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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

For the transition period from              to             

Commission file number: 000-30267

ORCHID BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (609) 750-2200

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

None

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

Common Stock, $.001 Par Value Per Share

Preferred Share Purchase Rights

(Title of Class)

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  x    No  ¨

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

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the Common Stock was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $73,695,524.

As of March 24, 2004, the registrant had 110,720,232 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 11, 2004.

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ORCHID BIOSCIENCES, INC.

FORM 10-K

INDEX

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PART I

The following Business Section contains forward-looking statements, which involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors”).

Item 1. BUSINESS

We are engaged in the development and delivery of genetic testing, or genotyping, services that generate information related to disease susceptibility and genetic uniqueness, or the genetic variability that distinguishes one organism from another. This information is generated from the analysis of DNA.

DNA based genotyping, or analyzing DNA by identifying a single difference in the nucleotide base of DNA for comparing genetic variability between people, has become a widely used standard technology for the establishment of paternity and forensic identification. Genotyping has also been adapted for food safety and selected animal testing applications (which we refer to as public health testing). Our business includes public health testing services, such as animal susceptibility testing to breed sheep resistant to scrapie disease. Our services are used extensively in each of these applications and we expect their uses to increase. We also expect our services to be used in new genotyping markets, such as food traceability; or being able to identify the source of a meat or plant product based on genotyping.

We conduct paternity genotyping determinations for government agencies and private individuals in North America, and provide forensic DNA testing for primarily government agencies in the United States (US). We also have operations located in the United Kingdom (UK), which provide paternity, forensics and animal susceptibility testing.

Our principal executive offices are located at 4390 US Route One, Princeton, New Jersey, 08540. Our telephone number is (609) 750-2200 and our web site address is www.orchid.com. Our Corporate Code of Conduct and Ethics as well as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and all amendments to these reports, which have been filed with the Securities and Exchange Commission (SEC), are available to you free of charge through the Investor section on our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we file reports and other information with the SEC electronically, the public may obtain access to those documents at the SEC’s Internet web site: http://www.sec.gov. We include our web site address in this Annual Report on Form 10-K as an inactive textual reference only.

History

We incorporated as a Delaware corporation and began operations in 1995. In the first three years of business we were primarily focused on developing our microfluidics technologies for applications in high throughput production of small molecules under collaborative research programs with SmithKline Beecham and Sarnoff Corporation. Microfluidics is primarily the movement and pumping of very minute fluids, which was essential to the mechanization of laboratory research. In 1998, we made a fundamental shift in our business focus to apply our technology to determine genetic variability and differences, including single nucleotide polymorphisms, or SNPs, and perform genotyping services. At this time, we acquired substantially all of the assets of Molecular Tool, Inc. (Molecular Tool), a wholly owned subsidiary of GeneScreen, Inc. (GeneScreen). Molecular Tool’s proprietary primer extension technology, which enabled us to determine a single base pair variation within DNA, for genotyping SNPs matched our existing microfluidics technologies and allowed us to focus our business on genetic diversity. We also developed instruments and kits that could be used for genotyping to be performed independently by third parties. Although we do not currently utilize our microfluidic technology, we do license this technology to others for their use. In December 1999, we acquired GeneScreen, a provider of services to

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determine identity based on genomic technology, or identity genomics. In 2001, we acquired two other identity genomics businesses: Cellmark Diagnostics (Cellmark), a business division of AstraZeneca, a provider of DNA laboratory testing in the UK and a supplier of genotyping products for human inherited disease diagnosis; and Lifecodes Corporation (Lifecodes), a national provider of identity genomics testing for forensics and paternity with multiple laboratories in the US, and a provider of human leukocyte antigens, or HLA, genotyping products and services for transplantation compatibility testing.

In early 2002, we began the process of realigning our business into strategic units for marketing purposes. As a result of this realignment, we organized our business into four business units consisting of Orchid Identity Genomics, Orchid Diagnostics, Orchid GeneShield, and Orchid Life Sciences. Additionally, our international operations, which encompassed all of our business units, were managed under a regional business unit, Orchid Europe. The business units operated in the following areas:

At the end of 2002 and throughout 2003, we sharpened our business focus and moved away from the multiple business units established in early 2002. We concentrated our efforts on genotyping services directed towards forensics, paternity and public health applications, which were the basis of the Orchid Identity Genomics business unit. As part of this strategy, we have discontinued the operations of the Orchid Life Sciences and Orchid Diagnostics business units and have scaled back significantly our pharmacogenomics efforts formerly conducted by the Orchid GeneShield business unit.

After we exited these businesses, we determined that we operate our business under one segment, the development and delivery of genetic testing, services that generate information related to genetic susceptibility and uniqueness, or the genetic variability that distinguishes one organism from another. During the quarters ended March 31, June 30 and September 30 of 2003, we reported Orchid public health as a separate segment, however, upon further analysis, we concluded public health should be included with our Identity Genomics business unit and we now operate under one reporting segment. Financial information relating to such segments can be found in Note 15 to the consolidated financial statements.

Discontinued and Limited Operations

From its inception in 1995, Orchid has engaged in several different technologies and businesses that the company has since elected to exit.

Orchid Diagnostics

In January 2004, we completed the sale of certain assets related to Diagnostic products and services, previously included in our Diagnostics business unit, to Tepnel Life Sciences, plc for a combination of $3.5 million in cash and assumption of certain liabilities, which is subject to a further adjustment in respect of net

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assets once completion accounts have been prepared and agreed by both parties. As part of this transaction, we sold substantially all of our assets and liabilities related to our HLA genotyping services for transplant compatibility matching along with the HLA genotyping products including the Lifematch system, and our ELUCIGENE product line for the diagnosis of mutations associated with inherited diseases including cystic fibrosis in the US and Europe. The transaction included transfer of one of our facilities and all employees associated exclusively with the business unit. In connection with the sale of these assets and liabilities to Tepnel, we were required to sign an unconditional guarantee related to a lease for the Stamford, Connecticut facility, which was assigned to Tepnel. We also reflected the fair value of the guarantee of $1.6 million as a reduction to the net realizable value of these assets and liabilities.

Orchid GeneShield

In May 2003, we realigned our personalized medicine business, to reduce the staff and consolidate operations of the entire business unit, significantly. This was done in response to slower market acceptance of the use of genetic information in personalized medicine. We expect that this leaner and more flexible approach will allow expansion of efforts if and when market forces accelerate or change. We do not currently provide products or services through this business unit but maintain rights to certain intellectual property associated with personalized medicine.

Orchid Life Sciences

In December 2002, we sold certain instrumentation related assets to Beckman Coulter, Inc. (BCI) for a combination of cash payments of $1.1 million and BCI’s assumption of approximately $0.6 million of debt obligations. In connection with this transaction, BCI acquired certain rights to the SNP genotyping instrumentation and related consumables, reagents, and software formerly marketed by our Orchid Life Sciences business unit, as well as other patent and trademark rights. BCI received an exclusive license to use our proprietary primer extension SNP analysis technology in products sold to the research and specialty testing markets, and a non-exclusive license to use our primer extension technology in the field of diagnostics. We also entered into a supply agreement with BCI, which was amended in December 2003 whereby we would continue to purchase certain components necessary to our paternity testing services business. Under the terms of the amended agreement, we committed to purchase a minimum amount of materials and supplies in the amount of $0.6 million during 2003, $0.7 million during 2004, and $1.3 million during 2005 from BCI. These payments are subject to BCI meeting the terms and conditions of the agreement as amended, including manufacturing product to our specifications. We retained rights to use the primer extension technology in all of our genotyping service businesses, including identity testing for forensics and paternity, public health applications, and specialty testing markets including diagnostics and pharmacogenomics.

Background

Newer genetic analysis techniques and technologies are being applied to long-established DNA testing applications, such as identity determination for forensics and paternity. The most common form of genetic variation is that of a single DNA base, called a single nucleotide polymorphism, or SNP. SNPs have become a primary focus of genetic variability studies, and we expect them to become even more important as their impact is better understood. Technology we developed for analyzing SNPs has significant utility in each of our current genotyping testing businesses. The identification of some of the nearly 3,000 victims of the World Trade Center disaster on September 11, 2001 was aided by the use of our SNP technology. Our expertise in deploying these technologies into our established businesses provides ongoing opportunities for improvement in operations and financial performance. As genomic information and genetic variability are better understood, there are increasing demands for the services, which utilize the expanding information base and opportunities to apply this information in useful ways. Our testing services target some of the largest of such applications, where value-added testing is established and exhibiting attractive growth.

Genetic information provides a basis for identification of individuals, as well as an understanding of biological and medical functions in organisms. In recent years, scientists have analyzed large portions of

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deoxyribonucleic acid, or DNA, to determine the sequence of nucleotide bases in the DNA within the human genome and within the genomes of plant and animal species, with the objective of understanding and using this molecular level knowledge to transform traditional approaches to medicine, agriculture and other fields. With the first phase of the human genome sequence completed in 2000, attention has turned from mapping the sequence to identifying genetic differences between individuals to applying this knowledge in healthcare and other related fields where genetic variability is of use. The earliest and most established markets use proven technologies in identity applications, using genetic differences and similarities to identify individuals or infer their genetic relatedness. The increasing availability of genomic data derived from species other than humans is driving the use of genetic variability information for animal identification, to produce improved characteristics in livestock or crops, and to protect against animal-borne diseases. The introduction of DNA testing in the criminal justice system, both in the US and abroad, has been characterized as the most significant improvement in forensic science since the introduction of fingerprinting over one hundred years ago. Not only does DNA evidence afford prosecutors with a means of absolute identification of a defendant by the biological evidence he or she left behind at the crime scene, but DNA evidence has proved to be the best means for a wrongfully accused individual to prove his or her innocence beyond a reasonable doubt. Studies published by the FBI indicate that approximately 30 percent of primary suspects arrested in sexual assault cases are excluded from the suspect pool based on use of this technology. Also, in post-conviction testing of previously untested evidence, there have been in excess of 140 prisoners exonerated to date in the US through the use of DNA testing, including more than a dozen that were death row inmates.

Technologies Utilized

All DNA testing for identity purposes examines specific segments of DNA (also known as markers) that exhibit variability between individuals and animals. Two forms of such variability are known as Short Tandem Repeats (STRs) and SNPs.

STRs

An STR is a portion of DNA in which small segments are repeated a variable number of times. Typically, there might be 10 to 25 possible variations of a given marker, with each person having just one or two variations. By looking at a moderate number of STRs, a DNA profile is determined that is virtually unique for each individual, except in the case of identical twins whose DNA patterns are identical. In the US, there are 13 standard markers that are analyzed by the FBI and throughout the industry to identify felons who are profiled and recorded into a national felon database known as the Combined DNA Index System, or CODIS.

A DNA profile can be determined from any type of biological specimen containing nuclear DNA, including blood or a tissue sample such as a cheek swab. These specimens may be used for paternity testing, for determining profiles of suspects, victims, and felons, and for determining the profile of an animal in both susceptibility and traceability applications as detailed further in the description of public health testing below.

A DNA profile can also be determined from DNA contained in biological evidence from a crime scene, such as blood stains, semen, and even minute samples resident in cigarette butts or postage stamps. DNA profiles from evidence can be compared with that of a suspect or victim, or can be catalogued in a database much like fingerprint data for future comparison. DNA testing can also be used to prove a person’s innocence in a crime and help to exonerate individuals who have been wrongly convicted and imprisoned. In various countries around the world, DNA samples are collected from convicted felons, profiled and entered in a national database. Evidence from crime scenes where there is no suspect can then be analyzed and compared with this database to identify a suspect.

DNA testing may be used in paternity testing. Since DNA markers are inherited, the profile of a child is compared with the mother and alleged father. The alleged father can then either be excluded as the biological father or assessed to be the likely father with a high probability. Similarly, DNA markers can prove familial relationships for individuals immigrating to a country or for children being adopted by foreign nationals.

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SNPs

The second form of variability in DNA involves a change in a single nucleotide base, otherwise known as a SNP. Identifying SNPs can have significant effects on both disease susceptibility and drug response. It is anticipated that each individual has between three and ten million SNPs. By looking at a moderate number of SNPs, between fifty and seventy, a unique genetic profile can also be determined for an individual human, animal or organism. SNPs also have the advantage over STRs of being contained in smaller segments of DNA that are more likely to survive the environmental degradation that can occur due to extreme elements such as water and heat. As such, they may work when STR markers fail to produce a reliable result. It is this characteristic that has prompted the use of SNPs in the process of identifying victims of the World Trade Center disaster.

SNPs can also be used to determine patterns associated with disease susceptibility or resistance, such as the identification of a profile of SNPs in sheep which can be used to determine whether sheep have susceptibility or resistance to the animal disease, scrapie. By identifying sheep that are susceptible to scrapie, the disease can ultimately be bred out of the sheep population.

Continuing Businesses

Based on review of publicly available information regarding contract sizes and competitor activity, supplemented by industry publications and third party market assessment data, we believe we have the largest market share in paternity and forensics testing of any competitor in the US, and we are a recognized provider of such services in Europe. Based on these same sources, we believe these markets are some of the largest existing markets for genetic analysis today compared to smaller markets for providing such services as testing for familial relations for both immigration and adoption purposes. Through our brand Orchid GeneScreen, we conduct paternity genotyping determinations for government agencies and private individuals in North America. Through our brand Orchid Cellmark, we are a recognized private sector provider of forensic DNA testing in the US. Through Orchid Europe, we provide paternity, forensics and animal susceptibility testing under the Cellmark brand. We have six accredited laboratories in the US and UK, which provide high quality genotyping testing services for these businesses.

In each business, a significant amount of our current testing activity is with established contracts with a number of different government agencies. These contracts are usually awarded through a secure bid process and, when awarded, typically have a term from one to three years. These contracts provide a large base of revenue and testing volume that assists us in capacity and production planning, as well as process optimization. We believe that our experience as a reliable provider of services to government agencies is a valued credential that can be used in securing both new contracts and renewing existing contracts. In each business, we have also identified opportunities for further growth, including new contracts and new private DNA testing service markets as described further below.

