CIPHERGEN BIOSYSTEMS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

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

Commission file number: 000-31617

CIPHERGEN BIOSYSTEMS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		33-0595156
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification Number)

6611 DUMBARTON CIRCLE, FREMONT, CALIFORNIA		94555
(Address of principal executive offices)		(ZIP Code)

Registrant’s telephone number, including area code: 510-505-2100

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 whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Yes ý No o

Number of shares of common stock, $0.001 par value, outstanding as of April 30, 2004: 29,112,663

CIPHERGEN BIOSYSTEMS, INC.

INDEX FOR FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2004

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003

	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and March 31, 2003

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and March 31, 2003

	Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Changes in Securities and Use of Proceeds

Item 3.	Defaults Upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES

EXHIBIT INDEX

ITEM 1. FINANCIAL STATEMENTS

CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	29,309		$	32,853
Short-term investments	10,340			14,463
Accounts receivable, net	13,242			14,731
Inventories, net	9,066			8,300
Notes receivable from related parties	152			56
Prepaid expenses and other current assets	2,972			2,878

Total current assets	65,081			73,281

Property, plant and equipment, net	15,797			15,891
Goodwill and other intangible assets, net	10,639			9,879
Notes receivable from related parties	116			216
Other long-term assets	2,678			2,759

Total assets	$	94,311		$	102,026

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,617		$	5,062
Accrued liabilities	9,799			9,495
Deferred revenue	5,831			5,768
Current portion of capital lease obligations	319			324
Current portion of long-term debt	675			662

Total current liabilities	21,241			21,311

Deferred revenue	652			594
Capital lease obligations, net of current portion	2,141			2,274
Long-term debt, net of current portion	917			1,090
Convertible senior notes, net of discount	27,649			27,515
Other long-term liabilities	1,436			1,185

Total liabilities	54,036			53,969

Commitments and contingencies

Minority interest	—			165

Stockholders’ equity:
Common stock	29			29
Additional paid-in capital	186,156			186,043
Notes receivable from stockholders	(988		)	(1,093		)
Deferred stock-based compensation	(486		)	(725		)
Accumulated other comprehensive income	3,565			4,158
Accumulated deficit	(148,001		)	(140,520		)

Total stockholders’ equity	40,275			47,892

Total liabilities, minority interest and stockholders’ equity	$	94,311		$	102,026

See notes to unaudited condensed consolidated financial statements.

CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2004			2003
Revenue:
Products	$	13,074		$	11,169
Services	2,464			1,672

Total revenue	15,538			12,841

Cost of revenue:
Products	3,960			3,977
Services	971			846

Total cost of revenue	4,931			4,823

Gross profit	10,607			8,018

Operating expenses:
Research and development	6,195			6,381
Sales and marketing	7,020			5,849
General and administrative	3,881			4,708
Amortization of intangible assets	207			207

Total operating expenses	17,303			17,145

Loss from operations	(6,696		)	(9,127		)

Interest and other income (expense), net	(525		)	175
Loss attributable to minority interest	—			157

Loss before provision for income taxes	(7,221		)	(8,795		)
Provision for income taxes	260			401

Net loss	$	(7,481	)	$	(9,196	)

Basic and diluted net loss per share	$	(0.26	)	$	(0.34	)

Shares used in computing basic and diluted net loss per share	29,039			27,211

See notes to unaudited condensed consolidated financial statements.

CIPHERGEN BIOSYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Three Months Ended March 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,481	)	$	(9,196	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,750			1,281
Change in minority interest	—			(157		)
Stock-based compensation expense	205			389
Amortization of debt discount	133			—
Interest accrued on notes receivable from related parties	(21		)	(22		)
Changes in operating assets and liabilities:
Accounts receivable, net	1,513			1,015
Inventories, net	(741		)	50
Prepaid expenses and other current assets	(95		)	252
Other long-term assets	(141		)	—
Accounts payable and accrued liabilities	(224		)	962
Deferred revenue	113			455
Other long-term liabilities	266			74

Net cash used in operating activities	(4,723		)	(4,897		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net	(1,303		)	(1,391		)
Purchase of marketable securities	—			(748		)
Maturities of marketable securities	4,030			7,300
Purchase of Ciphergen Biosystems KK common stock	(1,000		)	—

Net cash provided by investing activities	1,727			5,161

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options	147			40
Principal payments on capital lease obligations	(85		)	(224		)
Repayment of long-term debt	(159		)	—
Repayments of notes receivable from stockholders	105			197

Net cash provided by financing activities	8			13

Effect of exchange rate changes	(556		)	91

Net increase (decrease) in cash and cash equivalents	(3,544		)	368
Cash and cash equivalents, beginning of period	32,853			25,145

Cash and cash equivalents, end of period	$	29,309		$	25,513

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reductions in deferred stock-based compensation	$	(34	)	$	(730	)
Transfer of fixed assets to inventory	102			58
Acquisition of property and equipment under capital leases	21			—
Increase to goodwill from BioSepra acquisition due to income tax settlement accrued	203			—

See notes to unaudited condensed consolidated financial statements.

CIPHERGEN BIOSYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2004

1. ORGANIZATION AND BASIS OF PRESENTATION

Ciphergen Biosystems, Inc. (the “Company” or “Ciphergen”) develops, manufactures and sells ProteinChipâ Systems for life science researchers. The core technology, which is patented, is Surface Enhanced Laser Desorption/Ionization (“SELDI”). The systems consist of ProteinChip Readers, ProteinChip Software and related accessories, which are used in conjunction with consumable ProteinChip Arrays and ProteinChip Kits. These products are sold primarily to biologists at pharmaceutical and biotechnology companies, and academic and government research laboratories. The Company also provides research services through its Biomarker Discovery Centerâ laboratories and process proteomics centers, and chromatography sorbents used for protein purification through its BioSepra® subsidiary.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods shown herein are not necessarily indicative of operating results for the entire year or any other future interim period.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation. During 2003 and the first quarter of 2004, the Company owned 70% of its Japanese subsidiary, Ciphergen Biosystems KK, and reported the 30% non-controlling interest as minority interest in the consolidated balance sheets and statements of operations. At the end of the first quarter of 2004, the Company acquired the remaining 30% ownership interest.

This unaudited financial data should be read in conjunction with the consolidated financial statements and footnotes contained in the Company’s 2003 Form 10-K.

2. INVENTORIES

Net inventories consisted of the following (in thousands):

	March 31, 2004		December 31, 2003
Raw materials	$	3,470	$	2,791
Work in process	1,504		1,320
Finished goods	4,092		4,189

	$	9,066	$	8,300

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following (in thousands):

	March 31, 2004						December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Non-amortizing:
Goodwill	$	3,908	$	—	$	3,908	$	2,870	$	—	$	2,870
Amortizing:
Acquired completed technology	5,400		2,057		3,343		5,400		1,865		3,535
Patents	400		152		248		400		138		262
Acquired license related to litigation settlement	4,349		1,209		3,140		4,118		906		3,212
	$	14,057	$	3,418	$	10,639	$	12,788	$	2,909	$	9,879

Annual amortization expense for these intangible assets is expected to be approximately $2,038,000 in 2004 and in 2005; $1,852,000 in 2006; $829,000 in 2007; $483,000 in 2008; and $0 in 2009. Amortization expense for other intangible assets was (in thousands):

	Three Months Ended March 31,
	2004		2003

Acquired completed technology	$	192	$	193
Patents	14		14
Acquired license related to litigation settlement	303		—
	$	509	$	207

4. WARRANTIES AND MAINTENANCE CONTRACTS

Ciphergen has a direct field service organization that provides service for its products. The Company generally includes a standard 12 month warranty on its ProteinChip Systems, ProteinChip Tandem MS Interfaces and accessories in the form of a maintenance contract upon initial sale, after which maintenance and support may be provided under a separately priced contract or on an individual call basis.

Changes in product warranty obligations, including separately priced maintenance obligations, during the three months ended March 31, 2004 and 2003 were as follows (in thousands):

		2004					2003
Balance at the beginning of period		$			3,442		$	1,800
Add: Costs incurred for maintenance contracts		489					531
	Revenue deferred for separately priced maintenance contracts		1,340				1,062
Less: Settlements made under maintenance contracts		(489				)	(531		)
	Revenue recognized for separately priced maintenance contracts			(1,189		)	(688		)
Balance at end of period		$			3,593		$	2,174

Revenue for maintenance contracts is recognized on a straight-line basis over the period of the applicable maintenance contract. Costs are recognized as incurred.

