Table	of	Contents

# SECURITIES	AND	EXCHANGE	COMMISSION

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)

# OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	28,	2003

# TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)

# Illumina,	Inc.

(Exact	name	of	Registrant	as	Specified	in	Its	Charter)

Delaware

(State	or	other	Jurisdiction	of Incorporation	or	Organization)

9885	Towne	Centre	Drive,

San	Diego,	California

(Address	of	Principal	Executive	Offices)

(zip	code)

Registrant's	telephone	number,	including	area	code:

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

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

# Common	Stock,	$.01	par	value

(Title	of	class)

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

						Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of 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

						As	of	January	31,	2004,	there	were	32,900,523	shares	of	the	Registrant's	Common	Stock	outstanding.	The	aggregate	market	value	of	the	Common	Stock	held	by non-affiliates	of	the	Registrant	(based	on	the	closing	price	for	the	Common	Stock	on	the	Nasdaq	National	Market	on	June	30,	2003)	was	approximately	$56,230,576. This	amount	excludes	an	aggregate	of	12,673,530	shares	of	common	stock	held	by	officers	and	directors	and	each	person	known	by	the	Registrant	to	own	10%	or	more of	the	outstanding	common	stock.	Exclusion	of	shares	held	by	any	person	should	not	be	construed	to	indicate	that	such	person	possesses	the	power,	direct	or	indirect,	to direct	or	cause	the	direction	of	management	or	policies	of	the	Registrant,	or	that	such	person	is	controlled	by	or	under	common	control	with	the	Registrant.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

						Certain	exhibits	filed	with	the	Registrant's	prior	registration	statements	and	reports	under	the	Securities	Exchange	Act	of	1934	are	incorporated	herein	by	reference into	Part	IV	of	this	Report.

# 	PART	I

# 	PART	II

# 	PART	III

# 	PART	IV

						This	Annual	Report	on	Form	10-K	may	contain	forward-looking	statements	within	the	meaning	of	Section	27A	of	the	Securities	Act	of	1933,	and	Section	21E	of the	Securities	Exchange	Act	of	1934.	These	statements	relate	to	future	events	or	our	future	financial	performance.	We	have	attempted	to	identify	forward-looking statements	by	terminology	including	"anticipates,"	"believes,"	"can,"	"continue,"	"could,"	"estimates,"	"expects,"	"intends,"	"may,"	"plans,"	"potential,"	"predicts," "should"	or	"will"	or	the	negative	of	these	terms	or	other	comparable	terminology.	These	statements	are	only	predictions	and	involve	known	and	unknown	risks, uncertainties	and	other	factors,	including	the	risks	outlined	under	"Factors	Affecting	Operating	Results,"	contained	in	Item	7	—	"Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operation,"	that	may	cause	our	actual	results,	levels	of	activity,	performance	or	achievements	to	be	materially	different from	any	future	results,	levels	or	activity,	performance	or	achievements	expressed	or	implied	by	these	forward-looking	statements.	Although	we	believe	that	the expectations	reflected	in	the	forward-looking	statements	are	reasonable,	we	cannot	guarantee	future	results,	levels	of	activity,	performance	or	achievements.	We	are	not under	any	duty	to	update	any	of	the	forward-looking	statements	after	the	date	we	file	this	Annual	Report	on	Form	10-K	or	to	conform	these	statements	to	actual	results, unless	required	by	law.

						Illumina®,	Array	of	Arrays TM ,	BeadArray TM ,	GoldenGate TM ,	Sentrix®	and	Oligator®	are	our	trademarks.	This	report	also	contains	brand	names,	trademarks	or service	marks	of	companies	other	than	Illumina,	and	these	brand	names,	trademarks	and	service	marks	are	the	property	of	their	respective	holders.

						Our	annual	report	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	and	all	amendments	to	those	reports	are	available	free	of	charge	on our	website,	www.illumina.com.	Such	reports	are	made	available	as	soon	as	reasonably	practicable	after	filing	with	the	Securities	and	Exchange	Commission.

# Item	1. Business.

# Overview

						We	are	a	leading	developer	of	next-generation	tools	for	the	large-scale	analysis	of	genetic	variation	and	function.	Understanding	genetic	variation	and	function	is critical	to	the	development	of	personalized	medicine,	a	key	goal	of	genomics.	Our	tools	provide	information	that	could	be	used	to	improve	drugs	and	therapies, customize	diagnoses	and	treatment,	and	cure	disease.

						Completion	of	the	sequencing	of	the	human	genome	will	drive	demand	for	tools	that	can	assist	researchers	in	processing	the	billions	of	tests	necessary	to	convert raw	genetic	data	into	medically	valuable	information.	This	requires	functional	analysis	of	highly	complex	biological	systems,	involving	a	scale	of	experimentation	not practical	using	currently	available	tools	and	technologies.	Using	our	technologies,	we	have	developed	a	comprehensive	line	of	products	that	can	address	the	scale	of experimentation	and	the	breadth	of	functional	analysis	required	to	help	achieve	the	goals	of	molecular	medicine.

						Our	patented	BeadArray	technology	uses	microscopic	beads	randomly	deposited	in	wells	to	achieve	a	level	of	miniaturization	that	allows	for	a	new	scale	of experimentation.	A	microarray	is	a	collection	of	miniaturized	test	sites	arranged	on	a	surface	that	permits	many	tests,	or	assays,	to	be	performed	in	parallel.	Our	arrays allow	simultaneous	processing	of	many	samples	in	parallel,	achieving	throughput	we	believe	to	be	significantly	beyond	the	capability	of	any	other	technology	currently on	the	market.	We	assemble	our	arrays	using	relatively	inexpensive	materials.	Our	proprietary	manufacturing	process	allows	us	to	easily	adapt	the	arrays	to	a	broad range	of	applications,	including	both	genotyping	and	gene	expression.	These	characteristics	allow	us	to	create	next-generation	arrays	with	a	unique	combination	of	high throughput,	cost	effectiveness	and	flexibility.	In	addition,	our	complemen-

tary	Oligator	technology	permits	parallel	synthesis	of	the	millions	of	different	pieces	of	DNA	necessary	to	perform	large-scale	genetic	analysis	on	arrays.

						We	provide	both	products	and	services	that	utilize	our	proprietary	technologies.	During	2001,	we	launched	our	commercial	genotyping	service	product	line	which combines	our	BeadArray	technology	with	an	automated,	laboratory	information	management	system,	or	LIMS,	controlled	process	to	provide	high	throughput identification	of	the	most	common	form	of	genetic	variation,	known	as	single	nucleotide	polymorphisms,	or	SNPs.	We	also	began	the	sale	of	custom	synthesized	pieces of	DNA	called	oligonucleotides,	or	oligos	using	our	proprietary	Oligator	technology.

						In	the	third	quarter	of	2002,	we	announced	the	launch	of	our	production	scale	BeadLab	genotyping	system.	This	integrated	turnkey	system	is	built	around	our proprietary	BeadArray	technology.	Included	in	the	system	are	the	BeadArray	Reader,	GoldenGate	assay	protocols,	LIMS	and	analytical	software,	fluid-handling robotics,	and	access	to	Sentrix	arrays	and	reagent	kits	for	analyzing	genetic	sequences.	Our	Sentrix	array	is	a	collection	of	individual	arrays	arranged	in	a	pattern compatible	with	standard	microtiter	plates,	our	reagent	kit	uses	highly	multiplexed	GoldenGate	assay	protocols	which	allow	up	to	1536	SNPs	to	be	analyzed	at	one	time in	a	sample	and	our	BeadArray	Reader	is	a	proprietary	scanner	used	to	read	the	results	of	the	experiments	captured	on	our	arrays.	Our	genotyping	system	is	based	on	the production	laboratory	that	has	been	operational	in	our	genotyping	service	product	line	since	2001.	When	installed,	the	BeadLab	genotyping	system	is	able	to	routinely produce	up	to	1.4	million	genotypes	per	day.	As	of	the	end	of	February	2004,	we	have	installed	six	BeadLab	genotyping	systems.

						In	the	fourth	quarter	of	2002,	we	were	named	the	largest	U.S.	participant	in	the	$100	million	International	HapMap	Project	funded	by	the	National	Institutes	of Health.	This	project	is	an	internationally	funded	successor	project	to	the	Human	Genome	Project	that	will	help	identify	a	map	of	genetic	variations	that	may	be	used	to perform	disease-related	research.	This	map	of	the	human	genome	will	allow	more	rapid	and	efficient	large-scale	genetic	association	studies	aimed	at	discovering variants	contributing	to	human	disease	and	differential	response	to	drug	treatments.	We	are	one	of	five	funded	U.S.	participants	in	a	worldwide	initiative	that	includes research	groups	in	Canada,	China,	Japan,	Nigeria	and	the	United	Kingdom.	We	will	be	directly	responsible	for	screening	over	15%	of	the	assays	in	the	project.	This effort	leverages	our	Oligator	DNA	synthesis	capability	and	the	production-scale	throughput	of	our	genotyping	services	operation.	Our	BeadLab	system	is	being	used	by organizations	responsible	for	creating	over	60%	of	the	assays	in	this	project.

						In	the	first	quarter	of	2003,	we	completed	the	installation	of	and	recorded	revenue	for	our	first	BeadLab	high-throughput	SNP	genotyping	system.	We	installed	and recorded	revenue	for	a	second	BeadLab	in	the	second	quarter	of	2003,	two	additional	BeadLabs	in	the	third	quarter	of	2003	and	a	fifth	and	sixth	BeadLab	system	in	the fourth	quarter	of	2003.

						In	the	second	quarter	of	2003,	we	announced	the	launch	of	a	new	microarray	format,	the	Sentrix	BeadChip,	which	is	expected	to	significantly	expand	market opportunities	for	our	BeadArray	technology	and	provide	increased	experimental	flexibility	for	life	science	researchers.

						In	the	third	quarter	of	2003,	we	announced	the	launch	of	a	gene	expression	product	line	on	both	the	Sentrix	Array	Matrix	and	the	Sentrix	BeadChip	that	will	allow researchers	to	analyze	a	focused	set	of	genes	across	eight	to	96	samples	on	a	single	microarray.

						In	the	fourth	quarter	of	2003,	we	announced	the	launch	of	a	benchtop	SNP	genotyping	system,	the	BeadStation,	for	performing	medium	scale	genotyping	using	our technology.	The	BeadStation	includes	our	BeadArray	Reader,	genotyping	analysis	software	and	GoldenGate	assay	reagents	and	is	designed	to	match	the	throughput requirements	and	variable	automation	needs	of	individual	research	groups	and	core	labs.	This	system	is	expected	to	be	available	for	shipment	in	the	second	quarter	of 2004.