After our strategic realignment completed in 2003, we now focus on providing genotyping services in three distinct markets: forensics, paternity and public health.

Paternity Testing Services

We offer paternity DNA testing services to both governmental agencies and private customers. Laboratory testing is done in three accredited laboratories located in East Lansing, Michigan, and Dayton, Ohio in the US and in Abingdon, UK. We have the ability to increase testing volume and therefore grow revenue within the existing facilities and without purchasing additional equipment. In addition, because we use industry standard reagents and instrumentation that have been fully validated, we can add additional processing capacity to meet increased demand at minimal expense. While the reagents and instruments are highly specialized, similar reagent kits and instruments are available from other suppliers, so that in the event our current suppliers were to have a major supply problem, we have the ability to switch to alternative suppliers if needed, at little or no additional cost.

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Government paternity testing

The government, or public, paternity testing market in the US, which comprises the majority of our paternity testing services, involves tests ordered by state or county governmental agencies commonly referred to as Child Support Enforcement Agencies (CSEAs). CSEAs are required by law to identify the biological father of a child in circumstances where a mother applies for public monetary assistance, in order to compel the father to make child support payments or to recoup any disbursements made for the benefit of the child. In the US, the Federal government reimburses 90% of the costs of paternity testing incurred by CSEAs, provided the CSEAs abide by certain Federal regulations. These regulations provide incentives to the CSEAs to increase effectiveness and efficiency in their paternity establishment measures. This has resulted in continued expansion of this market. Services are provided to these agencies under contracts awarded in a competitive bid process and typically have a term of one to three years. The contract bidding process is highly competitive and the criteria used to determine the awards vary. Typically, specifications are issued in the form of a Request For Proposal (RFP) and vendors respond in a sealed bid response by a specified response date. In some cases contracts are awarded solely on the basis of price, while others use a scoring matrix to achieve the desired mix of price, quality and service. In addition to CSEAs, we also provide testing services to US and certain foreign government agencies in charge of immigration. Such testing is done to verify claimed family relationships for visa applications. We provide this testing under contract or from an approved vendor list.

Private paternity testing

Our DNA paternity testing services provided through Orchid Europe are done so strictly on a private basis to individuals, solicitors and health care professionals. We do not perform services or receive revenue for DNA paternity testing services in the UK under any government contracts. Conversely, in the US, due to changing demographics related to out-of-wedlock births, reduced stigmas associated with paternity testing, and increased public understanding of paternity testing, demand for private paternity testing in the US has increased in recent years. During 2002, we began marketing paternity testing services in the private market on a much broader scale, and based on growth achieved during 2003 and continued demand, we expect to aggressively pursue a larger share of the private paternity market. In addition to offering services directly to individuals, in 2003 we began establishing relationships with firms or individuals acting as our marketing agents. Under the terms of these relationships, we supply products and materials to such agents and in return, the agent agrees to exclusively utilize our services for their customers seeking private paternity testing. We are further increasing our marketing efforts to the private sector to increase awareness of our services, increase the number of referral sources and improve our service offerings. These marketing efforts include internet marketing channels, offering innovative sample collection methods, and offering these services to our customers.

We intend to continue to develop and evaluate new technologies for enhancing our laboratory processes, including instrumentation, automation and new testing methodologies, which we expect will provide us with a competitively low cost of operation.

Forensic Testing Services

In the forensic DNA testing business, our laboratory services are performed in four accredited facilities located in Germantown, Maryland, Nashville, Tennessee, and Dallas, Texas in the US and in Abingdon, UK. We have selectively focused certain services in specific facilities, where appropriate, to maximize economies of scale, while at the same time enabling significant capacity for expansion across all facilities in the areas of both suspect and no-suspect casework. The use of forensic DNA testing has enabled law enforcement agencies worldwide to utilize national databases for the identification of suspected perpetrators of crimes in which there are no other leads to identify a criminal. In the US, the CODIS database currently stores the DNA profiles of more than one million convicted felons. When evidence from an otherwise unsolvable crime is DNA tested and the DNA profile from the biological evidence is compared successfully to one of the profiles in the national CODIS database, a match may be generated, revealing the identity of the criminal from the database. To date, more than 20,000 criminal investigations have been aided by matching DNA from evidence against the database.

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We expect the use of this technology will accelerate as law enforcement investigators use this technology to successfully identify criminals in cases where there was previously no suspect. We also anticipate growth in this casework based on legislation both in the US and the UK, increased Federal funding in the US and improved utility of the growing National databases. In the US, there has been a significant increase in the number of contracts to address the backlog of cases with no known suspect for screening against the CODIS database.

We offer forensic DNA testing through Orchid Cellmark, a respected forensic DNA testing provider and is known for its high quality and expert staff, having tested numerous high profile forensic cases drawing extensive media coverage. We test a variety of forensic evidence samples collected at crime scenes and provide DNA identification profiles on individual felons for inclusion in national and state DNA databases. Testing services on criminal casework may be provided to implicate or exclude a known suspect, or may be provided in the absence of a suspect to generate a DNA profile of a perpetrator for searching DNA databases. Although the majority of testing is done for criminal justice agencies, we also provide testing services for defense attorneys as well. Casework testing for government agencies may be provided on an individual case basis or under long-term contract. Contract services are usually awarded through a competitive bid process in which specifications are issued in the form of a RFP and vendors respond in a sealed bid response by a specified response date. Such contracts typically have a term of one to three years. In addition to casework, we also provide felon database testing under contract. DNA specimens are collected from incarcerated individuals according to state laws in the US and national legislation in the UK, and tested by our laboratories to provide a DNA identification profile for inclusion in a national database in either the US or UK. In the US, this database is known as CODIS, and in the UK, the database is known as the National DNA Database^®, or NDNADB. Biological evidence from criminal cases with no known suspects may then be screened against these databases to identify a possible suspect. Databasing contracts are also usually awarded in a competitive bid process similar to that of our paternity testing business and typically have a term of one to three years.

All three of our forensic testing facilities in the US have received the prestigious American Society of Crime Lab Directors-LAB accreditation, a designation that only a small number of non-government DNA laboratories have been awarded. Only five other private forensics labs in the US have earned this respected ASCLD accreditation. The value of genotyping in solving crimes is increasingly being recognized and we anticipate that Federal and state governments in the US and national and local governments in the UK will allocate greater resources to support wider use of DNA. This is evidenced by legislation originally considered by the US Senate and House of Representatives known as “The Debbie Smith Act”, and now encompassed in the President’s DNA Initiative in which the US government indicated its intent to allocate $900 million over fiscal years 2005 to 2009 towards reducing the backlog of forensic testing that currently exists in the criminal justice system. Through a process directed by the National Institute of Justice (NIJ) states may apply for Federal funds to assist in testing the enormous backlog of untested cases with no known suspect. A substantial portion of the awarded funds are designated for outsourcing to private sector laboratories. Contracts are then awarded by the states receiving the Federal funds under competitive procurement. Such contracts are awarded on a matrix of criteria including experience, capacity, quality and price, and are usually for one year with the ability to extend under certain circumstances. Virtually all contracts require either ASCLD or NFSTC accreditation, and our three accredited facilities are actively pursuing these contracts.

On July 15, 2002, we entered into a five-year agreement with Forensic Alliance Ltd. (FAL) to provide forensic testing services as an exclusive subcontractor to all customers of FAL, which include a majority of the police departments in the UK. The agreement may be terminated at each anniversary of the date of the agreement upon twelve months notice by FAL. While this agreement does not guarantee annual minimum service levels or revenue, our provision of services to police departments throughout the UK under this agreement constituted 18% of revenue for the fiscal year ended December 31, 2003.

Orchid Europe is the largest independent supplier of scene-of-crime DNA analysis to UK police forces, providing a full range of forensic DNA services from the routine analysis of DNA samples for submission to the National DNA Database^® to the analysis of evidence for the most serious crimes. UK Government funding for DNA analysis has increased significantly in recent years through its DNA Expansion Plan. Working with FAL,

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Orchid Europe is increasing its forensic DNA business by focusing on quality while driving down processing time. Orchid Europe expects to further expand its casework business by pursuing additional contracts with other police agencies through our partner, FAL.

Each of our forensics DNA testing facilities has broad capabilities in handling the complex evidence samples related to casework. Further, we have developed processes and procedures that allow us to scale up to handle the larger volumes associated with specific contracts, particularly in response to the expanding initiatives to reduce the backlog of no-suspect cases. We started to introduce additional automation processes and new technologies to reduce the labor-intensive aspects of testing. We have also made significant upgrades to our laboratory information system to handle higher complexity operations and volume. We have similarly introduced automation and new technology into our felon data basing processes.

We have continued to expand our service offerings with new technology for special cases and new services such as our DNA Express Service, which provides accelerated testing services at a premium price. Specialty testing services include Y chromosome STR analysis, which is important in sexual assault analysis, as well as mitochondrial DNA testing and SNP based testing, both of which are used on very small or extremely degraded samples. For example, in 2002, we were awarded a multi-year contract by the Office of the Chief Medical Examiner of New York City to apply our SNP technology to analyze DNA samples collected from the World Trade Center disaster site for victim identification. In a pilot program conducted with New York City officials in early 2002, we demonstrated that panels of SNPs could enable the identification of additional victims from DNA specimens that have failed previous attempts with traditional forensic analysis methods. As a part of that pilot program, we have analyzed nearly 15,000 samples related to the World Trade Center disaster and continue to work with the Chief Medical Examiner on remains identification. We anticipate offering this technology upon individual customer request in a commercial format for use on highly degraded forensic evidence.

Public Health Testing

Through Orchid Europe, we currently conduct the major portion of the UK Government’s project to help British farmers breed sheep with reduced susceptibility to the animal disease, scrapie. Following a competitive bid process, we were awarded a multi-year contract in 2001 to generate several million scrapie genotypes per year for the project. The project is part of the innovative National Scrapie Plan, or NSP, for Great Britain developed by the Department for Environment, Food and Rural Affairs, or DEFRA, in conjunction with the Agriculture and Rural Affairs Departments in Scotland and Wales. Scrapie, one of the transmissible spongiform encephalopathies, is an untreatable, fatal disease that affects sheep worldwide. With an estimated UK sheep population of over forty million, scrapie has the potential to cause significant economic losses to farmers. Prevention of the disease agent’s ability to maintain itself is viewed as the most effective way to limit the spread of the disease. As SNPs affect an individual sheep’s susceptibility to scrapie, sheep with SNPs associated with a genetic resistance to scrapie are selected as breeding stock. Over time, farmers expect to produce flocks with greatly reduced vulnerability to the condition and, in turn, decrease the risk of animal diseases disseminating into the food supply.

Scrapie eradication is now expanding into the European Economic Community (EEC) as EEC mandated programs are defined. In February 2003, the EEC passed legislation that sets requirements for genotyping-based breeding programs for scrapie resistance in sheep on a voluntary basis beginning January 1, 2004 and on a compulsory basis beginning April 1, 2005. We expect our success in the UK will result in new market opportunities for us in the European Union.

On August 8, 2001, we entered into a three-year agreement with DEFRA to provide genotyping services on sheep in order to determine their susceptibility to the disease, scrapie. DEFRA is providing this service free of charge to sheep farmers as part of the National Scrapie Plan in order to help farmers breed sheep that are not susceptible to this disease, which is similar to mad-cow disease. This agreement is renewable for an additional two years. Under the agreement, we are guaranteed an annual minimum number of samples to be genotyped at a

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per genotype rate based on a sliding scale, dependent upon volume. Based upon volumes performed during 2003, revenue received under this agreement constituted 13% of revenue for the fiscal year ended December 31, 2003.

The recent outbreak of mad cow disease in the US and worldwide awareness of its effect has expanded interest in food safety, and led to the opening of a new market opportunity using DNA testing for meat traceability for the food industry. By way of example, we recently announced participation in a joint project with Maple Leaf Foods of Canada and Pyxis Genomics to be the exclusive provider of assay development and service testing for Maple Leaf’s pork traceability project. This project will entail development and testing on a panel of markers that enable identification of packaged meat back to the farm of origin.

We currently provide animal testing solely from our facility in the UK. We currently have the necessary capacity to accommodate increased volume within the existing laboratory space and equipment configuration in our UK facility. In addition, because we use industry standard reagents and instrumentation that have been fully validated, we can add processing capacity to meet expansion demands at little or no additional cost.

We continue to develop similar assays utilizing this technology for use on other animals that would either identify susceptibility or determine traceability.

Intellectual Property

Since divesting our non-core and non-profitable businesses, we have adjusted our patent strategy such that we continue to protect existing intellectual property relevant to our focused business of genetic diversity. We rely on both patent and trade secret protection of our intellectual property. However, we cannot be certain that patents will be issued from any of our patent applications or that any issued patents will have sufficient breadth to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. The laws of some foreign countries may not protect our proprietary rights to the same extent as US law. Our strategy will continue to concentrate on protection of our intellectual property as it relates to our identity genomic testing service businesses. Our existing patent portfolio continues to reflect our international scope and includes pursuing patent protection mainly in North America and Europe. We currently own, or have exclusive licenses to, 55 US issued patents and 56 foreign patents, and have received a notice of allowance for 1 additional Australian patent application. Additionally, we have 59 pending patent applications of which 11 are US applications and 48 are foreign patent applications. Of our existing patent portfolio, both issued and pending patents, approximately half of the patents are primarily related to microfluidic technology, that is, technology related to moving and pumping very minute amounts of fluids. The remainder of our portfolio is made up of methods to identify SNPs and utilization of SNPs. We have sought and continue to seek patent protection for novel uses of the utility of SNPs in the genetic testing field. In cases where novel uses of SNPs have already been patented by a third party, we may need to obtain a license for the use of this technology to make use of or sell products using such technology. As of December 31, 2003, the majority of our patents have approximately 7 or more years before they expire.

