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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

Commission file number: 0-21872

Gen-Probe Incorporated

Registrant’s telephone number, including area code:

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

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

      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 þ          No o

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

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

      As of March 17, 2003, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $530.3 million, based on the closing price of the registrant’s common stock on the Nasdaq National Market on March 17, 2003 of $22.28 per share. The registrant’s common stock was not publicly traded as of the last business day of its most recently completed second quarter.

      As of March 17, 2003, 23,799,945 shares of registrant’s common stock, $0.0001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after close of the fiscal year are incorporated by reference into Part III of this report.

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GEN-PROBE INCORPORATED

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PART I

      ACCUPROBE®, APTIMA®, APTIMA COMBO 2^TM, DTS^TM, GEN-PROBE®, LEADER®, PACE®, TIGRIS^TM, TMA^TM and our other logos and trademarks are the property of Gen-Probe Incorporated. PROCLEIX® is a trademark of Chiron Corporation. VERSANT® is a trademark of Bayer Corporation. All other brand names or trademarks appearing in this Annual Report are the property of their respective holders. Use or display by us of other parties’ trademarks, trade dress or products is not intended to, and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.

FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.

      Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “pro forma” or “anticipates,” or other similar words (including their use in the negative), or by discussions of future matters such as the development of new products, technology enhancements, possible changes in legislation and other statements that are not historical. These statements include but are not limited to statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the heading “Item 1. Business — Risk Factors” and elsewhere in this Annual Report could substantially harm our business, results of operations and financial condition and that if any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock.

      The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

Overview

      We are a global leader in the development, manufacture and marketing of rapid, accurate and cost-effective nucleic acid probe-based products used for the clinical diagnosis of human diseases and for screening donated human blood. Founded in 1983, we pioneered the scientific and commercial development of nucleic acid testing, or NAT. By utilizing nucleic acid probes that specifically bind to nucleic acid sequences known to be unique to target organisms, NAT enables detection of microorganisms that are difficult or time-consuming to detect with traditional laboratory methods. To date, we have received FDA approvals for more than 50 products that detect a wide variety of infectious microorganisms. In February 2002, the FDA approved our Biologics License Application, or BLA, for our biochemical test, or assay, used to screen donated blood for human immunodeficiency virus (type 1), or HIV-1, and hepatitis C virus, or HCV. At the time, our assay was the only FDA-approved NAT assay available for screening donated blood and is currently utilized to screen over 72% of the United States donated blood supply for HIV-1 and HCV.

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      We generate revenues primarily from sales of clinical diagnostic and blood screening assays. Our clinical diagnostic products are marketed to laboratories and public health institutions in the United States and Canada through our direct sales force of approximately 40 representatives. We have agreements with Bayer, bioMérieux and Fujirebio, through their subsidiary Rebio Gen, Inc., to market some of our clinical diagnostic products in various global markets. In addition to product sales, we also generate revenues through research collaborations with government organizations and healthcare companies and through licenses of our patented NAT technologies.

      We have achieved a leading position in the industry because of our technologically advanced and reliable NAT assays and instruments and the capabilities of our sales force and technical support group. Our investment in research and development has enabled us to develop a portfolio of proprietary and patented technologies that we combine to create NAT products to meet our customers’ changing needs for rapid, accurate and cost-effective assays. We also have worked with outside vendors to develop a range of instrument systems for performing our assays. We are currently developing what we believe to be the world’s first fully automated NAT instrument system, known as the TIGRIS. We believe the TIGRIS instrument will significantly reduce labor costs and contamination in high-volume diagnostic testing environments and enable large blood collection centers to individually test each donor’s blood. We intend to initiate clinical trials on the TIGRIS instrument for both blood screening and diagnostic applications by the end of 2003.

      We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our Internet address is http://www.gen-probe.com.

Separation from Chugai Pharmaceutical

      On December 10, 2001, Chugai Pharmaceutical Co., Ltd., our former indirect parent, announced its intention to spin us off as a separate, stand alone company by distributing all of its shares of our common stock to its shareholders. On September 15, 2002, Chugai Pharmaceutical completed the distribution, and our common stock began regular way trading on the Nasdaq National Market on September 16, 2002. Prior to the spin-off, Chugai Pharmaceutical commenced a reorganization that resulted in us becoming a wholly owned subsidiary of Chugai Pharmaceutical. As part of the reorganization, on July 23, 2002, our former direct parent company, Gen-Probe Holding Company, Inc., merged into us, making us a wholly owned subsidiary of Chugai Pharmaceutical. Gen-Probe Holding was a non-operating holding company at the time of the merger and had approximately $75.9 million in cash and owned 37 acres of land, including the site of our headquarters, and approximately $1.5 million of other net assets.

Current Market Opportunity

      The NAT market developed in response to a need for more rapid, sensitive and specific diagnostic tests for the detection of infectious microorganisms than were previously available using traditional laboratory procedures, such as culture and immunoassays. Culture methods require the growth of a microorganism in a medium and can take several days or longer to yield a definitive diagnostic result. By contrast, nucleic acid probes, which specifically bind to nucleic acid sequences that are known to be unique to the target organisms, can generally deliver a diagnostic result in just hours. For example, culture tests for Mycobacterium tuberculosis can take six to eight weeks for a diagnosis as compared to only a few hours for NAT. The greater sensitivity of NAT allows for the detection of a lower concentration of the target organism, reducing the potential for “false negative” results and thus the number of undiagnosed individuals. For example, the greater sensitivity of amplified NAT allows for the rapid, direct detection of a target organism like Chlamydia trachomatis in urine, even when it is present in low concentrations. Without amplified NAT, more invasive methods of collection like cervical or urethral swabs must be used. Likewise, the increased specificity of NAT helps clinicians distinguish between harmful and benign

