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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART IV

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

FORM 10-K

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

For The Fiscal Year Ended December 31, 2002
Commission File Number 000-30833

BRUKER DALTONICS INC.
(Exact name of Registrant as specified in its charter)

40 Manning Road
Billerica, MA 01821
(Address of principal executive offices, including zip code)

(978) 663-3660
(Registrant's telephone number, including area code)

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 ý 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 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 Rule 12b-2 of the Act.) Yes o No ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was approximately $45,329,730 (based on the last reported sale price on the Nasdaq National Market on that date).

        The number of shares outstanding of the registrant's Common Stock as of March 21, 2003 was 55,007,931.

BRUKER DALTONICS INC.
Annual Report on Form 10-K
Table of Contents

        This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including without limitation those discussed in "Factors Affecting Our Business, Operating Results and Financial Condition" section herein. Such forward-looking statements speak only as of the date on which they are made, and we caution readers not to place undue reliance on such statements.

        References to "we," "us," "our," the "Company" or "Bruker Daltonics" refer to Bruker Daltonics Inc. and, in some cases, its subsidiaries, as well as all predecessor entities.

        Our principal executive offices are located at 40 Manning Road, Billerica, Massachusetts 01821, and our telephone number is (978) 663-3660. Information about Bruker Daltonics is available at www.BDAL.com. The information on our website is not incorporated by reference into and does not form a part of this report. Daltonics and the Daltonics logo are trademarks of Bruker Daltonics. All other trademarks, tradenames or copyrights referred to in this report are the property of their respective owners.

PART I

ITEM 1. BUSINESS

Overview

        Bruker Daltonics is a leading developer and provider of innovative life science tools based on mass spectrometry and develops a broad range of field analytical systems for substance detection and pathogen identification. Our substantial investment in research and development allows us to design, manufacture and market a broad array of products intended to meet the rapidly growing needs of our diverse customer base. Our customers include pharmaceutical companies, biotechnology companies, agricultural biotechnology companies, proteomics companies, molecular diagnostics companies, academic institutions and government agencies.

        Mass spectrometers are sophisticated devices that measure the mass or weight of a molecule and provide highly accurate information about the structure of materials. Our mass spectrometry-based systems often combine advanced mass spectrometry instrumentation; automated sampling and sample preparation robots; reagent kits and other disposable products, called consumables, used in conducting tests, or assays, and powerful bioinformatics software. Our systems offer integrated solutions for applications in multiple existing and emerging markets including genomics and proteomics, metabolic and biomarker profiling, drug discovery and development, molecular assays and diagnostics, molecular and systems biology and basic medical research.

        We market our life science systems both through our direct sales force and through strategic distribution arrangements with Agilent Technologies, Sequenom, Biacore and others. We are also a worldwide leader in supplying mass spectrometry-based systems for substance detection and pathogen identification in security and defense applications.

        Bruker Daltonics was incorporated in Massachusetts, as Bruker Federal Systems Corporation. In February 2000, we reincorporated in Delaware as Bruker Daltonics Inc.

Industry Background

        We design our products to address the rapidly evolving needs of the life science industry. Public and private efforts to sequence the entire human genome have led to advances that are fueling further investment in the discovery and identification of single nucleotide polymorphisms, or SNPs, and other forms of genetic variation. These developments, combined with advances in combinatorial chemistry, which is the creation of libraries of chemical compounds, and in basic molecular biology and medical research, are spurring growth in the following rapidly developing and emerging areas:

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pharmacogenomics, which compares the genetic information of an individual to the average human genome to predict the response of individual patients and patient populations to drugs;



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personalized medicine, which seeks to apply inexpensive, rapid molecular diagnostic tests, or assays, to profile a patient's genetic composition and enable the prescription of individualized drug therapy;



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proteomics, which involves the large-scale separation, identification and characterization of proteins in order to understand how proteins are created based on the information contained in genes;



•

new methods of drug discovery, which are based on the rapid measurement, or high-throughput screening, of large numbers of small organic compounds synthesized through combinatorial chemistry against large numbers of disease pathways, or targets, identified by genomics and proteomics;

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biomarker detection, or bio-barcoding, which develops rapid and sensitive assays for a broad range of cell and tissue types for applications including infectious disease detection, human tissue assessment, the identification of specific agricultural characteristics and pathogen identification, even when the molecular mechanisms are not understood or the genomic sequence is not available; and



•

metabolic profiling, or metabolomics, which analyzes the levels of substances produced by the metabolism, called metabolites, present in a cell or in biological fluids to draw correlations between disease states, genetic modifications and variations in metabolite levels.

        In addition, increased levels of funding for basic medical research have fueled demand by universities, medical schools and government agencies for sophisticated bioanalytical systems, such as mass spectrometers. Funding has also increased for substance detection and pathogen identification systems for security and defense applications.

Limitations of Alternative Life Science Tools

        Many of the bioanalytical tools available today based on technologies other than mass spectrometry, including those described in the next paragraph, have significant limitations when used for applications including the detection of genetic variation, pharmacogenomics, proteomics, drug discovery and biomarker detection. These limitations include lack of throughput to accommodate the volume of analysis required, lack of automation, time-consuming sample preparation and insufficient accuracy of the resulting data. For example, the two leading methods traditionally used for DNA sequencing and expression profiling are electrophoresis and hybridization. The error rate of these techniques can increase the cost, complexity and time involved in completing more demanding analyses.

        Traditional protein science tools, including Edman sequencing and two-dimensional gel separations are time consuming, relatively inaccurate and labor intensive. Additionally, many alternative life sciences tools can only be utilized by expert scientists. Other, newer bioanalytical tools, like biological chips that can be read by fluorescence readers, may be highly automated. However, these instruments are often less flexible or less accurate than mass spectrometers. For other emerging applications including metabolic profiling and rapid biomarker detection, we believe there presently are no automated, sensitive and accurate alternative tools available other than mass spectrometry-based systems.

        Increasingly, life science companies are looking to solutions that address the limitations inherent in these alternative tools.

