UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2003

For the transition period from          to          

Commission File Number: 0-11647

HYCOR BIOMEDICAL INC.

7272 Chapman Avenue, Garden Grove, California 92841

Registrant’s telephone number, including area code (714) 933-3000

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $.01 par value

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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 identified in Rule 12b-2 of the Act). Yes [   ] No [X]

     As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing sale price of such stock on such date) was $33,045,051.

     The number of shares of common stock of the registrant outstanding at March 15, 2004 was 8,114,222.

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Table of Contents

PART I

     Item 1. Business

General

     Hycor Biomedical Inc. (“Hycor” or the “Company”) is engaged in the research, development, manufacturing, and marketing of medical diagnostic products throughout the United States and many foreign countries.

     The Company operates two wholly owned subsidiaries, Hycor Biomedical GmbH (“Hycor GmbH”), located in Kassel, Germany and Hycor Biomedical, LTD (“Hycor Ltd.”), formally known as Cogent Diagnostics Limited, located in Edinburgh, Scotland. Hycor GmbH primarily packages and distributes allergy diagnostic products in Europe. Hycor Ltd. develops, manufactures and markets a broad line of test kits for the diagnosis of autoimmune disease.

Merger Agreement

     On July 24, 2003, the Company announced the execution of an Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Stratagene, a Delaware corporation, SHC Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Stratagene, and the Company. Pursuant to the Merger Agreement, Stratagene would acquire all of the outstanding shares of the Company through a merger between SHC Acquisition Sub and the Company. The Company will survive the merger as a wholly owned subsidiary of Stratagene. Pursuant to the Merger Agreement, the Company’s stockholders would receive a fixed exchange ratio of 0.6158 Stratagene shares in exchange for each share of the Company, plus cash for any fractional shares. The closing of the transaction is subject to closing conditions, including, but not limited to, the parties obtaining the necessary regulatory and shareholder approvals. The Company expects that the proposed transaction will be recognized as a tax-free reorganization.

     Stratagene has filed a registration statement on Form S-4 (No. 333-109420) related to the proposed transaction. Once the SEC declares the Form S-4 effective, it will be mailed along with the proxy to the shareholders of Hycor.

Products

     The Company engages in business activity in only one operating segment that entails the development, manufacture, and sale of medical diagnostic products with a focus on allergy and autoimmune testing and urinalysis products. While the Company offers a wide range of items for sale, many are manufactured at common production facilities.

     The KOVATM Microscopic Urinalysis System is the Company’s largest product line accounting for approximately 47%, 52%, and 56% of net sales for 2003, 2002, and 2001, respectively. The KOVA System provides laboratories with the capability to perform uniform and reliable microscopic analyses of urine specimens. It is composed of plastic collection containers, tubes and pipettes, patented microscopic slides, and human urine-based control materials.

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     The Company’s Clinical Immunology product lines consist of Allergy and Autoimmune diagnostic products.

     The Company’s Allergy diagnostic product line, which accounted for approximately 40%, 35%, and 29% of revenues for 2003, 2002, and 2001, respectively, is a complete line of RIA (“radioimmunoassay”) and EIA (“enzymatic immunoassay”) procedures to test for specific allergies to more than 1000 different allergens such as grasses, weeds, trees, epidermals (i.e. animal hair), dust, dust mites, molds, and foods; general screening tests are also available. Unlike the traditional prick puncture and intradermal testing methods of diagnosing allergies, the Company’s products permit a physician to diagnose allergies by testing a sample of the patient’s blood for the presence of the specific IgE or IgG antibody, which reacts with the corresponding allergen. This method has many advantages over the traditional methods of allergy diagnosis, not the least of which is patient comfort.

     The Company’s Autoimmune diagnostic product line, which accounted for approximately 9%, 8%, and 9% of revenues in 2003, 2002, and 2001, respectively, includes tests utilized for the diagnosis and monitoring of autoimmune disorders such as rheumatoid arthritis and systemic lupus erythematosus among others. Autoimmune diseases may be systemic or organ-specific and the need for this type of diagnostic testing is expected to increase as the population ages and primary care physicians are educated about autoimmune diseases. The Company’s tests are based on enzyme immunoassay technology in a microplate format. Unlike traditional methods like immunofluorescence, which requires a dedicated and highly trained technologist to read slides manually through a microscope one at a time, the Company’s products can be automated either on the Company’s HY•TEC instruments or on general microplate processors.