						In	the	first	quarter	of	2004,	we	announced	the	launch	of	two	new	Sentrix	BeadChips	for	whole-genome	gene	expression.	These	BeadChips	are	designed	to	enable high-performance,	cost-effective,

whole-genome	expression	profiling	of	multiple	samples	on	a	single	chip,	resulting	in	a	dramatic	reduction	in	cost	of	whole-genome	expression	analysis	while	allowing researchers	to	expand	the	scale	and	reproducibility	of	large-scale	biological	experimentation.

						We	are	seeking	to	expand	our	customer	base	for	our	BeadArray	technology;	however,	we	can	give	no	assurance	that	our	sales	efforts	will	continue	to	be	successful.

						We	were	incorporated	in	California	in	April	1998.	We	reincorporated	in	Delaware	in	July	2000.	Our	principal	executive	offices	are	located	at	9885	Towne	Centre Drive,	San	Diego,	California	92121.	Our	telephone	number	is	(858)	202-4500.

# Industry	Background

# Genetic	Variation	and	Function

						Every	person	inherits	two	copies	of	each	gene,	one	from	each	parent.	The	two	copies	of	each	gene	may	be	identical,	or	they	may	be	different.	These	differences	are referred	to	as	genetic	variation.	Examples	of	the	physical	consequences	of	genetic	variation	include	differences	in	eye	and	hair	color.	Genetic	variation	can	also	have important	medical	consequences,	including	predisposition	to	disease	and	differential	response	to	drugs.	Genetic	variation	affects	diseases,	including	cancer,	diabetes, cardiovascular	disease	and	Alzheimer's	disease.	In	addition,	genetic	variation	may	cause	people	to	respond	differently	to	the	same	drug.	Some	people	may	respond	well, others	may	not	respond	at	all,	and	still	others	may	experience	adverse	side	effects.	The	most	common	form	of	genetic	variation	is	a	Single	Nucleotide	Polymorphism,	or SNP.	A	SNP	is	a	variation	in	a	single	position	in	a	DNA	sequence.	It	is	estimated	that	the	human	genome	contains	between	three	and	six	million	SNPs.

						While	in	some	cases	a	single	SNP	will	be	responsible	for	medically	important	effects,	it	is	now	believed	that	the	genetic	component	of	most	major	diseases	is	the result	of	the	interaction	of	many	SNPs.	Therefore,	it	will	be	important	to	investigate	many	SNPs	together	in	order	to	discover	medically	valuable	information.

						Current	efforts	to	understand	genetic	variation	and	function	have	primarily	centered	around	SNP	genotyping	and	gene	expression	profiling.

# SNP	Genotyping

						SNP	genotyping	is	the	process	of	determining	which	SNPs	are	present	in	each	of	the	two	copies	of	a	gene,	or	other	portion	of	DNA	sequence,	within	an	individual or	other	organism.	The	use	of	SNP	genotyping	to	obtain	meaningful	statistics	on	the	effect	of	an	individual	SNP	or	a	collection	of	SNPs,	and	to	apply	that	information	to clinical	trials	and	diagnostic	testing,	will	require	the	analysis	of	millions	of	SNP	genotypes	and	the	testing	of	large	populations	for	each	disease.	For	example,	a	single large	clinical	trial	could	involve	genotyping	200,000	SNPs	per	patient	in	1,000	patients,	thus	requiring	200	million	assays.	Using	available	technologies,	this	scale	of SNP	genotyping	is	both	impractical	and	prohibitively	expensive.

						Large-scale	SNP	genotyping	will	be	used	for	a	variety	of	applications,	including	genomics-based	drug	development,	clinical	trial	analysis,	disease	predisposition testing,	and	disease	diagnosis.	SNP	genotyping	can	also	be	used	outside	of	healthcare,	for	example	in	the	development	of	plants	and	animals	with	desirable	commercial characteristics.	These	markets	will	require	billions	of	SNP	genotyping	assays	annually.

# Gene	Expression	Profiling

						Gene	expression	profiling	is	the	process	of	determining	which	genes	are	active	in	a	specific	cell	or	group	of	cells	and	is	accomplished	by	measuring	mRNA,	the intermediary	between	genes	and	proteins.	Variation	in	gene	expression	can	cause	disease,	or	act	as	an	important	indicator	of	disease	or	predisposition	to	disease.	By comparing	gene	expression	patterns	between	cells	from	different

environments,	such	as	normal	tissue	compared	to	diseased	tissue	or	in	the	presence	or	absence	of	a	drug,	specific	genes	or	groups	of	genes	that	play	a	role	in	these processes	can	be	identified.	Studies	of	this	type,	used	in	drug	discovery,	require	monitoring	thousands,	and	preferably	tens	of	thousands,	of	mRNAs	in	large	numbers	of samples.	Once	a	smaller	set	of	genes	of	interest	has	been	identified,	researchers	can	then	examine	how	these	genes	are	expressed	or	suppressed	across	numerous samples,	for	example,	within	a	clinical	trial.	The	high	cost	of	current	gene	expression	methods	has	limited	the	development	of	the	gene	expression	market.

						Once	gene	expression	patterns	have	been	correlated	to	specific	diseases,	gene	expression	profiling	is	expected	to	become	an	important	diagnostic	tool.	Diagnostic use	of	expression	profiling	tools	is	anticipated	to	grow	rapidly	with	the	combination	of	the	sequencing	of	various	genomes	and	the	availability	of	more	cost-effective technologies.

# Our	Technologies

# BeadArray	Technology

						We	have	developed	a	proprietary	array	technology	that	enables	the	large-scale	analysis	of	genetic	variation	and	function.	Our	BeadArray	technology	combines microscopic	beads	and	a	substrate	in	a	simple	proprietary	manufacturing	process	to	produce	arrays	that	can	perform	many	assays	simultaneously.	Our	BeadArray technology	provides	a	unique	combination	of	high	throughput,	cost	effectiveness,	and	flexibility.	We	achieve	high	throughput	with	a	high	density	of	test	sites	per	array and	our	ability	to	format	arrays	in	either	a	pattern	arranged	to	match	the	wells	of	standard	microtiter	plates	or	in	various	configurations	in	the	format	of	standard microscope	slides.	We	maximize	cost	effectiveness	by	reducing	consumption	of	expensive	reagents	and	valuable	samples,	and	from	the	low	manufacturing	costs associated	with	our	complementary	technologies.	Our	ability	to	vary	the	size,	shape	and	format	of	the	well	patterns	and	to	create	specific	bead	pools,	or	sensors,	for different	applications	provides	the	flexibility	to	address	multiple	markets	and	market	segments.	We	believe	that	these	features	will	enable	our	BeadArray	technology	to become	a	leading	platform	for	the	emerging	high-growth	markets	of	SNP	genotyping	and	gene	expression.

						Our	proprietary	BeadArray	technology	combines	microwells	etched	into	a	substrate	and	specially	prepared	beads	that	self-assemble	into	an	array.	We	have	deployed our	BeadArray	technology	in	two	different	formats,	the	Array	Matrix	and	the	BeadChip.	Our	first	bead-based	product	was	the	Array	Matrix	which	incorporates	fiber optic	bundles.	We	have	the	fiber	optic	bundles	manufactured	to	our	specifications,	which	we	cut	into	lengths	of	less	than	one	inch.	Each	bundle	contains	approximately 50,000	individual	fibers	and	96	of	these	bundles	are	placed	into	an	aluminum	plate,	which	forms	an	Array	Matrix.	BeadChips	are	fabricated	in	microscope	slide-shaped sizes	with	varying	numbers	of	sample	sites	per	slide.	Both	formats	are	chemically	etched	to	create	tens	of	thousands	of	wells	for	each	sample	site.

						In	a	separate	process,	we	create	sensors	by	affixing	a	specific	type	of	molecule	to	each	of	the	billions	of	microscopic	beads	in	a	batch.	We	make	different	batches	of beads,	with	the	beads	in	a	given	batch	coated	with	one	particular	type	of	molecule.	The	particular	molecules	on	a	bead	define	that	bead's	function	as	a	sensor.	For example,	we	create	a	batch	of	SNP	sensors	by	attaching	a	particular	DNA	sequence	to	each	bead	in	the	batch.	We	combine	batches	of	coated	beads	to	form	a	pool specific	to	the	type	of	array	we	intend	to	create.	A	bead	pool	one	milliliter	in	volume	contains	sufficient	beads	to	produce	thousands	of	arrays.	One	of	the	advantages	of this	technology	is	that	it	allows	us	to	create	universal	arrays	for	SNP	genotyping.	All	of	our	SNP	genotyping	arrays	are	manufactured	with	the	same	set	of	sensors.	This allows	us	to	manufacture	one	type	of	genotyping	array,	and	by	varying	the	reagent	kit,	still	be	able	to	use	it	to	test	for	any	combination	of	SNPs.

						To	form	an	array,	a	pool	of	coated	beads	is	brought	into	contact	with	the	array	surface	where	they	are	randomly	drawn	into	the	wells,	one	bead	per	well.	The	tens	of thousands	of	beads	in	the	wells	comprise	our	BeadArray.	Because	the	beads	assemble	randomly	into	the	wells,	we	perform	a	final	procedure	called	decoding	in	order	to determine	which	bead	type	occupies	which	well	in	the	array.	We

employ	several	proprietary	methods	for	decoding,	a	process	that	requires	only	a	few	steps	to	identify	all	the	beads	in	the	array.	One	beneficial	by-product	of	the	decoding process	is	a	validation	of	each	bead	in	the	array.	This	quality	control	test	characterizes	the	performance	of	each	bead	and	can	identify	and	eliminate	use	of	any	empty wells.	We	ensure	that	each	bead	type	on	the	array	is	sufficiently	represented	by	having	multiple	copies	of	each	bead	type.	This	improves	the	reliability	and	accuracy	of the	resulting	data	by	allowing	statistical	processing	of	the	results	of	identical	beads.

						One	performs	an	experiment	on	the	BeadArray	matrices	by	preparing	a	sample,	such	as	DNA	from	a	patient,	and	introducing	it	to	the	array.	The	design	features	of our	Array	Matrix	allow	it	to	be	simply	dipped	into	a	solution	containing	the	sample,	whereas	our	BeadChip	allows	processing	of	samples	on	a	slide.	The	molecules	in	the sample	bind	to	their	matching	molecules	on	the	coated	bead.	The	BeadArray	Reader	detects	the	matched	molecules	by	shining	a	laser	on	the	fiber	optic	bundle	or	on	the BeadChip.	Since	the	molecules	in	the	sample	have	a	structure	that	causes	them	to	emit	light	in	response	to	a	laser,	detection	of	a	binding	event	is	possible.	This	allows the	measurement	of	the	number	of	molecules	bound	to	each	coated	bead,	resulting	in	a	quantitative	analysis	of	the	sample.