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      According to Front Line Strategic Consulting, Inc., the worldwide NAT market in 2001 for infectious diseases was approximately $1.5 billion. While NAT represents only a small portion of the estimated $21 billion worldwide market for human diagnostic products, it is the segment with the highest recent growth rate. Front Line reported that the NAT market grew at a compounded annual rate in excess of 30% during the three years beginning in 1998. Accordingly to Front Line, we held approximately 10% of the NAT infectious disease market in 2001. We focus our business on market opportunities in two principal segments of the NAT market, clinical diagnostics and blood screening. The clinical diagnostic market currently accounts for the substantial majority of our NAT sales. According to Frost and Sullivan, we held 46% of the United States chlamydia and gonorrhea testing market and 72% of the United States tuberculosis testing market in 2001. We also are exploring opportunities to develop products to address emerging segments of the NAT market. The diagram below illustrates existing and emerging NAT markets with examples of product targets within each category.

      Clinical Diagnostics for the Detection of Non-Viral Microorganisms. NAT assays currently are used to detect the microorganisms causing various STDs, including chlamydia and gonorrhea as well as those causing various other infectious diseases, such as Mycobacterium tuberculosis, Group A Streptococcus and Group B Streptococcus.

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      Chlamydia, the common name for the condition of infection with the bacterium Chlamydia trachomatis, is the most prevalent bacterial sexually transmitted infection in the United States, with more than 3 million new cases in the United States each year according to the Centers for Disease Control and Prevention, or CDC. The clinical consequences of undiagnosed and untreated chlamydia infections include pelvic inflammatory disease, ectopic pregnancy and infertility. Gonorrhea, the disease caused by the bacterium Neisseria gonorrhoeae, is the second most frequently reported STD in the United States, according to the CDC. The CDC estimates that each year approximately 650,000 people in the United States develop gonorrhea. Untreated gonorrhea is also a major cause of pelvic inflammatory disease, which may lead to infertility or abnormal pregnancies. In addition, recent data suggests that gonorrhea facilitates HIV transmission. Chlamydia infections and gonorrhea frequently co-exist, complicating the clinical differential diagnosis. Because chlamydia infections and gonorrhea are often asymptomatic, screening programs are important in high-risk populations such as sexually active men and women between the ages of 14 and 24. Currently, most testing for chlamydia and gonorrhea occurs in the United States.

      Tuberculosis, or TB, the disease caused by the microorganism Mycobacterium tuberculosis, remains one of the deadliest diseases in the world. The World Health Organization estimates that each year more than 8 million new cases of tuberculosis occur worldwide and approximately 2 million people die from the disease. Group B Streptococcus, or GBS, represents a major infectious cause of illness and death in newborns in the United States and can cause epilepsy, cerebral palsy, visual impairment, permanent brain damage and retardation. Group A Streptococcus, or GAS, is the cause of “strep” throat, which if left untreated may cause serious complications such as rheumatic fever and rheumatic heart disease.

      Clinical Diagnostics for the Detection of Viral Microorganisms. NAT assays can be used to detect viral DNA or RNA in a patient sample. These tests can be qualitative, meaning that the tests simply provide a “yes-no” answer for the presence or absence of the virus, or quantitative, meaning that the quantity of virus is determined in the patient sample. Quantitative tests are useful in monitoring the efficacy of treatments to reduce the amount of virus in circulation. NAT assays currently are used to detect viruses such as HIV, HCV and hepatitis B virus, or HBV.

      HIV is the virus responsible for acquired immune deficiency syndrome, or AIDS. In 2001, there were approximately 816,149 reported cases of AIDS in the United States, according to the CDC. Individuals with AIDS show progressive deterioration of their immune systems and become increasingly susceptible to various diseases, including many that rarely pose a threat to healthy individuals.

      Hepatitis C virus is a blood-borne pathogen posing one of the greatest health threats in developing countries. According to the National Women’s Health Resource Center, up to 85% of individuals infected with HCV develop chronic liver disease, which can lead to both cirrhosis and liver cancer. Approximately 170 million people are infected worldwide with HCV, according to the World Health Organization.

      The American Social Health Association estimates that 140,000 to 320,000 new HBV infections occur each year in the United States. Chronic HBV infection can lead to the development of severe, potentially fatal complications, such as cirrhosis of the liver.

      Blood Screening. We believe the field of blood screening is one of the fastest growing areas for NAT assays. Worldwide, approximately 75 million units of blood are drawn annually. Before being used for transfusion, blood must be screened to ensure that it does not contain infectious agents. The most serious threats to recipients of donated blood are HIV, HCV and HBV. There is also growing concern over the presence of other viruses in the donated blood supply, including West Nile virus, parvo B-19 and hepatitis A, or HAV. In the United States, blood collection centers have begun NAT screening of donated blood by taking samples from individual units of blood and then combining these samples into pools of 16 or 24 samples. These pooled samples are then tested to determine whether HIV or HCV is present. If the presence of virus is detected, additional testing is then conducted to determine which sample in the pool contains the virus. Some of our customers, such as the U.S. military, test blood units individually rather than in pools.

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      Prior to the introduction of NAT for blood screening, blood collection centers used immunoassays to determine the presence of blood-borne pathogens through the detection of virus-specific antibodies and viral antigens. These tests either directly detect the viral antigens or detect antibodies formed by the body in response to the virus. Consequently, if the donor has not developed detectable antibodies or detectable amounts of viral antigens as of the time of the donation, recipients of that blood may be unwittingly exposed to serious disease. In the case of HIV-1, antibodies are detectable in the blood approximately 22 days after infection. With HCV, the window between the time of infection and the detection of the antibodies is much longer, approximately 70 days or more. NAT technology can narrow both windows significantly through amplification and detection of the nucleic acid material of the viruses themselves rather than requiring the development of detectable levels of antibodies or viral antigens. According to the CDC, NAT will reduce the window period for HIV-1 detection from 22 days for tests relying on HIV-1 antibodies to 12 days. We believe that NAT reduces the window period for HCV detection from about 70 days for tests relying on HCV antibodies to approximately 10 to 14 days.