     The Company’s Allergy and Autoimmune product lines also include the HY•TEC 480 and HY•TEC 288 automated diagnostic systems that provide clinical laboratories with significant productivity improvement capabilities. The HY•TEC systems include the instruments, software, and test reagents necessary to perform allergy and autoimmune testing. The Company places a large percentage of the HY•TEC systems on a “reagent rental” basis. A “reagent rental” transaction, common to the diagnostic market, involves the placement of an instrument in the laboratories of customers that pay for the system over an agreed contract period through the purchase of test reagents. The Company’s HY•TEC reagent rental program is similar in that instruments are typically placed in use with direct customers and paid for over an agreed contract period through the purchase of test reagents, but also includes the sale of some instruments to distributors and direct customers. The typical contract period for the HY•TEC reagent rental is between 3 to 5 years. The instruments that are sold to distributors are sold with a minimal gross profit to assist them with their instrument placements, on the expectation that the Company will earn a profit on the subsequent sales of reagents necessary to operate the instrument.

Sales and Marketing

     Clinical laboratories and certain specialty physicians are primary users of the Company’s products. In the United States, the Company’s product lines are generally sold through both independent and clinical laboratory distributors. The majority of sales in the United States are to Cardinal Health Corporation (formerly Allegiance Healthcare Corporation) and Fisher Scientific, two

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major U.S. distributors. The allergy product line is sold directly to the end user through the Company’s direct sales force.

     In foreign countries the Company’s products are sold primarily through a network of independent distributors. The Company sells its allergy and autoimmune products to the German and U.K. market through a direct sales force.

     Export sales (all to unaffiliated customers) accounted for approximately $1,906,000, $1,774,000, and $1,730,000 in 2003, 2002, and 2001, respectively, which represents approximately 10% of total consolidated sales for each year. The primary geographical area was Europe, which, including sales by the Company and its foreign subsidiaries, accounted for sales of $5,792,000, $5,754,000, and $5,036,000 in 2003, 2002, and 2001, respectively. (See Note 11 to the Consolidated Financial Statements.)

     The Company’s two largest distributors, Cardinal Health Corporation and Fisher Scientific, each accounted for 14% of net product sales in 2003; 18% and 16% of net product sales in 2002; and 22% and 13% of net product sales in 2001, respectively. A loss of one or both of these distributors or a decision by a significant customer to substantially decrease or delay purchases from the Company or the Company’s inability to collect receivables from these customers could have a material adverse effect on the Company’s financial condition and results of operations. However, there are other national, regional, and foreign clinical laboratory products distributors, as well as the Company’s sales force that could market the Company’s products.

     The Company did not have a significant backlog of orders at December 31, 2003 and December 31, 2002. Because of the short time between order receipt and expected delivery, the Company, consistent with industry practice, carries a large inventory to meet the expected flow of orders. Backlog is not a significant factor in the Company’s business.

     The Company’s business is not considered seasonal in nature but is slightly affected in the third quarter by the general slowdown in Europe during the traditional vacation months.

Raw Materials

     Although a substantial amount of the Company’s total purchases for raw materials and finished products were from a limited number of suppliers during the last fiscal year, a number of alternative sources are available to the Company should they be required.

Research and Development

     The Company maintains an ongoing research and development effort. The purpose of this effort is to evaluate new technologies, improve the Company’s current product lines, and develop new products. Current projects in progress are focused on programs to support and enhance the HY•TEC diagnostic system. In addition during 2003, the Company entered into development agreements with Bayer Healthcare LLC and Beckman Coulter, Inc. to adapt its autoimmune tests to their automated immunoassay system. The Company expects to begin sales of products in late 2004.

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     Total research and development expenditures were approximately $2,169,000, $1,846,000, and $1,940,000 for 2003, 2002, and 2001, respectively.

Government Regulations

     The Company is indirectly affected by government regulations directed towards containing the cost of medical services and limiting the amount of reimbursement to service providers. These types of regulations, which are applicable to both domestic and international markets, will tend to limit growth rates in the Company’s target markets. The Company’s products, including the HY•TEC automated diagnostic system, are designed to provide a cost effective solution to service providers, thereby aiding in the cost containment efforts. However, the Company cannot predict the long-term affect on revenue growth resulting from these regulations.

     The Company is registered as a manufacturer of medical devices and a licensed biological manufacturer with the Food and Drug Administration (“FDA”). To comply with FDA requirements, the Company must manufacture its products in conformance with the FDA’s medical device Good Manufacturing Practice regulations. The Company’s existing products are also subject to certain pre-market notification requirements of the FDA.