# Oligator	Technology

						Genomic	applications	require	many	different	short	pieces	of	DNA	that	can	be	made	synthetically,	called	oligonucleotides.	For	example,	SNP	genotyping	typically requires	three	to	four	different	oligonucleotides	per	assay.	A	SNP	genotyping	experiment	analyzing	10,000	SNPs	may	therefore	require	30,000	to	40,000	different oligonucleotides,	contributing	significantly	to	the	expense	of	the	experiment.

						We	have	designed	our	proprietary	Oligator	technology	for	the	parallel	synthesis	of	many	different	oligonucleotides	to	meet	the	requirements	of	large-scale genomics	applications.	We	believe	that	our	Oligator	technology	is	substantially	more	cost	effective	and	provides	higher	throughput	than	available	commercial alternatives.	Our	synthesis	machines	are	computer	controlled	and	utilize	many	robotic	processes	to	minimize	the	amount	of	labor	used	in	the	manufacturing	process. Each	of	these	synthesizers	can	produce	up	to	3072	oligos	in	parallel,	using	very	small	amounts	of	material.	We	believe	both	of	these	attributes	are	substantial improvements	over	other	existing	technologies.

# Key	Advantages	of	Our	BeadArray	and	Oligator	Technologies

						We	believe	that	our	BeadArray	and	Oligator	technologies	provide	distinct	advantages,	in	a	variety	of	applications,	over	competing	technologies,	by	creating	cost- effective,	highly	miniaturized	arrays	with	the	following	advantages:

						High	Throughput.	The	miniaturization	of	our	BeadArray	technology	provides	significantly	greater	information	content	per	unit	area	than	any	other	array	known	to us.	To	further	increase	throughput,	we	have	formatted	our	Arrays	in	a	pattern	arranged	to	match	the	wells	of	standard	microtiter	plates,	allowing	throughput	levels	of	up to	150,000	unique	assays	per	microtiter	plate,	as	well	as	the	use	of	laboratory	robotics	to	speed	process	time.	The	Oligator's	parallel	synthesis	capability	allows	us	to manufacture	the	diversity	of	oligonucleotides	necessary	to	support	large-scale	genomic	applications.

						Cost	Effectiveness.	Our	BeadArray	products	substantially	reduce	the	cost	of	experiments	as	a	result	of	our	proprietary	manufacturing	process	and	our	ability	to capitalize	on	cost	reductions	generated	by	advances	in	fiber	optics,	digital	imaging	and	bead	chemistry.	In	addition,	these	products	require	smaller	reagent	volumes	than other	array	technologies,	and	therefore	reduce	reagent	costs.	Our	cost-effective	Oligator	technology	further	reduces	reagent	costs,	as	well	as	the	cost	of	coating	beads.

						Flexibility.	A	wide	variety	of	conventional	chemistries	are	available	for	attaching	different	molecules,	such	as	DNA,	RNA,	proteins,	and	other	chemicals	to	beads. By	using	beads,	we	are	able	to	take	advantage	of	these	chemistries	to	create	a	wide	variety	of	sensors,	which	we	assemble	into	arrays	using	the	same	proprietary manufacturing	process.	In	addition,	we	can	have	fiber	optic	bundles	and

BeadChips	manufactured	in	multiple	shapes	and	sizes	with	wells	organized	in	various	arrangements	to	optimize	them	for	different	markets	and	market	segments.	In combination,	the	use	of	beads	and	etched	wells	provides	the	flexibility	and	scalability	for	our	BeadArray	technology	to	be	tailored	to	perform	many	applications	in	many different	market	segments,	from	drug	discovery	to	diagnostics.	Our	Oligator	technology	allows	us	to	manufacture	a	wide	diversity	of	lengths	and	quantities	of oligonucleotides.

						Quality.	The	high	density	of	beads	in	each	array	enables	us	to	have	multiple	copies	of	each	individual	bead	type.	We	measure	the	copies	simultaneously	and combine	them	into	one	data	point.	This	allows	us	to	make	a	comparison	of	each	bead	against	its	own	population	of	identical	beads,	which	permits	the	statistical calculation	of	a	more	reliable	and	accurate	value	for	each	data	point.	Finally,	the	manufacture	of	the	array	includes	a	proprietary	decoding	step	that	also	functions	as	a quality	control	test	of	every	bead	on	every	array,	improving	the	overall	quality	of	the	data.

# Our	Strategy

						Our	goal	is	to	make	our	BeadArray	platforms	the	industry	standard	for	products	and	services	utilizing	array	technologies.	We	plan	to	achieve	this	by:

•	focusing	on	emerging	high-growth	markets;

•	rapidly	commercializing	our	BeadLab,	BeadStation,	Sentrix	and	BeadChip	products;

•	expanding	our	technologies	into	multiple	product	lines	and	market	segments;	and

•	strengthening	our	technological	leadership.

# Products	and	Services

						The	first	implementation	of	our	BeadArray	technology,	the	Sentrix	Array	Matrix,	is	a	disposable	matrix	with	96	fiber	optic	bundles	arranged	in	a	pattern	that matches	the	standard	96-well	microtiter	plate.	Each	fiber	optic	bundle	performs	more	than	1,500	unique	assays.	Therefore,	one	Sentrix	array	can	perform	nearly	150,000 individual	assays	simultaneously,	more	than	any	other	array	system	known	to	us.	The	BeadChip,	introduced	in	2003,	is	fabricated	in	multiple	configurations	to	support multiple	applications	and	scanning	technologies.

						We	have	provided	genotyping	services	using	our	proprietary	BeadArray	technology	since	2001.	In	addition,	we	have	developed	our	first	genotyping	and	gene expression	products	based	on	this	technology.	These	products	include	disposable	Sentrix	Arrays	and	BeadChips,	GoldenGate	reagent	kits	for	SNP	genotyping	and BeadArray	Reader	scanning	instruments.

						In	2001,	we	introduced	the	first	commercial	application	of	our	BeadArray	technology	by	launching	our	SNP	genotyping	services	product	line.	Since	this	launch	we have	had	peak	days	in	which	we	operated	at	two	million	genotypes	per	day	based	on	individual	samples.	To	our	knowledge,	no	other	genotyping	platform	can	achieve comparable	levels	of	throughput	while	delivering	such	high	accuracy	and	low	cost.

						We	designed	our	first	consumable	BeadArray	product,	the	Sentrix	Array	Matrix,	for	SNP	genotyping.	The	Sentrix	Array	Matrix	uses	a	universal	format	that	allows it	to	analyze	any	set	of	SNPs.	We	have	also	developed	reagent	kits	based	on	GoldenGate	assay	protocols	and	the	BeadArray	Reader,	a	laser	scanner,	which	is	used	to read	our	array	products.	These	components,	combined	with	LIMS,	standard	operating	procedures	and	analytical	software	and	fluid	handling	robotics	comprise	our BeadLab	SNP	genotyping	system.	This	production	scale	system	was	commercialized	in	late	2002	and	when	installed,	the	genotyping	system	can	routinely	produce	up	to 1.4	million	genotypes	per	day.

						In	January	2003,	we	announced	the	availability	of	two	assay	sets,	one	for	genetic	linkage	analysis	and	the	other	for	fine	chromosomal	or	whole-genome	mapping. These	standard	products	have	been	deployed	in	our	genotyping	services	operation	and	are	also	sold	to	customers	who	use	our	SNP	genotyping	system.	Genetic	linkage analysis	can	help	identify	chromosomal	regions	with	potential	disease	associations	across	a	related	set	of	samples.	Fine	mapping	provides	dense	genotyping	and	may enable	target	gene	identification	related	to	a	specific	disease.

						In	November	2003,	we	announced	the	BeadStation,	a	system	for	performing	moderate	scale	genotyping	designed	to	match	the	throughput	requirements	of individual	research	groups	and	core	labs.	The	BeadStation	includes	our	BeadArray	Reader,	genotyping	analysis	software	and	GoldenGate	assay	reagents	and	will initially	support	a	high-density	version	of	our	BeadChip.	The	Sentrix	BeadChip	allows	simultaneous	processing	of	16	samples	and	uses	identical	content	as	the	Sentrix Array	Matrix.

						In	September	2003,	we	introduced	our	focused	set	gene	expression	products	on	both	the	Sentrix	Array	Matrix	and	Sentrix	BeadChip	platforms.	For	high-throughput projects,	our	system	includes	a	BeadArray	Reader	for	imaging	Sentrix	Array	Matrices,	a	hybridization	chamber	and	software	for	data	extraction.	For	research	projects that	require	moderate	throughput,	a	version	of	the	Sentrix	BeadChip	analyzes	eight	samples	in	parallel	and	can	be	scanned	on	a	portion	of	the	installed	base	of	Axon Instruments'	GenePix TM 	scanners.	In	addition,	we	have	developed	standard	gene	expression	products	for	each	of	the	human,	mouse	and	arabidopsis	genomes.

						In	January	2004,	we	announced	two	whole-genome	gene	expression	BeadChip	products.	Both	products	allow	whole-genome	expression	profiling	of	multiple samples	on	a	single	chip	and	are	imaged	using	our	BeadArray	Reader.	The	first	BeadChip	is	designed	to	analyze	six	discrete	whole-human-genome	samples	on	one	chip, interrogating	in	each	sample	approximately	48,000	transcripts	from	the	estimated	30,000	genes	in	the	human	genome.	The	second	BeadChip	product	analyzes	eight samples	in	parallel	against	the	roughly	22,000	genes	represented	in	the	consensus	RefSeq	database,	a	well-characterized	whole-genome	subset	used	broadly	in	genetic analysis.	We	expect	that	the	new	whole-genome	gene	expression	BeadChips	will	dramatically	reduce	the	cost	of	whole-genome	expression	analysis,	allowing researchers	to	expand	the	scale	and	reproducibility	of	large-scale	biological	experimentation.

# Scanning	Instrumentation

						We	have	developed	the	BeadArray	Reader	which	is	an	instrument	that	uses	a	laser	to	read	the	results	of	experiments	that	are	captured	on	our	Sentrix	Array Matrices	and	BeadChips,	and	is	part	of	both	our	production	scale	BeadLab	SNP	genotyping	laboratory	and	our	benchtop	BeadStation	system.	This	scanning	equipment was	designed	to	be	used	in	all	areas	of	genetic	analysis	that	use	our	Sentrix	arrays.