      Adoption of amplified screening technology. We believe that the market for clinical diagnostic products for the detection of non-viral microorganisms, particularly STDs, will expand due to the adoption of amplified screening technology. Target amplification is particularly advantageous when screening for the presence of a microorganism when the level of that microorganism in clinical samples might be insufficient to permit detection with other methods. While many potential carriers of STDs forego diagnosis due to the current invasive methods of testing, we believe amplified NAT technology, which can use samples collected non-invasively such as urine, will expand screening of high-risk populations and asymptomatic individuals. We believe expansion of the screening of these populations will be accelerated by adoption of guidelines by the Health Plan Employer Data and Information Set, or HEDIS, an organization that provides information about, and recommendations to, managed health care organizations, that call for routine screening of certain populations, such as women between the ages of 15 and 25, to improve early detection and treatment of chlamydia.

      Advances in automated testing. We believe that the introduction of automated instrumentation, such as the TIGRIS system we are currently developing, will facilitate growth in both the clinical diagnostics and blood screening segments of the NAT market. It is becoming increasingly difficult for clinical laboratories to recruit and retain skilled laboratory technologists. Within the STD segment, we anticipate that demand will increase as the technology is applied to diagnose new target viral microorganisms, including human papilloma virus, which has been linked to cervical cancer, and herpes virus. The rate of market growth for testing additional STD-related microorganisms will depend heavily upon automation as well as continuing advances in testing methodologies that address the issues of specificity, sensitivity, contamination, ease of use, time to results and overall cost effectiveness.

      Additionally, we believe there will be significant demand for automation if blood collection centers begin the screening of individual blood donations rather than the testing of pooled samples, in an effort to further improve the safety of the nation’s blood supply. Individual unit screening at larger blood centers currently is impractical without automated instrumentation because of the throughput limitations of current semi-automated instruments. In addition, we believe automation will encourage adoption of additional blood screening tests, such as tests for HBV, West Nile virus, parvo B-19 and HAV.

      Increased focus on safety of blood supply. We believe blood collection centers will continue to focus on improving the safety of donated blood by adopting the most advanced blood screening technologies available. In addition, we believe that blood collection centers will seek to adopt individual donor testing, rather than the testing of pooled samples, as automated instrumentation technologies make such testing feasible.

      Growth in viral load testing. We expect increased monitoring of patients on anti-viral therapies to be a key factor in the growth of the market for NAT products. Anti-viral therapies are managed by periodic measurement of the level of the virus in a patient, known as the “viral load,” and the detection of viral

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      Development of emerging markets for NAT technology. We believe markets will continue to develop for new applications for NAT technology in both clinical and non-clinical fields. Among clinical fields, we believe NAT technology will be utilized in the areas of new analytes, such as the West Nile Virus, cancer diagnosis and pharmacogenomics. DNA probe diagnostics for hematological cancers already are growing steadily, but we believe that the greatest opportunity will be in the diagnosis, prognosis, high-risk screening and monitoring of solid tumors. New markers are being discovered at an ever-increasing rate, and we believe that once these markers have been clinically validated, there will be a large market for NAT-based cancer diagnostic products. We believe that NAT diagnostic assays will be used in the field of pharmacogenomics to screen patients prior to administering new drugs. The field of pharmacogenomics includes the study of the relationship between nucleic acid variations and an individual’s response to a particular drug. Many genetic variations are caused by a single mutation in nucleic acid sequence, a so-called “single nucleotide polymorphism,” or SNP. Individuals with a specific SNP in a drug metabolism gene may not respond to a drug or may have an adverse reaction to that drug because the body may not metabolize the drug in a normal fashion. We believe the emergence of pharmacogenomics and individually targeted therapeutics will create opportunities for diagnostic companies to develop tests to detect genetic variations that affect responses to drug therapies. Emerging non-clinical markets for NAT include food, beverage, bioterrorism and environmental testing. Today, these markets predominately use traditional methods for microbiological testing, such as culture. However, there is increasing demand for NAT technology to provide more rapid and efficient tests.

Our Competitive Strengths

      Our competitive strengths form the foundation for our business and position us to compete effectively within the NAT market.

      We believe that we have developed one of the broadest arrays of core NAT technologies in the industry. Our products incorporate these technologies, which, in combination, have significantly advanced NAT assays, making them more specific, more sensitive, easier to use and faster than products based on competing NAT technologies. For example, our proprietary Transcription-Mediated Amplification, or TMA, technology offers significant advantages over other available amplification methods, including Polymerase Chain Reaction, or PCR. We believe TMA technology allows our products to offer a higher degree of sensitivity, less risk of contamination and greater ease of use than our competitors’ amplification products. In the past, we have leveraged our core technologies to develop products that have achieved leading positions in new NAT markets, such as blood screening and tuberculosis testing. We plan to continue to use our core NAT technologies as a platform for the development of additional products addressing emerging segments of the NAT market.

      We believe that we are unique in offering our customers a broad portfolio of both non-amplified and amplified NAT assays, as well as multiple instrumentation platforms on which to perform our NAT assays. Our expertise in NAT products has enabled us to develop over 50 FDA-approved products for the

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      We pioneered the development of the NAT market with our introduction of the first FDA-approved probe-based assays in 1985. As of December 31, 2002, our world-class research and development group, consisted of more than 160 employees, 68 of whom hold advanced degrees. From our PACE family of products to our amplified APTIMA Combo 2 assay, which can detect both gonorrhea and chlamydia infections in urine samples from symptomatic or asymptomatic patients, our scientists have developed proprietary assays that have brought significant innovation to the market for NAT clinical diagnostics. To complement these products, we have developed and continue to develop instrumentation technologies that enable our customers to increase throughput while improving accuracy in a cost-effective manner. We currently are developing what we believe to be the world’s first fully automated NAT instrument system, known as the TIGRIS. Our current initiatives aimed at applying our core NAT technologies to viral diagnostic detection and blood screening are consistent with our philosophy of designing innovative products to meet the existing needs of our customers as well as the emerging needs of new markets.