We also own or exclusively license patents covering other areas of our business including paternity, forensic genetic markers and pharmacogenomics, otherwise known as the ability to correlate genetic information and predisposition to disease or adverse drug response. We continue to maintain a number of license agreements that rely on technology we own claimed under US patent numbers 5,888,819, 6,013,431 and 6,004,744. We also provide paternity testing services and public health testing services that rely on the technology claimed in the aforementioned patents, as well technology we exclusively license claimed under patent numbers 5,846,710, 5,856,092. We license these patents under exclusive agreements with Saint Louis University and GeneCo Pty Ltd., Diatech and Queensland University of Technology, respectively.

As part of our efforts to build a technology portfolio for genetic analysis using SNPs, in July 2001 we entered into an agreement with Affymetrix, Inc. whereby we were assigned all right, title and interest to US patent number 5,856,092 as well as all of its counterparts. The original agreement called for payment obligations

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to the original owners of said patent of $1.6 million upon signing and payments as follows: $0.3 million in 2001; $0.8 million in 2002; approximately $1.0 million in 2003; and $1.2 million in 2004. Thereafter, we were obligated to pay annual minimum royalties of approximately $1.2 million in 2005 and increasing to approximately $1.9 million in 2008 and thereafter. In July of 2003, we entered into an amended Patent Assignment and License Agreement with the patent owners, which reduced the purchase obligations to approximately $0.4 million for 2003, and approximately $0.2 million in each of the years 2004, 2005, 2006 and 2007. We no longer have a requirement to pay annual minimum royalties beyond the purchase obligations.

On August 6, 2002, we had entered into a patent assignment agreement with Saint Louis University whereby the University would have assigned us US patent number 5,846,710, upon the University receiving consent from the National Institutes of Health (NIH) to assign such patent. The University informed us in February 2003 that it had not received this consent from the NIH. Effective February 25, 2003 we entered into an Exclusive Patent License Agreement under which we received an exclusive license to the subject patent in all fields and for all uses upon payment to the University of a total of $1.0 million in cash and $0.5 million in common stock. We paid $0.3 million of this cash payment in 2002, approximately $0.5 million in 2003 and the balance will be paid in installments in 2004.

We further attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Most of our employees and consultants also sign agreements requiring that they assign to us their interests in discoveries, inventions, patents and copyrights arising from their work for us, maintain the confidentiality of our intellectual property, and refrain from unfair competition with us during their employment and for a period of time after their employment with us, which includes solicitation of our employees and customers. We cannot assure you that these agreements will not be breached or invalidated. In addition, we cannot assure you that third parties will not independently discover or invent competing technologies or reverse engineer our trade secrets or other technologies.

We have 39 trademarks for which we have received registrations or notices of allowance in the US and elsewhere. We also have 17 pending trademark applications pending. Some of the key trademarks for which we have either received registrations or notices of allowance include: Lifecodes Corporation, GeneScreen and the Orchid logo.

This Annual Report on Form 10-K contains references to some of our trademarked products and services, for which we have filed registration applications with the US Patent and Trademark Office. All other trademarks or trade names referred to in this annual report are the property of their respective owners.

Government Regulation

The identity testing industry involving both paternity and forensics testing is in general not formally government regulated, but rather establishes and maintains standards and quality through voluntary third party accreditation. The widely recognized body covering paternity testing is the American Association of Blood Banks (AABB), which has accredited our laboratories in Dallas, Texas, Dayton, Ohio, East Lansing, Michigan, Germantown, Maryland, Nashville, Tennessee, and Abingdon, UK. Similarly, for forensic testing, two entities afford accreditation: the American Society of Crime Laboratory Directors (ASCLD) providing laboratory accreditation, and the National Forensic Science Testing Center (NFSTC). Our facilities in Dallas, Texas, Germantown, Maryland, and Nashville, Tennessee have been accredited by both ASCLD and NFSTC. Only eight private forensics labs in the US have earned the respected ASCLD accreditation, three of which are our labs.

In addition to industry accreditations, selected government agencies offer accreditation. The New York State Department of Health has accredited our laboratories in Dallas, Texas, Dayton, Ohio, and East Lansing, Michigan for paternity testing, and our laboratories in Dallas, Texas, and Germantown, Maryland for forensic testing. The Dayton, Ohio facility has been accredited by the Standards Council of Canada (SCC) for paternity testing, which also confers ISO/IEC 17025 accreditation. Our Nashville, Tennessee facility has also been certified under ISO/IEC 17025 standards.

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Genetic diagnostic kits previously sold by us in Europe were classified as IVD medical devices and are covered by the European Directive, 98/79/EC, or the IVDD Directive. The IVDD Directive was implemented into UK legislation in 2000. There was a transition period until December 7, 2003 during which manufacturers had to either comply with the existing national laws or comply with the IVD Regulations and “CE” (the mark of conformity) mark their devices. It is now mandatory for manufacturers to comply with the IVD Regulations. However, given the recent sale of our Diagnostics business, we will no longer be subject to this Directive.

Manufacturers must also comply with the Products of Animal Origin (Import and Export) Regulations 1996 (SI 1996/3124) if it is applicable to their devices. In accordance with these regulations we obtained registration from the Ministry of Agriculture, Fisheries & Food for our UK manufacturing units that export genetic testing kits containing Purified Bovine Serum and Purified Gelatin.

During 2003, we sold a number of IVD products in the UK and have accreditation certificates for our UK quality systems from a Notified Body (SGS Yarsley ICS), having met the requirements of ISO9001, EN46001 and ISO13485. We also received an accreditation certificate meeting the requirements of ISO17025 from the UK Accreditation Service, or UKAS, in relation to our testing laboratory. UKAS is the national body for the accreditation of testing and calibration laboratories, certification and inspection bodies.

In the US and UK, we are also subject to numerous environmental and safety laws and regulations, including those governing the use and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could have an adverse effect on our business and results of operations.

Employees

As of December 31, 2003, we had 403 full time employees and 27 part time employees including forensic scientists, computer scientists, and biologists with experience in the medical diagnostic, genotyping, pharmacogenomic, forensic, animalic, and computer industries. None of our employees are represented by a collective bargaining agreement, nor have we experienced work stoppages. We believe that we maintain good relationships with our employees. Our success will depend in large part on our ability to attract and retain skilled and experienced employees. There can be no assurance that we will be successful in hiring or retaining qualified personnel, and our failure to do so could have a material adverse impact on our business, financial condition and results of operations.

Competition

In each of our markets, we compete with other companies offering services that are similar to those that we offer. Some of our competitors have greater financial, operational, sales and marketing resources, and more experience in research and development and commercialization than we have. Moreover, some competitors may have greater name recognition than we do, and may offer discounts as a competitive tactic.

Our competitors in the field of paternity DNA testing include: DNA Diagnostics, Identigene, Laboratory Corporation of America, Long Beach Genetics, Paternity Testing Corporation and Reliagene in the US, along with DNA BioSciences Laboratory of the Government Chemist Forensic Science, NorthGene, DadCheck, and London BioScience in the UK. In the field of forensics DNA testing, competitors include: Bode Technology Group, Commonwealth Biotechnologies, DNAPrint Genomics, Fairfax Identity Laboratories, Identigene, Laboratory Corporation of America, Myriad Genetics, and Reliagene in the US, along with Forensic Science Service and Laboratory of the Government Chemist in the UK. In animal susceptibility testing, we compete with the Laboratory of the Government Chemist in the UK and GAG Bioscience in Germany.

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Item 2. PROPERTIES

We lease three facilities, which provide us with approximately 62,000 square feet for our operations in Princeton, New Jersey, which serve as our corporate headquarters. We are currently attempting to sublease all or a portion of our current Princeton based facilities. Our corporate headquarters would be relocated to smaller space in the Princeton area should all current space be subleased. We lease an approximately 22,000 square foot facility in Dallas, Texas; an approximately 21,000 square foot facility in Dayton, Ohio; and an approximately 5,100 square foot facility in Sacramento, California. The Sacramento facility was closed in October 2003 and we are currently negotiating an early lease termination. We assigned our lease for an approximately 37,000 square foot facility in Stamford, Connecticut, to Tepnel Life Sciences, plc in connection with the sale of the Diagnostics business unit as of January 21, 2004. In connection with this assignment, we unconditionally guaranteed Tepnel’s obligations under the lease. We also lease an approximately 18,000 square foot facility in Germantown, Maryland, an approximately 18,000 square foot facility in Nashville, Tennessee, and an approximately 9,000 square foot facility in East Lansing, Michigan. In addition, we lease a total of approximately 35,000 square feet in three buildings located in Abingdon, UK for the operations of Orchid Europe. We currently believe our facilities are sufficient to meet our space requirements through the year 2004.

Item 3. LEGAL PROCEEDINGS

On or about November 21, 2001, a complaint was filed in the United States District Court for the Southern District of New York naming Orchid as defendant, along with certain of its officers and underwriters. An amended complaint was filed on April 19, 2002. The complaint, as amended, purportedly was filed on behalf of persons purchasing Orchid’s stock between May 4, 2000 and December 6, 2000, and alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated there under. The amended complaint alleges that, in connection with Orchid’s May 5, 2000 initial public offering, the defendants failed to disclose additional and excessive commissions purportedly solicited by and paid to the underwriter defendants in exchange for allocating shares of Orchid’s stock to preferred customers and alleged agreements among the underwriter defendants and preferred customers tying the allocation of IPO shares to agreements to make additional aftermarket purchases at pre-determined prices. Plaintiffs claim that the failure to disclose these alleged arrangements made Orchid’s registration statement on Form S-1 filed with the Commission in May 2000 and the prospectus, a part of the registration statement, materially false and misleading. Plaintiffs seek unspecified damages. Orchid believes that the allegations are without merit and has, and intends to continue to, vigorously defend against Plaintiffs’ claims. In this regard, on or about July 15, 2002, Orchid filed a motion to dismiss all of the claims against it and its officers. Though the court heard oral argument on the motion on November 1, 2002, a decision has not yet been rendered. On October 9, 2002, the court dismissed without prejudice only Orchid’s individual officers, Dale R. Pfost and Donald R. Marvin, from the litigation in exchange for Orchid entering into a tolling agreement with Plaintiffs’ executive committee. On February 19, 2003, Orchid received notice of the court’s decision to dismiss the Section 10(b) claims against Orchid. Plaintiffs and the defendant issuers have agreed in principal on a settlement that, upon a one-time surety payment by the defendant issuers’ insurers, would release the defendant issuers and their individual officers and directors from claims and any future payments or out-of-pocket costs. Defendants await the court’s approval of the settlement documents.

Prior to Orchid’s acquisition of Lifecodes Corporation in December 2001, Lifecodes Corporation sold Medical Molecular Diagnostics GmbH, (MMD), a wholly owned subsidiary of Lifecodes Corporation based in Dresden, Germany to Deutsche Knochenmarkspenderdatei gemeinnutzige Gesellschaft mbH (DKMS), pursuant to a Stock Purchase Agreement dated November 15, 2002 (the SPA). Upon the acquisition of Lifecodes Corporation, Orchid assumed Lifecodes Corporation’s obligations to DKMS under the SPA. On September 19, 2003, Orchid received a complaint filed in the 9th Chamber for Trade Affairs in Cologne, Germany on behalf of DKMS through a Request for Service Abroad of Judicial Documents. The complaint seeks damages under the SPA for DKMS’s cost to acquire MMD. DKMS claims defects in the equipment of the MMD laboratory. Orchid has not reserved any amount related to this case and believes that the allegations are without merit and intends to vigorously defend against these anticipated claims. In addition, in December 2002, Orchid filed a claim in the 29th Chamber for Trade Affairs in Tubingen, Germany against DKMS for significant unpaid accounts receivables that accrued during the

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year ended December 31, 2002. The accounts receivables were for HLA typing services conducted by the Diagnostics business unit, which Orchid sold to Tepnel Life Sciences plc in January 2004. The services performed by Orchid’s Diagnostic business unit were exclusively upon DKMS’ request.

Orchid is a defendant in litigation pending in the Southern District of New York entitled Enzo Biochem, Inc. et al. v. Amersham PLC, et al. The case was filed in October, 2002 and is in the early phases of discovery. By their complaint, Plaintiffs allege that certain defendants (i) breached their distributorship agreements by selling certain products for commercial development (which they allege was not authorized), (ii) infringed Plaintiffs’ patents through the sale and use of certain products, and (iii) are liable for fraud, unfair competition and tortious interference with contractual relations. Orchid did not have a contractual relationship with Plaintiffs, but is alleged to have purchased the product at issue from one of the other defendants. Orchid has sold the business unit, which is allegedly engaged in the unlawful conduct. As a result, there is no relevant injunctive relief to be sought from Orchid. The complaint seeks damages in an undisclosed amount.

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

No matters were submitted during the fourth quarter of the year ended December 31, 2003.

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PART II

Market Information

Our common stock began trading on The Nasdaq National Market on May 5, 2000 under the symbol “ORCH”. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported by Nasdaq, for the last two fiscal years:

On March 24, 2004, the last sale price of the common stock was $ 1.85.

Stockholders

As of March 24, 2004, there were approximately 670 stockholders of record of the 110,720,232 outstanding shares of common stock. On February 27, 2004 our stockholders approved a reverse stock split and on March 25, 2004, our board of directors approved the implementation of a 1-for-5 reverse stock split. We expect the reverse stock split will be effective as of March 30, 2004 and our common stock will begin trading on a split-adjusted basis when trading opens on March 31, 2004. Based on the number of shares of common stock outstanding as of March 24, 2004 we expect we will have approximately 22.1 million outstanding shares of common stock after the reverse stock split.

Dividends

During the twelve months ended December 31, 2003, we issued an aggregate of 26,053,237 shares of our common stock in connection with the conversion of 1,172 shares of our Series A convertible preferred stock. In connection with this conversion of our shares of Series A convertible preferred stock, we issued 126,183 shares of our common stock as payment of accrued dividends on the converted shares of Series A convertible preferred stock.

