Income Taxes.Income tax expense during the quarter was $14,000$10,000 while in 2002 income tax expense was $21,000.$76,000. During the quarter the Company recorded current tax expense related to its Japan branch operations and certain state taxes.foreign

operations. Our deferred tax assets as of March 31,June 30, 2003 were $24.6$26.4 million and were offset by a valuation allowance of $24.6$26.4 million. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

Six Months Ended June 30, 2003 and 2002

Net Sales.Net sales decreased 7% to $18.0 million in 2003 from $19.3 million in 2002. Sales in our BioSystems operating segment increased 17% to $13.6 million in 2003 from $11.6 million in 2002. Total revenues from sales of WAVE Systems increased 12% to $10.2 million in 2003 from $9.1 million in 2002. Bioconsumable product sales included in this operating segment increased 36% to $3.4 million in 2003 from $2.5 million in 2002. Sales of WAVE Systems increased mainly due to strong sales in Europe and the Far East offset by lower sales volumes to our North American customer base. Sales of WAVE-related consumable products increased as the installed base of WAVE Systems has increased. Sales in our Nucleic Acid operating segment decreased 43% to $4.4 million in 2003 from $7.7 million in 2002. The decrease in nucleic acid product sales is attributable largely to declines in demand for pharmaceutical grade chemical building blocks. Part of our business strategy is to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics. As part of this strategy we are focusing our sales efforts on large consumers of our Synthetic Nucleic Acid products who are willing to commit to long-term supply agreements. While we expect to see increased sales of these products based upon this strategy, we also may see varying demand depending on the success of the biopharmaceutical and pharmaceutical companies on which we are targeting our sales efforts. Therefore, we may see large variations in quarterly revenue flows for these products. We have experienced a decline in demand from these biopharmaceutical and pharmaceutical companies due in part to these companies experiencing varying degrees of success in their product development cycle.

Cost of Goods Sold.Cost of goods sold increased 26% to $11.7 million in 2003 from $9.3 million in 2002, representing 65% of net sales in 2003 and 48% of net sales in 2002. Cost of goods sold in our BioSystems segment was within historical ranges at 43% in 2003 compared to 39% in 2002. During the remainder of 2003 we anticipate that our cost of goods sold for our BioSystems products will remain within historical ranges. Currently our Nucleic Acid products are sold at lower margins compared to our Biosystems products. The margins in our Nucleic Acids operating segment have been negatively impacted by higher manufacturing costs due largely to our plant expansion efforts in Glasgow, Scotland and Boulder, Colorado and by declining sales resulting in the allocation of our fixed manufacturing costs across a smaller base. Cost of goods sold in our Nucleic Acid segment was 135% in 2003 compared to 64% in 2002. We expect margins in 2003 for our Nucleic Acid unit to remain under pressure due largely to underutilization of manufacturing capacity. Both total cost of goods sold and cost of goods sold as a percent of sales increased year over year due additional manufacturing costs and underutilization of Nucleic Acid manufacturing capacity. After 2003, we anticipate that the overall cost of goods sold percentage will improve based upon actions currently being taken. These actions include refining our systems configurations potentially reducing material costs, improving production methods in our Nucleic Acid operating segment which currently result in higher overall manufacturing costs and increasing product revenues thereby spreading our fixed production costs over a larger revenue base.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased 25% to $8.8 million in 2003 from $11.8 million in 2002. This decrease is primarily the result of our

restructuring activities that have reduced personnel and personnel-related expenses, outside services, advertising, sales promotions and travel expenses by approximately $1.9 million. A higher level of recorded foreign currency transaction exchange rate gains of approximately $170,000 further benefited these expense reductions. Total selling, general and administrative expenses represented 49% of net sales in 2003 versus 61% of net sales in 2002. It is expected that, as a result of our restructuring activities described below, our selling, general and administrative expenses will decrease from 2002 levels.

Research and Development Expenses.Research and development expenses decreased 18% to $4.7 million in 2003 from $5.7 million in 2002. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred with the exception of certain capitalized software development costs. The decrease is primarily the result of our restructuring activities that have reduced personnel and personnel-related expenses, outside services, supplies and travel related costs by approximately $1.6 million. These decreased expenses were offset by a decline in the amount of capitalized software development costs of approximately $790,000. Total research and development expenses represented 26% of net sales in 2003 versus 30% of net sales in 2002. It is expected that, as a result of our restructuring activities discussed below, our research and development expenses will decrease from 2002 levels.