# High-Throughput	Synthesis

						We	have	put	in	place	an	oligonucleotide	manufacturing	facility	that	currently	has	the	capability	of	producing	approximately	20	million	oligonucleotides	per	year.	In addition	to	their	use	to	coat	beads,	these	oligonucleotides	are	components	of	the	reagent	kits	for	our	BeadArray	products	and	are	used	for	assay	development.	Because our	production	capacity	exceeds	our	internal	needs,	we	began	to	offer	oligonucleotides	for	sale	to	high	volume	users	in	2001.	We	provide	oligonucleotides	in	a	wide range	of	lengths	and	in	several	scales,	with	the	ability	to	add	many	types	of	modifications.	We	offer	a	range	of	quality	control	options	and	have	implemented	a laboratory	information	management	system	to	control	much	of	the	manufacturing	process.	In	February	2003,	we	introduced	the	first	standard	product	offerings	in	our Oligator	product	line,	a	whole-genome	oligonucleotide	reference	set	designed	and	optimized	for	spotted	gene	expression	microarrays.	We	believe	our	Oligator technology	is	more	cost

effective	than	competing	technologies,	which	has	allowed	us	to	market	our	oligonucleotides	under	a	price	leadership	strategy	while	still	achieving	attractive	gross margins.

# Partnerships	and	Collaborations

						In	November	1999,	we	entered	into	a	joint	development	agreement	with	Applied	Biosystems,	a	Division	of	Applera	Corporation,	under	which	the	companies	would jointly	develop	a	SNP	genotyping	system	that	would	combine	our	BeadArray TM 	technology	with	Applied	Biosystems'	assay	chemistry	and	scanner	technology.	Under this	agreement,	we	were	primarily	responsible	for	developing	and	manufacturing	the	arrays	and	Applied	Biosystems	was	responsible	for	developing	and	manufacturing the	instruments,	SNP	assay	reagents	and	software	and	for	marketing	the	system	worldwide.	In	conjunction	with	the	agreement,	Applied	Biosystems	purchased 1.25	million	shares	of	Series	C	convertible	preferred	stock	at	$4.00	per	share.	In	addition,	Applied	Biosystems	agreed	to	provide	us	with	non-refundable	research	and development	support	of	$10	million,	all	of	which	was	provided	by	December	2001.	Upon	commercialization	of	the	system,	we	were	to	receive	a	share	of	the	operating profits	from	the	sales	of	all	components	of	these	systems,	had	such	sales	occurred.

						In	July	2002,	Applied	Biosystems	indicated	that	the	planned	mid-2002	launch	of	this	genotyping	system	would	be	delayed	a	second	time.	This	delay	was	related	to Applied	Biosystems'	inability	to	optimize	and	multiplex	the	SNP	assay	reagents.	We	do	not	believe	that	Applied	Biosystems	has	any	intention	of	continuing	to	develop	a collaboration	product	with	us.	As	a	result	of	the	delay	in	developing	the	collaboration	product,	we	launched	our	own	production-scale	genotyping	system	in	July	2002 utilizing	our	arrays	and	an	independently	developed	scanner	and	assay	method.	In	December	2002,	we	announced	that	we	had	notified	Applied	Biosystems	that	it	was	in breach	of	the	joint	development	agreement.	This	notification	followed	a	patent	infringement	suit	filed	by	Applied	Biosystems	against	us	and	a	notification	from	Applied Biosystems	alleging	that	we	had	breached	the	joint	development	agreement	and	seeking	to	compel	arbitration	pursuant	to	the	agreement.	In	December	2003,	we	notified Applied	Biosystems	that	we	had	terminated	the	joint	development	agreement.	For	further	information	regarding	this	matter,	please	see	ITEM	3,	"Legal	Proceedings" and	ITEM	7,	"Managements'	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations."	We	do	not	have	any	other	significant	partnerships	or collaborations.

# Research	and	Development

						We	have	made	substantial	investments	in	research	and	development	since	our	inception.	We	have	assembled	a	team	of	skilled	engineers	and	scientists	who	are specialists	in	biology,	chemistry,	informatics,	instrumentation,	optical	systems,	software,	manufacturing	and	other	related	areas	required	to	complete	the	development	of our	products.	Our	research	and	development	efforts	have	focused	primarily	on	the	tasks	required	to	optimize	our	BeadArray	and	Oligator	technologies	and	to	support commercialization	of	the	products	and	services	derived	from	these	technologies.	These	efforts	include	among	others:

•	We	enhanced	the	quality	and	manufacturing	yield	of	our	Sentrix	Array	Matrices	and	BeadChips.	We	are	exploring	ways	to	continue	to	increase	the	level	of automation	in	the	manufacturing	process	to	further	reduce	the	time	and	cost	of	producing	arrays.	We	currently	have	the	infrastructure	in	place	to	manufacture Sentrix	Array	Matrices	and	BeadChips	in	sufficient	quantity	to	meet	anticipated	internal	and	external	needs.

•	We	introduced	a	number	of	initiatives	in	2002	and	2003	to	improve	the	yield	and	quality	of	our	oligonucleotides	while	reducing	cost	substantially.	By	refining	our understanding	of	the	design	and	operation	of	our	Oligator	technology,	we	have	been	able	to	make	numerous	changes	in	our	process,	which	we	believe	provides	us a	more	cost	effective	system	than	competing	technologies.	Our	oligonucleotide	manufacturing	facility	currently	has	the	capability	of	producing	approximately 20	million	oligonucleotides	per	year.

•	We	have	developed	the	BeadArray	Reader,	a	laser	scanning	instrument	that	scans	our	Sentrix	array	platforms.	Laser	scanners	provide	the	high	sensitivity	and resolution	required	to	address	the	extremely	dense	geometries	of	our	bead-based	arrays.	We	made	the	first	commercial	shipments	of	our	scanners	in	the	first quarter	of	2003	as	part	of	our	BeadLab	system.

•	We	completed	development	of	and	launched	our	gene	expression	product	line	on	both	array	formats.	We	believe	the	combination	of	our	gene	expression	products flexibility	and	low-per-sample	cost	will	enable	larger	and	more	meaningful	gene	expression	studies.

•	We	have	been	exploring	the	underlying	molecular	biology	and	chemistry	issues	related	to	developing	assays	and	performing	experiments	on	our	BeadArray platforms.	By	improving	our	processes	and	protocols,	we	have	substantially	increased	the	number	of	assays	we	can	process	simultaneously	in	a	single	sample	on our	arrays.

						Our	research	and	development	expenses	for	the	fiscal	years	2003,	2002	and	2001	(exclusive	of	charges	relating	to	stock	based	compensation	of	$1.3	million, $2.4	million	and	$3.1	million,	respectively)	were	$22.5	million,	$26.8	million	and	$20.7	million,	respectively.	We	expect	research	and	development	expense	to	remain flat	in	2004	as	compared	to	2003	but	in	general	increase	in	the	future	as	we	continue	to	expand	our	research	and	product	development	efforts.

# Government	Grants

						Government	grants	allow	us	to	fund	internal	scientific	programs	and	exploratory	research.	We	retain	ownership	of	all	intellectual	property	and	commercial	rights generated	during	these	projects,	subject	to	a	non-exclusive,	non-transferable,	paid-up	license	to	practice,	for	or	on	behalf	of	the	United	States,	inventions	made	with federal	funds.	This	license	is	retained	by	the	U.S.	government	as	provided	by	applicable	statutes	and	regulations.	We	do	not	believe	that	the	retained	license	will	have any	impact	on	our	ability	to	market	our	products,	and	we	do	not	need	government	approval	with	respect	to	this	license	in	order	to	enter	into	collaborations	or	other relationships	with	third	parties.	We	are	the	recipient	of	a	grant	from	the	National	Institutes	of	Health	covering	our	participation	in	the	International	HapMap	Project, which	is	a	$100	million,	internationally	funded	successor	project	to	the	Human	Genome	Project	that	will	help	identify	a	map	of	genetic	variations	that	may	be	used	to perform	disease-related	research.	We	could	receive	up	to	$9	million	of	funding	for	this	project	which	covers	basic	research	activities,	the	development	of	SNP	assays	and the	genotyping	to	be	performed	on	those	assays.	As	of	the	end	of	2003,	we	had	approximately	$5.4	million	of	funding	remaining	related	to	this	project,	much	of	which	is expected	to	be	received	in	2004,	depending	on	the	actual	amount	of	work	that	is	performed	by	us.

# Intellectual	Property

						We	have	an	extensive	patent	portfolio,	including	ownership	of,	or	exclusive	licenses	to,	27	issued	U.S.	patents	and	65	pending	U.S.	patent	applications,	including four	allowed	applications	that	have	not	yet	issued	as	patents,	some	of	which	derive	from	a	common	parent	application.	Our	issued	patents,	which	cover	various	aspects of	our	BeadArray,	oligonucleotide	synthesis	and	chemical	detection	technologies,	expire	between	2011	and	2020.	We	are	seeking	to	extend	this	patent	protection	on	our BeadArray,	GoldenGate,	Oligator,	Sentrix	and	related	technologies.	We	have	received	or	filed	counterparts	for	many	of	these	patents	and	applications	in	one	or	more foreign	countries.

						We	also	rely	upon	trade	secrets,	know-how,	copyright	and	trademark	protection,	as	well	as	continuing	technological	innovation	and	licensing	opportunities	to develop	and	maintain	our	competitive	position.	Our	success	will	depend	in	part	on	our	ability	to	obtain	patent	protection	for	our	products	and	processes,	to	preserve	our copyrights	and	trade	secrets,	to	operate	without	infringing	the	proprietary	rights	of	third	parties	and	to	acquire	licenses	related	to	enabling	technology	or	products	used with	our	BeadArray,	GoldenGate,	Sentrix	and	Oligator	technologies.

						We	are	party	to	various	exclusive	and	non-exclusive	license	agreements	with	third	parties,	which	grant	us	rights	to	use	key	aspects	of	our	array	technology,	assay methods,	chemical	detection	methods,	reagent	kits	and	scanning	equipment.	We	have	exclusive	licenses	from	Tufts	University	to	patents	that	cover	our	use	of BeadArray	technology.	These	patents	were	filed	by	Dr.	David	Walt,	a	member	of	our	board	of	directors,	the	Chairman	of	our	Scientific	Advisory	Board	and	one	of	our founders.	Our	exclusive	licenses	expire	with	the	termination	of	the	underlying	patents,	which	will	occur	between	2010	and	2020.	In	2001,	we	entered	into	a	non- exclusive	license	agreement	with	Amersham	Biosciences	that	covers	certain	technology	contained	in	our	BeadArray	Reader.	In	2002,	we	obtained	a	non-exclusive license	from	Dade	Behring	Marburg	GmbH	that	relates	to	certain	components	of	our	GoldenGate	assay.	In	all	cases,	the	agreements	remain	in	effect	over	the	term	of	the underlying	patents,	may	be	terminated	at	our	request	without	further	obligation	and	require	that	we	pay	customary	royalties	while	the	agreement	is	in	effect.