No underwriters were involved in the foregoing offers and sales of securities. The issuance of the shares of common stock issued as a dividend on the shares of Series A convertible preferred stock were made in reliance upon an exemption from the registration provisions of the Securities Act of 1933, as amended (the Securities Act), set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering and the rules and regulations thereunder. The issuance the shares of common stock issued upon conversion of the shares of Series A convertible preferred stock were made in reliance upon an exemption from the registration provisions of the Securities Act, set forth in Section 3(a)(9) thereof relative to the exchange of securities with no additional consideration and the rules and regulations thereunder. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. However, the shares of common stock are covered by a resale registration statement on From S-3 filed with the Securities and Exchange Commission on May 30, 2003.

We have not paid dividends to our common stockholders since our inception and do not plan to pay cash dividends in the foreseeable future, as we currently intend to retain earnings, if any, to finance our growth.

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Item 6. SELECTED FINANCIAL DATA

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The following transactions had a material effect on the comparability of the data presented in the consolidated financial data above, as follows: contract revenues received from related party is relating to the SmithKline Beecham agreement, the acquisition of GeneScreen in December 1999, the sale of series E mandatorily redeemable convertible preferred stock in December 1999 and January 2000, the sale of common stock in our initial public offering in May 2000, the sale of common stock in our secondary offering in June 2001, the acquisitions of Cellmark in February 2001 and Lifecodes in December 2001, the sale of our common stock in February and March 2002, the decision to eliminate the Life Sciences product business including the sale of assets in 2002, the line of credit entered into in 2002, the sale of series A redeemable convertible preferred stock in March 2003, the decision in 2003 to realign the GeneShield business and the decision in 2002 to sell the Diagnostics business. The results of the Diagnostics business have been classified as “discontinued operations” and the related assets and liabilities are included as held for sale in 2003 and 2002. Please see our notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussions of these transactions.

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This Management’s Discussion and Analysis of Financial Condition as of December 31, 2003 and Results of Operations for the years ended December 31, 2003, 2002, and 2001 should be read in conjunction with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

We are engaged in the provision of services for profiling genetic uniqueness. We incorporated as a Delaware corporation and began operations in 1995. In the first three years of business we were primarily focused on developing our microfluidics technologies for applications in high throughput production of small molecules under collaborative research programs with SmithKline Beecham and Sarnoff Corporation.

In 1998, we made a fundamental shift away from the development of microfluidics technologies and focused our business on the application of our technology to determine genetic variability and differences, including genotyping SNPs. At that time, we acquired Molecular Tool because its proprietary primer extension technology for analyzing SNPs matched our existing microfluidics technologies, which allowed us to focus our business on genetic diversity testing. Our genetic diversity testing services included the measuring and analyzing of information related to genetic uniqueness, or the genetic variability that distinguishes one organism from another, also known as genotyping. During this period we also developed instruments and kits that could be used for genotyping performed independently by third parties. In December 1999, we acquired GeneScreen, a provider of identity genomics services. In 2001, we acquired two other identity genomics businesses: Cellmark and Lifecodes.

From 1998 through 2002, our business focused on SNP scoring products and services that used our proprietary primer extension technology, and on our identity genomics services in paternity and forensics. In December 2002, we disposed of our SNP genotyping instrumentation and related consumables assets offered by our Orchid Life Sciences business unit. Beginning late in 2002, based on a decision to pursue the sale of our Diagnostics business unit, we reflected this business as a discontinued operation in our consolidated results of operations. We completed the divestiture of our Diagnostics business unit in January 2004.

In 2003, we focused our efforts and reported our operating results around our Identity Genomics Segment serving customers in the United States and United Kingdom. Identity Genomics includes services that measure and analyze information related to genetic uniqueness, or the genetic variability that distinguishes one organism from another. These services are provided in the markets for the establishment of paternity, forensic identification and food safety and animal testing applications. We intend to continue to focus our operations on providing services related to genetic uniqueness.

We have incurred losses since inception and as of December 31, 2003 we had stockholders’ equity of approximately $31.1 million, including an accumulated deficit of approximately $287.5 million. We had previously indicated that we expected to attain profitability in the second half of 2003; however, due to market circumstances, particularly the rate at which funding of forensics testing was released from the NIJ, we were unable to achieve our objective.

Our revenues are predominately generated from services provided to our customers that relate to the completion of DNA laboratory testing. Our costs and expenses consist of costs of service revenue, research and development expense, marketing and sales expense, general and administrative expenses and other income and expense. Costs of Service revenues consist primarily of salaries and related personnel costs, laboratory supplies, fees paid for the collection of samples, and facility expenses. Research and development expense consists primarily of salaries and related costs, fees paid to consultants and outside service providers for development,

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laboratory supplies, and other expenses related to the design, development, testing and enhancement of our products. Marketing and sales expense consists of salaries and benefits for salespeople within our company and all related costs of selling and marketing our products and services. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, and other corporate expenses. Other income and expense, net consists principally of interest income and interest expense.

Our revenues in the United States are somewhat dependent on the timing of Federal funding for forensics DNA testing through the NIJ. In the fourth quarter of 2003 and the first quarter of 2004, we witnessed an increase in the amount of funding made available by the NIJ to various governmental and law enforcement establishments around the US. In the fourth quarter of 2003 and the first quarter of 2004, we have entered into several new contracts and renewed existing contracts with certain governmental agencies. We expect that our continued ability to add to our customer base and retain our existing customers will strengthen our top line and our ability to meet our financial objectives for 2004 and beyond. Our operations in the UK include 100% of our public health testing services and accounted for 40% of our 2003 revenues. In 2003, 78% of our UK revenues were from two customers one of which was DEFRA. We expect that our contract with DEFRA will be renewed in 2004, although there can be no assurances at this time that we will obtain this renewal. We expect that our UK business will continue to be a significant part of our business. We expect to experience continued growth in our UK-based forensics testing as a result of attaining a contract in late 2003 with the Metropolitan Police, and we expect to increase our business in the Public Health Testing area through the introduction of our meat traceability business with new customers, which includes the Maple Leaf Foods contract announced in the first quarter 2004.

We were favorably impacted during 2003 by exchange rate movements of the British Lb sterling as compared to the US Dollar, and this trend is expected to continue in the near term. However, the significant percentage of our revenue derived from our UK operations makes us vulnerable to future fluctuations in the exchange rate, and there can be no assurance that the recent favorable trend in this exchange rate will not be reversed, which would have an unfavorable impact on our consolidated financial results.

Our operating results are driven by our ability to generate sales and improve operating efficiency. As a result of our restructuring plan formalized in 2002 and implemented throughout 2002 and 2003 to restructure certain operations, we have achieved and sustained improvements in operating results and operating cash flow. The net cash used in operations declined from $35.0 million in 2002 to $6.9 million used in 2003. We expect that the full year effect of our restructuring plans will assist us in achieving additional improvements in operating results during 2004. We also expect to continue to focus on improving operating efficiencies during 2004. We expect that these operating efficiency improvements, together with our expected growth in revenue during 2004 of 20%, will result in improved gross margins during 2004. We believe that our current level of overhead expenses is sufficient to support our planned revenue growth in 2004, and we anticipate that these expenses will be lower than 2003 levels, as a result of the restructuring activities undertaken in 2003 and 2002. Overall, we expect to have positive income from operations for the full year 2004.

In the first quarter of 2004, we have taken certain measures to improve liquidity and provide working capital. On February 27, 2004, we closed a common stock private equity financing in the amount of $26.1 million, net of closing costs. In addition, as of February 6, 2004, 100% of our redeemable convertible preferred stockholders converted their shareholdings to common stock. In connection with the common stock private equity financing, we intend to file a registration statement covering the resale of the shares of common stock sold, as well as the shares of common stock issuable upon the exercise of the warrants issued in the financing, no later than March 26, 2004. As a result of these measures, we expect to have adequate capital to fund operations in the future.

On January 13, 2004 we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, to provide us with further opportunities to raise capital. When declared effective, this shelf

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registration will permit us, from time to time, to offer and sell up to $30 million of our common stock. We do not anticipate the need to raise additional capital in 2004 to fund current operations; however, if we determine that this need exists, or if we intend to fund future growth opportunities, we may use this shelf registration to provide financing. This registration statement has not yet been declared effective.

RESULTS OF OPERATIONS

Our Diagnostic business unit was considered to be a non-core asset, and was reflected as a discontinued operation. Accordingly, we have not included the results of operations of our Diagnostics business unit, which was held for sale, in the results of continuing operations in any period presented. The results of operations for this business unit have been reflected in discontinued operations for all periods presented. The assets and liabilities of our Diagnostics business unit, which was held for sale, have been reflected as such in the condensed consolidated balance sheets as of December 31, 2003 and December 31, 2002. We completed the sale of certain assets and liabilities related to our Diagnostics business unit in January 2004.

Years ended December 31, 2003 and 2002

The following table sets forth a year-over-year comparison of the components of our Net Loss for the years ended December 31, 2003 and 2002:

Revenues

Revenues for the twelve months ended December 31, 2003 of approximately $50.6 million represented an increase of approximately $0.2 million as compared to revenues of approximately $50.4 million for the comparable period of 2002. Total revenues during the twelve months ended December 31, 2003 versus 2002 increased as a result of increased service revenues. Total service revenues for the twelve months ended December 31, 2003 were approximately $49.1 million, an increase of approximately $4.5 million, or 10%, from approximately $44.6 million during the comparable period in 2002. Revenues from our service businesses of paternity, forensics and public health testing for the twelve months ended December 31, 2003 (excluding the service revenues of the US Life Sciences Group) were approximately $49.1 million, as compared to approximately $42.9 million for the twelve months ended December 31, 2002, an increase of approximately $6.2 million, or 14%. The increase in revenues from our service businesses was primarily attributable to an increase in our UK based service business, which grew to approximately $19.0 million during the twelve months ended

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December 31, 2003 as compared to approximately $12.1 million during the comparable period of the prior year. Our UK business performs paternity and forensics testing as well as public health testing services. These increases in our UK business were offset slightly by the loss of certain paternity and forensics contracts in the US.

As a result of the acquisition of Cellmark, in February 2001, the acquisition of Lifecodes in December 2001, and limited number of agreements with foreign companies, our business has become increasingly global, with international revenue representing 40% of total revenue in 2003. Fluctuations in foreign currency exchange rates during 2003 resulted in a favorable impact during the year on our consolidated revenues and profits. We are prepared to hedge against fluctuations in foreign currencies if the exposure is material, although we have not engaged in hedging activities to date.

In August of 2001 we entered into a three-year agreement with the DEFRA of the UK to provide several million genotypes on sheep in order to test the animals for their susceptibility or resistance to scrapie. Under this agreement, we received income during 2003 that was approximately 13% of our total annual revenues. We anticipate the renewal of this agreement; however, if it is not renewed, it could have a material adverse effect on the financial condition of our business. We also signed an agreement in July of 2002 with FAL, an agency through which we perform forensic testing services for multiple police forces throughout the UK. It is by virtue of our relationship with FAL that we have been able to increase our revenues based on this forensic testing. The agreement with FAL represented approximately 18% of our gross revenues for the year ended December 31, 2003.

During the twelve months ended December 31, 2003, we did not recognize any product revenues, as a result of our decision to sell the Diagnostics business unit and the sale of our Life Sciences product related assets in 2002. We recognized approximately $1.5 million in other revenues, specifically license and grant revenues, during the twelve months ended December 31, 2003, compared to approximately $3.4 million during the comparable period of the prior year. This decline relates to various technology licensing arrangements entered into in 2002, which did not occur in 2003, therefore, we expect license and grant revenues to decline in future periods. As a result of the strategic refocusing of our business, we anticipate entering into fewer licensing arrangements than in prior years as we focus on our service businesses.

Cost of Product Revenues

Cost of product revenues consist primarily of salaries and related personnel costs, raw materials, and facility expenses. There were no cost of product revenues for the twelve months ended December 31, 2003, compared to approximately $1.7 million of cost of product revenues for the comparable period of the prior year. This elimination of cost of product revenues is directly related to our decision to sell our Diagnostics business unit and the sale of our Life Sciences product related assets in 2002.

Cost of Service Revenues

Cost of service revenues consist primarily of salaries and related personnel costs, laboratory supplies, fees paid for the collection of samples, and facility expenses. Cost of service revenues was approximately $29.0 million, or 59% of services revenues, for the twelve months ended December 31, 2003 compared to approximately $26.0 million, or 58% of service revenues for the comparable period of the prior year. The increase in cost of service revenues primarily reflects growth in revenues from our businesses of forensics, paternity and public health testing services. In addition, resource investments were made in both our UK operations and our US based forensics operations in preparation for the addition of new contracts attained late in 2003. We expect that these investments made during the second half of 2003 will provide us with sufficient resources for these and other recently secured contracts and we expect a drop in costs of services as a percentage of service revenues once volume in these areas grows.

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Research and Development Expenses

Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for development, laboratory supplies, and other expenses related to the design, development, testing, and enhancement of our products and services. Research and development expenses for the twelve months ended December 31, 2003 were approximately $3.2 million, a decrease of approximately $17.8 million, as compared to approximately $21.0 million for the comparable period of the prior year. The significant decrease in research and development expenses for the twelve months ended December 31, 2003 as compared to the comparable period of the previous year was primarily attributable to a reduction in the research and development efforts undertaken by our Life Sciences and GeneShield business units. During the twelve months ended December 31, 2003, our Life Sciences and GeneShield business units contributed approximately $1.8 million of research and development expenses as compared to approximately $19.1 million for the twelve months ended December 31, 2002. For the twelve months ended December 31, 2003, the research and development charges related primarily to our GeneShield business unit, which incurred these costs for only the first seven months of 2003. During 2004, we do expect to incur charges to support our entry into the meat traceability market, although this is not expected to be material, as we will largely rely on the technology already used in our existing businesses. We anticipate these charges will be offset by the decline in research and development expenses related to our Geneshield business unit and therefore we expect that research and development expense will decrease in future periods, although actual results may vary due to changes in the condition of our business.