Mass Spectrometry

        Mass spectrometers are devices for measuring the mass, or weight, of a molecule. Mass spectrometry systems employ an ionization source which creates charged molecules, and a mass separation/detection component which separates these charged molecules on the basis of mass to detect their presence and quantity. Mass spectrometry has been used in physics and chemistry for over fifty years. Over the past fifteen years, mass spectrometry has emerged as a powerful research tool in the life sciences. For example, mass spectrometers can determine the identity, amount, structure, sequence and other biological properties of small molecules, like drug candidates and metabolites, as well as large biomolecules, like proteins or DNA.

        While highly accurate, mass spectrometers historically have been limited by the time and skill required to prepare samples, conduct each measurement and analyze the data.

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Our Solutions

        Our product lines integrate sophisticated mass spectrometers with automated sample preparation and measurement, and, where appropriate, bioinformatics software to address many of the bioanalytical and bioinformatics needs of the life sciences industry across a broad range of applications. Our products have particular application to:

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genetic variation analysis, including such evolving areas as pharmacogenomics and personalized medicine;



•

proteomics;



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metabolomics;



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drug discovery based on high-throughput screening and combinatorial chemistry; and



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drug development.

        Automated high-throughput mass spectrometry systems offer significant advantages over other bioanalytical tools, including Edman sequencing and two-dimensional gel separations, in these emerging and rapidly changing markets. Our automated systems allow our customers to generate and evaluate large volumes of accurate, high-quality data on a cost-effective basis. We believe that this enhanced throughput and high-quality data improves our customers' ability to apply bioinformatics to validate lead disease pathways, or targets, understand disease pathways and analyze lead compounds. Our customers also use our products in molecular biology and other basic medical research. In addition, our automated, integrated mass spectrometry technology forms the basis of our substance detection and pathogen identification products used in security and defense markets.

        Our life science systems are based on four core mass spectrometry technologies. Building on these core technologies, we offer a wide range of systems that address key analytical needs in multiple applications across the life sciences industry. We believe that our products offer the following advantages to our customers:

        High Degree of Automation.    Our automated sample preparation and measurement technology and sophisticated bioanalytic software allow our customers to process high sample volumes with reduced reliance on highly-trained scientific personnel.

        Integrated Solutions.    We provide our customers with complete bioanalytical solutions by integrating our mass spectrometry products with front-end sample preparation, a sample preparation technology that conditions samples before they are analyzed, with purification and separation methods that clean and separate components of sample mixtures, chemicals and other disposable materials used in conducting assays and with bioinformatics software that interprets and analyzes data after it has been generated.

        Accurate Results.    Our automated mass spectrometry systems generate large volumes of highly accurate data with the selectivity and sensitivity our customers demand. The high sensitivity of our products enables our customers to pursue miniaturization and analysis of smaller samples. The accuracy of the results reduces the need for repeat analysis to eliminate errors.

        Increased Productivity.    Our high-throughput products are designed to allow our life science customers to increase productivity by generating more results in a shorter time period.

        Cost Efficiency.    We have achieved performance advances with our products that are designed to result in increased information per analysis at a significantly lower cost per analysis for our customers.

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Our Strategy

        Our strategy is to continue to be a leading provider of mass spectrometry and related systems for use in life sciences, as well as in substance detection and pathogen identification. Key elements of our strategy include:

        Providing a Broad Array of Tools for a Wide Range of Applications.    In life sciences, our strategy is to offer a broad range of products that provide integrated solutions, including sample preparation, sample analysis and data interpretation, for applications in existing and emerging life science markets. Our longer term strategy is to expand our enabling life science tools beyond our current mass spectrometry-based product lines and to extend our position as a leading provider of enabling tools for the life science industry. We plan to selectively evaluate new life science markets to which we may apply our core technologies and to continue to develop and market our mass spectrometry systems for substance detection and pathogen identification.

        Developing New Platforms, Enhanced Products and New Applications.    We plan to continue our substantial investment in internal research and development, although at a gradually declining percentage of revenue. As a result of this investment, throughout 2000, 2001 and 2002 we introduced entirely new technology platforms, nine next generation mass spectrometers, three new consumable product lines and three bioinformatics software packages. We expect our collaborations with key industrial and academic customers to continue to play a strategic role in our research and development efforts and to assist us in identifying and anticipating opportunities for enhanced products and emerging applications.

        Building Alliances and Pursue Acquisitions.    We plan to continue to co-develop selected products with strategic partners, especially when these alliances expand our product lines and extend our marketing reach. As an example, our collaboration with Agilent resulted, in early 2000, in the introduction of two ion trap instruments designed to be installed on top of a laboratory bench. We also intend to pursue strategic acquisitions to extend our technology base. For example, at the end of 1999, we acquired Viking to expand our substance detection technologies. Similarly, in 2000, we entered into a strategic alliance with GeneProt whereby it purchased 51 of our systems as well as consumables and support over time for use in industrial-scale proteomics research. In 2001, we entered into strategic alliances with Affinium Pharmaceuticals, Inc. (formerly Integrative Proteomics, Inc.) as well as GeneFormatics, Inc. in the area of structural proteomics. In 2002, we announced an expanded alliance with Roche in the field of proteomics. The resulting collaboration focuses on the development of highly efficient methods for mass spectrometric protein analysis. Similarly, in 2002, our research and development collaboration with Biacore resulted in the introduction of a complete commercial system for SPR/MS.

        Generating Recurring Revenue.    Our consumables and product service and support provide an opportunity to generate recurring revenue. We seek to develop additional consumables, which enhance the ease of use and productivity of our tools. For example, our reagents and assay kits make sample preparation easier for our customers. We seek to increase recurring revenue from post-warranty service to our growing industrial customer base as well as from training and applications support.

        Leveraging Our Intellectual Property.    We expect to continue to pursue an intellectual property strategy of obtaining extensive patent protection. We have a substantial patent portfolio, and it is our strategy to build and protect our patent portfolio. We believe that maintaining extensive intellectual property rights allows us to maintain a competitive advantage through protecting access to key technologies. Where appropriate, we may pursue an active licensing program to generate recurring revenue or to gain access to the intellectual property of others.

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Our Products

Mass Spectrometry

        We base our life science solutions on four core mass spectrometry technology platforms which include:

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matrix-assisted laser desorption ionization, or MALDI, time-of-flight mass spectrometry; (MALDI-TOF), including tandem time-of-flight systems (MALDI-TOF/TOF);



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electrospray ionization, or ESI, time-of-flight mass spectrometry (ESI-TOF), including tandem mass spectrometry systems based on ESI-quadrupole-TOF mass spectrometry (ESI-Q-q-TOF);



•

Fourier transform mass spectrometry (FTMS); and



•

ion trap mass spectrometry (ITMS).