      We believe that we benefit from significant brand name recognition and customer loyalty among laboratories and physicians in the market for NAT assays. We believe our history of technological innovation, quality manufacturing, comprehensive sales capabilities and commitment to customer support has resulted in customer satisfaction and retention. We estimate that greater than 90% of our STD product sales during 2002 were to repeat customers. We believe that our brand name also facilitates market acceptance of our new products, providing us with opportunities for growth. Our selection in 1998 by The American Red Cross as its sole source for NAT assays for blood screening is an example of our standing in the industry.

      As of December 31, 2002, our direct sales force consisted of approximately 38 representatives and a 14-member technical field support group. We believe that these individuals comprise one of the most knowledgeable and effective sales and support organizations in the molecular diagnostics industry. Our sales representatives have an average of over 13 years of overall sales experience, with an average of 6 years focused on sales of NAT products. We view our long-standing relationships with laboratory customers and the value-added services that our sales force and technical field specialist group offer, including technical product assistance, customer support and new product training, as central to our success in the United States clinical diagnostics market. We complement our sales force with leading international distributors and the direct sales organizations of our collaborative partners.

      Our products, design control and manufacturing processes are regulated by numerous third parties including the FDA, foreign governments, independent standards auditors and customers. Our team of nearly 100 regulatory, clinical and quality systems professionals has successfully led us through multiple quality and compliance audits. In addition, we have designed and built our two state-of-the-art manufacturing facilities to comply with the highest FDA and quality standards. We began production in

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Our Growth Strategy

      We have successfully created and maintained a leadership position in the NAT testing market. From this strong position, we plan to grow our business through the following strategies:

      We have had a successful track record in identifying new market opportunities and becoming the market leader in a number of NAT testing segments by providing innovative product solutions based on our proprietary technology base. In the past we have utilized our patented technology portfolio, innovation and market development expertise to establish leadership positions in a number of areas including chlamydia, gonorrhea and tuberculosis testing. Our ability to strategically identify and assume leadership roles in new markets was most recently evidenced by our entrance into the blood screening market. We successfully developed the first FDA-approved NAT assay for HIV-1/ HCV detection, which is currently used to screen approximately 72% of the United States donated blood supply. We are currently exploring opportunities and expect to develop new products for emerging NAT markets. We are developing our first cancer-related product, a TMA-based assay for the detection of chronic myelogenous leukemia. In the industrial market, we have developed a NAT assay for Listeria monocytogenes, a food pathogen, that is used by the dairy industry in Europe, and a NAT assay for mycoplasma that is used by tissue culture facilities to detect for contamination of cell lines. We are also evaluating additional product opportunities in bioterrorism, pharmacogenomics, food and industrial water testing.

      We will continue to develop instruments that complement our established product lines in clinical diagnostics and blood screening. For example, we are developing the TIGRIS instrument system, which we believe will be the world’s first fully automated NAT instrument system. The TIGRIS system should significantly reduce the time, labor costs, risk of contamination and complexity associated with performing NAT assays and blood screening. We believe that the increased utility of this platform will lead to significant advances in both the clinical diagnostics and blood screening markets. The automation and throughput of the TIGRIS system will enable blood collection centers to process the large testing volumes necessary to screen each individual unit of donated blood for the presence of life-threatening viruses. In addition to the TIGRIS system, we currently are developing other next-generation systems to meet customers’ needs for increased productivity. Ultimately, we believe this approach of providing our customers with the latest generation of systems solutions will allow us to sustain and reinforce the market position and brand recognition that we have established.

      We will continue to use a systems approach to product development, which involves combining elements of our core technologies to create products that best meet our customers’ needs. For example, our APTIMA Combo 2 assay, which was launched in August 2001, integrates over 20 of our proprietary technologies. By understanding how our technologies complement one another and by combining reagents in our new products, we will be able to capitalize on the substantial product development work that went into some of our prior products. We believe that this approach will reduce development cycle times for our new products. We also believe that our experience in bringing over 50 FDA-approved products to market will help enable us to bring new products to the market. This, in turn, will help us expand our menu of

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      We historically have supplemented our internal research and development efforts by obtaining licenses to new technologies. To maintain our leadership position in NAT testing, we intend to selectively obtain rights to new technologies through licenses and acquisitions. For us to enter emerging NAT markets such as pharmacogenomics and cancer testing, we may need to obtain rights to new technologies and genetic markers for diseases as these markers are discovered and clinically validated by third parties.

      We will pursue collaborative relationships that enable us to implement our strategies, particularly with respect to the development of new products and entry into new markets. We seek to partner with industry leaders who can offer access to intellectual property or who can complement our commercialization capabilities by distributing co-developed products through their sales organizations. For example, our collaboration with Chiron for the blood screening market has allowed us to combine our NAT technology with Chiron’s patent portfolio relating to HCV and to leverage Chiron’s marketing and sales resources.

Technology

      Nucleic acids store and transfer genetic information in all living organisms. The two main types of nucleic acids are deoxyribonucleic acid, or DNA, and ribonucleic acid, or RNA. DNA functions as a stable repository of genetic information, while RNA typically serves to transfer the information stored within DNA to the cell’s machinery for making proteins.