     The receipt, use, and disposal of radioactive materials are subject to licensing requirements of the Nuclear Regulatory Commission (“NRC”). The Company holds a radioactive materials license from the NRC for its radioactive labeling activities and its facilities are inspected periodically by the NRC.

     The Company would be adversely affected if it were unable to maintain its governmental licenses or continue to comply with applicable federal and state regulations, but the Company does not expect this to occur. The Company cannot predict whether future changes in government regulations might substantially increase compliance costs, adversely affect the time required to develop and introduce products, or limit or preclude the sale of its new products.

     Compliance with federal, state, and local regulations relating to environmental matters is not expected to have a material effect upon capital expenditures, earnings, or the competitive position of the Company.

Competition

     The Company’s product lines have several different competitors. The KOVA Microscopic Urinalysis System has significant competition from at least two national diagnostic product manufacturing and distribution companies that market supplies that perform similar functions. Management believes that the Company is the leading supplier of standardized microscopic urinalysis systems.

     Pharmacia, Inc. and Diagnostic Product Corporation have products that compete with the Company’s allergy diagnostic products.

     A substantial number of the Company’s competitors are larger and have greater resources than the Company. The Company competes on the basis of price, promotion, quality of products,

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design of product, strength of the Company’s relationship with dealers, and other methods relevant to the business.

Patents

     The Company has maintained an aggressive patent policy and currently holds a number of domestic and foreign patents. While these patents offer some protection to its product lines and related technology, management believes that continued improvements to the product lines are more important for the protection of its market position. The most recent patent was issued in April 1999.

Employees

     As of February 20, 2004, the Company had approximately 147 employees. None of the employees are covered by collective bargaining agreements and management believes that the Company’s relations with its employees are satisfactory.

     Item 2. Properties

At December 31, 2003, the Company had three separate facilities.

1)		The Company’s corporate headquarters, principal administrative, and manufacturing facility is located in a leased 76,000 square foot two-story freestanding facility at 7272 Chapman Avenue, Garden Grove, California. The lease has a ten-year term ending December 31, 2007. The Company has the option to extend the lease term for an additional five-year period.
2)		The Company leases a 12,900 square foot freestanding building located at Otto-Hahn Straße 16, 34123 Kassel, Germany. The lease has a ten-year term ending March 31, 2005. The Company has the option to extend the term of the lease for an additional five years. The Company uses this facility for the packaging, warehousing, distribution, and administrative functions of its wholly owned subsidiary, Hycor Biomedical GmbH.
3)		The Company leases the 7000 square foot ground floor of a two-story building located at Pentlands Science Park, Bush Loan Penicuik, EH26 OPL Scotland. The lease has a five-year term ending September 30, 2006. The Company has the option to extend the term of the lease for an additional five years. The Company uses this facility for the laboratory, manufacturing, warehousing, distribution, and administrative functions of its wholly owned subsidiary, Hycor Biomedical Ltd.

     In management’s opinion, in general, its plant and equipment are adequately maintained, in good operating condition and adequate for the Company’s present needs. The Company upgrades and modernizes its facilities and equipment and expands its facilities as necessary to meet customer and regulatory requirements.

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     Item 3. Legal Proceedings

     To the best of management’s knowledge, there are no material pending legal proceedings. However, on occasion there may exist immaterial routine litigation that is incidental to the normal operations of the business to which the Company is a party or to which the Company’s property is subject.

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

     During the fourth quarter of the fiscal year ended December 31, 2003, there were no matters submitted to a vote of security holders.

PART II

     Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Price of Common Stock

     Hycor Biomedical Inc.’s common stock trades on The Nasdaq Stock Market under the symbol HYBD. The following table sets forth the range of high and low trading prices for the common stock for the periods indicated as reported. The prices do not include retail markups, markdowns, or commissions.

     There were 866 shareholders of record as of March 15, 2004. No dividends have been paid to stockholders since the Company was founded and the Company has no current intentions of paying cash dividends in the foreseeable future. The Company’s bank line of credit also precludes the payment of dividends.

