        Financial instruments which subject the Company to credit risk consist of cash and cash equivalents, short-term investments and accounts receivables. The risk with respect to cash and cash equivalents and short-term investments is minimized by the Company's policy of investing in short-term financial instruments issued by highly-rated financial institutions. The risk with respect to accounts receivable is minimized by the credit worthiness of the Company's customers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations. For the years ended December 31, 2000, 2001 and 2002, two customers accounted for an aggregate of 11%, 17% and 17%,

44

respectively, of the Company's product revenue. Accounts receivables for these two customers accounted for an aggregate of 10% and 14% of total receivables as of December 31, 2001 and 2002.

Inventories

        Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out, ("FIFO") method. An allowance for excess and obsolete inventory is maintained to reflect the expected un-saleable or un-refundable inventory based on an evaluation of slow moving products.

        Inventories include demonstration equipment which the Company offers for sale to current and potential customers. The Company amortizes its demonstration equipment on a straight-line basis over a three year period. Amortization expense for demonstration equipment was approximately $952,000, $1.8 million and $3.9 million for the years ended December 31, 2000, 2001 and 2002, respectively.

Property, Plant and Equipment

        Property, plant and equipment which includes land, buildings, machinery and equipment, furniture and fixtures and leasehold improvements are recorded at cost and are being depreciated on a straight-line basis over the estimated useful lives as follows:

Software Costs

        Purchased software is capitalized at cost and is amortized over the estimated useful life, generally three years. Software developed for use in the Company's products is expensed as incurred and is classified as research and development expense.

Intangible and Other Assets

        Intangible and other assets consist principally of patents and licenses. Patents, patent applications and rights are recorded at acquisition cost and are amortized using the straight-line method over the legal lives of the patents, generally for periods ranging up to ten years. Accumulated amortization of these assets was approximately $1.4 million and $2.0 million as of December 31, 2001 and 2002, respectively.

Investments in Other Companies

        Investment in other companies consists of equity securities of privately-held companies accounted for under the cost method. The Company's ownership interest in each of these companies is less than 20%. We periodically evaluate the carrying value of these investments for potential impairment. If our evaluation identifies an impairment that we deem to be other than temporary, the investments are written down to their estimated fair value through a charge to current earnings.

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Long-lived Assets

        The Company reviews long-lived assets for impairment, in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). If facts and circumstances indicate that the Company's long-lived assets might be impaired, the estimated future undiscounted cash flows associated with the long-lived asset would be compared to its carrying amount to determine if a write-down to fair value is necessary. If a write-down is required, the amount is determined by estimation of the present value of net discounted cash flows in accordance with FAS 144. To date, no such indicators of impairment have been identified.

Warranty Costs

        The Company generally provides a one year parts and labor warranty with the purchase of equipment. The anticipated cost for this one year warranty is accrued upon recognition of the sale and is included as a current liability on the accompanying balance sheets. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase resulting in a decreased gross profit.

        Changes in our product liability during the period are as follows (in thousands):

Contingencies

        The Company is subject to proceedings, lawsuits and other claims related to patents, product and other matters. The Company assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

        The Company records charges for the costs it anticipates incurring in connection with litigation and claims against the Company when management can reasonably estimate these costs.

Customer Deposits

        Under the terms and conditions of contracts with certain customers, the Company may require an advance deposit. These deposit amounts are recorded as a liability until revenue is recognized against the specific contract at time of acceptance of the system.

Earnings Per Share

        Basic earnings per share is calculated by dividing net earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share computation includes the effect of shares which would be issuable upon the exercise of outstanding stock options, reduced by the

46

number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period.

Fair Value of Financial Instruments

        The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, amounts due from/to affiliated companies and long-term debt. The carrying amounts of the Company's cash and cash equivalents, short-term investments, accounts receivable, accounts payable and amounts due from/to affiliated companies approximate fair value due to their short-term nature. The fair value of long-term debt is estimated based on current interest rates offered to the Company for financing arrangements with similar maturities. The recorded value of these financial instruments approximate their fair value at December 31, 2001 and 2002.

Foreign Currency Translation

        In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," all balance sheet accounts of foreign subsidiaries are translated into United States dollars at the current exchange rate, and income statement items are translated at the average exchange rate for the period; resulting translation adjustments are made directly to accumulated other comprehensive income (loss) in stockholders' equity. Realized exchange gains and losses on foreign currency transactions included in other income (expenses) were gains of approximately $332,000 in 2000 and losses of $113,000 in 2001 and $379,000 in 2002.