      DNA and RNA are both composed of chains of chemical subunits called nucleotides. There are four types of nucleotides in DNA, which differ in one chemical part called a base. The four different bases are: adenine, thymine, guanine and cytosine (abbreviated A, T, G and C). These four nucleotides form the building blocks of all DNA. The sequence of the individual A, T, G and C nucleotides in a DNA molecule encodes the genetic information that instructs the cell how to make particular proteins. Because DNA sequences determine which proteins a cell will make, it is differences in their DNA sequences that make the cells of one organism differ from the cells of another.

      Most DNA in cells exists in the form of a double-stranded structure that resembles a twisted ladder. In double-stranded DNA, the nucleotides on opposite sides of the ladder are always paired in a precise way. An “A” nucleotide binds only to a “T” nucleotide on the opposite strand, and vice versa. Likewise, a “G” nucleotide binds only to a “C” nucleotide, and vice versa. Each combination of an “A” nucleotide with a “T” nucleotide (or a “C” with a “G”) is referred to as a “base pair.” The way in which each type of nucleotide binds only to one other type of nucleotide is called “complementary base pairing.” As a result of complementary base pairing, the sequence of nucleotides on one strand of a DNA molecule necessarily determines the sequence of nucleotides on the opposite strand.

      The “attraction” of a nucleotide sequence to its complementary sequence allows a scientist to use pieces of nucleic acid as probes to detect the presence of a target nucleic acid in a test sample. If two complementary pieces of DNA (or RNA) are present in a solution under the right conditions, the complementary bases will come together and bind to form double strands. This method is commonly known as “nucleic acid hybridization.” Nucleic acid hybridization techniques can be applied in a diagnostic test to detect an infectious organism (the target organism) by the use of a probe that is designed to bind specifically to a nucleic acid sequence known to be unique to the target organism. The sample suspected of containing the infectious organism is treated to break open the organism, release its nucleic acids into the solution, and render them single-stranded, if necessary. The specific probe is then added, and conditions conducive to hybridization are established.

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      If the target organism is present in the sample, the probe should bind to the target organism’s nucleic acids because the sequence of the probe has been designed to be complementary to them. By attaching a detectable label to a probe, scientists are able to determine how much, if any, probe has bound to sequences from the target organism.

      We have developed technologies that make NAT assays practical and effective for commercial use, thereby overcoming many of the limitations of previous DNA probe assays that restricted their use to research laboratories. Our products incorporate a combination of patented technologies that have significantly advanced NAT assays, making them more specific, more sensitive, easier to use and faster than products based on competing technologies. These technologies include the following:

	•	targeting of ribosomal RNA,
	•	target capture technology,
	•	Transcription-Mediated Amplification technology, and
	•	chemiluminescent detection using Hybridization Protection Assay and Dual Kinetic Assay technologies.

      Together, these technologies have allowed us to commercialize new diagnostic tools that provide results in hours instead of days or weeks. This has led to quicker time to result and diagnosis, thereby making a difference in patient treatment and outcome.

      Targeting Ribosomal RNA. We have developed and patented a technique that detects and identifies organisms by targeting their ribosomal RNA, or rRNA. The major benefits in targeting rRNA include the following:

	•	Each cell contains up to 10,000 copies of rRNA, as compared with only a few copies of DNA. Most NAT assays target DNA, which is present in only one or two copies in each target organism cell. By using a probe that hybridizes to rRNA, the sensitivity of the test is increased thousands of times because there is much more rRNA target present than DNA target. This has allowed us to develop indirect and direct probe tests that are used with cultured samples or samples drawn directly from the patient. Because of our patented rRNA technology, we are the only company able to offer convenient and sensitive non-amplified NAT assays for the detection of non-viral microorganisms.
	•	The high number of rRNA targets also offers significant advantages when target-amplified assays are used. When very small numbers of organisms are present in a sample, they may not be present in the portion of the sample used for the assay, despite being present in the sample. This would result in a negative test result. By breaking open the organisms prior to sampling, the multiple copies of rRNA targets are dispersed throughout the sample volume and the likelihood of detecting them is increased many fold. Thus, the likelihood of obtaining a false negative result is significantly less than is the case when single-copy DNA targets are used.
	•	rRNA molecules naturally exist as single strands that can directly hybridize with our chemiluminescent labeled DNA probes. This is in contrast to most DNA targets, which exist as double strands that must be separated before a probe can bind. These separated DNA strands tend to hybridize to each other rather than to the DNA probe, thus limiting the amount of DNA probe that can bind and the overall sensitivity of the test.
	•	rRNA molecules are present in all bacteria, fungi and parasites. This gives us the ability to design diagnostic products for any emerging infectious diseases caused by these pathogens.

      Target Capture Technology. Detection of target organisms that are present in small numbers in a large-volume clinical sample requires that target organisms be concentrated to a detectable level. One way to accomplish this is to isolate the particular nucleic acid of interest by binding it to a solid support, which

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      We have developed target capture techniques to immobilize nucleic acids on magnetic beads by the use of a “capture probe” that attaches to the bead and to the target nucleic acid. We use a magnetic separation device to concentrate the target by drawing the magnetic beads to the sides of the sample tube, while the remainder of the sample is washed away and removed from the reaction tube. We use these techniques in conjunction with our patented amplification methods in our current generation of amplified assays. When used in conjunction with our patented amplification methods, target capture techniques concentrate the target organisms and also remove materials in the sample that might otherwise interfere with amplification.

      Target capture offers the following benefits:

	•	Concentration of target organisms from large volume samples, without the need for centrifugation steps,
	•	Elimination of potential inhibitors of amplification,
	•	Increased ability to test a variety of clinical samples, including urine and blood,
	•	Capture of multiple targets by using capture probes that hybridize to one or more specific nucleic acid sequences, and
	•	Enhanced specificity through selective capture of target and removal of contaminants that may produce a false positive signal.