5. PURCHASE OF ADDITIONAL INTEREST IN CIPHERGEN BIOSYSTEMS KK

In January 1999, the Company formed Ciphergen Biosystems KK and took a 30% equity interest in this joint venture with Sumitomo Corporation to distribute the Company’s products in Japan. On August 31, 2002, the Company acquired an additional 40% ownership in Ciphergen Biosystems KK, bringing its total ownership to 70%. On March 23, 2004, the Company acquired the remaining 30% equity stake in Ciphergen Biosystems KK, bringing its total ownership to 100%. The Company paid $1 million in cash to SC BioSciences (a unit of Sumitomo Corporation) for the final 30% of the shares of Ciphergen Biosystems KK common stock. Acquisition costs were immaterial. The acquisition was accounted for using the purchase method of accounting.

The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows (in thousands):

Tangible net assets acquired:
Accounts receivable, net, and other current assets	$	1,804
Inventories	218
Property and equipment	281
Other tangible assets	101
Accounts payable and accrued liabilities, including working capital loans	(2,221		)
Capital lease obligations	(18		)
	165
Excess of purchase price over net assets acquired	835

	$	1,000

The amount of the purchase price in excess of the net assets acquired was recorded as goodwill and is evaluated for impairment at least annually and more frequently if circumstances warrant.

6. FOREIGN CURRENCY TRANSACTIONS

During the quarter ended March 31, 2004, the Company entered into foreign currency forward contracts to manage the volatility of currency fluctuations as a result of an intercompany loan of approximately $1.0 million, denominated in yen, to the Company’s subsidiary in Japan. The effect of exchange rate changes on the forward exchange contracts is expected to offset the effect of exchange rate changes on the intercompany loan. As of March 31, 2004, the Company had one forward contract to sell approximately 120 million yen at a rate of 104.21 yen per U.S. dollar. Because there is no fixed maturity date for the intercompany loan, the Company closes each forward contract and enters a new one monthly. Net realized foreign currency gains and losses related to the

foreign currency forward contracts and the related intercompany loan were not material for the three month period ended March 31, 2004. The Company did not enter into any such forward contracts during the comparable quarter of 2003.

7. STOCK OPTIONS

The following information regarding pro forma net loss and pro forma net loss per share has been determined as if the Company had accounted for its employee stock options and employee stock option plans under the fair value method. The resulting effect on net loss and net loss per share is not likely to be representative of the effects on net loss and net loss per share in future periods, due to subsequent periods including additional grants and periods of vesting.

The following table illustrates the effect on reported net loss and net loss per share if the Company had applied the fair value recognition methodology to stock-based employee compensation (in thousands, except per share amounts):

	Three Months Ended March 31,
	2004			2003

Net loss as reported	$	(7,481	)	$	(9,196	)
Add: Employee stock-based compensation expense in reported net income, net of tax	216			388
Less: Employee stock-based compensation expense determined under the fair value method, net of tax	(1,027		)	(1,191		)
Pro forma net loss	$	(8,292	)	$	(9,999	)

Basic and diluted net loss per share:
As reported	$	(0.26	)	$	(0.34	)
Pro forma	$	(0.29	)	$	(0.37	)

8. INCOME TAXES

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets of the Company will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at March 31, 2004. The Company incurs income tax liabilities primarily in France and Japan, as well as in most of the other countries outside the U.S. in which it operates.

9. COMPREHENSIVE LOSS

Comprehensive loss consisted of the following (in thousands):

	Three Months Ended March 31,
	2004			2003

Net loss	$	(7,481	)	$	(9,196	)
Other comprehensive income:
Net change in unrealized gains/losses on investments	7			(14		)
Currency translation gains (losses)	(600		)	265
Other comprehensive income	(593		)	251
Total comprehensive loss	$	(8,074	)	$	(8,945	)

10. NET LOSS PER SHARE

Basic net loss per share is calculated using the weighted average number of common shares outstanding during the period. Because the Company is in a net loss position, diluted earnings per share is calculated using the weighted average number of common shares outstanding and excludes the effects of 8.2 million and 4.1 million potential common shares as of March 31, 2004 and 2003, respectively, that are antidilutive. Potential common shares include shares that could be issued if all convertible senior notes were converted into common stock, common stock subject to repurchase, common stock issuable under the Company’s 2000 Employee Stock Purchase Plan, and incremental shares of common stock issuable upon the exercise of outstanding stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):

	Three Months Ended March 31,
	2004			2003
Numerator:
Net loss	$	(7,481	)	$	(9,196	)
Denominator:
Weighted average common shares outstanding	29,091			27,345
Weighted average unvested common shares subject to repurchase	(52		)	(134		)
Denominator for basic and diluted calculations	29,039			27,211
Basic and diluted net loss per share	$	(0.26	)	$	(0.34	)

11. SEGMENT INFORMATION AND GEOGRAPHIC DATA

Ciphergen’s revenue is derived from the sales of related products and services on a worldwide basis. Although discrete components that earn revenues and incur expenses exist, significant expenses such as sales and marketing and corporate administration are not incurred by nor allocated to these operating units but rather are employed by the entire enterprise. Additionally, the chief operating decision maker evaluates resource allocation not on a product or geographic basis, but rather on an enterprise-wide basis. Therefore, management has determined that Ciphergen operates in only one reportable segment, which is the protein research/purification tools and collaborative services business.

The following table reflects the results of the Company’s sales to external customers by similar products and services for the three month periods ended March 31, 2004 and 2003 (in thousands):

	Three Months Ended March 31,
	2004		2003

ProteinChip systems and related products	$	10,890	$	7,319
Process chromatography products	2,184		3,850
Services	2,464		1,672
	$	15,538	$	12,841

The Company sells most of its products and services directly to customers in North America, Europe, Japan and China, and through distributors in other parts of Asia and in Australia. Chromatographic sorbents are also sold through distributors in parts of Europe. Revenue for geographic regions reported below is based upon the customers’ locations. Following is a summary of the geographic information related to revenue for the three month periods ended March 31, 2004 and 2003 (in thousands):

	Three Months Ended March 31,
	2004		2003

North America	$	6,145	$	6,577
Europe	5,083		5,223
Asia	4,310		1,041

Total	$	15,538	$	12,841

During the three month period ended March 31, 2004, sales to customers in Japan exceeded 10% of total revenue. During the three month period ended March 31, 2003, sales to customers in France exceeded 10% of total revenue.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We have made statements under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Factors That May Affect Our Results” and in other sections of this Form 10-Q that are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. We claim the protection of such safe harbor, and disclaim any intent or obligation to update any forward-looking statement. You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “could”, “should”, and “continue” or similar words. These forward-looking statements may also use different phrases. We have based these forward-looking statements on our current expectations and projections about future events. Examples of forward-looking statements include statements about expectations of revenue increases, expectations of costs decreasing as a percentage of total revenue, and estimated forecasts of revenue; deployment, capabilities and uses of our products; the expansion of our product portfolio, product development and product innovations; the importance of proteomics as a major focus of biology research; the ability of our products to enable proteomics research; the emerging market for process proteomics; increasing the size of our sales and marketing organization; increased activity at our Biomarker Discovery Center® laboratories; securing commercial rights to discoveries at our Biomarker Discovery Center laboratories; trends in our business; revenue growth; expansion plans, including expansion of our proteomics products; increasing costs, including sales and marketing, research and development, and general and administrative costs; expected levels of capital expenditures; the period of time for which our existing financial resources and interest income will be sufficient to enable us to maintain current and planned operations; and our plans for mitigating foreign currency exchange risks. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks set forth under the caption “Factors That May Affect Our Results” in this Form 10-Q and the similar factors and risks outlined in Form 10-K dated March 15, 2004, and in our other filings with the SEC.

OVERVIEW

We develop, manufacture and sell our ProteinChip® Systems, which use patented Surface Enhanced Laser Desorption/Ionization (“SELDI”) technology. These systems consist of a ProteinChip Reader, ProteinChip Software and related accessories which are used in conjunction with our consumable ProteinChip Arrays and ProteinChip Kits. We market and sell our products primarily to research biologists in pharmaceutical and biotechnology companies, and academic and government research laboratories. In 1997, we acquired IllumeSys Pacific, Inc., which holds specific rights to the SELDI technology for the life science research market. Our first designed and manufactured system, the ProteinChip System, Series PBS I, was available for shipment in the third quarter of 1997. In 1997, we also established a subsidiary in the U.K. and began direct selling in Europe. During 1999, we initiated an expanded marketing program and in May began shipping the ProteinChip System, Series PBS II, the current version of which is now referred to as the ProteinChip Biology System. In 1999, we also established a joint venture with Sumitomo Corporation to distribute our products in Japan. During 2000, we began offering research services and established Biomarker Discovery Center laboratories in Fremont, California; Copenhagen, Denmark; and Malvern, Pennsylvania.