Revenue Recognition

        Revenue is recognized from system sales, including hardware with embedded software, when a product is accepted by the customer, except when sold through an independent distributor, a strategic distribution partner or an unconsolidated Bruker affiliated distributor which assumes responsibility for installation, in which case the system sale is recognized when the products are shipped to the distributor and title has transferred to the distributor. The Company's distributors do not have price protection rights or rights to return; however, the Company's products are warranted to be free from defect for a period of, typically, one year. Revenue from accessories and parts is recognized upon shipment, and revenue from services when performed.

        The Company also offers to its customers warranty and service agreements extending beyond the initial year of warranty for a fee. These fees are recorded as deferred revenue and amortized into revenue over the life of the agreements.

        Other revenues, which are principally comprised of research and development grants, are recognized as grant work is performed.

        The Company believes that its revenue recognition policies comply with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition."

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Shipping and Handling Costs

        The Company records costs incurred in connection with shipping and handling products as marketing and selling expenses. Amounts billed to customers in connection with these costs are included in revenues. Shipping and handling costs were $700,000, $1.0 million and $1.1 million for the years ended December 31, 2000, 2001 and 2002, respectively.

Advertising Costs

        Advertising costs are expensed as incurred. Advertising expenses included in sales and marketing were approximately $793,000, $958,000 and $1.0 million for the years ended December 31, 2000, 2001 and 2002, respectively.

Income Taxes

        The Company provides for income taxes under the liability method prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Stock Compensation Arrangements

        The Company accounts for its stock compensation arrangements under the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." The Company has adopted the disclosure-only provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Any compensation cost on fixed awards with pro rata vesting is recognized on a straight-line basis over the award's vesting period.

        If the Company had elected to recognize compensation expense for the granting of options under stock option plans based on the fair values at the grant dates consistent with the methodology prescribed by Statement No. 123, net income (loss) and net income (loss) per share for the years ended December 31, 2000, 2001 and 2002 would have been reported as the following pro forma amounts:

Accounting Developments

        In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. Statement No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability

48

Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit or disposal plan. The Company adopted the provisions of Statement No. 146 effective January 1, 2003. Statement No. 146 will not impact the accounting for any restructuring plan approved and announced as of December 31, 2002; however, the pronouncement will impact the accounting for any future exit or disposal activities.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. The disclosure provisions of Interpretation No. 45 are effective for the Company as of December 31, 2002. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The Company does not expect the recognition provisions of Interpretation No. 45 to materially impact its consolidated financial statements.

        In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." Statement No. 148 amends Statement No. 123, to provide alternative methods of transition to Statement No. 123's fair value method of accounting for stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement No. 123 and APB Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has adopted the disclosure provisions of Statement No. 148.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have on the results of operations and financial condition.

Reclassifications

        Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2002 presentation.

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3.    Investments in Other Companies

GeneProt, Inc.

        In November 2000, the Company acquired 909,091 shares of Series B Preferred Stock of GeneProt, Inc. in exchange for $7.0 million in cash and 79,218 shares of the Company's common stock. The acquired securities are included in investments in other companies and are accounted for under the cost method. Due to the uncertain outlook of GeneProt, we concluded that the investment has suffered an impairment that was deemed to be other than temporary. As such, we recorded an $8.3 million charge to earnings in 2002 to write our investment in GeneProt down to the estimated fair market value.

Affinium Pharmaceutials, Inc

        In March 2001, the Company acquired 369,004 shares of Series IIA Preferred Stock of Affinium Pharmaceuticals, Inc. (formerly Integrative Proteomics, Inc.) in exchange for $500,005 in cash and 28,425 shares of the Company's common stock. The acquired securities are included in investments in other companies and are accounted for under the cost method. Due to the uncertain outlook of Affinium Pharmaceuticals, we concluded that the investment has suffered an impairment that was deemed to be other than temporary. As such, we recorded a $603,000 charge to earnings in 2002 to write our investment in Affinium Pharmaceuticals down to the estimated fair market value.

GeneFormatics, Inc.

        In October 2001, the Company acquired 333,334 shares of Series C Preferred Stock of GeneFormatics, Inc. in exchange for $500,013 in cash and 30,693 shares of the Company's common stock. The acquired securities are included in investments in other companies and are accounted for under the cost method. Due to the uncertain outlook of GeneFormatics, we concluded that the investment has suffered an impairment that was deemed to be other than temporary. As such, we recorded a $721,000 charge to earnings in 2002 to write our investment in GeneFormatics down to the estimated fair market value.

4.    Inventories

        The components of inventories were as follows: