Prepared and filed by St Ives Burrups

10-K 1 b327147_10k.htm ANNUAL REPORT Prepared and filed by St Ives Burrups

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

FORM 10-K

[ X ] Annual Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2003

[ ] Transition Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number 1-4389

Applera Corporation
(Exact name of registrant as specified in its charter)

DELAWARE	06-1534213
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

301 Merritt 7, Norwalk, Connecticut	06851-1070
Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:	203-840-2000

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

Title of Class		Name of Each Exchange on Which Registered

Applera Corporation-Applied Biosystems Group Common Stock (par value $0.01 per share)		New York Stock Exchange Pacific Exchange

Rights to Purchase Series A Participating Junior Preferred Stock (par value $0.01 per share)		New York Stock Exchange Pacific Exchange

Applera Corporation-Celera Genomics Group Common Stock (par value $0.01 per share)		New York Stock Exchange Pacific Exchange

Rights to Purchase Series B Participating Junior Preferred Stock (par value $0.01 per share)		New York Stock Exchange Pacific Exchange

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

Title of Class

Class G Warrants

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-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of December 31, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Applera Corporation-Applied Biosystems Group Common Stock (based upon the average of the high and low price) held by non-affiliates was $3,655,061,200, and the aggregate market value of Applera Corporation-Celera Genomics Group Common Stock (based upon the average of the high and low price) held by non-affiliates was $674,821,371. As of September 22, 2003, 207,968,709 shares of Applera Corporation-Applied Biosystems Group Common Stock and 72,443,406 shares of Applera Corporation-Celera Genomics Group Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year ended June 30, 2003 – Parts I, II, and IV.
Proxy Statement for Annual Meeting of Stockholders dated September 5, 2003 – Part III.

TABLE OF CONTENTS

		Page
PART I		1
Item 1.	Business	1
	Company Overview	1
	Scientific Background	3
	Applied Biosystems Group Business	5
	Celera Genomics Group Business	22
	Celera Diagnostics, a 50/50 Joint Venture between Applied Biosystems and Celera Genomics	32
	Applera Genomics Initiative	42
	Employees	43
	Financial Information About Industry Segments	43
	Financial Information About Geographic Areas	43
	Executive Officers of the Registrant	44
Item 2.	Properties	44
Item 3.	Legal Proceedings	46
Item 4.	Submission of Matters to a Vote of Security Holders	49

PART II		49
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	49
	Information about our Common Stock and its Holders	49
	Forward Looking Statements and Risk Factors	50
Item 6.	Selected Financial Data	81
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	81
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 8.	Financial Statements and Supplementary Data	81
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81
Item 9A.	Controls and Procedures	82

PART III		82
Item 10.	Directors and Executive Officers of the Registrant	82
Item 11.	Executive Compensation	85
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	85
Item 13.	Certain Relationships and Related Transactions	88
Item 14.	Principal Accountant Fees and Services	88

PART IV		89
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	89

SIGNATURES		94

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PART I

Item 1. Business

Company Overview

Business Segments

Applera Corporation conducts business through three business segments, which are described below. Throughout this report, terms such as “Applera,” “we,” “us,” or “our” may be used to refer to Applera Corporation.

Applied Biosystems Group. Our Applied Biosystems Group, which we refer to as “Applied Biosystems” throughout this report, is engaged principally in the development, manufacture, sale, and service of instrument-based systems, reagents, and software, and the provision of contract services, for life science and related applications. A description of this business segment and developments during our 2003 fiscal year is set forth below in this Item 1 under the heading “Applied Biosystems Group Business.”

Celera Genomics Group. Our Celera Genomics Group, which we refer to as “Celera Genomics” throughout this report, is engaged principally in integrating advanced technologies to discover and develop new therapeutics. Celera Genomics intends to leverage its capabilities in proteomics, bioinformatics, and genomics to identify and validate drug targets and to discover and develop novel therapeutic candidates. A description of this business segment and developments during our 2003 fiscal year is set forth below in this Item 1 under the heading “Celera Genomics Group Business.”

Celera Diagnostics, a 50/50 Joint Venture between Applied Biosystems and Celera Genomics. Celera Diagnostics, a joint venture formed by Applied Biosystems and Celera Genomics in April 2001, is focused on the discovery, development, and commercialization of novel diagnostic products. A description of this business segment and developments during our 2003 fiscal year is set forth below in this Item 1 under the heading “Celera Diagnostics, a Joint Venture between Applied Biosystems and Celera Genomics.”

Information about the risk factors associated with our business segments is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity and Related Stockholder Matters – Forward Looking Statements and Risk Factors.”

We maintain a corporate staff to provide accounting, tax, treasury, legal, information technology, human resources, and other internal services for Applied Biosystems, Celera Genomics, and Celera Diagnostics.

Corporate History and Structure; Two Classes of Stock

Applera was incorporated in 1998 under the laws of the State of Delaware. Applera is the successor to PE Corporation (NY), formerly “The Perkin-Elmer Corporation,” which became a wholly-owned subsidiary of Applera as a result of a recapitalization of PE Corporation (NY) completed in May 1999. As part of the 1999 recapitalization, Applera established the following two classes of common stock that were intended to reflect separately the performance of the

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businesses of Applied Biosystems and Celera Genomics, which are business units of Applera and are not separate legal entities:


	•	Applera Corporation-Applied Biosystems Group Common Stock, which we refer to in this report as “Applera-Applied Biosystems stock”; and

	•	Applera Corporation-Celera Genomics Group Common Stock, which we refer to in this report as “Applera-Celera stock.”

More information about Applera-Applied Biosystems stock and Applera-Celera stock is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity and Related Stockholder Matters – Information about our Common Stock and its Holders.” Also, information about the risk factors associated with our capital structure and our two classes of stock is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity and Related Stockholder Matters – Forward Looking Statements and Risk Factors.”

On November 30, 2000, Applera changed its name from “PE Corporation,” its name at the time of the 1999 recapitalization, to its current name “Applera Corporation.” At the same time, Applied Biosystems, which was named the “PE Biosystems Group” at the time of the recapitalization, was renamed the “Applied Biosystems Group.”

Available Information

Websites.We maintain a corporate Internet website as well as separate Internet websites for each of Applied Biosystems, Celera Genomics, and Celera Diagnostics. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the Securities and Exchange Commission are available free of charge on our corporate website as well as the websites for Applied Biosystems and Celera Genomics. Section 16 “insider transaction” reports, which include Forms 3, 4, and 5, filed by our officers and directors are also available free of charge on these websites. We make these documents available on these websites as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Also, we intend to provide information relating to our corporate governance on our corporate website as well as the Applied Biosystems and Celera Genomics websites, including as may be required by the SEC or the New York Stock Exchange.

The following table indicates how to access our SEC filings and Section 16 “insider transaction” reports on our websites:

	Website Address	SEC Filings	“Insider Transaction” reports
Applera	www.applera.com	Click on the link to “SEC Filings” in the investor relations/media section of the website, and then click again on the link to “SEC Filings”	Click on the link to “SEC Filings” in the investor relations/media section of the website, and then click again on the link to “SEC Filings”
Applied Biosystems	www.appliedbiosystems.com
Celera Genomics	www.celera.com
Celera Diagnostics	www.celeradiagnostics.com	Not applicable	Not applicable

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Except for the documents on our websites that are expressly incorporated by reference into this report, the information contained on our websites is not incorporated by reference into this document and should not be considered to be a part of this document. Our website addresses are included in this document as inactive textual references only.

Information Incorporated by Reference.The SEC allows us to “incorporate by reference” some information from parts of other documents filed with the SEC, including:

•

our Annual Report to Stockholders for our 2003 fiscal year, which we refer to in this report as our “2003 Annual Report”; and


	•	our Proxy Statement dated September 5, 2003, in connection with our Annual Meeting of Stockholders to be held on October 16, 2003, which we refer to in this report as our “2003 Proxy Statement.”

When we “incorporate by reference,” that means that we are referring you to important information in other documents that have been filed with the SEC rather than repeating that information in this report. We recommend that you refer to the information that we indicate is contained in the other documents and which is incorporated by reference into this report. The portions of our 2003 Annual Report that are incorporated by reference into this report are included as Exhibit 13 to this report.

Scientific Background

All living organisms contain biological molecules. The most numerous are in the categories of: nucleic acids, which include DNA and RNA; proteins; carbohydrates; and lipids. Biological molecules are typically much larger and more complex than common molecules, and there is a wide diversity in the types of biological molecules present in living organisms. These characteristics make the analysis of biological molecules significantly more complex than the analysis of smaller compounds. Although all of these biological molecules are critical for a cell to function normally, key advances in therapeutics have historically come from an understanding of either proteins or DNA.

DNA molecules provide instructions that ultimately control the synthesis of proteins within a cell, a process referred to as “gene expression.” DNA molecules consist of chemical subunits, called “nucleotides,” bound in two long strands formed by a chemical “backbone” made up of sugar and phosphate molecules. There are four nucleotides – adenine, cytosine, guanine, and thymine – often abbreviated with their first letters A, C, G, and T and often referred to as “bases.” In a DNA molecule, the nucleotides in the two strands are bound together in pairs to form a structure that resembles a twisted ladder, which is often referred to as a “double helix.” The bound pairs of nucleotides, which form the rungs of the “ladder,” are often referred to as “base pairs.”

Genes are individual segments of these DNA molecules that carry the specific information necessary to construct particular proteins. Genes may contain from several dozen to tens of thousands of nucleotides. The entire collection of DNA in an organism, called the “genome,” may contain a wide range of nucleotides, including as few as 4 million nucleotides in the case of simple bacteria and 3.1 billion base pairs of nucleotides in the case of human beings.

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RNA molecules are similar to DNA in structure and are essential for biological function through a number of biochemical activities within the human body. There are different types of RNA molecules, each of which has a different function. For example, messenger RNA, the most common form of RNA, acts as an intermediary between DNA and protein, transcribing the genetic code from DNA into protein.

Principally driven by the “biotechnology revolution,” and the increasing focus on DNA, researchers are developing a better understanding of DNA's role in human disease. An increased appreciation of how DNA ultimately determines the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the genes that make up the human genome. We believe the best scientific evidence to date indicates that the number of genes in the human genome that code for proteins is between 25,000 and 35,000, which is significantly less than had been previously thought. The study of genes and other genetic material of organisms is now commonly referred to as “genomics.”

The field of genomics research generally includes three broad categories of analysis, consisting of sequencing, genotyping, and gene expression studies:

•

Sequencing is performed to determine the exact order of the individual nucleotides in a DNA strand. Sequencing was used to identify the nucleotides in the entire human genome and other species. It has also been used to identify naturally occurring genetic variations in the human genome, which are referred to as “single nucleotide polymorphisms” or “SNPs.” Scientists believe that SNPs can be correlated with, for example, susceptibility to disease, disease prognosis, therapeutic efficacy, and therapeutic toxicity, and therefore may have diagnostic or therapeutic utility.


	•	Genotyping is performed to determine a particular sequence variant of a gene and its particular association with an individual’s DNA. Genotyping is not performed to determine the complete structure of the gene, but rather is performed to determine if the particular DNA sequence variant, typically a SNP, can be associated with, for example, susceptibility to a particular disease or response to a particular drug.


	•	Gene expression is performed to determine whether a particular gene is expressed, or present, in a relevant biological material. This analysis can be used, for example, to measure and compare gene activity in various biological samples, such as samples from populations of healthy and diseased individuals, or from populations at different stages of disease development. These types of studies may be useful in the development of diagnostic tests and therapeutic treatments.

As researchers learn more about DNA and genes, they are also developing a better understanding of the role of proteins in human disease through efforts in the field of “proteomics,” the study of proteins expressed, or coded, by genes. Proteins are the products of genes and, along with gene expression and modification, are believed to be the key drivers and mediators of cellular function and biological system activity. The understanding and treatment of disease today involves the study of genes and the proteins they code for, and frequently involves the measurement of a drug’s ability to bind to specific proteins in the body.

We believe that gene and protein research will increase as companies in the pharmaceutical and biotechnology industries seek to accelerate their drug discovery and

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development efforts. We also believe that ongoing drug discovery and development efforts will increase research of cells as researchers seek to further understand how drugs work in the body.

The growth in DNA, protein, and other research has created the need for systems that facilitate the collection, organization, and analysis of the large amounts of data generated by this research. This demand has led to the development of the science of “bioinformatics.” The science of bioinformatics seeks to blend biology and computing to transform massive amounts of data into useful information.

Applied Biosystems Group Business

Overview

Applied Biosystems is engaged principally in the development, manufacture, sale, and service of instrument-based systems, reagents, and software, and the provision of contract services, for life science and related applications. Its products are used in various applications including the synthesis, amplification, purification, isolation, analysis, and sequencing of nucleic acids, proteins, and other biological molecules. Applied Biosystems’ products are designed to address the demand for increased automation and efficiency in pharmaceutical and biotechnology laboratories by combining the detection capabilities of analytical instruments with advances in automation and laboratory work-flow design.

The markets for Applied Biosystems’ products span the spectrum of the life sciences industry and research community, including: basic human disease research and genetic analysis performed by universities, government agencies, and other non-profit organizations; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; and food and environmental testing.

The Applied Biosystems business operations are divided among several principal operating units organized primarily according to their business function. These units are responsible for various aspects of product and service discovery, development, marketing, manufacturing, sales, and service. The operating activities of these units are supported by a shared service organization responsible for functions such as human resources, finance, communications, legal, and intellectual property.

For information on revenues from instruments and consumables for our 2001, 2002, and 2003 fiscal years, refer to pages 27 through 29 of Management’s Discussion and Analysis in our 2003 Annual Report, which pages are incorporated herein by reference.

Knowledge Business; Online Marketing and Distribution Agreement with Celera Genomics

General Description of Knowledge Business. The Applied Biosystems Knowledge Business develops and markets products and services designed to meet the needs of life science researchers in performing specific biological analysis applications. Products and services under development or expected to be developed by the Knowledge Business include: genomic assays

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and related information, such as DNA sequence information and annotations linking researchers to relevant databases; products for human identification; products for agriculture, food, and environmental testing; products for functional proteomics, the study of protein function; products for cellular analysis; as well as other information-rich products, services, and analytical tools.

The Knowledge Business is focused on generating value to life science customers through products and services with high information content that support improved experimental work-flows. The Knowledge Business is working in collaboration with the other product development units within Applied Biosystems to develop systems that provide “whole systems solutions” that link instruments and the analytical results generated by the instruments with information and analysis tools that researchers can use to interpret the results of their studies, design additional experiments, and ultimately generate useful information. As a result, the products developed by the Knowledge Business are in many cases offered for use with, or as a complement to, other Applied Biosystems products and services.

Online Marketing and Distribution Agreement. Concurrently with Applied Biosystems’ formation of the Knowledge Business in April 2002, Celera Genomics and Applied Biosystems entered into a ten-year marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics’ Celera Discovery System™ and related human genetic and other biological and medical information. As a result of this arrangement, the Applied Biosystems Knowledge Business has begun integrating the Celera Discovery System and other genomic and biological information into its product offerings.

In exchange for the rights it acquired under the marketing and distribution agreement, Applied Biosystems will provide Celera Genomics with royalty payments on revenues generated by sales of some Knowledge Business products from July 1, 2002, through the end of our 2012 fiscal year. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through our 2008 fiscal year. The royalty rate becomes a fixed percentage of sales starting in our 2009 fiscal year, and the rate declines each succeeding fiscal year through our 2012 fiscal year. The products subject to the royalties include:

•

Assays-on-Demand^TM products;


	•	Assays-by-Design^SM services;


	•	Some reagents for arrays; and


	•	New database subscriptions sold by the Knowledge Business.

Under the terms of the marketing and distribution agreement, Celera Genomics will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were entered into on or prior to June 30, 2002. However, the Applied Biosystems Knowledge Business took full responsibility for marketing and contracting for the Celera Discovery System and related products after that date. Accordingly, Celera Genomics does not expect any revenues from the Celera Discovery System and related products and services other than under contracts existing on that date, so long as they remain in effect, and from potential royalty payments from Applied Biosystems under the marketing and distribution agreement. Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from

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these contracts below $62.5 million during the four fiscal years ending with the 2006 fiscal year, if the shortfall is due to the actions of the Knowledge Business including changes in marketing strategy for the Celera Discovery System. However, this commitment is also subject to Celera Genomics otherwise continuing to perform under these contracts, and does not protect Celera Genomics from lost revenue due to other circumstances such as customer bankruptcy.

Products for the Genomics Market

Customers in the genomics market use systems for the analysis of nucleic acids for: basic research; pharmaceutical and diagnostic discovery and development; food and environmental testing; analysis of infectious diseases; and human identification and forensic analysis. Applied Biosystems has developed technologies and products to support key applications in genomics research such as sequencing, genotyping, and gene expression studies. Applied Biosystems’ products for the genomics market are described in the following paragraphs.

PCR Instruments, including Thermal Cyclers and Sequence Detection Systems, and Related Consumables. Polymerase chain reaction, commonly referred to as “PCR,” is a process in which a short strand of DNA is copied multiple times, or “amplified,” so that it can be more readily detected and analyzed. Applied Biosystems’ PCR product line includes amplification instruments, known as “thermal cyclers,” several combination thermal cyclers and PCR detection systems, and reagents and software necessary for the PCR amplification and detection process.

The Dual 384-Well GeneAmp^® PCR System 9700 thermal cycler is the highest capacity thermal cycler offered by Applied Biosystems. This instrument supports all key applications in genetic analysis and fills a significant market need for laboratories conducting high-volume genomics research. This instrument is referred to as a “dual 384-well” instrument because it can simultaneously amplify samples in two plastic trays, referred to by researchers as “microtiter plates,” each having wells to hold 384 samples. Applied Biosystems also offers 60- and 96- sample thermal cyclers. Applied Biosystems’ PCR product line also includes reagents for high-fidelity, or high-accuracy, amplification of long DNA segments. These are useful in the determination of “haplotypes,” which are correlated patterns of inherited DNA mutations. Haplotypes are just beginning to be understood by scientists and be used in complex disease-gene association studies.

Applied Biosystems’ Sequence Detection Systems product line includes products both for sample preparation and for analysis. Applied Biosystems’ sample preparation products extract DNA and/or RNA from whole cells, blood, and other samples. This DNA or RNA, largely separated from the other molecules found in cells, can then be analyzed in instruments largely without interference from those other molecules, such as proteins. The Applied Biosystems ABI PRISM™ 6700 Automated Nucleic Acid Workstation automates this phase of sample preparation as well as the two other key phases, depositing the DNA and/or RNA samples on assay plates and sealing those plates to avoid contamination prior to analysis. The model 6700 workstation is designed to substantially decrease the labor and cost involved in preparing DNA and RNA for analysis. Applied Biosystems also offers the ABI PRISM™ 6100 Nucleic Acid PrepStation. This instrument shares some features of the model 6700 workstation, but is less automated and is designed for researchers seeking an economical alternative to higher-performance, higher-priced instruments.

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Applied Biosystems offers two Sequence Detection System instruments for analysis of nucleic acids: The ABI PRISM^® 7900HT and the ABI PRISM 7000 systems. The model 7900HT system provides high-throughput analysis of DNA for gene expression and genotyping studies. This is an automated, 384-well analyzer that can process more than 250,000 samples in 24 hours for genotyping. The model 7000 system offers many of the same specifications as the model 7900HT system, but in a less automated and lower-throughput system designed for researchers seeking an economical alternative to higher-priced, higher-performance instruments.

Both the model 7900HT and model 7000 systems are modified versions of Applied Biosystems’ thermal cyclers, which are described above, and use TaqMan^® chemistry, a unique PCR technology designed by the Roche Group and developed by Applied Biosystems. TaqMan chemistry can be used both for measurement of gene expression and for genotyping. TaqMan chemistry detects the product of PCR amplification and quantifies the initial sample during the amplification process. This technique is referred to as “quantitative real-time PCR.” The Sequence Detection Systems instruments analyze a sample by measuring fluorescence resulting from the reaction of the TaqMan chemistry and the sample. This product line has been widely accepted in the pharmaceutical discovery research market. Applied Biosystems’ Assays-on-Demand products and Assays-by-Design services are TaqMan chemistry-based assays designed for use on Applied Biosystems’ Sequence Detection Systems instruments. These products are described below in Item 1 of this report under the headings “Applied Biosystems Group Business – Products for the Genomics Market – Genomic Assays.”

During our 2003 fiscal year, Applied Biosystems commenced sales of a new proprietary Micro Fluidic Card system, which was jointly developed with 3M Company, and a modified version of its model 7900HT system to support the new cards for gene expression analysis. The Micro Fluidic Cards are consumable laminated plastic sheets containing 384 microscopic fluid channels and wells. They are designed for use instead of microtiter plates, which are used in many types of laboratory analyses, including gene expression or genotyping studies on Applied Biosystems’ instruments. The microscopic fluid channel design of the new cards enables researchers to automatically route a sample to the reaction wells rather than doing this by hand or using expensive and complex robotics as is required when using microtiter plates. The Applied Biosystems Knowledge Business is currently offering the Micro Fluidic Cards pre-loaded with Assays-on-Demand human, mouse, and rat gene expression reagents. Using an on-line ordering system, customers can customize the cards by selecting the assays that are pre-loaded on to the card. Applied Biosystems and 3M Company had previously considered developing a Micro Fluidic Card system for SNP genotyping, but that program has been suspended pending further evaluation of the market for that system.

Genetic Analysis Instruments. Applied Biosystems genetic analysis instruments, referred to as DNA or genetic analyzers, can be used to perform both DNA sequencing and fragment analysis. DNA sequencing is used to determine the exact order of nucleotides in a strand of DNA. DNA fragment analysis is used to determine the size, quantity, or pattern of DNA in a strand of DNA. DNA sequencing instruments have been used extensively to obtain the DNA sequence of the human genome and the genomes of other species and to identify SNPs and other genetic mutations.

Applied Biosystems’ genetic analysis instruments use “electrophoresis” to analyze molecules. During electrophoresis, the molecules being analyzed are placed in a separation medium, usually a gel, and then subjected to an electric charge. The molecules will pass through the gel at different speeds because the molecules have different lengths and electrical charges.

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Typically, the molecules being analyzed are labeled, or chemically linked, with fluorescent “tags” before being subjected to the electrophoresis, with each of the four different nucleotides – A, C, G, and T – being labeled with a different color tag. During electrophoresis, the genetic analysis instrument can analyze the molecules by using an optical device that can “read” the fluorescent tags. Applied Biosystems offers several sequencing chemistries optimized for various customer requirements. Samples prepared using these chemistries are then analyzed on Applied Biosystems genetic analysis instruments.

All of Applied Biosystems’ genetic analysis instruments now use capillaries, which are tubes through which a DNA sample moves during electrophoresis. Capillary systems have higher throughput and greater automation than those based on slab-gels, an older and less efficient technology. Applied Biosystems offers the following genetic analysis instruments:

Instrument	Description
Applied Biosystems 3730xl DNA Analyzer	96 capillary sequencer
Applied Biosystems 3730 DNA Analyzer	48 capillary sequencer
ABI PRISM^® 3100 Genetic Analyzer	16 capillary sequencer
ABI PRISM^® 3100-Avant Genetic Analyzer	4 capillary sequencer
ABI PRISM^® 310 Genetic Analyzer	1 capillary sequencer

Applied Biosystems provides servicing and customer support for these instruments.

The model 3730xl DNA Analyzer has superseded the 96 capillary model 3700 DNA Analyzer, which is no longer offered for sale by Applied Biosystems although Applied Biosystems continues to provide servicing and support for this instrument. At the time of its introduction in 1999, the model 3700 instrument represented a significant advance in DNA sequencing technology because it could perform high-throughput analysis of samples in unattended operation. The model 3700 instrument was the principal instrument used by Celera Genomics for sequencing human and other genomes, and we believe the model 3700 instrument is also the principal instrument used by the Human Genome Project for its sequencing projects. The model 3730xl instrument offers significant advances in data quality, throughput, and cost effectiveness over the model 3700 instrument. Because of these advances, the model 3730xl instrument is able to read longer DNA fragments than its predecessor. For a given sequencing project, this means that customers using the model 3730xl instrument will need to process fewer samples, lowering their preparation costs. Also, by incorporating a more sensitive optical design, the model 3730xl instrument is able to complete the same analysis with lower reagent consumption per sample. The 48-capillary model 3730 instrument, which incorporates the same technological advances as the model 3730xl instrument, can be upgraded to become a 96-capillary model 3730xl instrument.

The 16-capillary model 3100 Genetic Analyzer was designed for use by academic programs and commercial laboratories. It was the technological precursor of the model 3730 DNA Analyzer and incorporates many of the same features, though it has lower throughput and is less expensive. The 4-capillary model 3100-Avant Genetic Analyzer is a reduced capacity instrument derived from the model 3100 Genetic Analyzer and has a lower cost than the model 3100 instrument. A model 3100-Avant Genetic Analyzer can be upgraded to a model 3100 Genetic Analyzer. Applied Biosystems has discontinued sales of its ABI PRISM 377 DNA Sequencer, the last of its instruments to use slab-gel technology, although Applied Biosystems continues to provide servicing and support for this instrument.

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In January 2003, Applied Biosystems announced the introduction of the SNPlex™ Ultra High Throughput Genotyping System, and Applied Biosystems expects commercial sales to commence by the end of the 2003 calendar year. The SNPlex system uses “multiplexing,” a scientific term that refers to multiple reactions in a single tube or well, to rapidly identify large numbers of target SNPs in a single biological sample. Using this system, customers will be able to perform studies based on Applied Biosystems’ proprietary SNP reference library or their own customized set of reference SNPs. The system consists of reagents and software for use on an Applied Biosystems DNA sequencing instrument, initially expected to be the 3730 and 3730xl models. The high-throughput genotyping capabilities of this new system will complement the PCR-based genotyping that can be performed by the Applied Biosystems Sequence Detection System instruments. Applied Biosystems expects that researchers seeking to perform genotyping will choose between these alternative technologies based on a variety of factors, including the type of studies they are performing, the scientific requirements of these studies, their access to the needed instrumentation, and their budgets.

Genomic Assays. Through its Knowledge Business, Applied Biosystems offers its Assays-on-Demand product line and its Assays-by-Design service. The Assays-on-Demand product line, launched in July 2002, is a collection of TaqMan chemistry-based assays for gene expression and genotyping that incorporate genome data into a tool that is ready-to-use for experimentation. Assays-by-Design is a service for the manufacture of custom-made TaqMan chemistry-based assays. Researchers using the Assays-by-Design service supply the desired target, and Applied Biosystems designs and manufactures an assay for that target using Applied Biosystems’ proprietary software algorithms.

Our assays are chemical tests used to measure a DNA or RNA target. A genomic assay combines a set of pre-selected “oligonucleotides” or “oligos,” which are synthetic single-stranded pieces of DNA, with other analytical reagents that allow a researcher to measure differences between samples of genetic material. For example, a gene expression assay is a chemical test to measure how much RNA is being produced from a specific gene in the cells of a tissue sample. A genotyping assay is a chemical test to measure the presence or absence of a specific genetic sequence variation or mutation among DNA samples from different populations that can be used to correlate genetic traits with physical traits such as disease susceptibility or drug response.

The Assays-on-Demand product line is the first commercial product line resulting from the Applera Genomics Initiative, which is described below in Item 1 of this report under the heading “Applera Genomics Initiative.” Applied Biosystems believes that Assays-on-Demand is also the first commercial product line to incorporate genomic data from both the public and private sector human genome sequencing projects. Since the initial launch of Assays-on-Demand products, Applied Biosystems has continued to increase the number of assays available and currently offers over 146,000 human SNP genotyping assays, and over 19,000 gene-specific human gene expression assays. Also, in May 2003, Applied Biosystems launched mouse gene expression Assays-on-Demand, and currently offers over 10,000 of these assays. In July 2003, Applied Biosystems launched rat gene expression Assays-on-Demand, and currently offers over 3,000 of these assays. The ability to study mouse and rat genomes is important to researchers involved in therapeutic research and development because mice and rats have genes that are believed to correspond to human genes and the results of disease research or safety, toxicology, or other studies on mice or rats may therefore be correlated to humans with corresponding genetic characteristics.