In 2001, we introduced the ProteinChip Biomarker System, which utilizes sophisticated third-party software to automate pattern recognition-based statistical analysis methods and correlate protein expression patterns from clinical samples with disease phenotypes. We also began selling the Biomek® 2000 Workstation, a robotic accessory which is manufactured by Beckman Coulter and which has been optimized for use with our ProteinChip Biomarker System to increase sample throughput and reproducibility. In addition, we expanded our product offering with a SELDI ProteinChip interface to high-end tandem mass spectrometers, which we developed and which is manufactured for us by a third party manufacturing company. On July 31, 2001, Ciphergen acquired the BioSepra® process chromatography business from Invitrogen Corporation. BioSepra S.A., a wholly-owned subsidiary of Ciphergen located near Paris, France, currently has 57 employees who develop, manufacture and market products for the large-scale process chromatography market and provide related contracted services. We have integrated the BioSepra business into our sales and marketing organization and are offering a line of products to address process proteomics, an emerging market driven by pharmaceutical company demand to produce proteins for research, development and therapeutic manufacturing purposes.

In 2002, we opened an office in Beijing, China, hired local staff and began direct selling in China. On August 31, 2002, we increased our ownership interest in Ciphergen Biosystems KK, the Japanese joint venture we formed with Sumitomo Corporation in 1999, from 30% to 70%. Shortly thereafter, we opened a Biomarker Discovery Center laboratory at the Yokohama facility of Ciphergen Biosystems KK. In October 2002, we launched the ProteinChip AutoBiomarker System, an automated version of our ProteinChip Biomarker System, which incorporates an autoloader and a Biomek robot to increase sample throughput and automate the reading of ProteinChip Arrays. On March 23, 2004, we purchased the remaining 30% ownership interest in Ciphergen Biosystems KK.

We have used our resources primarily to develop and expand our proprietary ProteinChip Systems and related consumables and to establish a marketing and sales organization for commercialization of our products. We have also used our resources to establish Biomarker Discovery Center laboratories to provide research services to our clients, to foster further adoption of our products and technology, and to discover biomarkers that we seek to patent for diagnostic and other purposes. In early 2004, Ciphergen formed a Diagnostics Division and increased its efforts to discover protein biomarkers and panels of biomarkers that can be developed into protein molecular diagnostic tests that improve patient care. In addition, we acquired the BioSepra process chromatography business which expanded our proteomics products business. We also used our funds to establish a joint venture to distribute our products in Japan and to increase our ownership in the joint venture to majority control. Since our inception we have incurred significant losses and as of March 31, 2004, we had an accumulated deficit of $148.0 million.

Our sales are currently driven by the need for new and better tools to perform protein discovery, characterization, purification, identification and assay development. In addition, many of our customers later enhance their ProteinChip Systems to add automation accessories and advanced software. Most of the ProteinChip Systems sold to our customers also generate a recurring revenue stream from the sale of consumables and maintenance contracts. As a result, we expect our revenue to increase in 2004.

Our expenses, excluding stock-based compensation, have consisted primarily of costs incurred in manufacturing our ProteinChip Systems, ProteinChip Arrays and chromatography sorbents, including materials, labor and overhead costs, marketing and sales activities, research and development programs, litigation, and general and administrative costs associated with our operations. We expect our cost of revenue to increase in 2004 as we sell additional units of our ProteinChip System, ProteinChip Arrays and chromatography sorbents, but to decrease as a percent of total revenue as we gain efficiencies from spreading our fixed costs over a greater number of units. We expect our research and development expenses to decrease slightly in 2004 as we transition certain products into manufacturing, partly offset by increased efforts at our Biomarker Discovery Center laboratories to discover, validate and patent biomarkers that may have diagnostic and/or therapeutic utility. We expect our selling expenses to increase in 2004 as we continue to commercialize our products and expand our sales force. We expect our general and administrative expenses to increase to support the overall growth and complexity of our operations. As a result, we expect to incur losses for at least the next year. Our current level of revenue is insufficient for us to become profitable. To become profitable, we will need to increase unit sales of our ProteinChip Systems and Arrays, and chromatography sorbents.

We have a limited history of operations and we anticipate that our quarterly results of operations will fluctuate for the foreseeable future due to several factors, including market acceptance of current and new products, the length of the sales cycle and timing of significant orders, the timing and results of our research and development efforts, the introduction of new products by our competitors and possible patent or license issues. Our limited operating history makes accurate prediction of future results of operations difficult or impossible.

RECENT DEVELOPMENTS

On March 23, 2004, we paid $1 million in cash to purchase an additional 30% ownership in Ciphergen Biosystems KK, our Japanese subsidiary, from SC BioSciences (a unit of Sumitomo Corporation), bringing our ownership interest to 100%.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003

PRODUCT REVENUE. Product revenue increased to $13.1 million in the first quarter of 2004 from $11.2 million for the same period in 2003, an increase of $1.9 million or 17%. The increase was primarily the result of increased unit sales of ProteinChip Systems and Arrays, and increased sales of higher-end configurations and automation accessories, aided by the increase in the size of our sales force and increased market acceptance of SELDI technology. This increase was partially offset by a decrease in revenue from the sale of BioSepra chromatographic sorbents.

SERVICE REVENUE. Service revenue increased to $2.5 million in the first quarter of 2004 from $1.7 million for the same period in 2003, an increase of $792,000 or 47%. This increase was primarily due to an increase in revenue from maintenance contracts driven by growth in our installed base, and an increase in revenue from collaboration services handled through our Biomarker Discovery Center laboratories.

We expect to see overall revenue growth of approximately 30% to 40% in 2004, for total forecasted 2004 revenue of approximately $76 to $82 million. Based on seasonality, the timing of anticipated process chromatography sorbent orders and continued anticipated strength in selling our ProteinChip products and services, we expect revenue in the second quarter of 2004 to be approximately $16.5 to $17.5 million.

COST OF PRODUCT REVENUE. Cost of product revenue was $4.0 million in the first quarter of 2004, unchanged from the same period in 2003. Increased cost of revenue from ProteinChip Systems and Arrays was offset by a decrease in cost of revenue for BioSepra chromatographic sorbents, largely the result of lower sales volume for sorbents. The gross margin for product revenue increased from 64% in the first quarter of 2003 to 70% in the same period of 2004. This improvement was mainly due to product mix, as well as manufacturing efficiencies as production volumes of ProteinChip Systems and Arrays increased. This increase was partially offset by the amortization of expenses associated with our litigation settlement, which reduced the gross margin for product revenue in the first quarter of 2004 by approximately 2%. Stock-based compensation expense in cost of product revenue was $16,000 in the first quarter of 2004 compared to $29,000 in the same period of 2003.

COST OF SERVICE REVENUE. Cost of service revenue increased to $971,000 in the first quarter of 2004 from $846,000 for the same period in 2003, an increase of $125,000 or 15%. This increase was primarily the result of increased collaboration expenses associated with revenue-generating contracts at our Biomarker Discovery Center laboratories. The gross margin for service revenue increased from 49% in the first quarter of 2003 to 61% in the same period of 2004. This improvement was mainly due to improved operating efficiencies of our field service team. This increase was partially offset by the amortization of expenses associated with our litigation settlement, which reduced the gross margin in the first quarter of 2004 for service revenue by approximately 3%.

We expect our overall gross margin to be in the 67% to 70% range during 2004.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased to $6.2 million in the first quarter of 2004 from $6.4 million for the same period in 2003, a decrease of $186,000 or 3%. The decrease was largely due to a decline in headcount, resulting in a reduction of payroll and related costs by approximately $382,000. Stock-based compensation expense in research and development was $18,000 in the first quarter of 2004, compared to $30,000 in the same quarter of 2003. These decreases were partially offset by higher project material spending as we continue to develop new products.

We expect research and development expenses, excluding stock-based compensation, to modestly decline in 2004 relative to 2003 as we transition certain products into manufacturing. This decrease will be partially offset by increased activities through our Biomarker Discovery Center laboratories to discover, validate and patent biomarkers.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to $7.0 million in the first quarter of 2004 from $5.8 million for the same period in 2003, an increase of $1.2 million or 20%. The increase was largely due to a 22% increase in headcount, resulting in an increase in payroll and related costs of approximately $576,000. Travel, outside services, depreciation and other equipment expenses, as well as promotional activities also increased as we increased our sales activities. Stock-based compensation expense in sales and marketing was $45,000 in the first quarter of 2004, compared to $75,000 in the same quarter of 2003.

We expect sales and marketing expenses, excluding stock-based compensation, to increase in 2004 relative to 2003 as we continue to grow our sales force in North America, Western Europe, Japan and China, and increase our promotional activities.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased to $3.9 million in the first quarter of 2004 from $4.7 million for the same period in 2003, a decrease of $827,000 or 18%. The decrease was largely driven by a $1.3 million decrease in legal fees following the settlement of our litigation in the second quarter of 2003, and a decrease of $129,000 in stock-based compensation expense. These decreases were partially offset by a 14% increase in administrative staff, thereby increasing payroll and related costs approximately $238,000. Stock-based compensation expense was $126,000 in the first quarter of 2004, compared to $255,000 in the same quarter of 2003.

We expect general and administrative expenses, excluding stock-based compensation, to increase in 2004 as we add necessary infrastructure to support the increased activities and complexities of our business.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquired completed technology and patents during the first quarter of 2004 was $207,000, unchanged from the first quarter of 2003.

INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income in the first quarter of 2004 was $167,000 compared to $208,000 in the same quarter of 2003. The decrease was due to smaller average investment balances and lower interest rates. Interest expense in the first quarter of 2004 was $525,000 compared to $33,000 in the same quarter of 2003. The increase was largely due to the issuance of $30.0 million of convertible senior notes in August 2003. Approximately $133,000 of the interest expense was non-cash, attributable to amortization of the beneficial conversion feature associated with the notes. Other income (expense) in the first quarter of 2004 was a net expense of $167,000 compared to zero in the same quarter of 2003. The net expense in the first quarter of 2004 resulted primarily from the amortization of the offering costs related to the convertible senior notes.

PROVISION FOR INCOME TAXES. The provision for income taxes in the first quarter of 2004 was $260,000, compared to $401,000 in the same quarter of 2003. The decrease was primarily due to lower profits reported by our French subsidiary in 2004.

LIQUIDITY AND CAPITAL RESOURCES

From our inception through March 31, 2004, we have financed our operations principally with $150.7 million from the sales of products and services to customers and net proceeds from equity financings totaling approximately $145.8 million. This includes net proceeds of $92.4 million from our initial public offering in September 2000 and net proceeds of $26.9 million from our Series E Preferred Stock financing in March 2000. We also received $28.1 million of net proceeds from the sale of 4.5% convertible senior notes on August 22, 2003. These notes are due September 1, 2008. Cash, cash equivalents and investments in securities at March 31, 2004 were $39.6 million, compared to $47.3 million at December 31, 2003. Working capital at March 31, 2004 was $43.8 million, compared to $52.0 million at December 31, 2003. Long-term debt and capital lease balances at March 31, 2004 totaled $31.7 compared to $31.9 million at December 31, 2003.

Net cash used in operating activities was $4.7 million in the first three months of 2004 compared to $4.9 million in the first three months of 2003. More cash was collected from customers in the first three months of 2004 as compared to the first three months of 2003 due to increased revenues in 2004. This increase in cash was used to fund increases in operating expenses and inventory purchases for the first three months of 2004. The increase in cash collected was offset by a decrease in interest income, which was $167,000 for the first three months of 2004 as compared to $208,000 for the first three months of 2003, due to lower interest rates. Interest expense also increased from $33,000 for the first three months of 2003 to $525,000 for the first three months of 2004 due primarily to an equipment financing loan and the convertible senior notes. Net cash used in operating activities in the first three months of 2003 was primarily to fund operating expenses and inventory purchases.

Net cash provided by investing activities was $1.7 million in the first three months of 2004 compared to $5.2 million in the first three months of 2003. Net cash provided by investing activities in the first three months of 2004 consisted of maturities of investment securities of $4.0 million, offset primarily by property and equipment purchases of $1.3 million and acquisition of the remaining 30% ownership in Ciphergen Biosystems KK for $1.0 million. Net cash provided by investing activities in the first three months of 2003 consisted of net maturities of investment securities of $6.6 million, offset primarily by property and equipment purchases of $1.4 million. We expect to acquire additional capital equipment on an ongoing basis as we add staff, increase capacity and improve capabilities. We also anticipate capital expenditures for fiscal year 2004 will total approximately $5 million to $6 million.

Net cash provided by financing activities was $8,000 in the first three months of 2004 compared to $13,000 in the first three months of 2003. Net cash provided by financing activities in the first three months of 2004 consisted of the issuance of common stock under our stock option plans of $147, 000 and repayment of stockholder loans in the aggregate principal amount of $105,000, offset by the repayment of capital lease obligations of $85,000 and repayments of the equipment financing loan of $159,000. Net cash provided by financing activities in the first three months of 2003 consisted of the issuance of common stock under our stock option plans of $40,000 and repayment of stockholder loans in the aggregate principal amount of $196,500, offset by the repayment of capital lease obligations of $224,000.

We currently believe that current cash resources will be sufficient to maintain current and planned operations at least through the end of 2005. Ciphergen currently expects to fund expenditures for capital requirements as well as liquidity needs from a combination of available cash, marketable securities and long-term debt. We may be required to raise additional capital through a variety of sources, including securities issuances and collaborative arrangements. If additional capital is raised through the issuance of equity or securities convertible into equity, our stockholders may experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of our common stock or the notes. If we obtain funds through arrangements with collaborators or strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. Additional financing may not be available to us on favorable terms, if at all. If we are unable to obtain financing on acceptable terms, we may be unable to execute our business plan and we could be required to delay, reduce the scope of, or eliminate our operations and we may not be able to pay off the notes if and when they come due.

The following summarizes Ciphergen’s contractual cash obligations at March 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

	Total		Less than 1 Year		1-3 Years		4-5 Years		Beyond 5 Years
Contractual obligations(1):
Capital lease obligations	$	2,460	$	319	$	654	$	712	$	775
Equipment financing loan	1,592		675		917		—		—
Convertible senior notes(2)	30,000		—		—		30,000		—
Non-cancelable collaboration obligations	331		331		—		—		—
Non-cancelable operating lease obligations	16,666		4,152		7,423		4,871		220
Purchase obligations(3)	1,916		1,916		—		—		—

Total contractual cash obligations	$	52,965	$	7,393	$	8,994	$	35,583	$	995

(1) Principal amounts, not including interest.

(2) Excludes the beneficial conversion feature amounting to $2,677, less related amortization of $326.

(3) Purchase obligations include agreements to purchase inventory that are enforceable and legally binding on Ciphergen and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

Ciphergen has complied with all covenants or other requirements set forth in its credit agreements. We have also entered into a cancelable commitment to fund a Biomarker Discovery Center at the Johns Hopkins University School of Medicine which totals $475,000 for the remaining nine months of 2004 and $685,000 in 2005.

FACTORS THAT MAY AFFECT OUR RESULTS

We expect to continue to incur net losses in 2004 and at least the first half of 2005. If we are unable to significantly increase our revenues or significantly decrease our expenses, we may never achieve profitability.

From our inception in December 1993 through March 31, 2004, we have generated cumulative revenue of approximately $150.7 million and have incurred net losses of approximately $148.0 million. We have experienced significant operating losses each year since our inception and expect these losses to continue for at least the next several quarters. For example, we experienced net losses of approximately $25.8 million in 2001, $29.1 million in 2002, $36.7 million in 2003, and $7.5 million in the first quarter of 2004. Our losses have resulted principally from costs incurred in research and development, sales and marketing, litigation, and general and administrative costs associated with our operations. These costs have exceeded our gross profit which, to date, has been generated principally from product sales. We expect to incur additional operating losses and these losses may be substantial as a result of increases in expenses for manufacturing, marketing and sales, research and product development, and general and administrative costs. We may never achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

If we are unable to further establish the utility of our products, our products and services may not achieve market acceptance.