Marketing and Sales Expenses

Marketing and sales expenses consist of salaries and benefits for salespeople within our company and all related costs of selling and marketing our products and services. These costs include travel, advertising, market research costs, and certain professional fees. Marketing and sales expenses for the twelve months ended December 31, 2003 were approximately $6.1 million as compared to approximately $8.7 million during the comparable period of the prior year. The decrease in these costs of approximately $2.6 million was substantially related to reduced marketing efforts while we completed the financing at the end of the first quarter of 2003, costs incurred in 2002 for marketing efforts as it related to the commercialization of diagnostic products and our other expenditures associated with our Life Sciences business unit which were not incurred in 2003. In addition, there was a significant reduction in expenditures for our Geneshield business unit as a result of our decision to realign this business unit, and our efforts to reduce discretionary spending as it related to marketing our services. We expect that marketing and sales expenses will decrease slightly in future periods, although actual results may vary due to changes in the condition of our business.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual property and other corporate expenses. General and administrative expenses for the twelve months ended December 31, 2003 were approximately $23.5 million, a decrease of approximately $9.5 million, as compared to approximately $33.0 million for the comparable period of the prior year. We attribute the decrease in overall general and administrative expenses to the restructuring efforts taken in 2003 and 2002. Personnel related costs and costs of consultants have decreased by approximately $4.8 million during the twelve months ended December 31, 2003 as compared with the comparable period of 2002. Facility costs, which mainly include rent, utilities and depreciation, have also decreased by approximately $3.7 million for the twelve months ended December 31, 2003 as compared with the comparable period of 2002. In addition, we paid approximately $1.0 million in 2003 related to facility costs, which were included in the restructuring charges recorded in 2002. We also incurred additional costs of approximately $3.0 million during the twelve months ended December 31, 2003, which consisted of approximately $1.5 million associated with third party bankers, approximately $0.5 million in legal costs and approximately $0.9 million in consulting costs. The bankers and related legal costs were incurred by us in our preparation to obtain the financing which was consummated in March 2003 as well as for assistance with

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certain strategic corporate activities as requested by our Board of Directors. We expect that general and administrative expense will decrease slightly in future periods, although actual results may vary due to changes in the condition of our business.

Impairment of Assets

During the twelve months ended December 31, 2003, we recorded approximately $0.8 million of impairment of assets, as compared to $20.8 million during the twelve months ended December 31, 2002. During the quarter ended June 30, 2003, we decided to strategically realign our GeneShield business unit and we are currently in the process of evaluating potential future market segments and commercialization strategies for this initiative. In connection with this decision, we terminated most of our GeneShield employees, most of whom were located in our Arlington, Virginia facility. As a result of this decision, we impaired some of the fixed assets, including office and computer equipment, furniture and fixtures and software related to the GeneShield business unit for approximately $0.8 million.

Restructuring

As of December 31, 2003 and December 31, 2002, we have $2.0 million and $4.3 million, respectively, in restructuring accruals outstanding of which approximately $0.8 million and approximately $1.9 million, respectively, are classified as long-term liabilities. A summary of the restructuring charges is as follows (in thousands):

During the twelve months ended December 31, 2003, we settled two restructuring obligations on favorable terms. The first favorable settlement related to our leasehold obligation for one of our Princeton based facilities. During the second quarter of 2003, we recorded a benefit to the restructuring expense of approximately $0.3 million due to the settling of this matter for an amount less than our original estimate, which was recorded in 2002. During the third quarter of 2003, we reflected another benefit to the restructuring expense of approximately $0.4 million related to a favorable settlement of an obligation to our former chief executive officer. In connection with this settlement, we issued 106,570 shares of common stock and approximately $0.2 million in cash payments.

During the twelve months ended December 31, 2003, we recognized an additional restructuring expense of approximately $0.7 million, which offsets the benefits mentioned above. As a result of the realignment of our GeneShield business unit we recorded approximately $0.4 million of severance, legal and facility related charges in the restructuring. We also recognized approximately $0.1 million as a restructuring expense associated with a former chief financial officer, a portion of which is related to the modification of the terms of previously issued options to purchase common stock. During 2003, we also shut down a customer service facility located in California and recorded approximately $0.2 million of severance and facility related costs.

During the twelve months ended December 31, 2002, we formalized and announced plans to restructure certain operations in order to reduce costs. As a result, over 135 positions related to certain areas of our operations were eliminated. Most of these terminations were from our Princeton, New Jersey facility. During the

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twelve months ended December 31, 2002, we recorded a restructuring charge of approximately $6.9 million which consisted of employee related charges such as severance, benefits and outplacement services of approximately $3.4 million and approximately $3.5 million of facility charges related to lease exit costs. The restructuring charge related to facilities was based upon management’s estimate of when these facilities are expected to be subleased and an estimate of the expected discount to the existing lease rates from the anticipated subleasing arrangements. We are attempting to sublease all of our Princeton based laboratory facilities, which are currently not in use.

Amortization of Intangible Assets

During the twelve months ended December 31, 2003, we recorded approximately $1.8 million of amortization of intangible assets as compared to approximately $3.0 million during 2002. During the twelve months ended December 31, 2003, we had a lower amount of amortization primarily due to the impairment charge related to intangible assets of our Life Sciences business unit, which we recorded in the fourth quarter of 2002.

Interest Income

Interest income for the twelve months ended December 31, 2003 was less than $0.1 million, compared to approximately $0.5 million during the same period of the prior year. This decrease was primarily due to interest received on less cash, cash equivalent, and short-term investment balances than we had held during the twelve months of 2002.

Interest Expense

Interest expense for the twelve months ended December 31, 2003 was approximately $0.5 million compared to approximately $0.6 million during the comparable period of the prior year. Interest expense during the twelve months ended December 31, 2003 has decreased as a result of reduced levels of long term debt.

Other Income

On July 16, 2003, we amended our agreement with Affymetrix related to our 2001 acquisition of US Patent No. 5,856,092 and its foreign counterparts. Pursuant to the amended agreement, we are obligated to pay approximately $0.4 million at the signing of the agreement and $0.6 million over the next four years in ratable installments of $0.15 million per year to the original patent holders. Prior to the execution of the amended agreement, we reflected an obligation pursuant to the original agreement in an amount of $2.4 million, net of the amount related to interest. Based on the amended agreement, we recorded a benefit to other income of $1.4 million to our statement of operations during the twelve months ended December 31, 2003.

Income Tax (Expense)/Benefit

During the twelve months ended December 31, 2003, we recorded net income tax expense of approximately $2.0 million related to our UK business which is generating taxable income, which was slightly offset by an approximately $0.4 million tax benefit associated with the sale of some of our state net operating loss carryforwards to another company which was authorized by the New Jersey Economic Development Authority.

Discontinued Operations

During 2002 and 2003, we considered our Diagnostic business unit to be a non-core asset and therefore it has been reflected as a discontinued operation. The results of operations for this business unit have been reflected in discontinued operations for all periods presented. The assets and liabilities of the Diagnostics business unit have been reflected as such in the consolidated balance sheets as of December 31, 2003 and 2002. As we

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completed the sale of this business in January 2004, all of the assets and liabilities as of December 31, 2003 have been reflected as current. The results of operations for this business unit have been reflected in discontinued operations. We recorded approximately $9.2 million and approximately $9.0 million of loss from the discontinuance of the Diagnostic business unit during the twelve months ended December 31, 2003 and 2002, respectively. During the twelve months ended December 31, 2003, we obtained additional information with respect to the value of our Diagnostic business unit. Based on this additional information, we determined that an evaluation of the long-lived assets of the discontinued business was required. Based on this evaluation, we recorded an impairment charge of approximately $8.3 million related to predominantly intangible assets of that business unit, which has been reflected as part of the operations of the discontinued business.

Net Loss and Net Loss Allocable to Common Stockholders

Due to the factors described above, which includes restructuring charges and impairment of asset charges, during the twelve months ended December 31, 2003, we reported a net loss of approximately $23.6 million compared to a net loss of approximately $80.1 million for the comparable period of the prior year. We also recorded a beneficial conversion feature, dividends and accretion of approximately $3.9 million, which was included in our net loss allocable to common stockholders of approximately $27.5 million. The beneficial conversion feature of $0.7 million related to our March 2003 financing was calculated as the difference between the per share value as of the commitment date and the per share value of the transaction after giving effect to the value associated with the warrants to purchase common stock issued in the financing. The approximately $0.5 million in dividends relate to the 6% dividend payable to the holders of our Series A redeemable convertible preferred stock. In addition, we accreted approximately $2.6 million for the conversion of shares of our Series A redeemable convertible preferred stock into shares of our common stock during the twelve months ended December 31, 2003. (See “Liquidity and Capital Resources” below for a further discussion of the financing).

Years ended December 31, 2002 and 2001

We considered the Diagnostic business unit to be a non-core asset, in 2002, which we had committed to sell and, therefore, reflected it as a discontinued operation. Accordingly, we have not included the results of operations of the Diagnostics business unit in the results of continuing operations in any period presented. We completed the sale of this business unit in January of 2004.

The following table sets forth a year-over-year comparison of the components of our Net Loss for the years ended December 31, 2002 and 2001:

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Revenues

Revenues for the year ended December 31, 2002 of approximately $50.4 million represents an increase of approximately $19.8 million as compared to revenues of approximately $30.6 million for 2001. This increase is primarily attributable to an increase of approximately $23.7 million in service revenues, which primarily relates to an increase in service revenues from our acquisition of Lifecodes, which we acquired in December 2001. Lifecodes had service revenues during the year ended December 31, 2002 of approximately $20.2 million as compared to service revenues of $1.3 million in 2001. Our business based in the UK experienced an increase in service revenues in 2002 as well. Our UK business, which performs paternity and forensics testing as well as public health testing services, had service revenues of approximately $12.1 million during the year ended December 31, 2002 as compared to approximately $6.1 million during the year ended December 31, 2001. The decline in product revenues and access fees of approximately $2.5 million from approximately $5.0 million during the year ended December 31, 2001 to approximately $2.5 million during the year ended December 31, 2002 relates primarily to SNP instrumentation and consumables. The decrease in revenues on a year over year basis relates to a disappointing launch of a diagnostic product line, which was ultimately sold during the fourth quarter of 2002. We also recognized approximately $3.4 million in license, grant and other revenues during the year ended December 31, 2002, compared to $4.7 million during the year ended December 31, 2001. This decline relates to various technology licensing arrangements entered into in 2001, which did not occur in 2002.

Cost of Product Revenues and Access Fees

Cost of product revenues and access fees consist primarily of salaries and related personnel costs, raw materials, and facility expenses. Cost of product revenues and access fees for the year ended December 31, 2002 were approximately $1.7 million, or 68% of product revenues and access fees, compared to approximately $3.8 million, or 76% of product revenues and access fees, for 2001. During 2002, the cost of product revenues and access fees includes an inventory charge of approximately $0.8 million, which relates to the costs of discontinued inventory. The change in 2002 is attributable to an increase in the proportion of product with higher gross margin than lower gross margin products for the year ended December 31, 2002.

Cost of Service Revenues

Cost of service revenues consist primarily of salaries and related personnel costs, laboratory supplies, fees paid for the collection of samples, and facility expenses. Cost of service revenues were approximately $26.0 million, or 58% of service revenues, for the year ended December 31, 2002 compared to approximately $14.5 million, or 69% of service revenues, in 2001. The increase in cost of service revenues was primarily attributable to increased costs of approximately $11.3 million associated with a full year of cost related to Lifecodes. The decrease in cost of service revenues as a percent of service revenues is attributed to the inclusion of Lifecodes in the results of operations for a full twelve-month period, which generated a higher gross margin on service revenues than our previous service testing business. In addition, our UK based business experienced significant growth in higher margin service testing that also contributed to the improved cost of service testing on a percentage basis.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for development, laboratory supplies, and other expenses related to the design, development, testing, and enhancement of our products. Research and development expenses for the year ended December 31, 2002 were approximately $21.0 million, a decrease of approximately $13.0 million, as compared to approximately $34.0 million for 2001. During the year ended December 31, 2002, we incurred approximately $1.4 million of software development costs associated with our GeneShield business unit and $2.6 million of research and development costs associated with an internal decision to utilize inventory previously

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held for sale in the research and development of our ultra-high throughput genotyping product for use in our business units other than Orchid Life Sciences. Without giving effect to these research and development charges, the decrease in research and development expenses would have been approximately $17.0 million. The decrease in research and development expenses for the year ended December 31, 2002 as compared to the comparable previous year was primarily attributable to a decrease in purchases of laboratory supplies of approximately $7.7 million. There was also a reduction in research and development personnel, primarily related to our Life Sciences business unit, and facility costs, which contributed to the overall decrease during the year ended December 31, 2002 as compared to the prior year. During the year ended December 31, 2001, we had a significant amount of research and development costs in connection with the expansion of our internal and collaborative efforts, which was not incurred during the year ended December 31, 2002, except for an insignificant amount during early 2002. During 2002, we also had a reduction in salary expense from the restructuring efforts taken during the year ended December 31, 2002.

Marketing and Sales Expenses

Marketing and sales expenses consist of salaries and benefits for salespeople within our company and all related costs of selling and marketing our products and services. These costs include travel, advertising, market research costs, and certain professional fees. Marketing and sales expenses for the year ended December 31, 2002 were approximately $8.7 million as compared to approximately $6.3 million during the comparable year of 2001. The increase in these costs of approximately $2.4 million was substantially related to costs associated with Lifecodes of $2.6 million during 2002, which were not included in the previous year’s results of operations.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual property and other corporate expenses. General and administrative expenses for the year ended December 31, 2002 were approximately $33.0 million, an increase of approximately $9.1 million, as compared to approximately $23.9 million for 2001. The increase in overall general and administrative expenses was primarily attributable to Lifecodes, which accounted for approximately $4.2 million in general and administrative expenses in 2002, which were not included in the previous year’s results of operations. In addition, our UK business had general and administrative expenses of approximately $4.1 million during the year ended December 31, 2002, as compared to approximately $2.8 million during 2001, which was caused by the growth of that business and the inclusion of its results of operations for a full twelve month period.