      Transcription-Mediated Amplification. The goal of amplification technologies is to produce millions of copies of the target nucleic acids that are present in samples in small numbers, which can then be detected using DNA probes. Amplification technologies can yield results in only a few hours versus the several days or weeks required for traditional culture methods.

      Most amplification-based NAT assays utilize a technology known as Polymerase Chain Reaction, or PCR, to amplify DNA. With additional steps, PCR also can be used to amplify RNA. Since most organisms contain only one or two copies of DNA, there are fewer target molecules to initiate amplification when DNA targets are used, and sometimes amplification does not begin at all. In such cases, assays using PCR can fail to produce results. PCR also uses repeated heating and cooling steps requiring complex and expensive thermocyclers. Because PCR produces large amounts of DNA, which is a stable molecule, there is an increased risk of cross-contamination from one PCR assay to another, potentially leading to a high number of false positive results. The increased complexity, cost of thermocyclers and risk of contamination have prevented many clinical laboratories from adopting PCR.

      Our patented TMA technology is designed to overcome the many problems faced with other target amplification methods such as PCR. TMA is a transcription-based amplification system that uses two different enzymes to drive the process. The first enzyme is a reverse transcriptase that creates a double-stranded DNA copy from an RNA or DNA template. The second enzyme, an RNA polymerase, makes thousands of copies of the complementary RNA sequence, known as the “RNA amplicon,” from the double-stranded DNA template. Each RNA amplicon serves as a new target for the reverse transcriptase and the process repeats automatically, resulting in an exponential amplification of the original target that produces over a billion copies of amplicon in less than 30 minutes.

      TMA offers the following benefits:

	•	The TMA process takes place in one tube at one temperature without the need of expensive thermocyclers required by PCR. All reagents are added to the tube and nothing is removed. This makes the test simpler to use and suitable for automation, and it minimizes the possibility of carry-over contamination and false positive test results,
	•	TMA is very robust and often can be used with clinical samples with little or no purification,

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	•	The RNA nucleic acid that is synthesized in the TMA reaction is much more labile when outside the reaction tube and in the lab environment than the DNA that is produced in the PCR method. This reduces the possibility of carry-over contamination, and
	•	TMA is able to amplify RNA and DNA targets, whereas PCR requires additional reagents and steps to amplify RNA.

      Chemiluminescent Technologies and Hybridization Protection Assay. Our DNA probes use chemiluminescent acridinium esters, or AE molecules, that generate light as a label for detection. The AE technology is much more sensitive than fluorescence or absorbance techniques used by our competitors. When AE-labeled DNA probes are mixed with chemical activators, a light signal is produced. Many DNA probe assays and immunoassays use enzyme or radioisotope labels. Assays that use enzyme-labeled DNA probes are complex and can be inhibited by contaminants present in the sample. Radioisotopes offer a strong signal but are difficult to handle, difficult to dispose of and dangerous because they give off harmful radiation.

      We have simplified testing, further increased test sensitivity and specificity and increased convenience with our patented Hybridization Protection Assay, or HPA, technology. With HPA, we introduced the first NAT assay that did not require the cumbersome wash steps needed with conventional probe tests and immunoassays. In the HPA process, the AE molecule is protected within the double-stranded helix that is formed when the probe binds to its specific target. Prior to activating the AE molecule, known as “lighting off,” a chemical is added that destroys the AE molecule on any unbound probes, leaving the label on the bound probes unaffected. When the “light off” reagent is added to the specimen tube, only the label attached to the hybridized probe produces a signal indicating the target organism’s DNA or RNA is present. All of these steps occur in a single tube or microtiter plate and without any wash steps.

      Our Dual Kinetic Assay, or DKA, technology uses two types of AE molecules — one that “flashes” and another one that “glows.” By using DKA, we have created NAT assays that can detect two separate targets simultaneously.

      APTIMA Technology. We have combined target capture, TMA and DKA together into an integrated family of technologies known as APTIMA. APTIMA assays represent the latest generation of nucleic acid amplification testing, simplifying sample handling, minimizing contamination and allowing for the simultaneous detection of two analytes in one tube. APTIMA thereby increases assay performance, reduces laboratory costs and improves laboratory efficiency. APTIMA assays offer the only single-tube testing approach for modern clinical laboratories. We believe APTIMA technology will accommodate true walk-away automation, allowing hundreds of specimens to be tested by an individual technician in a single run.

Our Products

      We have applied our core technologies to develop multiple product lines, all of which utilize our expertise in NAT probes, sample collection and processing. We categorize our products into clinical diagnostic products and blood screening products.

      Within our clinical diagnostic product group, we have developed products for the detection of non-viral and viral microorganisms.

      Clinical Diagnostic Products for the Detection of Non-Viral Microorganisms. We have developed FDA-approved amplified and non-amplified NAT assays that detect non-viral microorganisms. We have established a market-leading position in non-amplified NAT assays, particularly with respect to assays for the detection of chlamydia and gonorrhea, and we have obtained FDA approval for an amplified STD test to compete in that market segment.

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      Our principal products for the detection of non-viral microorganisms include our non-amplified AccuProbe and non-amplified PACE family of products and our amplified Mycobacterium Tuberculosis Direct Test and amplified APTIMA Combo 2 product.

Clinical Diagnostic Products for the Detection of Non-Viral Microorganisms

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      AccuProbe Products. Our AccuProbe Culture Identification products are powerful tools for the identification of mycobacterial, fungal and bacterial pathogens, with sensitivities and specificities approaching 100% in most cases. These products allow for the detection of target organisms from primary cultures, eliminating the additional labor of purifying secondary cultures. All AccuProbe Culture Identification assays are based on our HPA technology.