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Researchers traditionally have used “home brew” assays, which are assays that researchers both design and prepare themselves in their laboratories, a process that is relatively time consuming and expensive. Applied Biosystems believes that its Assays-on-Demand product line offers significant advantages to researchers compared with home brew assay design. These advantages include:

•

facilitation of experiments with many genes in parallel;


	•	substantial reduction in experiment setup time;


	•	decreased assay cost; and


	•	creation of a set of standard and validated assays that enable comparisons of data between laboratories.

Applied Biosystems’ current Assays-on-Demand products and Assays-by-Design services are designed to be used with Applied Biosystems’ Sequence Detection Systems PCR instruments.

Microarrays. In July 2003, Applied Biosystems announced the introduction of the Applied Biosystems Expression Array System for high-throughput gene expression analysis. This system combines “microarray” technology and a proprietary “chemiluminescence” technology and was designed to detect a greater number of genes, with higher sensitivity and specificity, while using less biological sample than existing commercially-available microarray technologies. This system is highly sensitive because it can detect the expression of very small quantities of expressed genes, and highly specific because of its accuracy in identifying the presence of expressed genes without falsely “reading” the presence of other genes. Applied Biosystems expects sales of this new system to commence by the end of the 2003 calendar year.

Microarray technology involves the miniaturization of reactions on a single consumable product to enable a large number of simultaneous reactions or analyses. Applied Biosystems’ microarrays are small, porous nylon plates that can be used to analyze in parallel the presence of over 30,000 human genes in a sample. The microarrays are used in combination with the 1700 Chemiluminescent Microarray Analyzer, an instrument that measures gene expression by detecting chemiluminescence, which is the conversion of chemical energy stored within a molecule into light. DNA “probes,” which are single-stranded pieces of DNA, are chemically attached to the microarray and designed to cause a chemiluminescent reaction in the presence of expression targets. The DNA probes used for this application are approximately 60 bases long. Applied Biosystems believes the use of chemiluminescence rather than fluorescence, and the use of longer probes, will result in higher sensitivity and specificity compared to existing commercially-available microarray systems.

Applied Biosystems expects that this system will complement the gene expression capabilities of its TaqMan chemistry-based Sequence Detection System products. Although this new system enables a larger number of parallel reactions, Applied Biosystems expects that researchers may seek to validate their results and perform further analysis on Sequence Detection System instruments based on the results of Expression Array System studies. Applied Biosystems plans to introduce whole genome expression arrays for the mouse and rat genomes in the future.

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DNA Synthesis. DNA synthesizers produce synthetic single-stranded pieces of DNA for genetic analysis. These molecules, referred to as “oligonucleotides” or “oligos,” are an essential reagent for PCR and DNA sequencing and are also used in drug discovery applications. DNA synthesis is used both by companies performing high-throughput synthesis as a service as well as individual laboratories that synthesize DNA for their own use. Applied Biosystems offers several models of synthesizers and supporting reagents for the needs of its different customers. Applied Biosystems also provides custom synthesis, in which oligonucleotides are made to order and shipped to customers.

PNA. Applied Biosystems has a license, which is exclusive for some applications, to manufacture and sell peptide nucleic acid within various markets including the molecular biology research market. Peptide nucleic acid, which is often referred to as “PNA,” resembles DNA in its chemical structure except that it has a neutral peptide-like “backbone,” whereas DNA has a negatively charged sugar phosphate backbone. The unique chemical structure of PNA enhances its affinity and specificity as a DNA or RNA “probe.” Probes are used in various types of analysis, and are used to “search” for DNA and RNA sequences in a sample by binding to those sequences if they are present. PNA may be used in many areas, including basic research, pharmaceutical discovery, diagnostic development, and food and environmental testing. During our 2002 fiscal year, Applied Biosystems acquired additional rights to PNA technology, particularly exclusive rights in the field of diagnostics, through its acquisition of Boston Probes, Inc. and a party related to Boston Probes.

Products for the Proteomics Market

Genes code for proteins in biological organisms, and proteins are the key biological molecules that function in all aspects of living things such as growth, development, and reproduction. Differences in the types or amounts of specific proteins in biological systems are thought to be the primary differences between healthy and diseased systems or organs. A majority of drugs to treat human disease bind to and affect proteins. Proteins are large biological molecules made up of peptides, and peptides are made up of amino acids chemically linked together in long chains. Customers in the proteomics research market need systems for the analysis of proteins and peptides for the purpose of discovery of drug targets, protein therapeutics, and diagnostics. Applied Biosystems has developed products for the identification, characterization, and measurement of expression of proteins and peptides. Applied Biosystems’ products for the proteomics market are described in the following paragraphs.

Mass Spectrometry. Mass spectrometry has become very useful for the analysis of large molecules of biological importance such as proteins. Analysis of proteins and other molecules by mass spectrometry involves the very accurate measurement of the mass, or size, of components in a sample, such as the measurement of the multiple different peptides that make up a defective protein. The technique involves the measurement of these molecules in instruments using very high vacuum and sensitive electronics capable of measuring extremely fine differences in very small quantities of complex samples with multiple components. The technique of mass spectrometry requires that the following key elements be incorporated into the instrument:

•

A unique sample preparation process called “ionization” to charge the molecules for analysis. Applied Biosystems sells instruments with ionization by either a laser based system called “MALDI,” which refers to “matrix assisted laser desorption

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		ionization,” or a high voltage electric system called “ESI,” which refers to “electrospray ionization.”

	•	Mass analysis and detection, which involves the separation and electronic measurement of the mass of molecules and the measurement of the relative amounts present. Applied Biosystems has a variety of mass analysis technologies which separate and measure the mass of molecules in a sample. These include “TOF,” which refers to “time of flight,” which measures mass based on flight time in an electric field under vacuum; and “quadrupole” or “quad,” and “linear ion trap,” both of which measure mass using radio frequencies and electric charges though using related but different technologies.

Mass spectrometry products are often referred to or named based on their sample preparation and mass analysis technologies. For example, a “MALDI TOF” instrument is an instrument that uses MALDI to charge molecules for analysis and TOF for mass analysis. Also, mass spectrometry instruments are often referred to or named based on whether they are connected to liquid chromatography separation devices, which are used for sample preparation prior to analysis using mass spectrometry. For example, an “LC/MS” system is a liquid chromatography device connected directly to a mass spectrometry instrument, and an “LC/MS/MS” system is a liquid chromatography device coupled with tandem mass spectrometry instruments. Tandem mass spectrometry enables a more detailed and accurate analysis of the components of the molecules being studied.

The market for mass spectrometry is served by a wide range of instrument types based on a variety of technologies for both ionization and mass analysis and combined together in different combinations in different instruments. The different instrument types, technologies, and combinations result in differing performance characteristics and price levels, and the suitability of any particular system for any researcher or research laboratory will depend on the nature of the work being performed and the capital budget of the researcher or research laboratory.