        Time-of-flight mass spectrometers measure mass based on the time it takes for charged molecules to travel from the ionization source to the detection component. With the ability to analyze as many as 30,000 samples per day, these mass spectrometers currently have the highest sample throughput and can analyze the broadest range of masses of any mass spectrometer for use in the fields of genomics and proteomics. Our time-of-flight mass spectrometry solutions make full use of this potential for increased speed by automating various steps of the analysis. Our time-of-flight solutions combine high sensitivity, accuracy and throughput to generate large volumes of accurate raw data for SNP detection and proteomics.

        MALDI Time-of-Flight Mass Spectrometers utilize an ionization process to analyze solid samples using a laser that combines large volume sample throughput with high mass range and significant sensitivity. Our MALDI-TOF mass spectrometers are useful for: (a) SNP analysis; (b) genotyping; (c) personalized medicine; (d) forensics; (e) proteomics and protein function analysis; (f) drug discovery and development; and (g) fast cell and tissue biomarker detection. We offer five MALDI time-of-flight instruments:

        ultraflex™ TOF/TOF.    The ultraflex incorporates a MALDI source coupled with a tandem Time of Flight mass analyzer. This allows for high-throughput protein identification by MALDI-TOF using peptide mass fingerprinting, followed by more detailed protein characterization via further fragmentation and secondary TOF detection.

        ultraflex™ TOF.    Our top-of-the-line MALDI time-of-flight instrument offers modular flexibility that allows various configurations in the research laboratory and automated sampling combined with high sensitivity, resolution and accuracy.

        autoflex™.    Our first MALDI time-of-flight instrument is specifically designed for industrial biology. The autoflex can be used in SNP analysis and proteomics. Sequenom uses this system in its industrial genomics MassArray system.

        OmniFLEX™.    Our first MALDI time-of-flight instrument which can be installed on a laboratory bench can be used in general-purpose mass spectrometry laboratories. The OmniFLEX combines sensitivity, resolution and accuracy, for a wide variety of routine and higher-end applications, with a lower price than our other three products described above.

        OmniFLEX LT™.    Our easy-to-use and affordable linear bench-top MALDI time-of-flight instrument is designed as a biologist-friendly molecular mass measurement tool. We introduced this product in March 2002. The OmniFLEX LT combines sensitivity, resolution and accuracy, for a wide variety of routine and lower-end applications, with a lower price than our basic OmniFLEX.

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        These products utilize our proprietary AnchorChip microarrays which prepare samples for analysis. These microarrays employ patented microfluidics technology that improves sensitivity and reduces analysis time per sample by concentrating the sample in a defined location.

        ESI Time-of-Flight Mass Spectrometers utilize an ionization process to analyze liquid samples. This process, which does not destroy the sample, allows for rapid data acquisition and analysis of large biological molecules. ESI time-of-flight mass spectrometers are useful for: (a) identification, protein analysis and functional complex analysis in proteomics and protein function; (b) molecular identification in metabolomics and drug metabolite analysis; (c) combinatorial chemistry high-throughput screening, or HTS; and (d) fast liquid chromatography mass spectrometry, or LC/MS, in drug discovery and development. We offer three ESI time-of-flight instruments:

        BioTOF™III.    The BioTOF III is the next generation of our leading performance floor-standing ESI-TOF system. It is especially useful for the analysis of high molecular weight materials such as proteins and other biologically active complexes.

        BioTOF™III Q.    The BioTOF III Q adds a high performance quadrupole mass analyzer and a collision multipole to the BioTOF III. This type of tandem mass spectrometry using Q-q-TOF geometry permits the sensitive and highly accurate determination of molecular fragment ions. It is particularly useful in de novo peptide sequencing as it can eliminate ambiguities in the assignment of amino acid sequences by high accuracy fragment analysis.

        microTOF™.    The microTOF utilizes new state-of-the-art high-speed analog-to-digital converter (ADC) technology, which in contrast to older time-to-digital converters (TDC) permits reliable quantitative measurements, and can produce high-fidelity undistorted isotopic patterns.

        Fourier Transform Mass Spectrometers utilize high-field superconducting magnets to offer the highest resolution, selectivity and accuracy currently achievable in mass spectrometry. Our systems based on this technology often eliminate the need for time-consuming separation techniques in complex mixture analyses. In addition, our systems can fragment molecular ions to perform exact mass analysis on all fragments to determine molecular structure. Fourier transform mass spectrometers are useful for: (a) the study of the structure and function of biomolecules including proteins, DNA and natural products; (b) complex mixture analysis including combinatorial libraries; (c) high-throughput proteomics and metabolomics; and (d) high-throughput drug screening. We offer two Fourier Transform mass spectrometer instruments:

        APEX IV™.    In the spring of 2002, we introduced our new APEX IV instrument, a powerful and compact commercial Fourier transform mass spectrometer. This system allows a wide range of research capabilities while maintaining simplicity of operation. Our APEX IV system is available with several magnetic field strengths which can be tailored to meet a customer's analytical needs. An increase in field strength improves resolution, selectivity and accuracy.

        APEX-Q™.    In March of 2003, we introduced the APEX-Q hybrid Q-q-FTMS. The APEX-Q hybrid Q-q-FTMS is an innovative research instrument offering ultra high performance for proteomics research. In development for over two years, the APEX-Q platform represents the combination of both a Q-q- "front-end" and a high field FTMS magnet (9.4 or 12 Tesla) for the ultimate resolution proteomics mass spectrometer.