      All of our AccuProbe Culture Identification tests follow a standard format and use common reagents and do not require highly trained technical personnel. Results are obtained utilizing our luminometers, which are easy to use and offer precise readings. In addition, the convenient packaging provides extended stability and shelf life.

      As part of our AccuProbe Culture Identification product line, we also have developed a procedure to detect Group B Streptococcus from broth culture. The assay demonstrates near 100% sensitivity and specificity when testing broth samples after 24 hours of incubation. Our products address the market need for a more rapid, direct test procedure for GBS that can be used to effectively screen women during pregnancy and to provide prompt results when testing is performed just before delivery.

      Group A Streptococcus Direct. The Group A Streptococcus Direct Test, or GASDirect, assay is a rapid NAT assay for the direct detection of Streptococcus pyogenes in one hour from a throat swab. Sensitivity and specificity are equivalent to culture methods taking 72 hours to complete and are higher than the rapid membrane antigen tests often used in physician offices. The test provides fast and accurate results, eliminates subjective interpretation by the laboratory technician, and aids physicians in making more informed treatment decisions. The product’s ease of use enables efficient batch testing. An automatic pipetting option offers the availability of greater workflow economies and laboratory productivity.

      PACE Product Family. In 2001, our STD products accounted for 46% of the United States market for chlamydia and gonorrhea testing. Our NAT assays have proven to be more sensitive and specific than traditional enzyme immunoassay methods. The PACE 2 System currently is the major clinical diagnostic product line we manufacture and sell. Our PACE 2C is the first advanced NAT product to offer the convenience of testing for both chlamydia and gonorrhea infections from a single patient specimen. This feature eliminates the need to collect separate specimens and the need to transport the specimens under different conditions. The PACE 2C continues to meet the needs of today’s clinical laboratories that prefer a cost-effective, non-amplified NAT assay for routine screening for chlamydia infections and gonorrhea. Other products in the PACE 2 product line include individual tests to detect and confirm both chlamydia infections and gonorrhea. The PACE product family also includes the PACE Specimen Collection kits for endocervical and urethral specimens.

      Sales of our PACE family of assays accounted for 44% our total revenues in 2002, 57% of our total revenues in 2001 and 63% of our total revenues in 2000.

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      Mycobacterium Tuberculosis Direct Test. Amplification is particularly important when detecting pathogens present at low levels, as is often the case with tuberculosis. Culture tests for TB can take 6 to 8 weeks for a preliminary result, often resulting in a patient not receiving appropriate treatment on a timely basis or receiving unnecessary treatment. Our amplified Mycobacterium Tuberculosis Direct, or MTD, test has sensitivity similar to a culture test but can detect the TB pathogen within a few hours. The test is performed directly on a patient sample, and can be used to quickly differentiate between TB and other mycobacteria, resulting in quicker isolation and treatment of an infected patient.

      Our amplified MTD assay was initially approved by the FDA in December 1995. Additional applications of the test were subsequently approved. Our MTD assay was the first amplified NAT assay for obtaining same day results from sputum samples.

      APTIMA Combo 2. To meet market demand for amplified STD assays, we have developed our APTIMA Combo 2 assay, which received FDA approval in May 2001 and was launched commercially in August 2001. Acceptance of first generation amplified tests has been adversely affected by the complexity of the methodology and the lack of a format adequate for use in the average laboratory. We believe APTIMA Combo 2, which uses second generation amplification technologies, will allow us to overcome these barriers. The test offers superior performance and ease of use, including its use of a piercable cap that eliminates the need to uncap samples prior to testing and a sample transport medium that preserves the integrity of the sample for weeks at room temperature. We also believe it currently is the only NAT assay that can be used to accurately screen urine samples for chlamydia infections and gonorrhea with the same sensitivity as seen from cervical and urethral samples.

      We believe the assay is ideally suited to test specimens from both symptomatic and asymptomatic individuals. Symptomatic individuals typically have large amounts of the microorganism present at the infection site, while patients who are asymptomatic typically have much lower levels of the microorganism present at the infection site. APTIMA Combo 2 has the sensitivity and specificity to detect chlamydia infections and gonorrhea from both symptomatic and asymptomatic individuals.

      In addition to amplification technology, our APTIMA Combo 2 assay utilizes the latest versions of our core technologies, including target capture, HPA and DKA. APTIMA Combo 2 will qualitatively detect and differentiate rRNA from Chlamydia trachomatis and Neisseria gonorrhoeae bacteria. This continues the “one test, two results” advantage we first provided with our PACE 2C non-amplified assay for chlamydia infections and gonorrhea. We believe we are in a unique position to provide both amplified and non-amplified assays for these infections. This allows us to compete in all segments of the STD testing market and to provide the appropriate NAT solution to meet the needs of many different customers.

      We believe that APTIMA Combo 2 will be the first clinical diagnostic assay to be performed on the fully automated TIGRIS instrument when that system is introduced. APTIMA Combo 2 will continue to be performed on our existing instrumentation, including our semi-automated DTS instruments, until the TIGRIS system is available.

      Aptima CT ASR and Aptima GC ASR. We have also developed individual analyte specific reagents, or ASRs, to separately detect the presence of Chlamydia trachomatis and Neisseria gonorrhoeae. ASRs comprise a category of in vitro diagnostic reagents to bridge the gap between research and assays that have received FDA approval. The FDA has created a series of regulations governing these reagents. ASRs use a collection of specific reagents that, when combined with general purpose reagents, give clinical diagnostic testing laboratories the ability to build diagnostic tests often referred to as “home-brew” tests. ASRs allow diagnostic companies to deliver reagents to the market rapidly as most ASRs are exempt from FDA submissions.