The commercial success of our ProteinChip Systems and Arrays and chromatography sorbents depends upon validating their utility for important biological applications and increasing their market acceptance by researchers in pharmaceutical and biotechnology companies, academic and government research centers and clinical reference laboratories. If our products are not demonstrated to be more effective in providing commercially useful protein information than other existing technologies, it could seriously undermine market acceptance of our products and reduce the likelihood that we will ever achieve profitability.

We may not succeed in developing diagnostic products and even if we do succeed in developing diagnostic products, they may never achieve significant commercial market acceptance.

There is considerable technology risk in developing diagnostic products based on our biomarker discovery efforts; potential tests may fail to validate results in larger clinical studies and may not achieve acceptable levels of clinical sensitivity and specificity. If we do succeed in developing diagnostic tests with acceptable performance characteristics, we may not succeed in achieving significant commercial market acceptance for those tests. Our ability to successfully commercialize diagnostic products that we may develop will depend on several factors, including:

• our ability to convince the medical community of the safety and clinical efficacy of our products and their potential advantages over existing diagnostic products;

• our ability to establish business relationships with other diagnostic companies that can assist in the commercialization of these products; and

• the agreement by Medicare and third-party payers to provide full or even partial reimbursement coverage for our products, the scope and extent of which will affect patients willingness to pay for our products and will likely heavily influence physicians’ decisions to recommend our products.

These factors present obstacles to significant commercial acceptance of our products, which we will have to spend substantial time and money to overcome, if we can do so at all. Our inability to successfully do so will harm our business.

If we are unable to attract additional clients for our Biomarker Discovery Center services and satisfy these clients, we may not be successful in furthering adoption of our products and technology or generating additional revenue through commercial rights related to biomarker discoveries.

An important part of our business strategy is to operate Biomarker Discovery Center laboratories in part through partnerships with academic and government research centers, and pharmaceutical and biotechnology companies in order to increase adoption of our products and technology. Although we are currently in negotiation with additional potential partners and clients, to date we have entered into only a few such arrangements. Failure to enter into additional arrangements or expand existing relationships could limit adoption of our products and prevent us from generating additional revenue through commercialization of biomarker discoveries.

If we fail to successfully expand sales of our ProteinChip Systems and develop new versions of proteomic systems or leverage our chromatography product expertise to expand sales of other products, our revenue will not increase and we will not achieve profitability.

Our success depends on our ability to continue to expand commercial sales of our ProteinChip Systems, including our ProteinChip Arrays, develop new, higher performance, easier to use versions of proteomic systems, and leverage our chromatography product expertise. We may encounter difficulties in developing new, higher performance products or producing our current proteomic systems on a timely basis, we may not be able to

produce them economically, we may fail to achieve expected performance levels, or we may fail to gain industry acceptance of such products. We also may be unable to leverage our chromatography product expertise in conjunction with our ProteinChip technology to expand commercial sales of our ProteinChip Systems and chromatography products.

If we fail to continue to develop the technologies we base our products on, we may not be able to successfully foster further adoption of our products and services as an industry standard or develop new product offerings.

The technologies we use for our ProteinChip Systems and for our chromatographic sorbents are new and complex technologies, which are subject to change as new discoveries are made. New discoveries and further progress in our field are essential if we are to maintain and expand the adoption of our product offerings. Development of these technologies remains a substantial risk to us due to various factors including the scientific challenges involved, our ability to find and collaborate with others working in our field, and competing technologies, which may prove more successful than ours.

If we are unable to provide our customers with software that enables the integration and analysis of large volumes of data, the acceptance and use of our products may be limited.

The successful commercial research application of our products requires that they enable researchers to process and analyze large volumes of data and to integrate the results into other phases of their research. The nature of our software enables a level of integration and analysis that is adequate for many projects. However, if we do not continue to develop and improve the capabilities of our ProteinChip Software to perform more complex analyses of customer samples and to meet increasing customer expectations, market acceptance of our products may not increase and we could lose our current customers, which might adversely impact our revenues and we could be unable to develop a profitable business.

If our Bioprocess Products Group fails to develop new products, we may not be able to grow or maintain this operation in the face of larger entrenched competitors.

Customers using chromatographic processes to separate proteins have traditionally been slow to adopt new technologies, even when those new technologies offer considerable advantages over existing, proven approaches. We will need to develop new chromatography products with superior performance in order to expand this business. Even if our chromatography products and services are more efficient and of higher quality than alternatives, customers may favor more established products and companies, which would negatively impact our revenues.

Our quarterly operating results may fluctuate significantly due to a number of causes outside our control.

Because the timing of our product orders can vary, we may not be able to reliably predict quarterly revenue and profitability. Our operating results can also vary substantially in any period depending on the mix of products sold. Our quarterly sales and operating results are highly dependent on the volume and timing of orders received during the quarter, as well as the seasonal and cyclical nature of our markets. Historically, a relatively large percentage of our sales have arrived in the last month of each quarter, and often towards the end of such month. Accordingly, a short delay in receiving an order, shipping product, or recognizing revenue from such order may result in substantial quarterly fluctuations in revenue and earnings.

A significant portion of our operating expenses is relatively fixed in nature due to our significant sales, research and development and manufacturing costs. If we cannot adjust spending quickly enough to compensate for a revenue shortfall, this may magnify the adverse impact of such revenue shortfall on our results of operations. As a result, our quarterly operating results could fluctuate, and such fluctuation could cause the market price of our common stock and convertible senior notes to decline. Results from one quarter should not be used as an indication of future performance.

Future changes in financial accounting standards or practices may cause adverse unexpected fluctuations and affect our reported results of operations.

For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board (“FASB”) has announced, proposals to change generally accepted accounting principles in the U.S. that, if implemented, would require us to record charges to earnings for employee stock option grants. This pending requirement would negatively impact our earnings. In addition, the FASB has proposed a choice of valuation models to estimate the fair value of employee stock options. These models, including the Black-Scholes option-pricing model, use varying methods and inputs and may yield significantly different results. If another party asserts that the fair values of our employee stock options are misstated, securities class action litigation could be brought against us and/or the market price of our common stock could decline.

If we are unable to reduce our lengthy sales cycle, our ability to become profitable will be harmed.

Our ability to obtain customers for our products depends in significant part upon the perception that our products and services can help enable protein biomarker discovery, characterization and assay development. From the time we make initial contact with a potential customer until we receive a binding purchase order typically takes between a few weeks to a year or more. Our sales effort requires the effective demonstration of the benefits of our products and may require significant training, sometimes of many different departments within a potential customer. These departments might include research and development personnel and key management. In addition, we may be required to negotiate agreements containing terms unique to each customer. We may expend substantial funds and management effort and may not be able to successfully sell our products or services in a short enough time to achieve profitability.

New product introductions can result in disruptions to our revenue patterns and increased sales and marketing costs, and may involve manufacturing challenges that can negatively impact our gross margin.

We have introduced, and we plan to introduce in the future, new versions of our ProteinChip Systems, Arrays and Software, as well as new chromatography sorbents. New product introductions entail training and educating our customers and prospective customers about the new features, protocols and technology encompassed by the new products. This could disrupt our revenue patterns or

temporarily lengthen our sales cycles to a greater extent than it would at larger companies with broader product offerings. New product introductions may temporarily increase our sales and marketing costs. Manufacturing new products inherently runs the risk that initial costs may be high as new production processes are introduced, and it is possible that new products may involve quality issues that negatively impact our gross margins.

We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan.

We currently believe that current cash resources will be sufficient to meet our anticipated financial needs at least through the end of 2005. However, we may need to raise additional capital sooner in order to develop new or enhanced products or services, increase our Biomarker Discovery Center laboratory activities undertaken for our own account, or acquire complementary products, businesses or technologies. If we are unable to obtain financing, or to obtain it on acceptable terms, we may be unable to successfully execute our business plan.

If we do not effectively manage growth, management attention could be diverted and our ability to increase revenue and achieve profitability could be harmed.

We are expanding our operations, which is placing a strain on our financial, managerial and operational resources. For example, over the last four years we have increased our worldwide sales force and other personnel significantly, with plans for further expansion, and have established Biomarker Discovery Center laboratories with plans to expand their scope and volume of activity. These changes could divert management attention or otherwise disrupt our operations. In order to achieve and manage this growth effectively, we must continue to improve and expand our operational and financial management capabilities and resources. Moreover, we will need to effectively train, integrate, motivate and retain our employees. Our failure to manage our growth effectively could damage our ability to increase revenue and become profitable.