Applied Biosystems and Applied Biosystems/MDS SCIEX Instruments, a joint venture between Applied Biosystems and MDS Inc. of Canada, supply a broad family of mass spectrometry products for the proteomics market that involve different combinations of these technologies. Customers select from this range of product types based on their budgets, workflows, sample types, preferences, and experience. Under the terms of the joint venture agreement with MDS Inc., Applied Biosystems has the exclusive worldwide distribution rights to the LC/MS systems manufactured for the joint venture by the MDS SCIEX Division of MDS Inc. for the analytical instruments market.

The following table summarizes the mass spectrometry instruments offered by Applied Biosystems, including those manufactured through its MDS/SCIEX Instruments joint venture, for the proteomics market:

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Instrument Name	Ionization	Mass Analyzer
Voyager™-DE PRO Biospectrometry Workstation	MALDI	TOF
Voyager™-DE STR Biospectrometry Workstation	MALDI	TOF
4700 Proteomics Discovery System	MALDI	TOF/TOF™ Optics
QSTAR^® XL Hybrid LC/MS/MS System	ESI or MALDI	Hybrid quad/TOF (often referred to as a Qq-TOF)
Q TRAP^® LC/MS/MS System	ESI	Hybrid quad/linear ion trap
4000 Q TRAP^® LC/MS/MS System	ESI	Hybrid quad/linear ion trap

Applied Biosystems introduced the 4700 Proteomics Discovery System during our 2003 fiscal year as an upgraded and enhanced version of the 4700 Proteomics Analyzer with TOF/TOF™ optics, which was introduced during our 2002 fiscal year. This system was designed to address the needs of proteomic researchers for increased speed and throughput as well as enhanced data quality and molecular information. The 4700 Proteomics Discovery System, which has superseded the original 4700 analyzer, incorporates a high speed MALDI system with a tandem TOF mass analyzer. In addition, the new 4700 system incorporates mass spectrometry instrumentation with an online link to the Celera Discovery System, which is available by subscription from the Applied Biosystems Knowledge Business. This link enables users to integrate their mass spectrometry results with relevant biological information, including annotated protein and genome information, and bioinformatics analysis tools. Applied Biosystems believes that these system enhancements will facilitate researchers’ efforts to characterize proteins and their functions in biological systems, including the human body, and may add the enhancements to other systems in the future.

Applied Biosystems/MDS SCIEX Instruments introduced the 4000 Q TRAP LC/MS/MS system during our 2003 fiscal year to complement the Q TRAP system, which was introduced during our 2002 fiscal year. The 4000 Q TRAP system is based on the same linear ion trap technology introduced with the Q TRAP system but the 4000 Q TRAP system, a higher-priced instrument, has enhanced qualitative and quantitative analysis capabilities. Applied Biosystems believes these enhancements will enable researchers to combine experiments in a single, automated system that previously required multiple mass spectrometry instruments or were not practical to perform at all. The new system is now commercially available but Applied Biosystems does not expect full production capacity until later in our 2004 fiscal year.

In addition to the range of mass spectrometry instruments and software used to operate those instruments, Applied Biosystems has developed and commercialized the ICAT^® reagent technology created by Dr. Ruedi Aebersold and others while at the University of Washington. This chemistry technology, when used with various mass spectrometry systems, enables the quantitation and identification of proteins in experiments that compare normal and diseased cells or samples. The ICAT reagent approach now offers laboratories a way of running protein experiments using mass spectrometry and is the foundation of an expanding family of Applied Biosystems consumables, software, and systems for proteomics.

Biochromatography. Researchers studying complex protein samples through mass spectrometry must first prepare these samples and separate them into the components to be analyzed. A common and important technique for the separation, and in some cases purification, of biological molecules is generally referred to as “biochromatography,” a process by which molecules are separated according to one or more of their physical properties such as their size, shape, charge, or affinity to other molecules.

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Applied Biosystems’ biochromatography products use “liquid chromatography.” Liquid chromatography is a process that separates molecules by passing them, in a liquid, across a stationary or solid medium such as chemically modified plastic beads specially designed for this process. Separation occurs because different molecules, which have different affinities to the beads, will migrate, or pass, across the beads at different rates. Instruments that perform liquid chromatography under high pressure are referred to as “high pressure liquid chromatography,” or “HPLC,” instruments.

Applied Biosystems believes that its biochromatography products can be incorporated readily into the proteomics discovery process and the development and manufacturing process of protein based pharmaceutical products. Applied Biosystems also believes its biochromatography products offer productivity advantages, enabled by high speed separation combined with high capacity and resolution, over competitive product offerings.

Applied Biosystems’ patented Perfusion Chromatography^® system technology uses proprietary flow-through POROS^® beads and BioCad^® Chromatography workstations to reduce the time necessary for the purification and analysis of biological molecules. Applied Biosystems’ Vision™ Workstation is a robotic-equipped chromatography instrument marketed to life science researchers that allows for the separation of proteins followed by analysis of the fractions collected in an unattended operation. Together, the automated platform and flow-through beads are designed to increase throughput and efficiency for the separation and purification of biological molecules.

Protein Sequencing and Synthesis. Proteins are large biological molecules and are made of peptides, and peptides are made of amino acids chemically linked together in long chains. Protein sequencers provide information about the sequence of amino acids that make up a given protein by chemically disassembling the protein and analyzing the amino acids. The Procise^® Protein Sequencing system uses a protein sequencing chemistry known as Edman chemistry to sequence a peptide, one amino acid at a time, and in turn to identify or characterize the protein that contains the peptide.

Synthetically produced peptides are used in understanding antibody reactions and as potential drugs or drug analogs. The Applied Biosystems 433A Peptide Synthesis system is designed for the quality synthesis of peptides, peptide analogs, and small proteins. Applied Biosystems also manufactures and sells proprietary synthesis reagents and chemicals for use with this and other products.

Products for the Drug Metabolism and Pharmacokinetics Market

Applied Biosystems has a number of mass spectrometry products that life science researchers use to analyze small molecules. Small molecules studied in life science research are typically smaller than peptides and include, for example:

•

some drugs;


	•	metabolites, the compounds resulting from the body’s acting upon a drug, and present in bodily fluids such as blood or urine; and

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•

other small biological molecules found naturally in the human body such as hormones, which affect physiological activity by sending signals to cells and organs, and cholesterol, which the body uses, for example, to build cells and produce hormones.

Mass spectrometry instruments are especially important for pharmaceutical researchers studying “pharmacokinetics,” the measurement of the bodily absorption, distribution, metabolism, and excretion, or elimination, of drugs. The U.S. Food and Drug Administration and other regulatory agencies require pharmacokinetic information for the approval of drugs. This application requires instruments which have a high resolution, or the ability to distinguish among different molecules with similar masses, and high sensitivity, or the ability to identify very small quantities of molecules, because the amounts of the drugs and their metabolites are very low and the mixtures are very complex. Researchers can perform the required pharmacokinetic analysis with LC/MS/MS systems that have been developed and refined by Applied Biosystems/MDS SCIEX Instruments.