Impairment of Assets

We recorded approximately $20.8 million in impairment of asset charges during the year ended December 31, 2002 as compared to approximately $30.7 million during 2001. As a result of continuing losses incurred by our Life Sciences business unit, we prepared an internal evaluation of this unit’s long-lived assets. Based on this internal evaluation, approximately $5.4 million of laboratory equipment was determined to be idle and not able to be utilized in our other facilities and, therefore, determined to be permanently impaired. In addition, we estimated an impairment loss of approximately $3.5 million as it relates to leasehold improvements related to a facility utilized by the Life Sciences business unit. Certain intangibles, which underlie older technology were considered permanently impaired and were written down by approximately $10.1 million during the year ended December 31, 2002. These intangible assets supported our Life Sciences business unit. Upon completion of a strategic review, a change in senior management and the sale of the Life Sciences product related assets in 2002; we determined that these assets were no longer needed for our current operations. In addition, certain investments were impaired by approximately $1.7 million. The impairment of assets of approximately $30.7 million recorded during the year ended December 31, 2001 relate to approximately $27.3 million of goodwill recorded in connection with our acquisition of GeneScreen in December of 1999 as well as an impairment of lab equipment of approximately $3.4 million which represented the amount by which the carrying value of the equipment exceeds the related fair value of the SNP instrumentation which was considered impaired with the anticipated introduction of the UHT genotyping platform.

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Restructuring

During the year ended December 31, 2002, we formalized and announced plans to restructure certain operations in order to reduce costs. As a result, over 135 positions, which cover certain areas of our operations were eliminated. Most of these terminations were from our Princeton, New Jersey facilities. During the year ended December 31, 2002, we recorded a restructuring charge of approximately $6.9 million which consisted of employee related charges such as severance, benefits and outplacement services of approximately $3.4 million and approximately $3.5 million of facility charges related to lease exit costs. During the year ended December 31, 2001, we recorded approximately $0.4 million as a restructuring charge related to severance benefits and the closure costs for a facility.

Amortization of Intangible Assets

During the year ended December 31, 2002, we recorded approximately $3.0 million of amortization of intangible assets as compared to approximately $3.8 million during 2001. During the prior year, a significant portion of the amortization of intangible assets related to goodwill recorded on previously acquired businesses, which, effective January 1, 2002 are no longer amortized. Also, during the year ended December 31, 2002, we have recorded amortization expense associated with intangible assets acquired pursuant to our acquisitions of Lifecodes in December of 2001 and Cellmark in February of 2001, which were not amortized for the full year in 2001.

Interest Income

Interest income for the year ended December 31, 2002 was approximately $0.5 million, compared to approximately $2.9 million for 2001. This decrease was primarily due to interest received on larger cash, cash equivalent, and short-term investment balances which we held during 2001. This decrease is also attributable to lower interest rates during 2002 as compared to 2001.

Interest Expense

Interest expense for the year ended December 31, 2002 was approximately $0.6 million compared to approximately $0.8 million in 2001. Interest expense during these years was comparable because of the comparable level of long-term debt.

Loss on sale of assets

On December 19, 2002, we sold our Life Sciences product-related assets to Beckman Coulter (BCI) for cash of approximately $1.1 million and the assumption of certain debt and liabilities. Our decision to sell this product line was the culmination of a strategic review untaken by management. We sold inventory, which consisted of our UHT platform, and certain equipment that was needed to operate and maintain our existing customer base. We also entered into a supply agreement with BCI for the supply of components necessary for its paternity testing business, which agreement was amended in December 2003. Under the amended terms we are now committed to purchase from BCI a minimum amount of materials and supplies in the amount of $0.6 million during 2003, $0.7 million during 2004, and $1.3 million in 2005. We recorded a loss on the sale of these assets of approximately $0.9 million during the year ended December 31, 2002.

Income Tax Benefit

During the year ended December 31, 2002, we recorded an income tax benefit of approximately $0.6 million. This was related to the sale of some of our state net operating loss carryforwards to another company, which was authorized by the New Jersey Economic Development Authority. The sales of net operating losses generated an income tax benefit of approximately $1.5 million which was offset by approximately $0.9 million of income tax expense which related to our UK based business, which was profitable during 2002.

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Discontinued Operations

The Diagnostic business unit was considered to be a non-core asset, which we sold in January of 2004 and, therefore, has been reflected as a discontinued operation since 2001. The results of operations for this business unit have been reflected in discontinued operations. We recognized approximately $9.0 and $0.1 million in losses from the discontinuance of the Diagnostic business during the years ended December 31, 2002 and 2001, respectively. The loss for the year ended December 31, 2002 is mainly a result of an approximate $5.9 million impairment of long-lived assets of the Diagnostic business unit based on its estimated sale price, as well as approximately $2.4 million in bad debt expense associated with a certain Diagnostic customer for which we had historically performed a significant amount of service work. Revenues associated with this customer were reduced dramatically due to current litigation with this customer.

Net Loss and Net Loss Allocable to Common Stockholders

Due to the factors described above, for the year ended December 31, 2002, we reported a net loss and a net loss allocable to common stockholders of approximately $80.1 million as compared to approximately $84.7 million in 2001.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, we had approximately $9.9 million in cash and cash equivalents as compared to approximately $10.0 million as of December 31, 2002. Working capital decreased to approximately $7.6 million at December 31, 2003 from approximately $9.5 million at December 31, 2002. This decrease in working capital is due to cashflows used in operating the business and impairment charges associated with our Diagnostics business unit which was held for sale and classified as a current asset and liability, which offset the increase in working capital associated with the $16 million in financing that was completed on March 31, 2003.

Sources of Liquidity

Our primary sources of liquidity have been capital raising activities, including issuances of our securities and borrowings under our credit facility. The line of credit facility we had obtained from a commercial bank in December 2002 was terminated in December 2003. We are in the process of renegotiating a new line of credit arrangement with this same commercial bank which we expect to include more favorable terms and conditions. It is possible that we may consummate this new arrangement in the second quarter of 2004, although we have not made any commitment to do so.

We expect that revenues will increase in 2004 by approximately 20% compared to 2003, we will attain breakeven cash flow from operations by the end of the first half of 2004, and we will report positive operating income for the full year 2004. We expect this improvement in cash flow and profitability will result from the improved sales volume projected for 2004, as well as from the full year effect of restructuring and cost reduction activities initiated during 2003 and 2002.

The following table sets forth a year-over-year comparison of the components of our liquidity and capital resources for the years ended December 31, 2003 and 2002:

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Net cash used in operations for the twelve months ended December 31, 2003 was approximately $7.0 million compared with net cash used in operations of approximately $35.0 million for the prior year. This significant decline in net cash used in operations demonstrates the magnitude of cost savings we have achieved over the past year resulting from our divestitures and cost cutting efforts. Investing activities during the twelve months ended December 31, 2003 included capital expenditures of approximately $2.5 million that primarily related to our growing UK businesses. These capital additions in the UK are largely related to the construction of a new forensics laboratory to service our new contract with the London Metropolitan Police Service. Also included in investing activities for the twelve months ended December 31, 2003 was the reclassification of $1.3 million of restricted cash to unrestricted cash, which was due to the reduction in borrowings under our equipment financing loans, as noted below. Financing activities during the twelve months ended December 31, 2003 primarily consisted of approximately $16.0 million of net proceeds from our offering of Series A redeemable convertible preferred stock in March 2003 and repayment of debt of approximately $8.5 million, which included $5.2 million that was repaid on our $10 million credit facility.

We expect our restructuring efforts taken in 2002 and 2003 will continue to reduce future cash expenditures. We believe that the result of these efforts coupled with the divestitures of certain non-core assets, expected increases in both revenues and gross margins in our remaining business units and our financings in 2003 and early 2004 will enable us to operate our ongoing business activities until we reach operating profitability and attain positive cash-flows.

February 2004 Private Placement

On February 26, 2004, we entered into definitive agreements with accredited new and existing institutional investors to raise approximately $30.3 million in gross proceeds in a common stock private equity financing. Pursuant to the agreements, we sold approximately 15.8 million shares of common stock at $1.92 per share and granted the investors four-year warrants to purchase approximately an additional 3.2 million shares of the our common stock at an exercise price of $2.64. The transaction closed on February 27, 2004. The securities issued in this transaction have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the US absent registration or an applicable exemption from the registration requirements. We intend to file a registration statement covering the resale of the shares of common stock sold, as well as the shares of common stock issuable upon the exercise of the warrants, by March 26, 2004.

Shelf Registration Statement

Separate from and prior to the common stock private equity financing of February 27, 2004, we filed a registration statement on Form S-3 with the Securities and Exchange Commission on January 13, 2004. This shelf registration statement will permit us, from time to time, to offer and sell up to $30 million of our common stock. This registration statement has not yet been declared effective.

March 2003 Private Placement

On March 31, 2003, we completed a private placement of 1,600 Units each, consisting of one share of Series A redeemable convertible preferred stock and a warrant to purchase shares of our common stock, which resulted in net proceeds to us of $16.0 million. We registered the shares underlying the Series A redeemable convertible preferred stock and the warrants on a registration statement on Form S-3 filed with the Securities and Exchange Commission on May 30, 2003. As of February 6, 2004, all shares of Series A redeemable convertible preferred stock were converted into common stock and no shares of Series A convertible preferred stock remain issued or outstanding.

Line of Credit Facility

On December 23, 2002, we entered into a line of credit agreement with a commercial bank for a maximum of $10.0 million. Any amounts outstanding pursuant to this line of credit were secured by substantially all of our

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assets. The borrowing base was based on 80% of eligible accounts receivable (as defined in the agreement). Borrowings pursuant to the line of credit bore interest at a range of prime plus 0.5% to 2.5% based on our liquidity ratio (as defined in the agreement). The line of credit agreement contained certain financial and non-financial covenants. The agreement also contained a material adverse changes clause, which, if triggered, would have constituted an event of default. During the third and fourth quarters of 2003, we were not in compliance with certain financial covenants. However, subsequent to September 30, 2003 we received waivers through September 30, 2003 from our commercial bank related to our non-compliance with such covenants. On December 5, 2003, we entered into an agreement to terminate this line of credit. There have been no adverse financial ramifications from our failure to comply with the covenants because we had no amounts outstanding pursuant to this line of credit during 2003. During 2002 and pursuant to the terms of the line of credit, we also issued 215,000 warrants to purchase our common stock at an exercise price of $0.64 per share. The warrants were immediately exercisable and had a five-year term. We calculated the fair value of the warrants using the Black Scholes option-pricing model. This value was recorded as debt issuance costs were amortized over the term of the debt. These warrants were exercised in January of 2004. We are in the process of renegotiating a new line of credit arrangement with this same commercial bank which we expect will include terms and conditions more favorable to us. It is possible that we may consummate this new arrangement in the second quarter 2004, although we have not made any commitment to do so.

Equipment Financing

At December 31, 2003, we had borrowings of approximately $2.3 million outstanding related to a loan which was entered into primarily for equipment financing. If we do not maintain minimum unrestricted cash, as defined in the loan agreement, equal to the greater of $35.0 million or twelve months’ cash needs (calculated by taking the trailing three months net cash used in operations multiplied by four), we are required to provide a cash security deposit or letter of credit equal to an amount defined in the loan agreement, not to exceed 50% of outstanding amounts on draws made in or subsequent to December 2000. As of December 31, 2001, and just prior to our March 2002 equity offering we did not maintain the minimum unrestricted cash defined in the loan agreement. We received a waiver from our lender regarding our noncompliance with this covenant for this period. Subsequent to March 31, 2002, we did not maintain the minimum cash defined in the loan agreement. We also received written notice from the lender stating that the lender waived the financial covenant violation as a result of not maintaining a pledge of cash security deposit or letter or credit under this loan agreement for the period of noncompliance through June 19, 2002. On June 19, 2002, we obtained a letter of credit in the amount of approximately $2.7 million as required by the loan agreement, which was supported by a cash restriction on certain securities held by us. During 2003, our required letter of credit or cash deposit became less than the original $2.7 million letter of credit established because we continued to pay down our monthly obligation in accordance with the original terms of the loan line. The restricted cash amount has been reduced as of December 31, 2003 to approximately $1.2 million. This cash restriction, in addition to the cash restricted under two of our operating leases, is reflected as restricted cash in the consolidated balance sheet as of December 31, 2003 of $2.1 million, of which approximately $1.1 million is classified as a long term asset.

Uses of Liquidity in 2004

Throughout 2004, we plan to continue making substantial investments in our business. In that regard, we expect the following to be significant uses of liquidity: cost of service revenues including personnel costs; salaries and related personnel costs, laboratory supplies; fees paid for the collection of samples, and facility expenses as well as general and administrative costs which consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual property and other corporate expenses. We do not anticipate that we will incur significant capital expenditures in 2004, although these expenditures may increase in 2003 or prior years if opportunities arise to grow our business more aggressively. In addition, we may make investments in future acquisitions of complementary businesses or technologies.

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The amounts and timing of our actual expenditures will depend upon numerous factors, including our development activities, our investments in technology, the amount of cash generated by our operations and the amount and extent of our acquisitions, if any. Actual expenditures may vary substantially from our estimates.

We maintain multiple contractual commitments as of December 31, 2003, which will support our future business operations. Such commitments relate to noncancelable operating lease arrangements, long-term debt, minimum supply purchases, and future patent and minimum royalty obligations. We have identified and quantified the most significant of these commitments in the following table.

Payments due by period

(In thousands)

We believe that our existing cash on hand and the additional funds raised through the common stock private equity offering in February 2004 will be sufficient to fund our operations at least through the next twelve months. We expect to reach operating cash flow self-sufficiency by the end of the first half of 2004. We do not anticipate the need to raise additional capital in 2004. However, we may need to access the capital markets for additional financing to fund future growth opportunities or to operate our ongoing business activities after a period of time if our future results of operations fall below our expectations. If so, we may not be able to raise additional funds or raise funds on terms that are acceptable to us. If future financing is not available to us, or is not available on terms acceptable to us, we may not be able to fund our future needs. If we raise funds through equity or convertible securities, our stockholders may experience dilution and our stock price may decline.