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     Item 6. Selected Financial Data

(Dollars in thousands, except per share amounts)

a)		2001 results include the $723,000 write-off of goodwill related to the acquisition of Melja Diagnostik, GmbH.
b)		Includes long-term and current portion of the Company’s debts for all periods presented.
c)		2003 results include the $1,359,000 income tax benefit for the reversal of the valuation allowance against the Company’s domestic deferred tax assets and $688,000 in expenses related to the Company’s merger with Stratagene.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Execution of Agreement

     On July 24, 2003, the Company announced the execution of an Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Stratagene, a Delaware corporation, SHC Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Stratagene, and the Company. Pursuant to the Merger Agreement, Stratagene would acquire all of the outstanding shares of the Company through a merger between SHC Acquisition Sub and the Company. Pursuant to the Merger Agreement, the Company’s stockholders would receive a fixed exchange ratio of 0.6158 Stratagene shares in exchange for each share of the Company, plus cash for any fractional shares. The closing of the transaction is subject to closing conditions, including, but not limited to, the parties obtaining the necessary regulatory and shareholder approvals. The Company expects that the proposed transaction will be recognized as a tax-free reorganization.

     Stratagene has filed a registration statement on Form S-4 (No. 333-109420) related to the proposed transaction. Once the SEC declares the Form S-4 effective, it will be mailed along with the proxy to the shareholders of Hycor.

     If the proposed transaction is completed, the combined company would offer diagnostic products and life sciences research tool product lines to the global academic, pharmaceutical, and clinical and government laboratory markets. The Company is expected to be impacted by merger-related costs of approximately $3.7 million, consisting of severance payments, investment banking fees, professional fees and other miscellaneous expenses, of which the Company has incurred approximately $688,000 as of December 31, 2003 and the balance is expected to be recognized in the first and second quarter of 2004.

Significant Accounting Policies

     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and management is required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

Revenue Recognition

     Revenues from product sales are recognized at the time of shipment and passage of title. Revenues from customers under distributorship agreements are also recognized at the time of shipment and passage of title. The Company offers customers the right to return products only if the products are shipped in error, are damaged or in the event of product failure. While such returns have historically not been significant, the Company cannot guarantee that it will continue to experience the

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same return rates that it has in the past. Any significant increase in product failure rates and the resulting credit returns could have a material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.

Accounts Receivable

     The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness. The Company continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. The Company’s credit losses have historically been within expectations and the provisions established. However, the inability of one of the Company’s significant customers to pay amounts owed could have a material adverse impact on the Company’s operating results.

Inventories

     Inventories are valued at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory on specifically identified items based primarily on an estimated forecast of product demand and production requirements. The Company’s losses from disposal of excessive and obsolete inventories have historically been within expectations and the provisions established. However, the Company’s estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. In addition, rapid technological change or new product development could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if the Company’s inventory is determined to be overvalued, it would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if the Company’s inventory is determined to be undervalued, it may have over-reported its costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale.

     Additionally, the Company’s manufacturing costs and inventory carrying costs are dependent on management’s accurate estimates of customer demand for the Company’s products. A significant increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand and increase the expense of storing and maintaining the inventory until it is sold. Therefore, although management makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the Company’s inventory and its reported operating results.

Deferred Taxes

     The Company’s deferred taxes relate primarily to prior operating losses and R&D tax credits that are available to offset future income taxes. Deferred taxes are also recognized for differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company evaluates a variety of factors in determining the amount of deferred income assets to be recognized pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. During 2003, the Company reversed the valuation allowance on a portion of its deferred assets. To the extent that it becomes more likely than not that the deferred assets, which

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continue to have a valuation allowance, would be realized, the Company would be required to reverse all or a portion of the remaining valuation allowance. Reducing the amount of valuation allowance would have the affect of reducing the Company’s effective tax rate and have a positive impact on net income in the period of change. To the extent it becomes more likely than not that the net deferred tax asset recorded by the Company will not be realized, the Company would be required to increase its valuation allowance by recording an additional income tax provision. (See Note 7 to the Consolidated Financial Statements.)

Warranties

     All products are guaranteed to perform pursuant to Company policy for each product type when stored and used as directed. Warranty is limited to replacement of defective product returned at no cost to the customer. While the Company’s warranty costs have historically not been significant, the Company cannot guarantee that it will continue to experience the same warranty return rates that it has in the past. A significant increase in product return rates could have a material adverse impact on operating results for the period or periods in which such returns materialize.

Impairment Charges

     In 1994, the Company acquired Melja Diagnostik, GmbH and recorded total goodwill resulting from the acquisition of approximately $1,900,000. Significant changes in both German reimbursement rates and the value of the U.S. dollar versus the Euro have caused declining operating results. In the fourth quarter of 2001, the goodwill related to this acquisition was determined to be impaired. As a result of this impairment, the Company recorded a noncash pretax charge of $723,000 relating to Melja Diagnostik, GmbH goodwill. This write-down eliminates all goodwill related to this acquisition. The goodwill remaining on the balance sheet at December 31, 2003 amounts to approximately $156,000 and relates to the acquisition of Cogent Diagnostics Limited in 1997. (See Notes 9 and 12 to the Consolidated Financial Statements.)