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        Ion Trap Mass Spectrometers measure all ions simultaneously which improves sensitivity relative to older quadrupole mass spectrometers. Ion trap mass spectrometers are useful for: (a) sequencing and identification based on structural analysis; (b) quantitative liquid chromatography mass spectrometry; (c) identification of combinatorial libraries; and (d) generally enhancing the speed and efficiency of the drug discovery and development process. In addition to ion trap mass spectrometers that we sell via Agilent Technologies, we offer three ion trap mass spectrometer instruments via our direct sales channels:

        esquire2000™.    The esquire2000 is an affordable compact tandem mass spectrometer. It offers better sensitivity than previous analytical- grade ion trap LC/MS/MS systems, and features a mass range up to 2200m/z. The esquire2000 provides higher LC/MS/MS specificity than single quadrupole LC/MS systems at only an incremental cost increase.

        esquire3000plus™.    Our esquire3000plus ion trap mass spectrometer combines our patented ion trap technology with ion source and liquid chromatography technology from Agilent. It offers performance benefits over other ion trap systems, including software integration with Agilent separation systems, faster scan rates, higher sensitivity, a wider mass range and a simple Windows NT user interface. We also co-manufacture (with Agilent) a related product, the LC/MSD-trap, which is distributed by Agilent.

        esquire HCT™.    The esquire HCT is a novel high performance ion trap mass spectrometer for faster and more sensitive analysis in proteomics and metabolomics. This new high capacity trap (HCT) combines substantially higher ion storage capacity with a proprietary high-performance scan mode for even higher ion trap research performance.

        Automated Sample Preparation.    We provide versatile automated sample preparation robots specifically designed to enhance throughput of genomics and proteomics analysis.

        MAP™ II and MAP II/8.    Our customized liquid handler for automated MALDI sample preparation is available in 1 and 8 channel configurations for optimum throughput. MAP systems use standard microtiter plates for optimum throughput and integration with existing laboratory techniques.

        Proteineer™ SP Spot Picker.    The Proteineer™ SP Spot Picker enables automated spot picking from 2-D gels into 96 and 384 micro well plates. The SP is based on our successful MAP II liquid handler customized for MALDI applications and thus smoothly fits into our Proteineer suite.

        Proteineer™ DP Digest & Prep.    Similar to the SP, the DP automates digestion of proteins separated by 2-D gels and sample preparation for subsequent mass spectrometric analysis.

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Consumables

        We sell consumables for processing, purifying and preparing samples prior to mass spectrometric analyses. Additionally, our systems for substance detection and pathogen identification use consumables for sample collection. Consumables will provide an increasing recurring revenue stream as our installed systems base grows. Our consumables include:

Automation and separation products, training and services

        We sell a broad array of related products and services with our initial system sales and during a product's lifetime. For substance detection and pathogen identification systems, we have developed training products, including complete system simulator installations. We offer post-warranty service on either a pre-paid or per-call basis and sell repair and replacement parts for our growing installed systems base. Our related products include:

Bioinformatics and Software

        We have introduced automated control software to integrate separation devices and robotics into our solutions. In addition, we provide bioinformatics software to generate useable information from

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large volumes of raw data. Finally, we offer intuitive data acquisition and analysis software on a Windows NT platform to make our systems accessible to non-experts. Our related products include:

Substance Detection and Pathogen Identification

        We sell a wide range of portable analytical and bioanalytical detection systems and related products. Our customers use these devices for nuclear, biological pathogen and chemical defense applications, anti-terrorism, law enforcement and process and facilities monitoring. Our substance detection and pathogen identification products use many of the same technology platforms as our life sciences products. For example, we developed our esquire products using the same ion trap technology used in our chemical and biological mass spectrometers. We also provide integrated, comprehensive detection suites which include our multiple detection systems, consumables, training and simulators. Our related products include:

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Research and Development

        Product and Applications Development.    We commit substantial capital and resources to internal and collaborative research and development in order to provide innovative life science solutions to our customers. In 2000, 2001 and 2002, we spent $20.0 million, $18.5 million and $20.7 million, respectively, for research and development purposes. The following are a few examples of our recent research and development accomplishments:

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After a four-year development effort, we created a new technology platform for orthogonal time-of-flight mass spectrometry. In January 1998, we introduced our first commercial system using this technology platform, the BioTOF. In March 2000, we offered our second generation product derived from this ESI time-of-flight platform, the BioTOF II. In May 2001, we introduced the BioTOF Q which adds a high performance quadrupole mass analyzer to the BioTOF II. In March 2003, we introduced the microTOF, which is an innovative next-generation benchtop ESI-TOF system with higher performance for research and exacting analytical requirements, as well as the BioTOF III which replaces the BioTOF II.



•

In March 2000, we introduced various next-generation systems based on our existing mass spectrometry technology platforms including the Apex III Series Fourier transform mass spectrometer, the esquire3000 ion trap mass spectrometer, the OmniFLEX MALDI time-of-flight mass spectrometer and the MAP II/8 sample preparation robot. These new systems typically had two-year development and engineering cycles. In the first half of 2002, we introduced two additional next-generation systems; the Apex IV Series Fourier transform mass spectrometer and the OmniFLEX LT MALDI time-of-flight mass spectrometer.



•

In the second quarter of 2000, we commercialized our AnchorChip microarrays. These products incorporate our patented microfluidics technology which achieves greater sensitivity in MALDI analyses. We also developed our ion source, known as ZeroAdjust Nanospray™, to solve ease of use and throughput constraints associated with traditional ESI sources at low flow rates. This development increases throughput for proteomic applications.



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In the second half of 2000, we introduced the autoflex, the first MALDI time-of-flight system designed to analyze over 30,000 samples without operator intervention. The autoflex is the first MALDI time-of-flight system designed for high sample through put including fast, automatic analysis and maximum reliability for millions of sample analysis without service.



•

In the second half of 2001, we introduced the ultraflex™ TOF/TOF. The ultraflex incorporates a MALDI source coupled with a tandem time-of-flight mass analyzer. This allows for high-throughput protein identification by MALDI-TOF using peptide mass fingerprinting, followed by more detailed protein characterization via further fragmentation and secondary TOF detection. In addition, during the first half of 2002, we introduced the ultraflex™ TOF which is upgradeable to a full ultraflex™ TOF/TOF.

        Grants.    Historically, we have been the recipient of various government grants. In early 2000, we completed a five-year Advanced Technology Program grant from the National Institute of Standards and Technology for the development of a Mass Tag DNA Diagnostic Mass Spectrometer. We also currently have three ongoing, multi-year research grants from the German Federal Government for the development of new spectrometers and new applications for analysis. We have generally retained at least non-exclusive rights to any items or improvements we develop under these grants. The U.S. government generally retains the right to use technology developed under grants. The German government requires that we use and market technology developed under grants in order to retain our rights to the technology. In 2000, 2001 and 2002, we received research and development grants in the aggregate amounts of $1.8 million, $1.0 million and $218,000, respectively. We expect grant revenue to represent a decreasing portion of our revenue.