We cannot assure you that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. We also cannot assure you that we will not require substantial additional funding before we can achieve profitable operations. Our capital requirements depend on numerous factors, including the following:

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As of December 31, 2003, our net operating loss carry forwards were approximately $213.0 million and approximately $186.0 million for Federal and state income tax purposes, respectively. If not utilized, our Federal and state tax loss carry forwards will begin to expire in 2005. Utilization of our net operating losses to offset future taxable income, if any, may be substantially limited due to “change of ownership” provisions in the Internal Revenue Code of 1986. We have not yet determined the extent to which limitations were triggered as a result of past financings or may be triggered as a result of future financings. This annual limitation is likely to result in the expiration of certain net operating losses prior to their use.

Compensation Charges

In prior years, we recorded deferred compensation resulting from the granting of stock options to employees, directors, or consultants with exercise prices below the fair market value of the underlying common stock at the date of their grant. During 2001, 2002 and 2003, all stock options were granted with grant prices equal to the fair value of our common stock at the grant date. The portion of these deferred compensation amounts which resulted from grants to consultants is subject to remeasurement at the end of each reporting period based upon the changes in the fair value of our common stock until the consultant completes performance under his or her respective option agreement.

Critical Accounting Policies

Our critical accounting policies are as follows:

Revenue Recognition

We are engaged in the development and delivery of genetic testing, or genotyping, services that generate information related to genetic susceptibility, uniqueness, or the genetic variability that distinguishes one organism from another. We recognize DNA laboratory services revenues at the time test results are completed and reported. Deferred revenues represent the unearned portion of payments received in advance of tests being completed and reported. Unbilled receivables represent revenue, which has been earned on completed and reported tests, but has not been billed to the customer. Revenues from license arrangements, including license fees creditable against future royalty obligations of the licensee, are recognized when an arrangement is entered into if we have no significant continuing involvement under the terms of the arrangement. If we have significant continuing involvement under such an arrangement, license fees were deferred and recognized over the estimated performance period. Management has made estimates and assumptions relating to the performance period, which are subject to change. Changes in these estimates and assumptions could affect the amount of revenues from licenses reported in any given period.

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Prior to 2003, we had several sources of revenues, including research and development collaborations, SNP scoring services, SNP stream system hardware sales, consumable sales, and license arrangements. As described above, we have discontinued operations related to these revenues.

Prior to our acquisitions of GeneScreen, Cellmark, and Lifecodes, we derived substantially all of our revenues from research and development collaborations, technology grants and awards from several governmental agencies. In 1999, we derived our first revenues from the placement of our first commercial hardware system, and through 2002, we derived revenues from the sale of consumables used by the hardware system. As a result of the sale of certain assets to Beckman Coulter in December of 2002, we no longer have revenues from placements of these products and consumables. We also derived license revenues beginning in 2000. In 2000, we derived our first revenues from the performance of laboratory testing services by GeneScreen, our wholly owned subsidiary, in the US. In 2001, we derived our first revenues from the sale of testing kits and laboratory testing services from our Cellmark division in the UK.

In connection with the research and development collaborations that provided the majority of our revenues in the early years of our corporate history, we recognized revenues when related research expenses are incurred and when we satisfied specific performance obligations under the terms of the respective research contracts. We deferred up-front licensing fees obtained in connection with such agreements and amortized them over the estimated performance period of the respective research contract. We recognized milestone payments as revenues when the milestone event or requirement was completed, if it represented the achievement of a significant step in research and development or performance process.

We offered our some of our hardware products in two basic types of transactions, either a purchase and sale transaction or an arrangement in which the customer takes possession of the product and pays an access fee for its use. We recorded revenues on the sale of the hardware upon transfer of title and after we had met all of our significant performance obligations. We deferred access fee payments that we received when a system was initially placed with a customer and recognized revenues on a straight-line basis over the term of the agreement.

Revenues from the sale of consumables were recognized upon the transfer of title, generally when our products were shipped to our customers from our facilities.

Valuation of Long-Lived and Intangible Assets and Goodwill

We assess the impairment of amortizable identifiable intangibles, including goodwill, and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

When we determine that the carrying value of amortizable intangibles and other long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any

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impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business. Net amortizable intangible assets and long-lived assets, excluding goodwill, amounted to $ 26.0 million as of December 31, 2003. Goodwill is subject to at least an annual recoverability assessment pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”.

Accounting for Income Taxes.

We have generated net operating losses for tax purposes since inception. As of December 31, 2003, these losses generated net operating loss carryforwards of approximately $213.0 million and $186.0 million for Federal and state income tax purposes, respectively. In addition, due to our restructuring efforts certain charges written off in the current and prior years were not deductible for income tax purposes. These differences result in gross deferred tax assets. We must assess the likelihood that the gross deferred tax assets, net of any deferred tax liabilities will be recovered from future taxable income and to the extent we believe the recovery is not likely, we have established a valuation allowance.

Significant management judgment is required in determining this valuation allowance. We have recorded a valuation allowance of approximately $107.0 million as of December 31, 2003, due to uncertainties related to our ability to utilize some of our net deferred tax assets, primarily consisting of certain net operating loss carryforwards before they expire. The valuation allowance is based on our estimates of taxable income and the period over which the net deferred tax assets will be recoverable.

Conversely, if we are profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net deferred tax assets, for which a valuation has been recorded, we would record the estimated net realizable value of the net deferred tax asset at that time and would then pay income taxes at a rate equal to our combined federal and state effective rate of approximately 40%.

Stock Option Compensation

We account for options granted to employees and directors in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on fixed stock option grants only if the current fair value of the underlying stock exceeds the exercise price of the option at the date of grant and it is recognized on a straight-line basis over the vesting period. We account for stock options granted to non-employees on a fair-value basis in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and Emerging Issues Task Force Issue (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As a result, the non-cash charge to operations for non-employee options with vesting or other performance criteria is affected each reporting period by changes in the fair value of our common stock. As required, we also provide pro forma net loss attributable to common stockholders and pro forma net loss attributable to common stockholders per common share disclosures for employee and director stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied (see Note 1 to our consolidated financial statements).

Recently Issued Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150

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establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within SFAS 150’s scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Many of those instruments were previously classified as equity. SFAS 150 requires an issuer to classify the following instruments as liabilities (or assets in some circumstances): mandatorily redeemable financial instruments; obligations to repurchase the issuer’s equity shares by transferring assets; and certain obligations to issue a variable number of its equity shares. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise became effective at the beginning of the first interim period beginning after June 15, 2003. For certain mandatorily redeemable financial instruments, SFAS 150 will be effective for us at a later date if we were to enter into certain manditorily redeemable financial instruments. The adoption of SFAS 150 did not have a material effect on its consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation of variable interest entities. FIN 46 requires certain variable interest entities (“VIE’s”) to be consolidated by the primary beneficiary if the entity does not effectively disperse risks among the parties involved. The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003. The provisions, as amended, are effective for the first interim or annual period ending after December 15, 2003 for those variable interests held prior to February 1, 2003. The adoption of FIN 46 will not have an impact on our financial position or results of operations.

RISK FACTORS

FORWARD-LOOKING STATEMENTS

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This report may contain forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results or outcomes to differ materially from those described in such forward-looking statements. These statements address or may address the following subjects:

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For further information, refer to the more specific factors and uncertainties discussed throughout this Annual Report on Form 10-K and in the “Risk Factors” section hereof. Except as required by law, we undertake no obligation to update any forward-looking statements. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.

If any of the matters included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the value of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

If we fail to maintain the service contracts we have with various state and governmental agencies or fail to enter into additional contracts, we would lose a significant source of revenues.

We currently derive approximately 97% of our revenues from the identity genomics services we currently provide in the paternity, forensic and public health fields. These services are heavily dependent upon contracts we have with various governmental agencies, which are typically open to bid and usually have a term from one to three years. The process and criteria for these awards are typically complex and highly competitive, particularly with respect to price of services offered. We may not be able to maintain any of our existing governmental contracts or be the successful bidder on any additional governmental contracts, which may become available in the future, or negotiate terms acceptable to us in connection with any governmental contract awarded to us, which could adversely affect our results of operations and financial condition.

We currently receive more than 10% of our annual gross revenue through relationships with two customers.

In August of 2001 we entered into a three-year agreement with the Department of Environment, Food and Rural Affairs of the UK to provide several million genotypes on sheep in order to test the animals for their susceptibility or resistance to scrapie. These services were provided under an initiative called the National Scrapie Plan to provide genotyping services in the hopes of aiding British farmers to breed sheep with reduced susceptibility to scrapie. Under this agreement, we received income during 2003 that was approximately 13% of our total annual revenues. We anticipate the renewal of this agreement; however, if it is not renewed, it could have a material adverse effect on our financial condition. We also signed an agreement in July of 2002 with Forensic Alliance Ltd., an agency through which we perform forensic testing services for multiple police forces throughout the UK. It is by virtue of our relationship with FAL that we have been able to increase our revenues based on forensic testing such that the income we received was approximately 18% of our gross revenues for the fiscal year ended December 31, 2003. This agreement is renewable by the FAL each July, but also may be terminated by the FAL upon 12 months’ notice. We have no reason to believe that the agreement will not be renewed in 2004; however, if it is not renewed, it could have a material impact on the financial condition of our business. Together, these two agreements constituted 78% of international revenues for the fiscal year ended December 31, 2003.

We cannot guarantee the receipt of revenue based on government contracts.

We regularly compete in an open bid forum in order to secure or renew contracts with various governmental agencies for the provision of DNA-based testing services. While most of the time, a contract award may have

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limits that may be paid to the contract (as allowed by state or other approved funding), we are not always able to rely on a fixed amount of revenue based on services provided under the contract. For example, there may be a regulatory or other administrative basis beyond our control for which we do not receive the anticipated number of samples under a contract, which may have an adverse outcome on services billed or revenue received during a given fiscal period. Also, many contracts with governmental agencies allow for the agency to terminate a contract at any time if funding is not available to pay for our services.

The international sale of our products and services are subject to increased costs and other risks, which could affect our revenues.

Some of our laboratories rely upon international sales which are subject to certain inherent risks, including difficulties in collecting accounts receivable, potentially longer payment cycles, increased costs associated with maintaining international marketing efforts, currency fluctuations, changes in regulatory requirements, and difficulties in enforcement of contractual obligations and intellectual property rights. During 2003, we derived 40% of our revenues from international sales.

In December of 2002, we instituted a lawsuit against a customer of our then Diagnostic business unit, DKMS which operates out of Dresden, Germany. DKMS had accumulated a significant past due receivable account for diagnostic services that we provided. We have fully reserved an amount equal to this past due receivable account, however the outcome of thus dispute is still pending. Other than the foregoing, none of these difficulties have adversely affected our business.

Our failure to comply with applicable government and industry regulations may affect our ability to develop, produce, or market our potential products and services and may adversely affect our results of operations.

Our development, manufacturing and service activities involve the controlled use of hazardous materials and chemicals and patient samples. We are subject to Federal, state, local, UK and European laws and regulations governing the use, storage, handling and disposal of such materials and certain waste products, as well as the conveyance, processing, and storage of data on patient samples. Further, we are subject to CLIA as a result of our acquisition of GeneScreen, Cellmark, and Lifecodes. CLIA imposes certain certification requirements on all clinical laboratories performing tests on human specimens for the purpose of providing information for the diagnosis, prevention or testing of any diseases. Although we believe we comply in all material respects with the standards prescribed by Federal, state, local, UK and European laws and regulations, if we fail to comply with applicable laws or regulations, including CLIA, or if an accident occurs, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources.

All four of our clinical quality genotyping laboratories must comply with various industry regulations and accreditation standards in order to continue to provide our paternity testing and forensic testing In addition, our Cellmark laboratory must comply with various industry regulations and accreditation standards in order to provide paternity and forensic testing services. For example, our Cellmark laboratory has obtained accreditation from a Notified Body (SGC Yarsley ICS) and the UK Accreditation Service and a registration from the Ministry of Agriculture, Fisheries and Food in order to provide paternity and forensic testing services. In addition, Cellmark must comply with regulations applicable to the marketing of its products and services. We cannot assure you that we will be able to maintain our accreditations with any of these authorities or comply with the regulations applicable to the marketing of Cellmark products. If we fail to comply with the applicable regulations promulgated by any of these agencies or if we were to lose our accreditation by any of them, the revenues supporting our GeneScreen or Cellmark businesses could be eliminated or significantly reduced.

We had an accumulated deficit of $287.5 million as of December 31, 2003. If we fail to reach profitability and need to acquire additional capital to fund our current and future operating plans or obtain it on unfavorable terms, then we may have to take further cost-cutting measures to our operations.

We have expended significant resources developing our facilities and funding commercialization activities. As a result, we have incurred significant losses to date. We had net losses of $23.6 million for the year ended

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December 31, 2003, and approximately $80.1 million for the year ended December 31, 2002. We anticipate that our existing cash on hand will be sufficient to fund our current and future operating plans through 2004, at which time we expect to be cash-flow self sufficient. Our ability to reduce operating losses in 2003 was due, in large part, to our ability to divest non-core and non-profitable businesses, including our Life Sciences and Diagnostics business units. If we fail to reach cashflow self sufficiency, we may need to raise additional funds through the sale of equity or convertible debt or equity-linked securities or we may have to further review our existing operations to determine new measures of cost reduction, such as further consolidation of operational facilities and/or reductions in staff.

Fluctuations in our quarterly revenues and operating results may negatively impact our stock price.

Revenues and results of operations have fluctuated significantly in the past and significant fluctuations are likely to continue in the future due to a variety of factors, many of which are outside of our control. These factors include:

Fixed operating costs associated with our technologies and services, as well as personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. We cannot adjust these expenses quickly in the short term. If our testing volumes and related pricing declines due to market pressure, our revenues decline and we are not able to reduce our operating expenses accordingly. Our loss of revenues and failure to reduce operating expenses could harm our operating results for a particular fiscal period. In addition, market and other conditions may require certain non-cash charges such as stock based compensation charges and other charges such as impairment charges related to long-lived assets and restructuring charges to be recorded by us in future periods. If our operating results in some quarters fail to meet the expectations of public market analysts or investors, the market price of our common stock is likely to fall.