Results of Operations

2003 Compared to 2002 Overall, 2003 net sales increased $1,166,524 or 6.3% when compared to 2002. Sales in the Urinalysis product line decreased by approximately $396,000 or 4.1% when compared to 2002. The Urinalysis product line is sold primarily to distributors and sales trends are subject to their inventory management policies. The Company was aware that its two largest distributors in the United States had reduced inventory levels at year-end. Sales in the clinical immunology product line increased approximately $1,589,000 or 19.9% when compared to 2002. This increase was primarily the result of increased sales in the Allergy product line due to increased volumes with pre-existing accounts of approximately $844,000 and increasing activity from new accounts of approximately $396,000 for 2003, when compared to 2002. (See Note 11 to the Consolidated Financial Statements.)

     Sales in the year 2003 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of approximately 13.4%. This resulted in an increase to consolidated reported sales of approximately $682,000 or 3.5% when compared to 2002. Additionally, continued pressures in the health care industry for cost controls affect the Company’s revenue and the Company anticipates that these pricing pressures will continue in the future. During 2003, the Company did not experience any significant pricing changes for its products.

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     Gross profit as a percentage of sales increased to 54.5% in 2003 from 53.4% in 2002 due primarily to changes in the product sales mix.

     Selling, general and administrative expenses increased $1,157,034 or 16.9% in 2003 over 2002 (40.6% of net sales in 2003 versus 36.9% of net sales in 2002). This increase was due primarily to expenses related to the merger negotiations of approximately $688,000 and to increases in sales support costs related to field sales activities in the United States market of approximately $244,000. In addition, during 2003, an unfavorable foreign exchange impact caused an increase in reported expenses of approximately $220,000.

     Research and development costs increased $323,168 or 17.5% (11.0% of net sales in 2003 versus 9.9% of net sales in 2002) primarily due to increased expenses in 2003 for ongoing development projects with the Company’s allergy product line, expenses associated with the Company’s agreement with Bayer Diagnostics and recruitment expenses. In addition, included in 2002 were non-recurring severance costs related to the termination of a senior member of management of approximately $189,000.

     Operating income decreased $625,713 or 51.4% in 2003 when compared to 2002. This decrease was due primarily to expenses related to the merger negotiations of approximately $688,000.

     Interest income decreased $9,684 or 5.6% in 2003 over the prior year primarily as a result of the sale and transfer of approximately $2,255,000 in long-term bonds to money market accounts with lower interest rates. Interest expense decreased approximately $36,341 or 87.6% in 2003 from the prior year due to the payment of the long-term debt balances early in the first quarter of 2003.

     The tax provision for the 12 months ended December 31, 2003 reflects the provision for federal, state and foreign liabilities. The Company’s effective tax rate differs from the statutory rate primarily due to a foreign tax rate differential and a reversal of approximately $1,786,000 of its $2,695,000 valuation allowance on its deferred tax assets. The reversal of the valuation allowance resulted in an income tax benefit of approximately $1,329,000 in 2003 compared to income tax expense of approximately 193,000 in 2002. This reversal is the result of the Company’s recent sustained history of U.S. operating profitability and the determination by management that the future realization of the U.S. net deferred tax assets was judged to be more likely than not. Without the benefit of the valuation allowance reversal the Company’s effective tax rate would have been approximately 6.4% in 2003 compared to 13.3% in 2002. (See Note 7 to the Consolidated Financial Statements.)

2002 Compared to 2001 Overall, 2002 net sales increased $1,277,883 or 7.4% when compared to 2001. Sales of Urinalysis and Clinical Immunology product lines increased $1,444,000 or 8.9% compared to 2001, while sales of other products decreased $166,000 or 14.5% over the same period. The increase in sales was primarily the result of increased sales in the Allergy product line due to increased volumes with pre-existing long-term accounts and increasing purchasing activity from additional HY•TEC placements in clinical laboratories within the last 12 months. (See Note 11 to the Consolidated Financial Statements.)

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     Sales in the year 2002 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of approximately 4.8%. This resulted in an increase to consolidated reported sales of approximately $223,000 or 1.2% when compared to 2001. Additionally, continued pressures in the health care industry for cost controls affect the Company’s revenue and the Company anticipates that these pricing pressures will continue in the future.