Applied Biosystems/MDS SCIEX Instruments offers a broad product line of mass spectrometry instruments for small molecule and pharmacokinetics researchers:

Instrument Name	Ionization	Mass Analyzer
API 2000™ LC/MS/MS System	ESI or MALDI	Triple quad
API 3000™ LC/MS/MS System	ESI	Triple quad
API 4000™ LC/MS/MS System	ESI	Triple quad
QSTAR^® XL Hybrid LC/MS/MS System	ESI	Hybrid quad/TOF (often referred to as a Qq-TOF)
Q TRAP^® LC/MS/MS System	ESI	Hybrid quad/linear ion trap
4000 Q TRAP^® LC/MS/MS System	ESI	Hybrid quad/linear ion trap

The API product line instruments offer a range of sensitivity at varying costs, the API 4000 system being the most sensitive. This product line has been widely accepted by pharmaceutical researchers, and we believe the API 4000 system is the most sensitive triple quad mass spectrometry instrument available to this research market. The QSTAR XL Hybrid LC/MS/MS System, which is described above in Item 1 of this report under the headings “Applied Biosystems Group Business – Products for the Proteomics Market – Mass Spectrometry,” offers higher resolution and mass accuracy, or the ability to accurately determine the mass of a molecule, than the API 2000, API 3000, and API 4000 systems, which is particularly useful to researchers seeking to identify unknown molecules such as metabolites.

General information about mass spectrometry instruments and the technologies they incorporate, and also additional information about the QSTAR XL Hybrid LC/MS/MS, Q TRAP LC/MS/MS and 4000 Q TRAP LC/MS/MS systems, is set forth above in Item 1 of this report under the headings “Applied Biosystems Group Business – Products for the Proteomics Market – Mass Spectrometry.”

Cell Biology and Functional Proteomics Products

Applied Biosystems has developed, and expects to continue developing, products used for the study of cell and biological molecule function. Applied Biosystems intends to market existing products and develop new products within this field through its Knowledge Business. These products are intended for use by researchers studying the complex biological reactions that take place in cells, which researchers refer to as “biological pathways,” and how these pathways

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relate to human disease. These studies are needed in a variety of fields, including in particular drug discovery and development.

Applied Biosystems currently offers the 8200 Cellular Detection System, which is used by researchers to study cellular function. The system uses proprietary scanning technology to rapidly detect and measure fluorescence associated with objects as small as a single cell. Applied Biosystems also offers a range of chemiluminescent reagent products used by researchers studying cell function. Chemiluminescence is the conversion of chemical energy stored within a molecule into light, and the detection of chemiluminescence is another technology used to study cellular function.

During our 2002 fiscal year, Applied Biosystems entered into licensing, supply, and collaboration agreements with HTS Biosystems, Inc. to jointly develop and commercialize a functional proteomics system based on HTS Biosystems’ high-throughput affinity screening technology. This technology enables functional proteomics research, or the study of protein function, by analyzing proteins based on the way they bind to each other. Under these agreements, Applied Biosystems and HTS Biosystems are also jointly developing HTS Biosystems’ existing surface plasmon resonance technology, referred to as “SPR” technology. SPR technology, used in functional genomics research, or the study of gene function, enables the high-throughput study of protein interactions in a more cost-effective and efficient manner than other existing technologies. The study of protein interactions is an important part of functional genomics research because genes contain the code for proteins.

Applied Genetic Analysis Products

Applied Biosystems has developed, and expects to continue developing, products and services specially designed for specific markets, with a focus in the areas of human identification, and environmental and food testing.

For example, Applied Biosystems develops systems that are used by crime laboratories and other agencies to identify individuals based on their DNA. Applied Biosystems believes these systems are most often used in cases of violent crime where DNA found at the crime scene is matched with DNA from suspects. The use of DNA in some criminal investigations may help solve the crimes and may reduce the cost of the investigation, and we believe there is a growing recognition of the validity of the use of DNA testing and DNA databases for this purpose. This is evidenced in particular by a growing number of governmental initiatives in the U.S. and abroad to finance the analysis of DNA from crime scenes, including the existing backlog of samples from past crimes. These systems are also used to identify human remains, and for paternity testing.

Also, Applied Biosystems is developing technologies for bacterial and fungal detection, characterization, and identification. It offers the MicroSeq^® Microbial Identification System to accurately identify microorganisms. It also offers TaqMan Pathogen Detection Systems, which operate on Sequence Detection Systems instruments, to rapidly detect bacterial contamination and detect and analyze genetically modified organisms in foods.

During our 2003 fiscal year, Applied Biosystems entered into several contracts to manufacture products needed in response to the threat of biological terrorism, often referred to as the “biothreat” or “biosecurity” market. For example, Applied Biosystems entered into a contract to manufacture an Anthrax bacteria detection product that another company has

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contracted to install and maintain in select U.S. Postal Service mail sorting centers. Applied Biosystems is evaluating the market for biosecurity products and may develop or manufacture other products for this market if and when it identifies other opportunities.

Information Products

The Applied Biosystems Knowledge Business currently offers, and intends to further develop, products that offer information content designed to assist research and development efforts.The information products currently offered by the Knowledge Business include the Celera Discovery System database, as well as software, for use in combination with the Knowledge Business assay products, designed to facilitate and make more efficient experiment design and biological data analysis.

In January 2003, the Knowledge Business launched a new release of the Celera Discovery System that includes enhanced visualization and analysis tools for comparing the human and mouse genomes and additional data integration, and a new subscription model for academic researchers that lowers the cost and shortens the term of subscriptions to achieve better consistency with academic budgets and funding cycles. Also, as part of its overall mission of providing “whole systems solutions” to Applied Biosystems customers, during the 2003 fiscal year Applied Biosystems began marketing an instrument system, its 4700 Proteomics Discovery System, linked directly to the Celera Discovery System.

Informatics Products and Services

The Knowledge Business develops, markets, and distributes informatics software and services used to integrate and automate life sciences research, development, and manufacturing laboratories. Users of Knowledge Business informatics products and services are typically involved in gene mapping, drug discovery, drug development, and drug manufacturing. The Knowledge Business offers various software products for laboratory information management systems, often referred to as “LIMS.” These products are designed to facilitate sample tracking, data collection, data analysis, and data mining, and are generally designed to assist researchers in transforming data into useful information. The Knowledge Business also offers informatics consulting services through its Software Professional Services Group. These consulting services are designed for laboratories seeking greater automation and integration of lab processes. Knowledge Business consultants principally provide installation and customization of Applied Biosystems’ LIMS software offerings, and also can assist customers in selecting and integrating technologies to streamline and accelerate their genomics, proteomics, and high throughput screening activities.

Marketing and Distribution

The markets for Applied Biosystems’ products and services span the spectrum of the life sciences industry and research community, including: basic human disease research and genetic analysis performed by universities, government agencies, and other non-profit organizations; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; and food and environmental testing. Each of these markets has unique requirements and expectations that Applied Biosystems seeks to address in its product offerings. Applied Biosystems’ customers are continually searching for processes and systems that can perform tests faster, more efficiently, and at a lower cost. Applied Biosystems believes that its focus on automated and high-throughput systems enables it to respond to these needs.

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The size and growth of Applied Biosystems’ markets are influenced by a number of factors, including:

•

technological innovation in methods for analyzing biological data;


	•	government funding for basic and disease-related research, such as in heart disease, AIDS, and cancer;


	•	application of biotechnology to basic agricultural processes;


	•	increased awareness of biological contamination in food and the environment; and


	•	research and development spending by biotechnology and pharmaceutical companies.