Because our business is highly dependent on key executives and scientists, our inability to recruit and retain these people could hinder our business expansion plans.

Ciphergen is highly dependent on its executive officers, its senior scientists and engineers. Our product development and marketing efforts could be delayed or curtailed if we lose the services of any of these people. To expand our research, product development and sales efforts, we need additional people skilled in areas such as bioinformatics, biochemistry, information services, manufacturing, sales, marketing and technical support. Competition for qualified employees is intense. We will not be able to expand our business if we are unable to hire, train and retain a sufficient number of qualified employees. In addition, several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the U.S. that, if implemented, would require us to significantly change the manner in which we compensate our employees, which could considerably impact our ability to recruit and retain qualified employees.

If we are unable to successfully expand our limited manufacturing capacity for ProteinChip Readers, arrays and chromatography sorbents, we may encounter manufacturing and quality control problems as we increase our efforts to meet demand.

We currently have only one manufacturing facility at which we produce limited quantities of our ProteinChip Arrays and ProteinChip Readers, and one manufacturing facility at which we produce chromatography sorbents. Some aspects of our manufacturing processes may not be easily scalable to allow for production in larger volumes, resulting in higher than anticipated material, labor and overhead costs per unit. As a result, manufacturing and quality control problems may arise as we increase our level of production. We may not be able to increase our manufacturing capacity in a timely and cost-effective manner and we may experience delays in manufacturing new products. If we are unable to consistently manufacture our products on a timely basis because of these or other factors, we will not be able to meet anticipated demand. As a result, we may lose sales and fail to generate increased revenue and become profitable.

We may experience failure rates for our ProteinChip Systems and Arrays, and for related accessories, that are higher than we anticipated, particularly for newer products being introduced.

Our products and the components used in our products are based on complex technologies and we are currently in the process of developing new versions of certain products. It is difficult to predict the failure rate of new products. If the failure rates for our products

are higher than anticipated, we may experience increased warranty claims and increased costs associated with servicing those claims. We may also find it necessary to increase our warranty accrual, resulting in a decreased gross profit.

We face intense competition in our current and potential markets and if our competitors develop new technologies or products, our products may not achieve market acceptance and may fail to capture market share.

Competition in our existing and potential markets is intense and we expect it to increase. Currently, our principal competition comes from other technologies that are used to perform many of the same functions for which we market our ProteinChip System. The major technologies that compete with our ProteinChip System are liquid chromatography-mass spectrometry and 2D-gel electrophoresis-mass spectrometry. In the life science research market, competitive protein research tools and services are currently provided by a number of companies, including several which are larger than Ciphargen. In the large-scale chromatography market and the diagnostics market, there are several larger direct competitors. In many instances, our competitors may have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations. Additionally, our potential customers may internally develop competing technologies. If we fail to compete effectively with these technologies and products, or if competitors develop significant improvements in protein detection systems, develop systems that are easier to use, or introduce comparable products that are less expensive, our products may not achieve market acceptance and our sales may decrease.

If we are unable to maintain our licensed rights to the SELDI technology, we may lose the right to produce ProteinChip Systems and products based on the SELDI technology and the right to provide services and information related thereto.

Our commercial success depends on our ability to maintain our sublicenses to the SELDI technology. Pursuant to the settlement of the litigation between Ciphergen, Molecular Analytical Systems (“MAS”), LumiCyte and T. William Hutchens, MAS cannot terminate Ciphergen’s rights under the sublicenses. However, Baylor College of Medicine has the right to terminate its license with MAS in case of material breach by MAS. If the agreements between Baylor College of Medicine and MAS were terminated and we were unable to obtain a license to these rights from Baylor College of Medicine, we would be precluded from selling any SELDI-based products within the scope of the Baylor SELDI patents, we would no longer generate revenue from the sale of these products and we would have to revise our business direction and strategy.

If the government grants a license to the SELDI technology to others, it may harm our business.

Some of the inventions covered by our sublicense agreements with MAS were developed under a grant from an agency of the U.S. government and therefore, pursuant to the Bayh-Dole Act and regulations promulgated thereunder, the government has a paid-up, nonexclusive nontransferable license to those inventions and will be able in limited circumstances to grant a license to others on reasonable terms. We are not aware of any basis for the government to exercise such rights, but if circumstances change and the government exercises such rights, our business could be harmed.

If a competitor infringes our proprietary rights, we may lose any competitive advantage we may have as a result of diversion of management time, enforcement costs and the loss of the exclusivity of our proprietary rights.

Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. We rely on a combination of patents, trademarks, copyrights and trade secrets to protect our technology and brand. In addition to our licensed SELDI technology, we also have submitted patent applications directed to subsequent technological improvements and application of the SELDI technology, including patent applications covering biomarkers that may have diagnostic or therapeutic utility. Our patent applications may not result in additional patents.

If competitors engage in activities that infringe our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the competitor is not infringing, either of which would harm our competitive position. We cannot be sure that competitors will not design around our patented technology.

We also rely upon the skills, knowledge and experience of our technical personnel. To help protect our rights, we require all employees and consultants to enter into confidentiality agreements that prohibit the disclosure of confidential information. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.

If others successfully assert their proprietary rights against us, we may be precluded from making and selling our products or we may be required to obtain licenses to use their technology.

Our success also depends on avoiding infringing on the proprietary technologies of others. We are aware of third parties whose business involves the use of mass spectrometry for the analysis of proteins and DNA, third parties whose business involves providing chromatography sorbents and media, and third parties whose business involves providing diagnostic tests. Certain of these parties have brought their patents to our attention. If these parties assert claims that we are violating their patents, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology. Any such lawsuit may not be decided in our favor, and if we are found liable, we may be subject to monetary damages or injunction against using their technology. We may also be required to obtain licenses under their patents and such licenses may not be available on commercially reasonable terms, if at all.

We rely on single-source suppliers for many components of our ProteinChip Systems, processing services for our ProteinChip Arrays and raw materials for our chromatography sorbents, and if we are unable to obtain these components and raw materials, we would be harmed and our operating results would suffer.

We depend on many single-source suppliers for the necessary raw materials and components required to manufacture our products. We also rely on some single-source subcontractors for certain outsourced manufacturing services. Some of these suppliers are small companies without extensive financial resources. Because of the limited quantities of products we currently manufacture, it is not

economically feasible to qualify and maintain alternate vendors for most components of our ProteinChip Readers, processing services for our ProteinChip Arrays and many raw materials for our chromatography sorbents. We have occasionally experienced delays in receiving raw materials, components and services, resulting in manufacturing delays. If we are unable to procure the necessary raw materials, components or services from our current vendors, we will have to arrange new sources of supply and our raw materials and components shipments could be delayed, harming our ability to manufacture our products, and our ability to sustain or increase revenue could be harmed. As a result, our costs could increase and our profitability could be harmed.

If we fail to maintain certain distribution and patent license agreements, we may have to stop selling certain products and this may harm our revenue.

We sell certain products under either OEM or distribution or patent license agreements. These include arrangements with Beckman Coulter with respect to selling a customized version of the Biomek 2000 Workstation, with Salford Systems with respect to selling Biomarker Patterns software, with Genencor with respect to selling MEP HyperCel chromatography resin, and with Applied Biosystems / MDS Sciex with respect to selling our ProteinChip Tandem MS Interfaces. If we fail to maintain or extend after their expiration the underlying agreements with these companies, we would have to stop selling these particular products and may have to seek alternate products to sell, as a result of which our sales may be harmed.

If there are reductions in research funding, the ability of our existing and prospective customers to purchase our products could be seriously harmed.

A significant portion of our products are sold to universities, government research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. Government funding for research and development has fluctuated significantly in the past due to changes in congressional appropriations. Research funding by the U.S. government or the governments of other countries may be significantly reduced in the future. Any such reductions may seriously harm the ability of our existing and prospective research customers to purchase our products or may reduce the number of ProteinChip Arrays used. Limitations in funding for commercial, biotechnology and pharmaceutical companies and academic institutions that are the potential customers for our ProteinChip Systems and Arrays, and general cost containment pressures for biomedical research may limit our ability to sell our products and services.

If we or our future potential partners fail to comply with Food and Drug Administration (“FDA”) requirements, we may not be able to market our products and services and may be subject to stringent penalties; further improvements to our manufacturing operations will be required which may not be accomplished and will entail additional cost.