# Marketing	and	Distribution

						Our	current	products	address	the	genetic	analysis	portion	of	the	life	sciences	market,	in	particular,	experiments	involving	SNP	genotyping	and	gene	expression profiling.	These	experiments	may	be	involved	in	many	areas	of	biologic	research	including	basic	human	disease	research,	pharmaceutical	drug	discovery	and development,	pharmacogenomics,	toxicogenomics	and	agricultural	research.	Our	potential	customers	include	pharmaceutical,	biotechnology,	agrichemical,	diagnostics and	consumer	products	companies,	as	well	as	academic	or	private	research	centers.	The	genetic	analysis	market	is	relatively	new	and	emerging	and	its	size	and	speed	of development	will	be	ultimately	driven	by,	among	other	items,

•	the	ability	of	the	research	community	to	extract	medically	valuable	information	from	genomics	and	to	apply	that	knowledge	to	multiple	areas	of	disease-related research	and	treatment,

•	the	availability	of	sufficiently	low	cost,	high-throughput	research	tools	to	enable	the	large	amount	of	experimentation	required	to	study	genetic	variation	and function,	and

•	the	availability	of	government	and	private	industry	funding	to	perform	the	research	required	to	extract	medically	relevant	information	from	genomic	analysis.

						We	market	and	distribute	our	products	directly	to	customers	in	North	America,	major	European	markets,	Japan	and	Singapore.	In	each	of	these	areas	we	have dedicated	sales,	service	and	application	support	personnel	responsible	for	expanding	and	managing	their	respective	customer	bases.	In	markets	outside	of	these	areas, primarily	the	Pacific	Rim	countries,	we	sell	our	products	and	provide	services	to	customers	through	distributors	that	specialize	in	life	science	products.	We	expect	to significantly	increase	our	sales	and	distribution	resources	during	2004	and	beyond	as	we	launch	a	number	of	new	products	and	expand	the	number	of	customers	that	can use	our	products.

# Manufacturing

						We	manufacture	our	array	platforms,	reagent	kits,	scanning	equipment	and	oligonucleotides	in-house	and	believe	that	we	currently	have	the	ability	to	manufacture these	in	sufficient	quantity	to	meet	anticipated	internal	and	external	needs.	We	currently	depend	upon	outside	suppliers	for	materials	used	in	the	manufacture	of	our products.	We	intend	to	continue,	and	may	extend,	the	outsourcing	of	portions	of	our	manufacturing	process	to	subcontractors	where	we	determine	it	is	in	our	best commercial	interests.

						During	2001,	we	moved	into	a	new	facility	which	allowed	us	to	design	the	manufacturing	areas	to	fit	our	specific	processes,	and	optimize	material	flow	and personnel	movement.	In	addition,	we	have	implemented	information	management	systems	for	many	of	our	manufacturing	and	services	operations	to	manage	all	aspects of	material	and	sample	use.	We	adhere	to	access	and	safety	standards	required	by	federal,	state	and	local	health	ordinances,	such	as	standards	for	the	use,	handling	and disposal	of	hazardous	substances.

# Competition

						Although	we	expect	that	our	BeadArray	products	and	services	will	provide	significant	advantages	over	currently	available	products	and	services,	we	expect	to encounter	intense	competition	from	other	companies	that	offer	products	and	services	for	the	SNP	genotyping	and	gene	expression	markets.	These	include	companies such	as	Aclara	Biosciences,	Affymetrix,	Agilent,	Amersham	Biosciences	(recently	acquired	by	GE	Corp.),	Applied	Biosystems,	Beckman	Coulter,	Caliper	Technologies, Luminex,	ParAllele	Bioscience,	Perlegen	Sciences,	Sequenom	and	Third	Wave	Technologies.	Many	of	these	companies	have	or	will	have	substantially	greater	financial, technical,	research,	and	other	resources	and	larger,	more	established	marketing,	sales,	distribution	and	service	organizations	than	we	do.	In	addition,	they	may	have greater	name	recognition	than	we	do	in	the	markets	we	need	to	address	and	in	some	cases	a	large	installed	base	of	systems.	Each	of	these	markets	is	very	competitive	and we	expect	new	competitors	to	emerge	and	the	intensity	of	competition	to	increase	in	the	future.	In	order	to	effectively	compete	with	these	companies,	we	will	need	to demonstrate	that	our	products	have	superior	throughput,	cost	and	accuracy	advantages	over	the	existing	products.	Rapid	technological	development	may	result	in	our products	or	technologies	becoming	obsolete.	Products	offered	by	us	could	be	made	obsolete	either	by	less	expensive	or	more	effective	products	based	on	similar	or	other technologies.	Although	we	believe	that	our	technology	and	products	will	offer	advantages	that	will	enable	us	to	compete	effectively	with	these	companies,	we	cannot assure	you	that	we	will	be	successful.

# Geographic	Information

						During	2003,	$14.4	million,	or	51%,	of	our	total	revenues	came	from	customers	outside	the	United	States,	as	compared	to	$1.3	million,	or	13%,	in	2002.	We	expect that	sales	to	international	customers	will	continue	to	be	an	important	and	growing	source	of	revenues.	In	2003,	we	continued	to	add	sales	support	resources	in	Western Europe	and	opened	direct	sales	offices	in	Japan	and	Singapore.	In	addition,	we	established	new	distributor	relationships	in	China	and	Australia.

						Information	about	the	geographies	in	which	we	operate	can	be	found	in	the	Notes	to	Consolidated	Financial	Statements	at	Note	10,	"Segment	Information	and Geographic	Data."

# Employees

						As	of	December	28,	2003,	we	had	a	total	of	236	employees,	53	of	whom	hold	Ph.D.	degrees	and	103	of	whom	are	engaged	in	full-time	research	and	development activities.	None	of	our	employees	is	represented	by	a	labor	union.	We	consider	our	employee	relations	to	be	positive.

# Executive	Officers

						Jay	T.	Flatley	has	served	as	our	President,	Chief	Executive	Officer	and	a	Director	since	October	1999.	Prior	to	joining	Illumina,	Mr.	Flatley	was	co-founder, President,	Chief	Executive	Officer	and	a	Director	of	Molecular	Dynamics,	a	life	sciences	company,	from	May	1994	to	September	1999.	He	served	in	various	other positions	with	that	company	from	1987	to	1994.	From	1985	to	1987,	Mr.	Flatley	was	Vice	President	of	Engineering	and	Vice	President	of	Strategic	Planning	at	Plexus Computers,	a	UNIX	computer	company.	Mr.	Flatley	holds	a	B.A.	in	Economics	from	Claremont	McKenna	College	and	a	B.S.	and	M.S.	in	Industrial	Engineering	from Stanford	University.

						David	L.	Barker,	Ph.D.,	has	served	as	our	Vice	President	and	Chief	Scientific	Officer	since	March	2000.	Prior	to	joining	us,	Dr.	Barker	was	Vice	President	and Chief	Science	Advisor	at	Amersham	Pharmacia	Biotech,	a	life	sciences	company,	from	September	1998	to	March	2000.	From	May	1997	to	September	1998,	Dr.	Barker was	Vice	President	of	Research	and	Business	Development	of	Molecular	Dynamics.	From	1992	to	1997,	he	was	Vice	President	of	Scientific	Development.	From	1988 to	1995,	he	held	various	other	positions	with	that	company.	Dr.	Barker	holds	a	B.S.	in	Chemistry	from	California	Institute	of	Technology	and	received	his	Ph.D.	in Biochemistry	from	Brandeis	University.

						Paulette	D.	Cabral	has	served	as	our	Vice	President	of	Human	Resources	since	March	2001.	Prior	to	joining	us,	Ms.	Cabral	was	the	Vice	President	of	Human Resources	at	Marimba,	Inc.,	an	internet	infrastructure	company,	from	July	2000	to	February	2001.	From	December	1996	to	July	2000,	Ms.	Cabral	held	various	human resource	positions	at	Molecular	Dynamics;	most	recently,	she	was	Vice	President	of	Human	Resources.	Previous	to	that	she	held	various	positions	at	Acuson Corporation	and	Spectra	Physics.	Ms.	Cabral	holds	a	B.A.	in	Sociology	from	San	Jose	State	University.

						David	C.	Douglas	has	served	as	our	Vice	President	of	Manufacturing	since	January	2001.	Prior	to	joining	us,	Mr.	Douglas	was	Vice	President	of	Operations	at POSDATA	Inc.,	an	information	technology	equipment	company,	from	July	1989	to	December	2000.	From	July	1988	to	July	1989,	Mr.	Douglas	was	Test	Operations Manager	at	Acuson	Computed	Sonography,	a	medical	equipment	company.	Previous	to	that	he	held	various	positions	at	Plexus	Computers	and	Spectra	Physics. Mr.	Douglas	holds	a	B.S.	in	Electronics	Engineering	Technology	from	Oregon	Institute	of	Technology.

						Noemi	C.	Espinosa	has	served	as	our	Vice	President	of	Intellectual	Property	since	May	2000	and	our	Corporate	Secretary	since	January	2001.	Prior	to	joining	us,

Ms.	Espinosa	was	a	partner	with	the	firm	of	Brobeck,	Phleger	&	Harrison	LLP	from	January	1992	to	April	2000,	having	joined	the	firm	in	1990.	From	1983	to	1990,

Ms.	Espinosa	was	associated	with	the	intellectual	property	firm	of	Townsend	&	Townsend.	Ms.	Espinosa	holds	a	B.S.	in	Chemical	Engineering	from	San	Jose	State University	and	a	J.D.	from	the	University	of	California,	Hastings	College	of	Law.	She	is	registered	to	practice	before	the	United	States	Patent	and	Trademark	Office.

						Robert	C.	Kain	has	served	as	our	Vice	President	of	Engineering	since	December	1999.	Prior	to	joining	us,	Mr.	Kain	was	Senior	Director	of	Engineering	at Molecular	Devices	from	July	1999	to	December	1999.	Previously,	Mr.	Kain	served	as	Director	of	Microarray	Engineering	at	Molecular	Dynamics	from	August	1998	to July	1999	and	in	other	positions	from	August	1996	to	August	1998.	From	1983	to	1988,	Mr.	Kain	was	employed	at	DatagraphiX,	an	information	technology	equipment company.	Mr.	Kain	received	his	B.S.	in	Physics	from	San	Diego	State	University	and	his	M.B.A.	from	St.	Mary's	College.

						Timothy	M.	Kish	has	served	as	our	Vice	President	and	Chief	Financial	Officer	since	May	2000.	Prior	to	joining	us,	Mr.	Kish	was	Vice	President,	Finance	and	Chief Financial	Officer	at	Biogen,	Inc.,	a	biopharmaceutical	company,	from	September	1993	to	April	2000.	He	served	as	Corporate	Controller	of	that	company	from	1986	to 1993.	From	1983	to	1986,	Mr.	Kish	was	Director	of	Finance	at	Allied	Health	&	Scientific	Products	Company,	a	subsidiary	of	Allied-Signal	Corporation.	Mr.	Kish	holds a	B.B.A.	from	Michigan	State	University	and	an	M.B.A.	from	the	University	of	Minnesota.