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Customers

        We have a broad and diversified global life science customer base that includes over 1,800 customers with our installed products. Our life science system sales accounted for approximately 70% of our product revenue for the year ended December 31, 2002. Our life science customer base is composed primarily of end-users and includes pharmaceutical, biotechnology, proteomics, agricultural biotechnology, molecular diagnostics and fine chemical companies, as well as commercial laboratories, university laboratories, medical schools and other not-for-profit research institutes and government laboratories. Our customers generally do not have a need to buy numerous systems at one time, and historically we have not depended on any single customer in the sale of our life science systems. In 2002, no single customer accounted for more than 10% of our revenue.

        We sell our substance detection and pathogen identification products and services to allied defense departments and law enforcement and emergency response professionals. For the year ended December 31, 2002, our substance detection and pathogen identification system sales represented approximately 15% of our product revenue. Our substance detection and pathogen identification customers are primarily military and government end-users. Our after-market products, including consumables, software and services, accounted for the remaining 15% of our product revenue for the year ended December 31, 2002.

        Financial Information about our geographic areas required by Item 1 of Form 10-K may be found in Footnote 9 to our Financial Statements included in this report. Financial information about our revenues from external customers, measure of profit and total assets required by Item 1 of Form 10-K is included in our Financial Statements included in this report.

Strategic Collaborations

        We have several key technical collaborations and alliances for the development and distribution of new or existing products. These collaborations include:

        Agilent Technologies, Inc.    In 1996, we commenced a collaboration with Agilent (formerly an operating unit of Hewlett Packard) to develop and distribute ion trap liquid chromatography mass spectrometry instrumentation. We jointly manufacture two different models of ion trap mass spectrometers. One model is branded and distributed by Agilent, and the other model, the esquire3000plus, is branded and distributed by us. Under our agreement with Agilent, neither party can conduct joint ion trap development with any other party, and each party has agreed not to develop products that would compete with the products of the other party that are the subject of this agreement.

        Sequenom Inc.    In 1997, we began an alliance with Sequenom to develop industrial genomics tools for high-throughput SNP analysis. Under this agreement, Sequenom purchases MALDI time-of-flight mass spectrometers from us, and they include these spectrometers in their products. Our BIFLEX was the basis for a co-labeled system called SpectroScan™ which is an important component of the Sequenom MassARRAY system. Recently, Sequenom has adopted our autoflex MALDI-TOF. In late 2001, we announced a broadening of our collaboration with Sequenom for which we intend to develop a medium-throughput genotyping solution based on MALDI-TOF analysis for distribution by Sequenom.

        GeneProt, Inc.    In September 2000, we entered into a strategic alliance with GeneProt pursuant to which we will collaborate with GeneProt and share technologies for industrial-scale proteomics. As a part of this alliance, GeneProt initially purchased 51 of our mass spectrometry systems. Additionally, in November 2000, we made a strategic equity investment, in both cash and stock, in GeneProt. We financed this equity investment with cash and newly issued shares of our common stock. Each party owns any development it makes as a part of this agreement, and any developments made jointly shall

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be owned jointly by the parties. In November 2001, we entered into an agreement with GeneProt to deploy novel MALDI-TOF/TOF mass spectrometry technology at GeneProt's planned new U.S. proteomics facility in North Brunswick, N.J. Under the agreement, GeneProt was initially to purchase a total of seven ultraflex TOF/TOFs. In December 2001, GeneProt received one ultraflex TOF/TOF instrument from us for its Geneva proteomics research laboratory. In 2002, GeneProt decided not to pursue an expansion of its organization into the United States but to concentrate its existing resources in Geneva, Switzerland. As a result, GeneProt converted its November 2001 order for the remaining six ultraflex TOF/TOF instruments for its planned North Brunswick, New Jersey facility into an order to upgrade all of its 45 existing ion trap mass spectrometers to the latest esquire3000plus performance level in order to bring its existing Geneva proteomics facility to state-of-the-art performance. This upgrade dramatically increased the sensitivity and lowered the minimum detection levels for low-abundance proteins by up to an order of magnitude.

        Affinium Pharmaceuticals, Inc. (formerly Integrative Proteomics, Inc.) In March 2001, we, along with Bruker AXS Inc. and Bruker BioSpin Inc., entered into a strategic alliance and technology development collaboration with Affimium Pharmaceuticals pursuant to which we will collaborate with Affinium Pharmaceuticals on multidisciplinary proteomics technologies based on mass spectrometry. Pursuant to this agreement, Affinium Pharmaceuticals will procure MALDI-TOF mass spectrometry systems from us. The terms of our strategic alliance agreement provide that we own any development of instrumentation products, such as instrumentation, probes and general software, that we make, and Affinium Pharmaceuticals owns any development of discovery products, such as methods, reagents and compositions of matter, that Affinium Pharmaceuticals makes. If we solely or jointly make any development relating to discovery products as a part of a joint collaboration pursuant to this agreement, we will assign the intellectual property rights to Affinium Pharmaceuticals at no charge, and Affinium Pharmaceuticals will grant a royalty free, irrevocable and non-exclusive license to us to make use of the discovery products. In addition, if Affinium Pharmaceuticals solely or jointly makes any development relating to instrumentation products as a part of a joint collaboration pursuant to this agreement, Affinium Pharmaceuticals will assign the intellectual property rights to us at no charge, and we will grant a royalty free, irrevocable and non-exclusive license to Affinium Pharmaceuticals to make use of the instrumentation products. Additionally, in March 2001, we made a strategic equity investment in Affinium Pharmaceuticals with both cash and shares of our common stock.

        GeneFormatics, Inc.    In October 2001, we, along with Bruker AXS and Bruker BioSpin, entered into a strategic alliance with GeneFormatics pursuant to which we will collaborate in the development of technology for the experimental analysis of three-dimensional protein structures. Under this agreement, we will sell mass spectrometry systems and related equipment to GeneFormatics. Each party owns any development it makes as a part of this agreement, and any developments made jointly shall be owned jointly by the parties. Additionally, in October 2001, we made a strategic equity investment in GeneFormatics with both cash and shares of our common stock.