     Gross profit as a percentage of sales decreased to 53.4% in 2002 from 55.2% in 2001 due primarily to changes in the product sales mix with a higher percentage of sales coming from our allergy products, which typically have lower margins than urinalysis products.

     Selling, general and administrative expenses increased $87,000 or 1.3% in 2002 over 2001 (36.9% of net sales in 2002 versus 39.1% of net sales in 2001). Spending in 2002 remained relatively flat compared to 2001. However an unfavorable foreign exchange impact caused an increase of approximately $86,000. In addition, the implementation of SFAS No. 142, Goodwill and Other Intangible Assets, had a favorable impact of approximately $132,000 from the elimination of goodwill amortization in 2002.

     Research and development costs decreased $94,501 or 4.9% (9.9% of net sales in 2002 versus 11.2% of net sales in 2001) primarily due to a reduced number of research and development projects as compared to the prior year.

     Interest income increased $32,288 or 22.9% in 2002 over the prior year due to increased average monthly balances in cash and investments during the year partially offset by lower average interest rates. Interest expense decreased $12,852 or 23.7% in 2002 from the prior year due to declining interest rates in 2002.

     The tax provision for the 12 months ended December 31, 2002 reflects the provision for federal, state and foreign liabilities. The Company’s effective tax rate differs from the statutory rate primarily due to a foreign tax rate differential and a reduction in the valuation allowance due to the utilization of net operating loss carryforwards. (See Note 7 to the Consolidated Financial Statements.)

Financial Condition and Liquidity

     The Company’s working capital increased approximately $808,000 from $11,740,000 at December 31, 2002 to $12,548,000 at December 31, 2003, primarily as a result of profitable operations offset by the payment of the outstanding balance of $1,000,000 on the Company’s line of credit in January 2003. The reduction in inventory levels of approximately $461,000 was offset by the increase in current deferred tax assets of approximately $437,000. This deferred tax asset was created as a result of the reversal of the valuation allowance on a portion of the deferred tax assets. (See Note 7 to the Consolidated Financial Statements.)

     Total capital expenditures during fiscal 2003 and fiscal 2002 were approximately $586,000 and $609,000, respectively. Capital spending during fiscal 2003 and fiscal 2002 included approximately $250,000 and $300,000 for reagent rental equipment, respectively, and $200,000 in each year for tooling and test equipment utilized in the Company’s manufacturing and research and development areas. For fiscal 2004, the Company currently anticipates capital spending on property and equipment to be in the range of $500,000 to $600,000.

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     The Company reduced its allowance for doubtful accounts by $24,000 and $93,000 in 2003 and 2002, respectively. Hycor’s routine reserve analysis, based on a specific account review and calculated percentage review, determined that the accounts receivable reserve required these downward adjustments.

     During 2003, cash provided by investing activities increased over 2002 because the Company sold investments with an aggregate book value of $2,225,790 for total cash proceeds of $2,292,595 resulting in a net realized gain of $66,805. During 2002, the Company sold investments with an aggregate book value of $911,986 for total cash proceeds of $908,547, resulting in a net realized loss of $3,439.

     The Company’s principle capital commitments are for lease payments under non-cancelable operating leases. Additionally, the HY•TEC business requires the purchase of instruments, which in many cases are placed in use in laboratories of the Company’s direct customers and paid for over an agreed contract period through the purchase of test reagents. This “reagent rental” sales program, common to the diagnostic market, creates negative cash flows in the initial years.

     The Company has a line of credit that provides for borrowings of up to $2,000,000 and expires on July 1, 2004. The line of credit is collateralized by the Company’s accounts receivable, inventories, and property and equipment. At December 31, 2003, the Company had no outstanding advances under the line of credit and does not expect to renew it. Advances under the line of credit bear interest at the prime rate or at LIBOR plus 2% (3.17% as of December 31, 2003), payable monthly, with the principal due at maturity. During 2003, the applicable outstanding interest rate was 3.87%. The line of credit contains restrictive covenants, the most significant of which relate to the maintenance of minimum tangible net worth, debt-to-tangible net worth requirements and liquid assets plus accounts receivable-to-current liabilities requirements. At December 31, 2003, the Company was in compliance with such covenants.

     In addition, in the normal course of operations, the Company enters into purchase obligations with various vendors and suppliers of various key raw materials and other goods and services through purchase orders or other documentation. Such obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services. The purchase commitments covered by these various key raw materials and other goods and services aggregate approximately $696,000 for 2004.