						Arnold	Oliphant,	Ph.D.,	has	served	as	our	Vice	President	of	Scientific	Operations	since	October	2000.	Prior	to	joining	us,	Dr.	Oliphant	was	Vice	President	of Functional	Genomics	at	Myriad	Genetics,	a	genomics	company,	from	1997	to	September	2000	and	was	Process	Development	and	Production

Director	from	January	1995	to	June	1997.	From	January	1992	to	January	1995,	Dr.	Oliphant	held	several	positions	at	Pioneer	Hybrid	International,	a	plant	genetics company	and	prior	to	that	was	an	Assistant	Professor	at	the	University	of	Utah.	Dr.	Oliphant	received	his	B.A.	in	biology	from	the	University	of	Utah	and	his	Ph.D.	in Genetics	from	the	Harvard	Medical	School.

						Tristan	Orpin	has	served	as	our	Vice	President	of	Worldwide	Sales	since	December	2002.	Prior	to	joining	us,	Mr.	Orpin	was	the	Vice	President	of	Sales	and Marketing	at	Sequenom,	a	genomics	company,	from	August	2001	to	November	2002	and	was	Director	of	Sales	and	Marketing	from	September	1999	to	August	2001. From	December	1988	to	September	1999,	Mr.	Orpin	served	in	several	senior	sales	and	marketing	positions	at	Bio-Rad	Laboratories,	a	life	sciences	company.	Mr.	Orpin received	his	BSc.	in	Biochemistry	from	the	University	of	Melbourne.

						John	R.	Stuelpnagel,	D.V.M.,	one	of	our	founders,	is	our	Senior	Vice	President	of	Operations	and	has	been	a	director	since	April	1998.	From	October	1999	to	April 2002,	he	served	as	our	Vice	President	of	Business	Development.	From	April	1998	to	October	1999,	he	served	as	our	acting	President	and	Chief	Executive	Officer	and was	acting	Chief	Financial	Officer	through	April	2000.	While	founding	Illumina,	Dr.	Stuelpnagel	was	an	associate	with	CW	Group,	a	venture	capital	firm,	from	June 1997	to	September	1998	and	with	Catalyst	Partners,	a	venture	capital	firm,	from	August	1996	to	June	1997.	Dr.	Stuelpnagel	received	his	B.S.	in	Biochemistry	and	his Doctorate	in	Veterinary	Medicine	from	the	University	of	California,	Davis	and	his	M.B.A.	from	the	University	of	California,	Los	Angeles.

# Item	2. Properties.

						Our	principal	research	and	development,	manufacturing	and	administrative	facilities	occupy	approximately	90,000	square	feet	of	three	buildings	located	in San	Diego,	California,	which	we	purchased,	along	with	eight	acres	of	adjacent	land,	in	January	2002.	In	connection	with	this	purchase	we	assumed	a	$26	million,	10- year	mortgage	on	the	property	at	a	fixed	interest	rate	of	8.36%.	We	lease	a	total	of	26,000	square	feet	of	this	space	to	two	tenants.	The	land	has	been	approved	for construction	of	a	fourth	building	although,	we	have	no	current	plans	to	construct	the	fourth	building.	We	expect	that	these	facilities	will	be	sufficient	for	our	San	Diego based	operations	for	the	foreseeable	future.

						In	February	2003,	the	Company	began	leasing	approximately	3,300	square	feet	of	office	space	in	Tokyo	and	in	January	2004,	began	leasing	approximately 1,600	square	feet	of	office	space	in	Singapore.	These	facilities	are	used	by	local	sales,	marketing	and	field	service	personnel.	At	December	28,	2003,	annual	future minimum	payments	for	these	facilities	were	approximately	$462,000.

# Item	3. Legal	Proceedings.

						In	March	2001,	a	complaint	seeking	damages	of	an	unspecified	amount	was	filed	against	us	by	a	former	employee	in	the	Superior	Court	of	the	State	of	California	in connection	with	the	employee's	termination	of	employment	with	Illumina.	In	July	2002	a	California	Superior	Court	judgment	was	rendered	against	the	Company	and	we recorded	a	$7.7	million	charge	in	our	financial	results	for	the	second	quarter	of	2002	to	cover	total	damages	and	remaining	expenses.	We	believe	that	the	termination	was lawful	in	all	respects	and	that	the	verdict	was	unsupported	by	evidence	presented	at	the	trial.	A	notice	of	appeal	in	this	case	was	filed	on	October	10,	2002,	and	the	appeal process	is	ongoing.	We	are	also	recording	interest	expense	on	the	$7.7	million	during	the	appeal	based	on	the	statutory	rate.

						In	December	2002,	Applied	Biosystems	Group	filed	a	complaint,	then	later	in	March	2003	amended	and	refiled	a	complaint,	for	a	patent	infringement	suit	against	us in	the	federal	court	in	Northern	California	asserting	infringement	of	several	patents	related	to	an	Applied	Biosystems'	assay	intended	for	use	in	our	collaboration. Applied	Biosystems	seeks	a	judgment	granting	it	damages	for	infringement,	treble	damages	alleging	that	such	infringement	is	willful	and	a	permanent	injunction restraining	us	from	the	alleged	infringement.	We	have	answered	the	complaint,	asserting	various	defenses,	including	that	we	do	not	infringe	the	patents	or	that	the patents	are	invalid,	and	asserting

counterclaims	against	Applied	Biosystems	seeking	declaratory	judgment	relief	related	to	the	patents	being	asserted	against	us,	and	seeking	damages	from	Applied Biosystems	for	its	unfair	and	unlawful	conduct	which	constitutes	attempted	monopolization	in	violation	of	the	antitrust	laws.

						Also	in	December	2002,	Applied	Biosystems	sent	a	notification	to	us	alleging	that	we	had	breached	the	joint	development	agreement	between	Illumina	and	Applied Biosystems	entered	into	in	November	1999	and	seeking	to	compel	arbitration	pursuant	to	that	agreement.	This	notification	alleged	that	our	production-scale	genotyping products	and	services	are	collaboration	products	developed	under	the	joint	development	agreement,	and	that	our	commercial	activities	with	respect	to	our	genotyping products	and	services	are	unlawful,	unfair	or	fraudulent.	Among	other	relief,	Applied	Biosystems	is	seeking	compensatory	damages	of	$30	million,	disgorgement	of	all revenues	received	from	sales	of	these	products	and	services	and	a	prohibition	of	future	sales	of	these	products	or	services.

						In	December	2002,	we	filed	a	suit	alleging	breach	of	contract,	breach	of	the	implied	covenant	of	good	faith	and	fair	dealing,	unfair	competition	and	other	allegations against	Applied	Biosystems	in	San	Diego	Superior	Court,	and	a	motion	for	a	temporary	restraining	order	to	prevent	the	arbitration	of	our	joint	development	agreement sought	by	Applied	Biosystems.	In	December	2003,	we	notified	Applied	Biosystems	that	we	terminated	the	joint	development	agreement.

						In	December	2003,	after	having	granted	temporary	and	preliminary	injunctions	staying	the	arbitration,	the	San	Diego	Superior	Court	directed	Applied	Biosystems and	us	to	resolve	the	contract	dispute	in	a	binding	arbitration	procedure.	While	a	definitive	schedule	has	not	yet	been	set,	we	believe	that	the	arbitration	process	could	be completed	as	early	as	September	2004.	We	will	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	but	the	outcome	of	an	arbitration	proceeding	is inherently	uncertain	and	we	cannot	be	sure	that	we	will	prevail.	This	arbitration	could	result	in	a	range	of	potential	outcomes,	based	solely	on	the	judgment	and discretion	of	the	arbitrator,	including	(1)	the	award	of	all	damages	and	injunctive	relief	sought	by	Applied	Biosystems;	(2)	the	award	of	all	damages	and	relief	sought	by us;	or	(3)	a	partial	award	of	damages	and/or	injunctive	relief	to	either	party.	We	have	not	accrued	for	any	potential	losses	in	this	case	because	we	believe	that	an	adverse determination	is	not	probable,	and	potential	losses	cannot	be	reasonably	estimated.	In	addition,	our	financial	statements	include	a	$10	million	advance	payment	from Applied	Biosystems	that	would	have	been	deducted	from	the	profits	otherwise	payable	to	us	from	Applied	Biosystems	had	the	collaboration	been	successful	and	which could	offset	the	impact	on	our	consolidated	results	of	operations	of	an	adverse	arbitration	determination	up	to	that	amount.	However,	any	unfavorable	arbitration determination,	and	in	particular	any	significant	cash	amounts	required	to	be	paid	by	the	Company	or	prohibition	of	the	sale	of	our	products	or	services,	could	result	in	a material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						We	are	in	the	early	stages	of	proceedings	in	the	patent	case.	In	February	2004,	the	federal	district	court	in	Northern	California	ordered	that	the	patent	case	be	stayed pending	completion	of	the	arbitration	process.	We	intend	to	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	and	continue	to	pursue	our counterclaims	against	Applied	Biosystems.	However,	we	cannot	be	sure	that	we	will	prevail	in	these	matters.	Any	unfavorable	determination,	and	in	particular	any significant	cash	amounts	required	to	be	paid	by	the	Company	or	prohibition	of	the	sale	of	our	products	or	services,	could	result	in	a	material	adverse	effect	on	our business,	financial	condition	and	results	of	operations.

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

						No	matters	were	submitted	to	a	vote	of	security	holders	during	the	fourth	quarter	of	2003.

# Item	5. Market	for	Registrant's	Common	Stock	and	Related	Stockholder	Matters.

						Our	common	stock	has	been	quoted	on	the	Nasdaq	National	Market	under	the	symbol	"ILMN"	since	July	28,	2000.	Prior	to	that	time,	there	was	no	public	market for	our	common	stock.	The	following	table	sets	forth,	for	the	periods	indicated,	the	quarterly	high	and	low	closing	prices	per	share	of	the	common	stock	as	reported	on the	Nasdaq	National	Market.	Our	present	policy	is	to	retain	earnings,	if	any,	to	finance	future	growth.	We	have	never	paid	cash	dividends	and	have	no	present	intention to	pay	cash	dividends	in	the	foreseeable	future.

|  | High | Low |
| :--- | :--- | :--- |
| First\tQuarter | $12.34 | $6.50 |
| Second\tQuarter | 9.00 | 4.34 |
| Third\tQuarter | 6.22 | 2.93 |
| Fourth\tQuarter | 5.83 | 2.91 |

|  | High | Low |
| :--- | :--- | :--- |
| First\tQuarter | $3.95 | $1.80 |
| Second\tQuarter | 4.19 | 1.81 |
| Third\tQuarter | 5.31 | 2.81 |
| Fourth\tQuarter | 8.50 | 5.20 |

						At	March	1,	2004,	there	were	approximately	145	stockholders	of	record	and	the	price	per	share	of	our	common	stock,	as	reported	on	the	Nasdaq	National	Market	on such	date,	was	$6.89.