Future acquisitions or mergers could disrupt our ongoing operations, increase our expenses and adversely affect our revenues.

Since September 1998, we acquired Molecular Tool, a developer of SNP technologies, as well as GeneScreen, Cellmark and Lifecodes, providers of identity genomic and diagnostic testing services. Although we have no commitments or agreements with respect to any additional acquisitions or mergers at present, we anticipate that a portion of our future growth may be accomplished either by acquiring or merger with existing businesses. Factors that will affect the success of any potential acquisition or merger to be made by us include our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to motivate personnel and to retain customers of acquired or merged businesses. We may not be able to identify suitable acquisition or merger opportunities, obtain any necessary financing for an acquisition on acceptable terms or successfully integrate acquired personnel and operations. While we have not experienced material disruption to our ongoing business, distraction to our management and employees as a result of past acquisitions, we may experience such disruptions or distractions in the future.

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Our improvement of existing technologies and our ability to capture and develop of future technologies to be utilized in our service offerings may not be commercially successful, which would adversely affect our revenues.

We are currently developing and commercializing only a limited number of products and services based on our technologies in DNA testing of humans and animals. These services involve uses of products, software and technologies that require validation for commercial application, and we cannot assure you that we or our customers will be able to recognize a cost-effective, commercial benefit in using our technology. In addition, any assays we develop utilizing SNP analysis technology may not be useful in assisting pharmaceutical or diagnostic product development. Only a limited number of companies have developed or commercialized products based on utilizing SNP technology to date. Accordingly, even if we or our customers are successful in developing effective assays utilizing SNP technology, we cannot assure you that these discoveries will lead to commercially successful service offerings. If we fail to successfully develop our SNP scoring technologies or any products and services based on such technologies, we may not achieve a competitive position in the market.

Due to rapid product development and technological advancement in the DNA testing industry, our growth and future operating results will also depend, in significant part, upon our ability to apply new technologies to automate and improve our genetic analysis products or services to take advantage of new technologies. There can be no assurance that our development efforts will result in any additional commercially viable or successful improvements or efficiencies to our testing processes. Any potential improvements to the testing process may require substantial additional investment, laboratory development and clinical testing, and possibly regulatory approvals, prior to implementation. Our inability to successfully develop improvements to our testing processes, increase efficiencies, or to achieve market acceptance of such improvements could have a material adverse effect on our business, financial condition and results of operations. We believe that our future operating results will depend substantially upon our ability to overcome technological challenges, successfully introduce new technologies into our laboratories and to our customers and to gain access to and successfully integrate such technologies if developed by others.

We have limited sales and marketing resources, and as a result, may be unable to compete successfully with our competitors in commercializing our services.

We have adequate resources in sales and marketing, but are subject to the possibility that our competitors may recruit our employees. As of December 31, 2003 we had only 25 employees dedicated to the marketing and sales of our products and services, none of whom have employment contracts with us. We do not maintain key man life insurance policies for any of these individuals. We also intend to continue to market our paternity, forensic and public health testing services to governmental entities and our paternity and pharmacogenomic testing services to individual consumers. In the past, our inability to establish a company-wide sales and marketing force was in part due to the diverse nature of our various businesses, and in part due to lack of financial resources. Although, as a result of the restructuring of our business over the last eighteen months, we now have a more aligned business structure, our financial resources may limit our ability to establish and maintain a direct sales force.

We also plan to continue to market our products and services through the establishment of collaboration agreements with healthcare, pharmaceutical, biotechnology and agricultural companies, however we cannot guarantee our success at doing so. Our ability to successfully enter into and maintain such collaboration agreements, depends in part, on the quality and pricing of our products and services. If we are not successful at marketing through collaborations agreements, it could have a material adverse effect on our financial condition and business strategy.

Our ability to provide services may be seriously impaired by the occurrence of a natural disaster affecting any one of our laboratories.

Should we experience the occurrence of a natural disaster affecting any one of our laboratories such that we would be unable to continue to provide services out of that facility for an extended period of time, and were we not able to scale up operations at one of our other facilities in order to continue to provide such services, we would be at risk of losing significant contractual revenue from governmental agencies since many of our governmental agency contracts allow for the agency to terminate the contract early if we became unable to

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continue to render such services for an extended period of time, usually 90 days or more. However, we have multiple facilities, and may be able to shift operations from one facility to another in the event of a natural disaster, thereby mitigating the effects thereof.

Although we carry insurance for recovery in the instance of a natural disaster, the limits of this insurance are $52 million, and it is possible that our coverage will not be the same in all locations or that losses in such an instance could exceed our ability to recover such costs.

If we cannot enter into new collaborations or licensing agreements, we may be unable to further enhance our service offerings.

Our strategy for developing and commercializing technologies and services based on our discoveries depends upon our ability to form research collaborations and licensing arrangements. Our ability to enter into advantageous licensing or collaboration agreements will depend upon whether or not companies that have technology complimentary to ours are willing or able to enter into an agreement with us, and on our financial resources allocated to such investment. We also may have to rely on our collaborators and licensees or licensors for marketing of services, assembly and/or manufacturing of products, or distribution of products and services. If we are unable to enter into such research collaborations and licensing arrangements or implement our strategy to develop and commercialize additional products and services, it would have a material adverse effect on our results of operation and financial condition.

If our patent applications do not result in issued patents, our competitors may obtain rights to commercialize our discoveries, which would harm our competitive position.

Our commercial success will depend, in part, on our ability to obtain patent protection on our proprietary technologies, products and services and to enforce such protection. We may not be able to obtain new patents for these products, methods or services. We also may not have the resources to aggressively protect and enforce existing patent protection. We will pursue patent protection, but may need to obtain a license from certain third parties with respect to any patent covering technologies or methodologies, which we wish to incorporate into our service offerings. We may not be able to acquire such licenses on terms acceptable to us, if at all.

Our success will depend partly on our ability to operate without misappropriating the intellectual property rights of others.

We may be sued for infringing, or may initiate litigation to determine that we are not infringing, on the intellectual property rights of others. Intellectual property litigation is costly, and could adversely affect our results of operations. If we do not prevail in any intellectual property litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity, or obtain a license to or design around the intellectual property in question. If we are unable to obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell some of our products and services, which would result in reduced revenues. We are currently a named defendant in a patent litigation matter. However, we believe we have the right to practice such technology by virtue of a third party agreement, and we are actively engaged in defending such litigation. Other than the foregoing, we are not aware that we are misappropriating the intellectual property rights of others.

The scope of our issued patents may not provide us with adequate protection of our intellectual property, which would harm our competitive position.

Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. The US Patent and Trademark Office may invalidate one or more of our patents. In addition, third parties may have patents of their own which could, if asserted, prevent us from practicing our proprietary technologies, including the methods we use to conduct SNP genotyping. If we are otherwise unable to practice our patented technologies, we may not be able to commercialize our technologies or services and our competitors could commercialize our technologies. We currently believe that there may be at least one company actively infringing our proprietary single base primer extension technology. However, we have not completed an analysis of this third party’s practices or of the practices of any other third parties and cannot form a conclusion at this time as to infringement.

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We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could result in the forfeiture of these rights.

In order to protect or enforce our patent rights, we may need to initiate patent litigation against third parties. These lawsuits could be expensive, take significant time, and could divert management’s attention from other business concerns. These lawsuits could result in the invalidation or a limitation in the scope of our patents or forfeiture of the rights associated with our patents. We cannot assure you that we will prevail in any future litigation or that a court will not find damages or award other remedies in favor of the opposing party in any of these suits. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Securities analysts or investors may perceive these announcements to be negative, which would likely cause the market price of our stock to decline.

Other rights and measures that we rely upon to protect our intellectual property may not be adequate to protect our products and services and could reduce our ability to compete in the market.

In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. While we require employees, collaborators, consultants and other third parties to enter into confidentiality and/or non-disclosure agreements where appropriate, any of the following could still occur:

To our knowledge, we have never been materially harmed by a breach under any of circumstances listed above. However, if for any of the above reasons our intellectual property is disclosed or misappropriated, it would harm both our ability to protect our rights and our competitive position.

We may be held liable for any inaccuracies associated with our identity genomics services, which may require us to defend ourselves in costly litigation.

Our genotyping laboratory testing centers provide forensic, paternity, and animal testing services. Claims may be brought against us for false identification of paternity or other inaccuracies. Litigation of these claims in most cases are covered by our existing liability policies, however, they can be costly. We could expend significant funds during any litigation proceeding brought against us. Further, if a court were to require us to pay damages to a plaintiff, if not covered by our existing insurance, the amount of such damages could significantly harm our financial condition. We currently maintain products liability insurance with a maximum coverage limitation of $13 million and general laboratory professional liability insurance with a coverage limitation of $10 million. We have been a defendant in a number of minor suits where it has been alleged that it has either misreported results or the results of testing have been misinterpreted. None of the outcomes of these suits have had a material adverse effect on our business.

If we fail to hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenues.

Some of our employees have significant experience in research and development related to identity genomics, both in the paternity and forensic testing fields. To date, we have not experienced any difficulties attracting or retaining personnel. If we were to experiences such difficulty lose these employees to our competitors, we could spend a significant amount of time and resources to replace them, which could impair our research and development efforts. Further, in order to further enhance our service offerings, we may need to hire, train and retain additional scientific, business development and sales personnel. If we are unable to do so, we may experience delays in the development and commercialization of our technologies and services.

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Risks Associated with Our Common Stock

We cannot assure you that our intended reverse stock split will not have a negative affect on the price of our common stock.

On January 9, 2004, we announced that our board of directors had authorized us to seek shareholder approval to implement a reverse stock split with a split ratio split ranging from 1-for-3 to 1-for-7. On February 27, 2004, our shareholders approved the reverse stock split and on March 23, 2004, our board of directors approved the implementation of a 1-for-5 reverse stock split. We expect the reverse stock split will be effective as of March 30, 2004 and our common stock will begin trading on a split-adjusted basis when trading opens on March 31, 2004. Based on the number of shares of common stock outstanding as of March 24, 2004 we expect we will have approximately 22.1 million outstanding shares of common stock after the reverse stock split. Oftentimes a reverse stock split will not result in a trading price for the affected common stock that is proportional to the ratio of the split. We believe that a reverse stock split is in the best interests of our company and our stockholders because they will benefit from a capital structure more appropriate for a company of our operational and financial status. However, we cannot assure you that the implementation of the reverse stock split will have a positive impact on the price of our common stock.

Future issuance of our securities may dilute the rights of our stockholders.

Our board of directors has the authority to issue shares of preferred stock and to determine the price, preferences, privileges and other terms of these shares. Our board of directors may exercise this authority without any further approval of our stockholders. Additionally, if we need to raise additional funds through the sale of equity or convertible debt or equity-linked securities, your percentage ownership in the company will be reduced. These transactions may dilute the value of our outstanding common stock. We may also issue securities that have rights, preferences and privileges senior to our common stock. If we raise additional funds through collaborations or licensing arrangements, we may be forced to relinquish rights to certain of our technologies or products, or grant licenses to third parties on terms that are unfavorable to us.

We have various mechanisms in place that you as a stockholder may not consider favorable, which may discourage takeover attempts and may prevent or frustrate attempts by stockholders to change our direction or management.

Certain provisions of our certificate of incorporation and by-laws, as well as Section 203 of the Delaware General Corporation Law and our adoption of a shareholder’s rights plan, may discourage, delay or prevent a change in control of the company or the ability of stockholders to change our direction or management, even if the change in control would be beneficial to stockholders. These provisions include:

In addition, pursuant to our stockholder rights plan, each share of our common stock has an associated preferred share purchase right. The rights will not trade separately from the common stock until, and are

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exercisable only upon, the acquisition or the potential acquisition through tender offer by a person or group of 15% or more of our outstanding common stock.

Our stock price has been, and likely will continue to be, volatile and your investment may suffer a decline in value.

The market prices for securities of companies quoted on The Nasdaq Stock Market, including our market price, have in the past been, and are likely to continue in the future to be, very volatile. Between January 1, 2002 and December 31, 2003, the trading price of our common stock ranged from a low of $0.35 to a high of $5.95. The Nasdaq Composite Index has significantly declined since our initial public offering in May 2000 and remains very volatile. The market price of our common stock has been, and likely will continue to be, subject to substantial volatility depending upon many factors, many of which are beyond our control, including:

We cannot assure you that your initial investment in our common stock will not fluctuate significantly. One or more of these factors could significantly harm our business and cause a decline in the price of our common stock in the public market, which would adversely affect our business and financial operations.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Our exposure to market risk is principally confined to our cash equivalents, which are conservative in nature, with a focus on preservation of capital. Due to the short-term nature of our investments and the investment policies and procedures, we have determined that the risks associated with interest rate fluctuations related to these financial instruments are not material to our business. We have a certain amount of long-term debt recorded on our books. The interest rates applicable to such debt are not variable with respect to market conditions.

Foreign Currency Risk

As a result of our acquisition of Cellmark, in February 2001, our acquisition of Lifecodes in December 2001, and a limited number of agreements with foreign companies, our business has become increasingly global, with international revenue representing 40% of total revenue in 2003. We expect that international sales may continue to represent a significant portion of our revenue. Fluctuations in foreign currencies may have an impact on our financial results, although to date the impact has been favorable, though not material. We are prepared to hedge against fluctuations in foreign currencies if the exposure is material, although we have not engaged in hedging activities to date.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

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Independent Auditors’ Report

The Stockholders and Board of Directors

Orchid BioSciences, Inc.:

We have audited the consolidated financial statements of Orchid BioSciences, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orchid BioSciences, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As discussed in notes 1(g) and 3 to the consolidated financial statements, effective July 1, 2001 the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as required for goodwill and other intangibles resulting from business combinations consummated after June 30, 2001. As discussed in notes 1(g) and 7 to the consolidated financial statements, effective January 1, 2002, the Company fully adopted SFAS No. 142.

/s/    KPMG LLP

Princeton, New Jersey

February 27, 2004, except as to the third paragraph of Note 25, which is as of March 23, 2004

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ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

(In thousands, except share and per share data)