        We have a number of other collaborations, including a collaboration with Matrix Sciences for technology enhancements. We own all developments we make under these collaborations.

Sales and Marketing

        Marketing Activities.    Our primary marketing theme is "Enabling Life Science Tools Based on Mass Spectrometry." We emphasize our solutions and technology platforms rather than simply the provision of instruments. We pursue an active marketing program through a large number of activities throughout the year. Our key marketing vehicles include trade shows, advertising, our websites, newsletters and related activities.

        Direct Sales Channels.    During the last three years, we have committed significant resources to upgrade and expand our direct sales force and our distribution channels worldwide. We have direct

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sales coverage throughout most of the European Union, North America and much of the Pacific Rim. During the three years ending December 31, 2002, we more than doubled our sales and marketing staff.

        We have well-equipped application and demonstration facilities and qualified application personnel who assist customers and provide product demonstrations in specific application areas. We maintain our primary demonstration facilities in the United States (Massachusetts and California), Germany (Bremen and Leipzig), the United Kingdom (Coventry) and Japan (Yokohama). Demonstration systems and applications scientists are also available in Australia, France, Italy, Switzerland, China, Taiwan and Singapore.

        Indirect Sales Channels.    We have various international distributors and independent sales representatives, including affiliated companies and various representatives in the countries of South Korea, Portugal and Israel and in the regions of Latin America and Eastern Europe. We have adopted a distribution business model where we engage in strategic distribution alliances with other companies to address certain market segments. Our primary distribution alliances are:

•

We manufacture for Agilent an ion trap mass spectrometer, which Agilent incorporates into its liquid chromatography mass spectrometry systems for distribution into various industrial markets; and



•

We sell high-throughput MALDI time-of-flight mass spectrometers through Sequenom into emerging industrial genomics markets for high-throughput SNP analysis.

Sales Cycle

        The typical time between our first customer contact and our receipt of a customer's order for our life science systems is three to six months for most product lines. However, this sales cycle can be in excess of a year when a customer must budget the product into an upcoming fiscal year. Substance detection and pathogen identification products can have multi-year sales cycles for large production contracts.

Manufacturing

        We manufacture and test the majority of our products in our three principal ISO 9001 registered manufacturing facilities located in the United States and Germany. We have considerable manufacturing flexibility at our various facilities, and each facility can manufacture multiple products at the same time. We maintain in-house key manufacturing know-how, technologies and resources. Our facilities incorporate environmental chambers, CE mark compliance test centers, clean room manufacturing for vacuum components, licensed facilities for handling closed radioactive sources, computer-aided laser cutting and vacuum welding. We maintain multiple suppliers for key components that are not manufactured in-house.

Intellectual Property

        Our intellectual property consists of patents, copyrights, trade secrets, know-how and trademarks. Protection of our intellectual property is a strategic priority for our business. We have a substantial patent portfolio, and it is our strategy to build and protect our patents. We believe our owned and licensed patent portfolio provides us with a competitive advantage. This portfolio permits us to maintain access to a number of key technologies. We license our owned patent rights where appropriate. We will enforce our patent rights against infringers if necessary.

        The patent positions of life science tool companies involve complex legal and factual questions. As a result, we cannot predict the enforceability of our patents with certainty. In addition, we are aware of

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the existence from time to time of patents in certain countries which, if valid, could impair our ability to manufacture and sell our products in these countries.

        We are party to an agreement dated as of August 10, 1998 with Indiana University's Advanced Research and Technology Institute (IU-ARTI), which is the technology transfer arm of Indiana University, pursuant to which we have been granted an exclusive license to specified patent rights and products including three patents that relate to time-of-flight mass spectrometry. We pay IU-ARTI royalties under this agreement and have agreed to allow IU-ARTI to utilize any improvements that we make to the licensed products for research and educational purposes on a non-exclusive, royalty-free basis. IU-ARTI may terminate the agreement if we default on our obligations or become bankrupt. We may terminate the agreement with six months notice. The license granted by the agreement expires at the later of August 10, 2008 or expiration of the licensed patent rights. Additionally, we have entered into a collaboration agreement with IU-ARTI that ended in 2002 under which IU-ARTI will continue to perform experiments that are useful to us in exchange for a flat fee and a percentage fee of any sales of products developed for us by IU-ARTI.

        We are also a party to an agreement with Applied Biosystems Group, an Applera Corporation business, and IU-ARTI. The agreement is for the licensing of a portfolio of significant mass spectrometry patents. As part of the agreement, we have been appointed the exclusive agent for licensing this combined intellectual property to the life-science industry. These patent portfolios relate to MALDI-TOF mass spectrometry and cover the significant technology called Space-Velocity Correlation Focusing (SVCF), or Delayed Extraction. This technology improves both accuracy and sensitivity, and is implemented in most modern MALDI-TOF systems. As licensing agent for IU-ARTI's SVCF patents, we have granted Applied Biosystems a sub-license in exchange for multi-year royalty payments. Bruker Daltonics and Applied Biosystems also have cross-licensed each other on their respective patent portfolios related to this technology.

        We had been involved in patent litigation with a competitor, Finnigan, a subsidiary of Thermo Electron Corporation since December 31, 1996. In August 2001, we entered into a comprehensive settlement agreement for this litigation that provided for the dismissal of all pending suits, the waiving of all damages, and a framework of licensing and arbitration for potential future disputes between the companies in the field of ion trap mass spectrometry.

        We also rely upon trade secrets, know-how, trademarks, copyright protection and licensing to develop and maintain our competitive position. We generally require the execution of confidentiality agreements by our employees, consultants and other scientific advisors. These agreements provide that all confidential information made known during the course of a relationship with us will be held in confidence and used only for our benefit. In addition, these agreements provide that we own all inventions generated during the course of the relationship.

        Our management considers Daltonics and the Bruker Daltonics logo to be our material trademarks, both of which are registered in the United States.

        We are a party to various government contracts. Under some of these government contracts, the government may receive license or similar rights to intellectual property developed under the contract. However, under government contracts we enter we receive no less than non-exclusive rights to any items or technologies we develop.