Currently, the FDA does not actively regulate clinical laboratory tests, or “home brews”, that have been developed and used by the laboratory to conduct in-house testing. The FDA does regulate as medical devices the “active ingredients” (known as “analyte specific reagents” or “ASRs”) of certain tests developed in-house by clinical laboratories. The FDA’s regulations provide that most ASRs are exempt from the FDA’s pre-market review requirements. We believe that ASRs that we may provide will fall within those exemptions. However, the FDA has publicly stated it is reevaluating its ASR policy and regulations, and we expect that revisions to these regulations will be implemented in the near future and will have the effect of increasing the regulatory burden on manufacturers of these devices. The commercialization of our products and services could be impacted by being delayed, halted or prevented. If the FDA were to view any of our actions as non-compliant, it could initiate enforcement action such as a regulatory warning letter and possible imposition of penalties. Finally, ASRs that we may provide will be subject to a number of FDA requirements, including compliance with the FDA’s Quality System Regulations (“QSRs”), which establish extensive regulations for quality assurance and control as well as manufacturing procedures. Failure to comply with these regulations could result in enforcement action for us or our potential partners. Adverse FDA action in any of these areas could significantly increase our expenses and limit our revenue and profitability. Although we are ISO 9001:2000 certified in our ProteinChip manufacturing processes, we will need to undertake additional steps to bring our operations in line with FDA QSR requirements. Significant additional resources may be required to achieve this quality level. If we are successful in entering the diagnostics market, our manufacturing facilities will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies. We have not yet been subject to an FDA inspection. We may not satisfy such regulatory requirements, and any such failure to do so would have an adverse effect on our diagnostics efforts.

Our diagnostic efforts may cause us to have significant product liability exposure.

The testing, manufacturing and marketing of medical diagnostics entails an inherent risk of product liability claims. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. Our existing insurance will have to be increased in the future if we are successful at introducing diagnostic products and this will increase our costs. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage, our liabilities could exceed our total assets.

Business interruptions could limit our ability to operate our business.

Our operations as well as those of the collaborators on which we depend are vulnerable to damage or interruption from computer viruses, human error, natural disasters, power shortages, telecommunication failures, international acts of terror and similar events. We

have not established a formal disaster recovery plan and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses we may suffer. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

Our business is subject to risks from international operations.

We conduct business globally. Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, foreign currency exchange rates; regulatory, political, or economic conditions in a specific country or region; trade protection measures and other regulatory requirements; and natural disasters. Any or all of these factors could have a material adverse impact on our future international business.

We are exposed to fluctuations in the exchange rates of foreign currency.

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. With the acquisition of BioSepra and our 100% ownership interest in Ciphergen Biosystems KK, a significant percentage of our net sales are exposed to foreign currency risk. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results. The use of the euro as a common currency for members of the European Union could impact our foreign exchange exposure.

Consolidation in the pharmaceutical and biotechnology industries may reduce the size of our target market and cause a decrease in our revenue.

Consolidation in the pharmaceutical and biotechnology industries is generally expected to occur. Planned or future consolidation among our current and potential customers could decrease or slow sales of our technology and reduce the markets our products target. Any such consolidation could limit the market for our products and seriously harm our ability to achieve or sustain profitability.

We may not successfully resolve problems encountered in connection with any future acquisitions or strategic investments.

In July 2001, we acquired the BioSepra process chromatography business from Invitrogen Corporation. In August 2002, we increased our ownership interest in Ciphergen Biosystems KK, the Japanese joint venture we formed with Sumitomo Corporation in 1999, from 30% to 70%, and in March 2004, we further increased our ownership to 100%. In the event of any future acquisitions, joint ventures and other strategic investments, we could:

• issue stock that would dilute ownership of our then-existing stockholders;

• incur charges for the impairment of the value of investments or acquired assets; or

• incur amortization expense related to intangible assets.

If we fail to achieve the financial and strategic benefits of past and future acquisitions or strategic investments, our operating results will suffer. Acquisitions and strategic investments involve numerous other risks, including:

• difficulties integrating the acquired operations, technologies or products with ours;

• failure to achieve targeted synergies;

• unanticipated costs and liabilities;

• diversion of management’s attention from our core business;

• adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization; and

• potential loss of key employees, particularly those of the acquired organization.

We are subject to environmental laws and potential exposure to environmental liabilities.

We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of nonhazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused,

the contamination, as well as incur liability to third parties impacted by such contamination. The presence of, or failure to remediate properly, such substances could adversely affect the value and the ability to transfer or encumber such property. Based on currently available information, although there can be no assurance, we believe that such costs and liabilities have not had and will not have a material adverse impact on our financial results.

Anti-takeover provisions in our charter, bylaws and Stockholder Rights Plan and under Delaware law could make a third party acquisition of us difficult.

Our certificate of incorporation, bylaws and Stockholder Rights Plan contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be deemed beneficial by our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us.

The rights issued pursuant to our Stockholder Rights Plan will become exercisable the tenth day after a person or group announces acquisition of 15% or more of our common stock or announces commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of our common stock. If the rights become exercisable, the holders of the rights (other than the person acquiring 15% or more of our common stock) will be entitled to acquire, in exchange for the rights’ exercise price, shares of our common stock or shares of any company in which we are merged, with a value equal to twice the rights’ exercise price.

Risks Related to Our Convertible Senior Notes and Common Stock

Substantial leverage and debt service obligations may adversely affect our cash flows.

In connection with the sale of the convertible senior notes (the “notes”), we incurred $30 million of indebtedness. As a result of this indebtedness, our principal and interest payment obligations increased substantially. The degree to which we are leveraged could, among other things:

• make it difficult for us to make payments on the notes;

• make it difficult for us to obtain financing for working capital, acquisitions or other purposes on favorable terms, if at all;

• make us more vulnerable to industry downturns and competitive pressures; and

• limit our flexibility in planning for, or reacting to changes in, our business.

Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

The notes are unsecured, and future indebtedness could effectively rank senior to the notes.

The notes are unsecured and will rank equal in right of payment with our existing and future unsecured and unsubordinated indebtedness. The notes will be effectively subordinated to any secured debt to the extent of the value of the assets that secure the indebtedness. The notes will also be “structurally subordinated” to all indebtedness and other liabilities, including trade payables and lease obligations, of our existing and future subsidiaries. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes, payment on the notes could be less, ratably, than on any secured indebtedness. We may not have sufficient assets remaining to pay amounts due on any or all of the notes then outstanding.

The indenture governing the notes does not prohibit or limit us or our subsidiaries from incurring additional indebtedness and other liabilities, or from pledging assets to secure such indebtedness and liabilities. The incurrence of additional indebtedness and, in particular, the granting of a security interest to secure the indebtedness, could adversely affect our ability to pay our obligations on the notes. We anticipate that we may incur additional indebtedness from time to time in the future.

The notes are not protected by restrictive covenants, including financial covenants.

Neither we nor our subsidiaries are restricted from incurring additional debt, including senior debt, or liabilities under the indenture. In addition, the indenture does not restrict us or any of our subsidiaries from paying dividends or issuing or repurchasing securities. If we or our subsidiaries were to incur additional debt or liabilities, our ability to pay our obligations on the notes could be adversely affected.

We may be unable to repay, repurchase or redeem the notes.

At maturity, the entire outstanding principal amount of the notes will become due and payable by us. Upon a change in control, as defined in the indenture, note holders may require us to repurchase all or a portion of their notes. We may not have enough funds or be able to arrange for additional financing to pay the principal at maturity or to repurchase the notes on a change in control. Future credit agreements or other agreements relating to our indebtedness may restrict the redemption or repurchase of the notes and provide that a change in control constitutes an event of default. If the maturity date or a change in control occurs at a time when we are prohibited from repaying or repurchasing the notes, we could seek the consent of our lenders to purchase the notes or we could attempt to refinance this debt. If we do not obtain the necessary consents or cannot refinance the debt on favorable terms, or at all, we will be unable to repay or repurchase the notes. Our failure to repay the notes at maturity or repurchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other debt. Our obligation to offer to purchase the notes upon a change in control would not necessarily afford note holders protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

There may not be an active, liquid market for our common stock or the notes.

There is no guarantee that an active trading market for our common stock will be maintained on the Nasdaq Stock Market’s National Market. Investors may not be able to sell their shares quickly or at the latest market price if trading in our stock is not active. An active trading market for the notes may not be maintained. If an active market for the notes is not sustained, the trading price of the notes could decline significantly. The notes are eligible for trading on the PORTAL^sm Market. We do not intend to apply for listing of the notes on any securities exchange.