# Sales	of	Unregistered	Securities

# Use	of	Proceeds

						On	July	27,	2000,	we	commenced	our	initial	public	offering	pursuant	to	a	Registration	Statement	on	Form	S-1	(File	No.	333-33922)	resulting	in	net	offering proceeds	of	$101.3	million.	We	will	continue	to	use	proceeds	from	our	initial	public	offering	to	fund	operations.	Through	December	28,	2003,	we	have	used approximately	$18	million	to	purchase	property,	plant	and	equipment	and	approximately	$38	million	to	fund	general	operating	expenses.	The	remaining	balance	is invested	in	a	variety	of	interest-bearing	instruments	including	U.S.	Treasury	securities,	corporate	debt	securities	and	money	market	accounts.

# Item	6. Selected	Financial	Data.

						The	following	selected	historical	consolidated	financial	data	have	been	derived	from	our	audited	consolidated	financial	statements.	The	balance	sheet	data	as	of December	28,	2003	and	December	29,	2002	and	statements	of	operations	data	for	each	of	the	three	years	in	the	period	ended	December	28,	2003	are	derived	from audited	consolidated	financial	statements	included	in	this	Form	10-K.	You

should	read	this	table	in	conjunction	with	Item	7,	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,"	and	Item	8,	"Financial Statements	and	Supplementary	Data."

# Statements	of	Operations	Data

|  | Year	Ended<br>December	28,<br>2003 | Year	Ended<br>December	29,<br>2002 | Year	Ended<br>December	30,<br>2001 | Year	Ended<br>December	31,<br>2000 | Year	Ended<br>December	31,<br>1999 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands,\texcept\tper\tshare\tdata) |  |  |
| Revenue: |  |  |  |  |  |
| Product\trevenue | $18,378 | $4,103 | $897 | $42 | $37 |
| Service\trevenue | 6,496 | 3,305 | 99 | — | — |
| Research\trevenue | 3,161 | 2,632 | 1,490 | 1,267 | 437 |
| Total\trevenue | 28,035 | 10,040 | 2,486 | 1,309 | 474 |
| Costs\tand\texpenses: |  |  |  |  |  |
| Cost\tof\tproduct\tand\tservice\trevenue | 10,037 | 3,536 | 557 | — | — |
| Research\tand\tdevelopment | 22,511 | 26,848 | 20,735 | 13,554 | 4,085 |
| Selling,\tgeneral\tand\tadministrative | 18,899 | 9,099 | 5,663 | 4,193 | 1,349 |
| Amortization\tof\tdeferred |  |  |  |  |  |
| compensation\tand\tother\tnon-cash |  |  |  |  |  |
| compensation\tcharges | 2,454 | 4,360 | 5,850 | 6,797 | 958 |
| Litigation\tjudgment | 756 | 8,052 | — | — | — |
| Total\tcosts\tand\texpenses | 54,657 | 51,895 | 32,805 | 24,544 | 6,392 |
| Loss\tfrom\toperations | (26,622) | (41,855) | (30,319) | (23,235) | (5,918) |
| Interest\tincome,\tnet | (441) | 1,524 | 5,496 | 4,629 | 400 |
| Net\tloss | $(27,063) | $(40,331) | $(24,823) | $(18,606) | $(5,518) |
| Net\tloss\tper\tshare,\tbasic\tand\tdiluted | $(0.85) | $(1.31) | $(0.83) | $(1.37) | $(3.91) |
| Shares\tused\tin\tcalculating\tnet\tloss\tper\nshare,\tbasic\tand\tdiluted | 31,925 | 30,890 | 29,748 | 13,557 | 1,410 |

# Balance	Sheet	Data

|  | December	28,<br>2003 | December	29,<br>2002 | December	30,<br>2001 | December	31,<br>2000 | December	31,<br>1999 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands) |  |  |
| Cash,\tcash\tequivalents\tand\tcurrent |  |  |  |  |  |
| restricted\tcash\tand\tinvestments | $32,882 | $66,294 | $93,786 | $118,719 | $33,088 |
| Working\tcapital | 32,229 | 58,522 | 91,452 | 126,260 | 32,881 |
| Total\tassets | 99,234 | 121,906 | 122,465 | 132,793 | 33,895 |
| Long-term\tdebt\tobligations | 24,999 | 25,620 | 590 | 887 | — |
| Accumulated\tdeficit | (117,487) | (90,424) | (50,093) | (25,270) | (6,663) |
| Total\tstockholders'\tequity | 47,388 | 71,744 | 106,791 | 124,100 | 32,032 |

						See	Note	1	of	Notes	to	Financial	Statements	for	an	explanation	of	the	determination	of	the	number	of	shares	used	to	compute	basic	and	diluted	net	loss	per	share.

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operation.

						The	following	discussion	and	analysis	should	be	read	with	"Selected	Financial	Data"	and	our	financial	statements	and	notes	thereto	included	elsewhere	in	this Annual	Report	on	Form	10-K.	The	discussion	and	analysis	in	this	Annual	Report	on	Form	10-K	may	contain	forward-looking	statements	that	involve	risks	and uncertainties,	such	as	statements	of	our	plans,	objectives,	expectations	and	intentions.	The	cautionary	statements	made	in	this	Annual	Report	on	Form	10-K	should	be read	as	applying	to	all	related	forward-looking	statements	wherever	they	appear	in	this	Annual	Report	on	Form	10-K.	Our	actual	results	could	differ	materially	from those	discussed	here.	Factors	that	could	cause	or	contribute	to	these	differences	include	those	discussed	in	"Factors	Affecting	Operating	Results"	below	as	well	as	those discussed	elsewhere.

						Illumina,	Inc.	was	incorporated	in	April	1998.	We	are	developing	next-generation	tools	for	the	large-scale	analysis	of	genetic	variation	and	function.	Understanding genetic	variation	and	function	is	critical	to	the	development	of	personalized	medicine,	a	key	goal	of	genomics.	Using	our	technologies,	we	have	developed	a comprehensive	line	of	products	that	are	designed	to	provide	the	throughput,	cost	effectiveness	and	flexibility	necessary	to	enable	researchers	in	the	life	sciences	and pharmaceutical	industries	to	perform	the	billions	of	tests	necessary	to	extract	medically	valuable	information	from	advances	in	genomics.	This	information	is	expected	to correlate	genetic	variation	and	gene	function	with	particular	disease	states,	enhancing	drug	discovery,	allowing	diseases	to	be	detected	earlier	and	more	specifically,	and permitting	better	choices	of	drugs	for	individual	patients.

						In	November	1999,	we	entered	into	a	joint	development	agreement	with	Applied	Biosystems	under	which	the	companies	would	jointly	develop	a	SNP	genotyping system	that	would	combine	our	BeadArray	technology	with	Applied	Biosystems'	assay	chemistry	and	scanner	technology.	Under	this	agreement,	we	were	primarily responsible	for	developing	and	manufacturing	the	arrays	and	Applied	Biosystems	was	primarily	responsible	for	developing	and	manufacturing	the	instruments,	SNP assay	reagents,	and	software	and	for	marketing	the	system	worldwide.	In	conjunction	with	the	agreement,	Applied	Biosystems	purchased	1.25	million	shares	of	Series	C convertible	preferred	stock	at	$4.00	per	share.	In	addition,	Applied	Biosystems	agreed	to	provide	us	with	non-refundable	research	and	development	support	of $10	million,	all	of	which	was	provided	by	December	2001.	Upon	commercialization	of	the	system,	we	would	have	received	a	share	of	the	operating	profits	from	the sales	of	all	components	of	these	systems.	We	had	originally	deferred	recognition	of	revenue	from	the	research	funding	of	$10	million	provided	by	Applied	Biosystems, and	would	have	recognized	such	amounts	as	revenue	at	a	contractually	defined	rate	of	25%	of	the	total	profit	share	we	earned	from	the	sales	of

collaboration	products,	had	such	sales	occurred.	As	of	December	28,	2003,	this	amount	has	been	reclassified	to	an	advance	payment	from	former	collaborator.

						In	July	2002,	Applied	Biosystems	indicated	that	the	planned	mid-2002	launch	of	this	genotyping	system	would	be	delayed	a	second	time.	This	delay	was	related	to Applied	Biosystems'	inability	to	optimize	and	multiplex	the	SNP	assay	reagents.	We	do	not	believe	that	Applied	Biosystems	has	any	intention	of	continuing	to	develop	a collaboration	product	with	us,	and	it	has	recently	launched	a	competing	product.	As	a	result	of	the	delay	in	developing	the	collaboration	product,	we	launched	our	own production-scale	genotyping	system	in	July	2002	utilizing	our	arrays	and	an	independently	developed	scanner	and	assay	method.

						In	December	2002,	Applied	Biosystems	filed	a	complaint,	then	later	in	March	2003	amended	and	refiled	a	complaint,	for	a	patent	infringement	suit	against	us	in	the federal	court	in	Northern	California	asserting	infringement	of	several	patents	related	to	Applied	Biosystems'	patented	assay	intended	for	use	in	our	collaboration. Applied	Biosystems	seeks	a	judgment	granting	it	damages	for	infringement,	treble	damages	alleging	that	such	infringement	is	willful	and	a	permanent	injunction restraining	us	from	the	alleged	infringement.	We	have	answered	the	complaint,	asserting	various	defenses,	including	that	we	do	not	infringe	the	patents	or	that	the patents	are	invalid,	and	asserting	counterclaims	against	Applied	Biosystems	seeking	declaratory	judgment	relief	related	to	the	patents	being	asserted	against	us,	and seeking	damages	from	Applied	Biosystems	for	its	unfair	and	unlawful	conduct	which	constitutes	attempted	monopolization	in	violation	of	the	antitrust	laws.

						Also	in	December	2002,	Applied	Biosystems	sent	a	notification	to	us	alleging	that	we	had	breached	the	joint	development	agreement	entered	into	in	November	1999 and	seeking	to	compel	arbitration	pursuant	to	that	agreement.	This	notification	alleged	that	our	production-scale	genotyping	products	and	services	are	collaboration products	developed	under	the	joint	development	agreement,	and	that	our	commercial	activities	with	respect	to	our	genotyping	products	and	services	are	unlawful,	unfair or	fraudulent.	Among	other	relief,	Applied	Biosystems	is	seeking	compensatory	damages	of	$30	million,	disgorgement	of	all	revenues	received	from	sales	of	these products	and	services	and	a	prohibition	of	future	sales	of	these	products	or	services.