      Clinical Diagnostic Products for the Detection of Viral Microorganisms. In 1996, we were selected by the National Heart, Lung and Blood Institute of the National Institutes of Health, or NIH, to develop reagents and instrumentation for the blood donor screening market using our core technologies. We completed our development of the NAT assays for HIV-1 and HCV for blood screening contemplated by the NIH contract in February 2002. Our work under the NIH contract also launched us into development

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Clinical Diagnostic Products for the Detection of Viral Microorganisms

      Qualitative HCV Test. We have developed an amplified TMA assay for the qualitative detection of HCV based on the same technology used in our FDA-approved HIV-1/ HCV assay for screening donated blood. In collaboration with Bayer, we completed clinical trials in the United States for this assay in February 2002, and in November 2002, we received pre-market approval from the FDA. Bayer currently distributes this assay under the trademark VERSANT in the United States and other international markets under our collaboration agreement.

      ASR for Quantitative HCV Test. We also have developed, through our collaboration with Bayer, ASRs to quantitatively determine the amount of HCV present in a sample. Our ASRs are currently provided by Bayer to Quest Diagnostics Incorporated, a leading national diagnostics company. If we determine that there is sufficient demand for these reagents, we will consider the development of a fully approved FDA product in the future.

      Our viral diagnostic assays currently are run on our semi-automated instruments incorporating components of our DTS system.

      In 1996, the National Heart, Lung and Blood Institute of the NIH selected us to develop reagents and instrumentation for the blood donor screening market based on our core technologies. Under our agreement with the NIH, we developed our NAT assay for the simultaneous detection of HIV-1 and HCV, incorporating our core technologies of target capture, TMA and DKA.

Blood Screening Products

      In 1998, in collaboration with Chiron, we were selected by The American Red Cross to provide it with an HIV-1/ HCV assay for testing pooled blood samples under an IND filed with the FDA. The Red Cross is the largest supplier of blood, plasma and tissue products in the world. The Red Cross provides almost half of the nation’s whole blood supply of 3 million units by working with more than 4.5 million

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      Testing by these organizations under the IND started in June 1999 and pivotal clinical trials were completed in 2000. The completion of these trials allowed us to submit a BLA to the FDA for the HIV-1/ HCV assay, which the FDA approved in February 2002. As a result of FDA approval, Chiron began in the second quarter of 2002 to sell the assay at commercial prices to United States customers, which resulted in our recognizing increased revenues. The HIV-1/ HCV assay has received approval in the United States, some European countries, and in Asia. Regulations adopted by the European Union require all in vitro diagnostic products, including our HIV/ HCV blood screening assay, to be registered and receive “CE” mark approval by December 7, 2003. We received CE mark approval for the blood screening assay in February 2003 and we anticipate the release of the first CE-marked blood screening assays in the summer of 2003.

      As noted above, blood collection centers currently screen donated blood by taking samples from separate units and then conducting a probe-based test on the pooled samples. The Procleix system, which currently is performed on a version of our DTS instrumentation, provides sufficient throughput for screening pooled samples of donor blood. However, we believe that the FDA will ultimately require testing of each unit of blood individually. Testing each unit individually is currently impractical without fully automated instrumentation. Accordingly, we are investing in the development of the TIGRIS system, which we believe will provide the automation necessary to facilitate the adoption of individual donor testing. In addition, we are developing an assay for the simultaneous detection of HIV-1, HCV and HBV, which we believe will further drive demand for our blood screening products.

      We believe that our NAT technology and our instrumentation are well suited for numerous emerging applications. We have developed our first cancer-related product, a TMA-based assay for the detection of chronic myelogenous leukemia, or CML, that has been approved in Japan. In the United States, we have developed the product as an ASR reagent to allow clinical diagnostic laboratories to build their own assays for CML. We believe that the sensitivity and specificity provided by our technologies will allow us to develop additional products that can be used for detecting and monitoring the expression of the genes involved in cancer.

      In the industrial market, we have developed a NAT assay to detect the bacterium Listeria monocytogenes from a cultured sample. We received FDA approval for this product in June 1990. Listeria is a food pathogen, and our assay is used by the dairy industry in Europe to monitor for listeria contamination. We also have developed a test for mycoplasma that is used by tissue culture facilities in the industrial and research markets to detect contamination of cell lines and culture media. We are also evaluating additional product opportunities in bioterrorism, food and water testing.

      In addition, we also are conducting research studies to demonstrate the feasibility of our technology to detect genetic markers that might be useful as indicators of a patient’s predisposition to some disease states and also in the prediction of a patient’s responsiveness to a particular therapy. We are evaluating the market potential of these new products and we believe that if we successfully introduce one or more of these products, it should have a meaningful impact on our financial performance.

Instrumentation

      We have developed and continue to develop instrumentation and software that are designed specifically for performing our NAT assays. We also provide technical support and instrument service to maintain these systems in the field. Historically, we have provided our instrumentation to laboratories and

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      For instruments that will be used for blood screening or in connection with our collaboration with Bayer, we sell the instrumentation to Chiron and Bayer, and they are responsible for the placement, maintenance and repair of the units with end customers. We record the revenue associated with the delivery of our proprietary integrated instrument platforms to customers in product sales. The costs associated with the instrument are charged to cost of sales on a straight-line basis over the estimated life of the instrument, which ranges from three to five years. The costs to maintain these systems in the field are charged to operations as incurred.

      We first introduced the LEADER series of luminometers, designed in conjunction with MGM Instruments, Inc., for use with our PACE and AccuProbe products and, more recently, the APTIMA product line. Utilizing advanced chemiluminescent detection, our luminometers provide high sensitivity, speed, accuracy and ease-of-use. Currently there is an installed base of over 4,000 of our luminometers worldwide. The LEADER series can accommodate the throughput needs of low-volume testing laboratories. We have no firm, long-term commitments from MGM Instruments to supply products to us for any specific period, or in any specific quantity, excep