     The following table summarizes the approximate future minimum payments under the above contractual obligations at December 31, 2003:

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     In the past, the Company has generally funded our capital expenditures and working capital requirements with cash flows from operations and funds available to us under the line of credit. The Company expects to fund future capital expenditures and working capital needs with cash flows from operations.

     In October 2002, the Board of Directors authorized the repurchase of up to an aggregate of 1,000,000 shares of the Company’s outstanding common stock. As of December 31, 2003, 11,500 shares of the Company’s common stock had been purchased at an average cost of $1.77 per share for a total of $20,404. The following schedule summarizes the Company’s repurchase program:

Indemnification and Guarantees

     The Company has entered into employment contracts with each of the Company’s five officers. These contracts generally provide for severance benefits if the officer is terminated by the Company for convenience or by the officer for substantial cause. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interests in the event of an actual or threatened change in control of the Company, the contracts also generally provide four of the officers with certain protections in the event of such a change in control. Two of the contracts provide certain benefits in the event of a change of control only and two of the contracts provide certain benefits in the event of a change of control and the occurrence of other specified contingencies. Such obligations are not included in the table of contractual obligations set forth above. In the event the proposed transaction with Stratagene Holding Corporation is completed, the Company will incur severance obligations of approximately $1.5 million that are included in the expected merger related costs disclosed above under the heading “Execution of Agreement”.

New Accounting Pronouncements

     Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2003, which note is incorporated herein by this reference and is included as part of “Item 8., Financial Statements and Supplementary Data”, to this Form 10-K.

RISK FACTORS

     This report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed below and elsewhere in this annual

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report. The cautionary statements made in this annual report should be read as being applicable to all forward-looking statements wherever they appear. The Company’s operations are subject to a variety of risks and uncertainties, and the following risk factors are not to be considered a definitive list of all risks associated with its operations.

Dependence On Distributors And Limited Direct Sales Resources

     The Company relies upon third-party distributors, as well as its own sales force, to distribute its products. If the Company loses one or more of these distributors and cannot arrange suitable alternatives, its business could be adversely affected. The Company currently has limited resources in direct sales, and in the marketing and distribution of its products.

Competition

     Many of the Company’s competitors in its current and target markets, particularly allergy diagnostic products, have superior technology, greater financial, operational, sales and marketing, and research and development resources than the Company does.

Ability To Secure And Maintain Intellectual Property Protection

     The Company will be able to protect its proprietary rights from unauthorized use by third parties only to the extent that the Company’s technologies are protected by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of medical diagnostic companies, including the Company’s patent positions, can be highly uncertain and involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. The medical diagnostic product industry is characterized by extensive litigation regarding patents and other intellectual property rights because of the uncertainty in the breadth of patent coverage for inventions, technologies and products for medical diagnostic product inventions.

Impact Of Foreign Currency Fluctuations

     In 2003, the Company derived approximately 26% of its sales from its foreign operations. Sales and expenses of the Company’s foreign operations are conducted in local currency. As a result, the Company is exposed to market risk related to interest rates and foreign currency exchange rate fluctuations. The Company recognizes foreign currency gains or losses arising from its operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which the Company does business could adversely affect its results of operations.

     In addition, approximately 9.6% of the Company’s net sales in 2003 were exported from the United States. Several of the international markets in which the Company sells its products have experienced a strengthening in their currencies in the last year. The Company’s foreign customers for these export sales currently pay for the Company’s products with U.S. dollars. The weakening of the U.S. dollar as compared to the local currencies effectively decreased the cost of the Company’s products to these customers. If the U.S. dollar were to strengthen against these currencies, it would effectively increase the cost of the Company’s products in the foreign countries and make them less attractive to such customers. Accordingly, changes in exchange rates, and in particular a strengthening U.S. dollar, may negatively impact future sales and gross margins.

     The Company cannot predict the effects of exchange rate fluctuations upon its future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates.

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Fluctuations In Quarterly Results Of Operations

     The Company’s quarterly revenue and operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause the Company’s stock price to fluctuate significantly or decline.

Use Of Hazardous Materials

     The Company’s research and development processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. The Company’s operations also generate potentially hazardous waste. Federal, state, local and foreign laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. The Company cannot eliminate entirely the risk of contamination or the discharge of hazardous materials and any resultant injury from these materials. In addition, compliance with applicable environmental laws and regulations may be costly, and current or future environmental regulations may impair the Company’s research, development or production efforts.