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Scientific Advisory Board

        We have established an international Scientific Advisory Board to advise us on strategic research and development and strategic marketing issues. The members of the Board include:

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Jean Futrell, Ph.D., Director of the Department of Energy's Environmental Molecular Sciences Laboratory in Richmond, Washington; former Chairman of Chemistry and Biochemistry at the University of Delaware;



•

Steven A. Hofstadtler, Ph.D., Director of Drug Discovery Technology, ISIS Pharmaceuticals, Inc., Carlsbad, California;



•

Joachim R. Wesener, Ph.D., Head of Mass Spectrometry at Bayer Central Research, Leverkusen, Germany; Board Member of German Society for Mass Spectrometry;



•

Professor Helmut Meyer, University of Bochum, Germany; President of Protagen AG, Bochum, Germany;



•

Professor Peter Derrick, University of Warwick, United Kingdom; Director of University of Warwick's Institute for Mass Spectrometry; Professor and Chairman of the Department of Chemistry; and



•

Günther Heinrich, Ph.D., CEO and President of EPIDAUROS AG, Bernried, Germany.

        We provide members of our Scientific Advisory Board a fee of $6,000 per year, and we provided options to the members for 1,500 shares of our common stock at fair market value during their first year serving on the board. These options vest in equal annual increments over the course of their three-year tenure. We also reimburse Scientific Advisory Board members for expenses reasonably incurred related to the services they provide us.

Competition

        Our markets are highly competitive, and we expect the competition to increase. Currently, we compete with a variety of companies that offer mass spectrometry-based systems along each of our product lines. Our competitors in the life sciences include Applied Biosystems, Amersham Biosciences, Waters, ThermoElectron (which includes Finnigan), Shimadzu/Kratos, Ciphergen, Hitachi, JEOL and various automation companies. Our substance detection and pathogen identification markets are highly fragmented, and we compete with a number of companies in this area. Our most significant competitor is Smiths Detection (UK). Other competitors produce products based on some of the technology platforms that we utilize; however, none of them produce products utilizing all of our major technology platforms. Some of them have a greater market share than we have in particular technology platform areas. We also compete with other companies that provide analytical or automation tools based on other technologies. These technologies may prove to be more successful in meeting demands in the markets that our products serve. In addition, other companies may choose to enter our field in the future. We believe that the principal competitive factors in our markets are technology base applications expertise, product specifications and functionality, marketing expertise, distribution capability, proprietary patent portfolios, cost and cost effectiveness.

        Our existing products and any products that we develop may compete in multiple, highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and marketing resources than we do. They may offer or succeed in developing products that would render our products or those of our strategic partners obsolete or noncompetitive. In addition, many of these competitors have significantly greater experience in the life sciences market. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive, or more cost effective, than other currently marketed products. Current competitors or other companies

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may possess or develop technologies and products that are more effective than ours. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors.

Employees

        As of March 21, 2003, we employed over 670 full-time employees, with approximately 110 employees in the United States and more than 500 employees outside the United States, located primarily in Europe. Over 120 of these employees hold doctorates in biology, chemistry or physics.

Government Regulation

        We possess low-level radiation licenses for our facilities in Billerica, Massachusetts and Leipzig, Germany. Some of our products, particularly in the detection area, are subject to enhanced levels of export controls from the United States and Germany. Apart from these two areas, we are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate.

ITEM 2. PROPERTIES

        Our three principal facilities are located in Billerica, Massachusetts, Bremen, Germany and Leipzig, Germany. These facilities incorporate manufacturing, research and development, application and demonstration, marketing and sales and administration functions.

•

We own a 90,000 square foot facility in Billerica, Massachusetts.



•

We own an existing 60,000 square foot facility in Bremen, Germany, and in early 2002 we completed a 120,000 square foot extension of our Bremen facility.



•

We own a 60,000 square foot facility in Leipzig, Germany.

        We lease additional centers for sales, applications and service support in Fremont, California; Coventry, United Kingdom (Bruker Daltonics Ltd.); Wissembourg, France (Bruker Daltonique S.A.); Stockholm, Sweden (Bruker Daltonics Scandinavia A.B.); Faellanden, Switzerland (Bruker Daltonics GmbH); Yokohama, Japan (Nihon Bruker Daltonics K.K.); Beijing, People's Republic of China, Taipei, Taiwan; Ontario, Canada (Bruker Daltonics Ltd.); Milan, Italy (Bruker Daltonics Italiana SRL); Alexandria, Australia (Bruker Daltonics Pty Ltd.); Johannesburg, South Africa (Bruker Daltonics Pty LTD); Singapore (Bruker Daltonics Pte LTD); Bruxelles, Belgium (Bruker Daltonics NV) and Wormer, Netherlands (Bruker Daltonics BV).

ITEM 3. LEGAL PROCEEDINGS

        We may, from time to time, be involved in legal proceedings in the ordinary course of business. We are not currently involved in any pending legal proceedings that, either individually or taken as a whole, could materially harm our business, prospects, results of operations or financial condition.

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

        No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS

        Our common stock has been quoted on the Nasdaq National Market since August 4, 2000. Prior to that time, there was no public market for the common stock. The following table sets forth, for the period indicated, the high and low sale prices for the common stock as reported on the Nasdaq National Market.

        On March 21, 2003, the last sale price of the common stock on the Nasdaq National Market was $2.99. As of March 21, 2003, we had approximately 35 holders of record of our common stock. This number does not include the individual beneficial owners of shares held in nominee name or within clearinghouse positions of brokerage firms and banks.

        We have never declared or paid cash dividends on our capital stock. We currently anticipate that we will retain all available funds for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

        On August 3, 2000, a registration statement on Form S-1 (No. 333-34820) was declared effective by the Securities and Exchange Commission, pursuant to which 9,200,000 shares of our common stock were offered and sold by us at a price of $13 per share, generating gross offering proceeds of approximately $119.6 million. The managing underwriters were UBS Warburg LLC, CIBC World Markets and Thomas Weisel Partners LLC. In connection with the offering, we incurred $8.4 million in underwriting discounts and commissions, and approximately $1.5 million in other related expenses. The net proceeds from the offering, after deducting the foregoing expenses, were approximately $110.0 million. No payments or expenses were paid to directors, officers or affiliates of the Company or 10% owners of any class of equity securities of the Company. We have used a portion of the net proceeds of the offering to fund our continuing research and development activities, for working capital purposes, facility expansions and other general corporate purposes. Additionally, we have used approximately $7.0 million of the net proceeds to pay off a portion of our outstanding bank debt. The balance is invested in a variety of interest-bearing instruments including investment-grade corporate bonds, commercial paper and money market accounts.