In the U.S., Applied Biosystems markets the largest portion of its products directly through its own sales and distribution organizations, although some products are marketed through independent distributors and sales representatives. Sales to major markets outside of the U.S. are generally made by Applied Biosystems’ foreign-based sales and service staff, but are also made directly from the U.S. to foreign customers in some cases. In some foreign countries, sales are made through various representative and distributorship arrangements. Applied Biosystems owns or leases sales and service offices in the U.S. and in foreign countries through its foreign sales subsidiaries and distribution operations. None of Applied Biosystems’ products are distributed through retail outlets.

In addition, Applied Biosystems is seeking to expand the role of the Internet in the marketing and distribution of its products and services. In August 2003, Applied Biosystems launched an updated version of its Internet website for electronic commerce, or “e-commerce.” The updated e-commerce website includes access to the new myScience^SM Internet virtual research community. Applied Biosystems expects that its updated e-commerce and myScience Internet websites, by offering research resources linked to an online ordering system for Applied Biosystems products, will develop into a source of direct sales, particularly of its consumable products. The myScience Internet website is a free online resource that offers access to search tools and graphical viewers intended to help scientists plan their experiments, including selection of genomic reagents such as the Applied Biosystems Assays-on-Demand products. The myScience Internet website also offers fee-based access to the entire Celera Discovery System for an in-depth interpretation and analysis of experimental results.

Raw Materials

There are no specialized raw materials that are particularly essential to the operation of Applied Biosystems’ business. Applied Biosystems’ manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies, some of which are occasionally found to be in short supply. Applied Biosystems has multiple commercial sources for most components and supplies, but it is dependent on single sources for a limited number of such items, in which case Applied Biosystems normally secures long-term supply contracts. In some cases, if a supplier discontinues a product, it could temporarily interrupt the business of Applied Biosystems.

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Patents, Licenses, and Franchises

Applied Biosystems’ products are based on complex, rapidly developing technologies. Some of these technologies are covered by patents owned by Applied Biosystems, and others are owned by third parties and are used by Applied Biosystems under license. Applied Biosystems has pursued a policy of seeking patent protection in the U.S. and other countries for developments, improvements, and inventions originating within its organization that are incorporated into Applied Biosystems’ products or that fall within its fields of interest. Applied Biosystems’ business depends on its ability to continue developing new technologies which can be patented, or licensing new technologies from third parties that own patents in desired technologies. The rights that Applied Biosystems considers important to its current business include the following:

•

Applied Biosystems has rights to PCR technology under a series of agreements with the Roche Group, which owns some of the patents covering the PCR process. The first of these patents expires in 2005 in the U.S., and in 2006 in Europe and some other jurisdictions. In July 2000, Applied Biosystems and the Roche Group agreed to expand the markets each company serves with products incorporating PCR. Additionally, Applied Biosystems continues to distribute products the Roche Group manufactures for research and non-diagnostic applications.


	•	Applied Biosystems also licenses rights under some patents assigned to the California Institute of Technology relating to DNA sequencing. These patents expire between 2009 and 2018 in the U.S., and in 2005 in Europe and some other jurisdictions.

From time to time, Applied Biosystems has asserted that various competitors and others are infringing its patents; and similarly, from time to time, others have asserted that Applied Biosystems was or is infringing patents owned by them. These claims are sometimes settled by mutual agreement on a satisfactory basis and result in the granting of licenses by or to Applied Biosystems. However, we cannot make any assurances as to the outcome of any pending or future claims.

Applied Biosystems has established a licensing program that provides industry access to some of its intellectual property.

Backlog

Applied Biosystems’ total recorded backlog at June 30, 2002, was $235.8 million, which included $4.6 million of orders from Celera Genomics and $3.0 million of orders from Celera Diagnostics. Applied Biosystems’ total recorded backlog at June 30, 2003, was $252.5 million, which included $1.2 million of orders from Celera Genomics and $3.1 million of orders from Celera Diagnostics. Recorded backlog may not result in sales because of cancellation or other factors. It is anticipated that most of the orders included in backlog at June 30, 2003, will be delivered before the close of our 2004 fiscal year.

Competition

The markets in which Applied Biosystems operates are highly competitive and are characterized by the application of advanced technology. A number of Applied Biosystems’

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competitors are well known manufacturers with a high degree of technical proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which Applied Biosystems is engaged.

Applied Biosystems’ principal competition comes from specialized manufacturers that have strengths in narrow segments of the life science markets. Applied Biosystems competes principally in terms of the breadth and quality of its product offerings, and its service and distribution capabilities. While the absence of reliable statistics makes it difficult to determine Applied Biosystems’ relative market position in its industry segment, Applied Biosystems believes it is one of the principal suppliers in its fields, marketing a broad line of instruments and life science systems.

Research, Development, and Engineering

Applied Biosystems is actively engaged in basic and applied research, development, and engineering programs designed to develop new products and to improve existing products. Research, development, and engineering expenses for Applied Biosystems totaled $184.5 million in our 2001 fiscal year, $219.6 million in our 2002 fiscal year, and $238.4 million in our 2003 fiscal year. We expensed $323.4 million in our 2001 fiscal year, $381.9 million in our 2002 fiscal year, and $401.5 million in our 2003 fiscal year for Applera research, development, and engineering activities.

Applied Biosystems’ new products generally originate from four sources: internal research and development programs; external collaborative efforts with technology companies and individuals in academic institutions; devices or techniques that are generated in customers' laboratories; and business and technology acquisitions.

Research and development projects at Applied Biosystems include: the development of improved electrophoresis techniques for DNA analysis; real-time PCR for nucleic acid quantification; innovative approaches to cellular analysis; sample preparation; information technologies; and mass spectrometry.

Environmental Matters

Applied Biosystems is subject to federal, state, and local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, in those jurisdictions where Applied Biosystems operates or maintains facilities. Applied Biosystems does not believe that any liability arising under, or compliance with, environmental laws or regulations will have a material effect on its business, and no material capital expenditures are expected for environmental control.

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Celera Genomics Group Business

Overview

Celera Genomics is engaged principally in integrating advanced technologies to discover and develop new therapeutics. Celera Genomics intends to leverage its capabilities in proteomics, bioinformatics, and genomics to identify and validate drug targets, and to discover and develop new therapeutics either on its own or in collaboration with other companies. Celera Genomics expects to use these capabilities with its molecular and cell biology, medicinal and computational chemistry, pharmacology, and other drug development technologies to optimize the potency, selectivity, and physical properties of new drug candidates. Currently, Celera Genomics has agreements with large pharmaceutical companies and internal programs for discovering therapeutics for inflammatory diseases, including asthma, osteoporosis, and rheumatoid arthritis.Celera Genomics also has internal programs for discovering therapeutics for the treatment of thrombosis and various types of cancer, including pancreatic, lung, and colon cancer.

Celera Genomics and Celera Diagnostics are pursuing, in cooperation with each other, an overall strategy that we refer to as “targeted medicine.” This strategy is based on the belief that a bette

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