The notes and the common stock issuable upon conversion of the notes may be subject to restrictions on resale.

We entered into a registration rights agreement with the initial purchasers of the notes, pursuant to which we filed a shelf registration statement covering the resale of the notes and the common stock issuable upon conversion of the notes. If the effectiveness of the registration statement is not maintained, the liquidity and price of the notes and common stock issuable upon conversion of the notes would be adversely affected and note holders could lose all or part of their investment.

At various times during 2003 and 2004, the price at which our common stock could be purchased on the Nasdaq National Market was lower than the conversion price of the notes, and our stock price may be lower than the conversion price in the future.

Prior to electing to convert notes, the note holder should compare the price at which our common stock is trading in the market to the conversion price of the notes. Our common stock trades on the Nasdaq National Market under the symbol CIPH. The initial conversion price of the notes is approximately $9.19 per share. The market prices of our securities are subject to significant fluctuations. Such fluctuations, as well as economic conditions generally, may adversely affect the market price of our securities, including our common stock and the notes.

The notes may not be rated or may receive a lower rating than anticipated.

We believe it is unlikely that the notes will be rated. However, if one or more rating agencies rates the notes and assigns the notes a rating lower than the rating expected by investors, reduces their rating in the future or indicates that it will have their ratings on the notes under surveillance or review with possible negative implications, the market price of the notes and our common stock would be harmed. In addition, a ratings downgrade could adversely affect our ability to access capital.

Our stock price has been highly volatile, and an investment in our stock could suffer a decline in value, adversely affecting the value of the notes or the shares into which those notes may be converted.

The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

• actual or anticipated period-to-period fluctuations in financial results;

• failure to achieve, or changes in, financial estimates by securities analysts;

• announcements of new products or services or technological innovations by us or our competitors;

• developments regarding actual or potential discoveries of biomarkers by us or others;

• comments or opinions by securities analysts or major stockholders;

• conditions or trends in the pharmaceutical, biotechnology and life science industries;

• announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

• developments regarding our patents or other intellectual property or that of our competitors;

• litigation or threat of litigation;

• additions or departures of key personnel;

• sales of our common stock;

• limited daily trading volume; and

• economic and other external factors or disasters or crises.

In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been significant volatility in the market prices of securities of life science companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

Future sales of our common stock in the public market could adversely affect the trading price of our common stock, the value of the notes and our ability to raise funds in new stock offerings.

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales are likely to occur, could affect prevailing trading prices of our common stock and the value of the notes. As of March 31, 2004, we had:

• 29,109,126 shares of common stock outstanding;

• 4,734,642 shares of common stock reserved for issuance upon exercise of options outstanding under our stock option plans with a weighted average exercise price of $5.84 per share;

• in addition to the shares reserved for issuance upon the exercise of options referred to in the preceding bullet point, 1,490,403 shares reserved for future issuance under our stock option plans and employee stock purchase plan; and

• 96,750 shares of common stock potentially issuable to Stanford Research Systems, Inc. under a development contract if certain milestones are met.

Because the notes are convertible into common stock only at a specific conversion price, a decline in our common stock price may cause the value of the notes to decline.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale, and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss). These securities are not leveraged and are held for purposes other than trading.

The following discussion about our market risk involves forward-looking statements. We are exposed to market risk related mainly to changes in interest rates. We do not invest in derivative financial instruments.

INTEREST RATE SENSITIVITY

The fair value of our investments in marketable securities at March 31, 2004 was $10.3 million, with a weighted-average maturity of 121 days and a weighted-average interest rate of 1.29%.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. To achieve these objectives, we maintain our portfolio of cash equivalents, short-term investments and long-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. We mitigate default risk by investing in high credit-quality securities.

Some of the securities that we invest in may have market risk. That means that a change in prevailing interest rates may cause the fair value of the principal amount of an investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair value of the principal amount of our investment will probably decline. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of less than one year, with no individual security investment maturing in more than two years.

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our available funds for investment. Our long-term debt and capital lease agreements are at fixed interest rates. We do not plan to use derivative financial instruments in our investment portfolio.

FOREIGN CURRENCY EXCHANGE RISK

Most of our revenue is realized in U.S. dollars. However, the majority of our revenue from chromatography sorbents is realized in euros. In addition, all our revenue in

Japan is realized in Japanese yen. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because most of our revenue is currently denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in foreign markets.

The functional currencies of BioSepra S.A. and Ciphergen Biosystems KK are the euro and yen, respectively. Accordingly, the accounts of these operations are translated from the local currency to the U.S. dollar using the current exchange rate in effect at the balance sheet date for the balance sheet accounts, and using the average exchange rate during the period for revenue and expense accounts. The effects of translation are recorded as a separate component of stockholders’ equity. The net tangible assets of our non-U.S. operations, excluding intercompany debt, were $11.1 million at March 31, 2004.

The accounts of all other non-U.S. operations are remeasured to the U.S. dollar, which is the functional currency. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates, and non-monetary assets and related elements of expense are translated using historical rates of exchange. Income and expense elements are translated to U.S. dollars using average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as other income or loss in the statement of operations.

In 2003 and for the first three months of 2004, we entered into foreign currency contracts to manage the volatility of currency fluctuations as a result of an intercompany loan of approximately $1.0 million, denominated in yen, to our subsidiary in Japan. The effect of exchange rate changes on the forward exchange contracts is expected to offset the effect of exchange rate changes on the intercompany loan. As of March 31, 2004, Ciphergen had one forward contract to sell approximately 120 million yen at a rate of 104.21 yen per U.S. dollar. Because there is no fixed maturity date for the intercompany loan, we close each forward contract and enter a new one monthly. Net realized foreign currency gains and losses related to the foreign currency forward contracts were not material for the three month period ended March 31, 2004. We did not enter into any such forward contracts during the comparable quarter of 2003.

ITEM 4. CONTROLS AND PROCEDURES

As of March 31, 2004, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, Ciphergen’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that Ciphergen’s disclosure controls and procedures (as defined in Rules 13(a) — 14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective in ensuring that information required to be disclosed by Ciphergen in this report and in other reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There have been no significant changes in Ciphergen’s internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2004.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	The following exhibits have been filed with this report:

	3.2*	Amended and Restated Certificate of Incorporation of Registrant

	3.4*	Amended and Restated Bylaws of Registrant

	4.1*	Form of Registrant’s Common Stock Certificate

	4.2**	Preferred Shares Rights Agreement dated March 20, 2002 between Ciphergen Biosystems, Inc. and Continental Stock Transfer & Trust Company

	31.1	Certification of the Chief Executive Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

	31.2	Certification of the Chief Financial Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

	32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Incorporated by reference to exhibits (with same exhibit number) to Ciphergen Biosystems’ Registration Statement on Form S-1 (File No. 333-32812) declared effective on September 28, 2000.

** Incorporated by reference to our Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on March 21, 2002.

(b)		Reports on Form 8-K.

		On January 2, 2004, the Company furnished a Current Report on Form 8-K pursuant to Item 9 (Regulation FD Disclosure), announcing a preliminary forecast for fourth quarter 2003 earnings.

		On February 17, 2004, the Company furnished a Current Report on Form 8-K pursuant to Item 9 (based on “Item 12. Results of Operations and Financial Condition”), announcing fourth quarter 2003 earnings.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 10, 2004

	CIPHERGEN BIOSYSTEMS, INC.

	(Registrant)

	/s/ William E. Rich
	William E. Rich, Ph.D.
	President, Chief Executive Officer and Director

	/s/ Matthew J. Hogan
	Matthew J. Hogan
	Senior Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Exhibit Title
3.2(a)		Amended and Restated Certificate of Incorporation of Registrant
3.4(a)		Amended and Restated Bylaws of Registrant
3.5(b)		Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Ciphergen Biosystems, Inc.
4.1(a)		Form of Registrant’s Common Stock Certificate
4.2(b)		Preferred Shares Rights Agreement dated March 20, 2002 between Ciphergen Biosystems, Inc. and Continental Stock Transfer & Trust Company
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(a) Incorporated by reference to exhibits (with same exhibit number) to Ciphergen Biosystems’ Registration Statement on Form S-1 (File No. 333-32812) declared effective on September 28, 2000.

(b) Incorporated by reference to our Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on March 21, 2002.

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003