        On November 22, 2000, we issued 79,218 shares of our common stock, par value $.01 per share, to GeneProt, Inc. in exchange for shares of GeneProt valued at a total of approximately $2.2 million. The shares of our common stock were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(2) of this act.

        On March 12, 2001, we issued 28,425 shares of our common stock, par value $.01 per share, to Affinium Pharmaceuticals, Inc. (formerly Integrative Protemonics, Inc.) in exchange for shares of Affinium Pharmaceuticals, Inc. valued at a total of approximately $428,000. The shares of our common stock were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(2) of this act.

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        On October 2, 2001, we issued 30,693 shares of our common stock, par value $.01 per share, to GeneFormatics, Inc. in exchange for shares of GeneFormatics valued at a total of approximately $609,000. The shares of our common stock were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(2) of this act.

        On November 28, 2002, we issued 109,800 shares of our restricted common stock, par value $0.01 per share, to Dr. Dieter Koch, Managing Director of Bruker Daltonik GmbH and a Director of Bruker Daltonics Inc., valued at approximately $593,000 and cash of $593,000, in exchange for his minority interest in Bruker Saxonia Analytik GmbH, a majority-owned subsidiary of Bruker Daltonik GmbH. The shares of our common stock were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(2) of this act.

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ITEM 6. SELECTED FINANCIAL DATA

        The consolidated statements of operations data for each of the years ended December 31, 2000, 2001 and 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002 have been derived from our audited financial statements included elsewhere in this report. The combined statement of operations data for the year ended December 31, 1998 and 1999 and the consolidated and combined balance sheet data as at December 31, 1998, 1999 and 2000 have been derived from our audited financial statements not included in this report. The financial statements for 1998 are presented on a combined basis due to the common ownership of the Company and its affiliated company in Germany, which was formally acquired in December 1998. Historical results are not necessarily indicative of future results. The data presented below have been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read with the consolidated and combined financial statements, including the notes, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

        In 2002, the Company took a $9.6 million charge due to the write-down of investments in other companies.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Financial Data" and our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under "Factors Affecting Our Business, Operating Results and Financial Condition" and elsewhere in this report.

Overview

        We are a leading developer and provider of innovative life science tools based on mass spectrometry. We are also a worldwide leader in supplying mass spectrometry-based systems for substance detection and pathogen identification in security and defense applications. We maintain technical centers in Europe, North America and Japan, as well as customer support facilities in many industrialized and developing countries. We allocate substantial capital and resources to research and development and are party to various collaborations and strategic alliances. Our diverse customer base includes pharmaceutical companies, biotechnology companies, proteomic companies, academic institutions and government agencies.

Significant Accounting Policies

        Inventories.    Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out ("FIFO") method. We maintain an allowance for excess and obsolete inventory to reflect the expected un-saleable or un-refundable inventory based on an evaluation of slow moving products.

        Investments in Other Companies.    We have investments in other companies which consist of equity securities of privately-held companies that are accounted for at cost. Our ownership interest in each of these individual companies is less than 20%. We periodically evaluate the carrying value of these investments for potential impairment. If our evaluation identifies an impairment that we deem to be other than temporary, the investments are written down to their estimated fair value through a charge to current earnings.

        Customer Deposits.    Under the terms and conditions of contracts with many of our customers, we require a portion of the purchase price in the form of an advance deposit. We record these deposit amounts as a liability until the associated revenue is recognized at the time of acceptance of the system.

        Warranty Costs.    We provide a one-year parts and labor warranty with the purchase of equipment. The anticipated cost for this one-year warranty is accrued upon recognition of the sale and is included as a current liability on the accompanying balance sheets. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase resulting in a decreased gross profit.

        Contingencies.    We are subject to proceedings, lawsuits and other claims related to patents, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

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        Revenue Recognition.    We recognize revenue from system sales, including hardware with embedded software, when a product is accepted by the customer, except when sold through an independent distributor, a strategic distribution partner or an unconsolidated affiliated distributor which assumes responsibility for installation, in which case the system sale is recognized when the products are shipped to the distributor and title has transferred to the distributor. Our distributors do not have price protection rights or rights to return; however, our products are warranted to be free from defect for a period of, typically, one year. Revenue from accessories and parts is recognized upon shipment, and revenue from services when performed.

        Cost of Product Revenue.    Cost of product revenue includes direct costs, such as materials, direct labor, and benefits, as well as indirect costs related to generating revenue. These indirect costs include indirect labor, materials and supplies, equipment rental and depreciation of production equipment, test equipment and facilities as related to production space revenue.

        Sales and Marketing.    Sales and marketing expenses include salaries, sales commissions, benefits, travel, occupancy costs and related expenses for our direct sales force, sales support and marketing functions. We have expanded our sales and marketing organization substantially since 1997, adding subsidiaries and sales representatives in China, France, Japan, Scandinavia, Switzerland, the United Kingdom, Canada, Italy, Australia, Singapore, South Africa, Belgium, Netherlands and Taiwan. Sales and marketing expenses also include costs associated with supporting our distribution channel partners for our time-of-flight and ion trap mass spectrometry products. We expect that sales and marketing expenses will continue to increase in the future as we further expand our global distribution capabilities and introduce new products.

        General and Administrative.    General and administrative expenses include salaries, benefits and expenses for our executive, finance, legal, human resources and internal systems support personnel. In addition, general and administrative expenses include occupancy costs, fees for professional services and depreciation of office equipment. We expect general and administrative expenses to increase as we continue to expand our administrative infrastructure to support the anticipated growth of our business, and continue to incur costs associated with being a public company.

        Research and Development.    Research and development expenses include costs for the development of new technologies and products. These expenses include materials, salaries, benefits, occupancy costs and related expenses for development personnel. We expense research and development costs as incurred. We expect to increase spending on research and development in order to develop new products and applications but, as a percentage of revenues, spending should decrease over time.

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