Dependence On Key Personnel

     Due to the specialized nature of the Company’s business, it is highly dependent on the continued service of its executive officers and other key management, scientific and technical personnel. The loss of any of these persons would adversely affect the Company’s business. The Company’s success will also depend in large part upon its ability to continue to attract, retain and motivate qualified scientific and technical personnel with advanced degrees and technical research and manufacturing skills. The competition for qualified personnel is intense. If the Company cannot attract, retain and motivate such qualified personnel, its business will be adversely affected.

     Item 7a. Quantitative and Qualitative Disclosures about Market Risk

     The Company’s financial instruments include cash and cash equivalents and investments. At December 31, 2003, the carrying values of the Company’s financial instruments approximated their fair values based on current market prices and rates.

     The Company is exposed to a number of market risks in the ordinary course of business. These risks, which include foreign currency exchange risk and interest rate risk, arise in the normal course of business rather than from trading. Aside from the operations of the Company’s subsidiaries in Germany and Scotland, it does not transact business in foreign currencies. At the present time, the Company does not have any hedging programs in place and it is not trading in any financial or derivative instruments.

Foreign Currency

     The Company’s international sales expose it to foreign currency risk in the ordinary course of its business. Approximately 26% of the Company’s net sales in fiscal 2003 were generated by the Company’s foreign subsidiaries (“Foreign Subs”). The financial position and results of operations of the Foreign Subs are measured using the local currency as the functional currency. The Foreign Subs sell product in various European currencies that are collected at future dates and purchase raw materials and finished goods in both U.S. dollars and other European currencies. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency

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exchange rates. Realized gains and losses from foreign currency transactions are included in operations as incurred.

     For financial reporting purposes, the Foreign Subs’ statements of operations are translated from the local currency into U.S. dollars at the exchange rates in effect during the reporting period. When the local currency strengthens compared to the U.S. dollar, there is a positive effect on the Foreign Subs’ sales as reported in the Company’s Consolidated Financial Statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. In fiscal 2003, the net impact to the Company’s reported sales from the effect of exchange rate fluctuations from 2002 was an increase of approximately $682,000. In 2002, the net impact of the Company’s reported sales from the effect of the exchange rate fluctuations was an increase of approximately $223,000.

     Assets and liabilities of the subsidiaries are translated at the exchange rate in effect at each year-end. Translation adjustments arising from differences in exchange rates from period to period are included in the accumulated other comprehensive loss account in stockholders’ equity. At December 31, 2003, the accumulated other comprehensive loss was approximately ($407,000), which included the cumulative effect of foreign currency translation adjustments of approximately ($419,000).

     Certain countries in which the Company operates adopted the Euro as a legal currency effective January 1, 1999. Euro notes and coins came into circulation after a three-year transition period on January 1, 2002. The Company has not experienced any significant operational disruptions to date due to the Euro conversion and does not currently expect the continued implementation of the Euro to cause any significant operational disruptions.

Interest Rates

     Advances under the Company’s line of credit bear interest at the prime rate or at LIBOR plus 2% (3.17% as of December 31, 2003). During 2003, the applicable outstanding interest rate was 3.87%. At December 31, 2003, the Company had no outstanding advances under the line of credit.

     The Company’s cash and equivalents are generally invested in money market accounts and short-term debt instruments of highly rated credit issuers. The Company limits the amount of credit exposure to any one issuer and seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. Based on the Company’s short-term investment portfolio at December 31, 2003, the Company believes that a 10% rise or fall in interest rates would result in an increase or decrease in its interest income for the year of approximately $2,000.

     The Company’s interest income on longer-term investments is dependent on the interest rate attributable primarily to the debt securities purchased by the Company. Since the Company generally holds these securities to maturity, changes in interest rates are not expected to have a material impact on the value of the Company’s portfolio. During 2003, in anticipation of the expenses associated with the expected merger with Stratagene, the Company sold investments with an aggregate book value of approximately $2,226,000.

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     Item 8. Financial Statements and Supplementary Data

The following documents are filed as part of this report:

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders
Hycor Biomedical Inc.
Garden Grove, California

We have audited the accompanying consolidated balance sheets of Hycor Biomedical Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

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

As discussed in Note 9 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and intangible assets.

/s/ Deloitte & Touche LLP

Costa Mesa, California
March 26, 2004

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

See notes to consolidated financial statements

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

See notes to consolidated financial statements

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HYCOR BIOMEDICAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001