Stock Based Compensation.Stock based compensation expense was $85,000 in 2003 as compared to $60,000 in 2002. This expense represents the amortization of deferred compensation related to stock options issued.

Restructuring and Restructuring Related Charges.During the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, and termination of collaborations and write-offs of abandoned intellectual property. We continued to execute upon the plan during the first half of 2003. As a result, $738,000 in restructuring and restructuring related charges was recorded and is included in operating expenses. These charges consisted mainly of employee severance costs and the write-off of a note receivable related to the abandonment of a product development collaboration. The note receivable write-off was a non-cash charge totaling $364,000. We expect that, as a result of the restructuring, our total operating expenses for 2003 will be 20% to 25% below 2002 levels. Further restructuring activities may occur in the second half of 2003.

Other Income (Expense).Other income and expense, which consists mainly of net interest income and expense, decreased to an expense of $156,000 in 2003 from income of $405,000 in 2002. Interest income was $46,000 in 2003 as compared to $423,000 in 2002. Interest expense was $93,000 in 2003 as compared to none in 2002. The decrease in interest income is a result of declining interest rates on investments and reductions in our short-term investment balances. Interest expense will increase in 2003 due to the long-term debt obtained by the Company during 2002 and our line of credit.

Income Taxes.Income tax expense during the first half of 2003 was $24,000 while in 2002 income tax expense was $97,000. During the quarter the Company recorded current tax expense related to its foreign operations. Our deferred tax assets as of June 30, 2003 were $26.4 million and were offset by a valuation allowance of $26.4 million. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to

continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

Liquidity and Capital Resources

We have historically experienced net losses and negative cash flows. As a result, we had an accumulated deficit of $53.4$58.0 million as of March 31,June 30, 2003. As of March 31,June 30, 2003, and December 31, 2002, we had approximately $6.4$3.0 million and $9.7 million, respectively, in cash and cash equivalents. In addition, as of December 31, 2002, we had approximately $3.6 million in short-term investments for total cash and short-term investments of approximately $13.3 million.

During the first quarter ofsix months ended June 30, 2003 our major cash expenditures were the funding of our operations and capital projects. ACash and investments decreased by a total of approximately $6.9$10.3 million of cash and investments was used with approximately $3.1$6.7 million used to fund our operations and $3.7$4.9 million used for capital projects. Operating activities and capital projects were funded through existing cash and investments.offset by $1.3 million provided by advances on our line of credit. Major capital projects during the quarter included facility build-out, expansion and improvement at our two nucleic acid production facilities in Boulder, Colorado and Glasgow, Scotland. The Boulder facility project is designed to be a cGMP (Good Manufacturing Practices) facility for the synthesis of oligonucleotides. This facility began non-GMP production operations during the first quarter of 2003 and is expected to begin cGMP production in the second quarter of 2003. The Glasgow facility project, which produces nucleic acid building blocks, included the upgrading of equipment and processes at the current production facility and the build-out of a new facility that will include significant capacity expansion along with further equipment and process improvements. The current production facility improvements were completed during 2002 and the first production line, or pilot line, in the new facility is expected to be completed in 2003.

Our operating activities resulted in net outflows of $3.1$6.7 million in 2003 and $4.7$10.4 million in 2002. The operating cash outflows for these periods resulted mainly from our operating losses. Significant investments in manufacturing operations, research and development and sales and marketing contributed to the operating losses. The operating cash outflows for 2003 are lower than those in the prior year due in large part to increases in accounts payables and accrued liabilitiesmore effective management of working capital offset by higher operating losses and increased accounts receivable balances. Accounts receivable balances increased due largelylosses. Specifically, inventory levels were consistent in the current year as compared to the concentrationa significant increase in inventory levels of sales during the fourth quarter of 2002 and first quarter of 2003approximately $6.1 million in European countries where payment terms of 90 days or more are customary.2002.

Net cash providedused by investing activities was $157,000$1.1 million in 2003 as compared to cash used of $7.8$3.3 million for 2002. The investing cash flow in 2003 is due primarily to the maturity of short-term investment funds offset by investment in property, plant and equipment.equipment offset by the maturity of short-term investment funds. Cash used in investing activities in 2002 was due primarily to net reinvestment of fundsincreases in short-term investmentsnotes receivables, long-term assets and investments in property, plant and equipment.equipment offset by the net maturity of funds in short-term investments.

Net cash provided by financing activities was $33,000$1.4 million in 2003 and $388,000$91,000 for 2002. The financing cash inflows were the result of proceeds from the sale of common stock.stock and advances on our line of credit.

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