						In	December	2003,	after	having	granted	temporary	and	preliminary	injunctions	staying	the	arbitration,	the	San	Diego	Superior	Court	directed	Applied	Biosystems and	us	to	resolve	the	contract	dispute	in	a	binding	arbitration	procedure.	While	a	definitive	schedule	has	not	yet	been	set,	we	believe	that	the	arbitration	process	could	be completed	as	early	as	September	2004.	We	will	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	but	the	outcome	of	an	arbitration	proceeding	is inherently	uncertain	and	we	cannot	be	sure	that	we	will	prevail.	This	arbitration	could	result	in	a	range	of	potential	outcomes,	based	solely	on	the	judgment	and discretion	of	the	arbitrator,	including	(1)	the	award	of	all	damages	and	injunctive	relief	sought	by	Applied	Biosystems;	(2)	the	award	of	all	damages	and	relief	sought	by us;	or	(3)	a	partial	award	of	damages	and/or	injunctive	relief	to	either	party.	We	have	not	accrued	for	any	potential	losses	in	this	case	because	we	believe	that	an	adverse determination	is	not	probable,	and	potential	losses	cannot	be	reasonably	estimated.	In	addition,	our	financial	statements	include	a	$10	million	advance	payment	from Applied	Biosystems	that	would	have	been	deducted	from	the	profits	otherwise	payable	to	us	from	Applied	Biosystems	had	the	collaboration	been	successful	and	which could	offset	the	impact	on	our	consolidated	results	of	operations	of	an	adverse	arbitration	determination	up	to	that	amount.	However,	any	unfavorable	arbitration determination,	and	in	particular	any	significant	cash	amounts	required	to	be	paid	by	us	or	prohibition	of	the	sale	of	our	products	or	services,	could	result	in	a	material adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						We	are	in	the	early	stages	of	proceedings	in	the	patent	case.	In	February	2004,	the	federal	district	court	in	Northern	California	ordered	that	the	patent	case	be	stayed pending	completion	of	the	arbitration	process.	We	intend	to	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	and	continue	to	pursue	our counterclaims	against	Applied	Biosystems.	However,	we	cannot	be	sure	that	we	will	prevail	in	these	matters.	Any	unfavorable	determination,	and	in	particular	any significant	cash	amounts	required	to	be	paid	by	us	or	prohibition	of	the	sale	of	our	products	or	services,	could	result	in	a	material	adverse	effect	on	our	business, financial	condition	and	results	of	operations.

						In	the	first	quarter	of	2001,	we	began	commercial	sale	of	short	pieces	of	DNA,	or	oligos,	manufactured	using	our	proprietary	Oligator	technology.	We	believe	our Oligator	technology	is	more	cost	effective	than	competing	technologies,	which	has	allowed	us	to	market	our	oligonucleotides	under	a	price	leadership	strategy	while	still achieving	attractive	gross	margins.	In	the	second	quarter	of	2001,	we	initiated	our	SNP	genotyping	services	product	line.	As	a	result	of	the	increasing	market	acceptance of	our	high	throughput,	low	cost	BeadArray	technology,	we	have	entered	into	genotyping	services	contracts	with	many	of	the	leading	genotyping	organizations	including GlaxoSmithKline	and	The	Sanger	Centre,	and	have	been	awarded	$9	million	from	the	National	Institutes	of	Health	to	play	a	major	role	in	the	International	HapMap Project.

						Our	production-scale	genotyping	system,	BeadLab,	is	based	on	the	system	we	developed	that	has	been	operational	in	our	genotyping	service	product	line	since 2001.	In	addition	to	our	Sentrix	Array	Matrices,	it	includes	the	BeadArray	Reader,	a	proprietary	scanner	that	uses	a	laser	to	read	the	results	of	experiments	captured	on our	arrays,	as	well	as	the	GoldenGate	SNP	genotyping	assay	which	can	analyze	up	to	1536	SNPs	per	DNA	sample.	This	system	is	initially	being	marketed	to	a	small number	of	high	throughput	genotyping	users.

						In	the	second	quarter	of	2003,	we	announced	the	launch	of	a	new	array	format,	the	Sentrix	BeadChip,	which	is	expected	to	significantly	expand	market opportunities	for	our	BeadArray	technology	and	provide	increased	experimental	flexibility	for	life	science	researchers.

						In	the	third	quarter	of	2003,	we	announced	the	launch	of	a	gene	expression	product	line	on	both	the	Sentrix	Array	Matrix	and	the	Sentrix	BeadChip	that	will	allow researchers	to	analyze	a	focused	set	of	genes	across	eight	to	96	samples	on	a	single	array.

						In	the	first	quarter	of	2004,	we	announced	the	launch	of	two	new	Sentrix	BeadChips	for	whole-genome	gene	expression.	These	BeadChips	are	designed	to	enable high-performance,	cost-effective,	whole-genome	expression	profiling	of	multiple	samples	on	a	single	chip,	resulting	in	a	dramatic	reduction	in	cost	of	whole-genome expression	analysis	while	allowing	researchers	to	expand	the	scale	and	reproducibility	of	large-scale	biological	experimentation.

						A	significant	portion	of	our	current	revenue	is	derived	from	a	few,	large	individual	transactions	such	as	the	sale	of	production	genotyping	systems	and	large genotyping	services	contracts,	including	our	work	on	the	International	HapMap	Project.	Because	these	transactions	do	not	occur	regularly	and

there	is	a	lengthy	sales	cycle	for	such	transactions,	revenue	of	these	types	may	not	occur	on	a	consistent	or	frequent	basis.	In	addition,	our	total	amount	of	revenues	is subject	to	fluctuations	in	demand	from	seasonality	impacts,	the	timing	and	amount	of	U.S.	government	grant	funding	programs,	the	timing	and	size	of	research	projects our	customers	perform	and	changes	in	overall	spending	levels	in	the	life	science	industry.	Given	the	difficulty	in	predicting	the	timing	and	magnitude	of	sales	for	our products,	we	may	experience	quarter-to-quarter	fluctuations	in	revenue,	resulting	in	the	potential	for	a	sequential	decline	in	quarterly	revenue.	Due	to	the	possibility	of fluctuations	in	our	revenue	and	net	income	or	loss,	we	believe	quarterly	comparisons	of	our	operating	results	are	not	a	good	indication	of	our	future	performance.

						We	have	incurred	substantial	operating	losses	since	our	inception.	As	of	December	28,	2003,	our	accumulated	deficit	was	$117.5	million,	and	total	stockholders' equity	was	$47.4	million.	These	losses	have	principally	occurred	as	a	result	of	the	substantial	resources	required	for	the	research,	development	and	manufacturing	scale up	effort	required	to	commercialize	our	products	and	services,	as	well	as	charges	of	$8.8	million	related	to	a	termination-of-employment	lawsuit.	We	expect	to	continue to	incur	substantial	costs	for	research,	development	and	manufacturing	scale	up	activities	over	the	next	several	years.	We	will	also	need	to	significantly	increase	our selling,	general	and	administrative	costs	as	we	build	up	our	sales	and	marketing	infrastructure	to	expand	and	support	the	sale	of	systems,	other	products	and	services.	As a	result,	we	will	need	to	increase	revenue	significantly	to	achieve	profitability

# Results	of	Operations

						To	enhance	comparability,	the	following	table	sets	forth	audited	Consolidated	Statements	of	Operations	for	the	years	ended	December	28,	2003,	December	29, 2002	and	December	30,	2001	stated	as	a	percentage	of	total	revenue.

|  | Year	Ended<br>December	28,<br>2003 | Year	Ended<br>December	29,<br>2002 | Year	Ended<br>December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
| Revenue |  |  |  |
| Product\trevenue | 66% | 41% | 36% |
| Service\trevenue | 23 | 33 | 4 |
| Research\trevenue | 11 | 26 | 60 |
| Total\trevenue | 100 | 100 | 100 |
| Costs\tand\texpenses: |  |  |  |
| Cost\tof\tproduct\tand\tservice\trevenue | 36 | 35 | 23 |
| Research\tand\tdevelopment | 80 | 267 | 834 |
| Selling,\tgeneral\tand\tadministrative | 67 | 91 | 228 |
| Amortization\tof\tdeferred\tcompensation\tand\tother\tnon-cash |  |  |  |
| compensation\tcharges | 9 | 44 | 235 |
| Litigation\tjudgment | 3 | 80 | — |
| Total\tcosts\tand\texpenses | 195 | 517 | 1,320 |
| Loss\tfrom\toperations | (95) | (417) | (1,220) |
| Interest\tincome | 6 | 38 | 249 |
| Interest\texpense | (8) | (23) | (28) |
| Net\tloss | (97)% | (402)% | (999)% |

# Revenue

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Product\trevenue | $18,378 |  | $4,103 | 348% |
| Service\trevenue | 6,496 |  | 3,305 | 97 |
| Research\trevenue | 3,161 |  | 2,632 | 20 |
| Total\trevenue | $28,035 |  | $10,040 | 179% |

						Revenue	for	the	years	ended	December	28,	2003	and	December	29,	2002	was	$28.0	million	and	$10.0	million,	respectively.	Product	revenue	increased	to $18.4	million	in	2003	from	$4.1	million	in	2002.	The	increase	resulted	almost	entirely	from	the	first	sales	of	our	BeadLab	SNP	genotyping	system,	with	six	systems	sold in	the	year	ended	December	28,	2003,	along	with	sales	of	consumables	that	are	used	on	these	systems.	Prior	to	2003	we	had	no	sales	of	genotyping	systems	or consumable	products.	SNP	genotyping	service	revenue	increased	to	$6.5	million	in	2003	from	$3.3	million	in	2002.	Substantially	all	of	this	increase	relates	to genotyping	services	performed	for	the	International	HapMap	Project,	which	commenced	in	2003.	We	are	the	recipient	of	a	grant	from	the	National	Institutes	of	Health covering	our	participation	in	the	International	HapMap	Project,	which	is	a	$100	million,	internationally	funded	successor	project	to	the	Human	Genome	Project	that	will help	identify	a	map	of	genetic	variations	that	may	be	used	to	perform	disease-related	research.	We	could	receive	up	to	$9.1	million	of	funding	for	this	project	which covers	basic	research	activities,	the	development	of	SNP	assays	and	the	genotyping	to	be	performed	on	those	assays.	We	recognized	revenue	under	this	grant	of $3.7	million	in	2003	and,	as	of	the	end	of	2003,	we	had	approximately	$5.4	million	of	funding	remaining	related	to	this	project	which	is	expected	to	be	received	in	2004, depending	on	the	actual	amount	of	work	that	we	perform.	Government	grants	and	other	research	funding	increased	to	$3.2	million	for	the	year	ended	December	28,	2003 from	$2.6	million	for	the	year	ended	December	29,	2002	due	to	an	increase	in	the	number	of	grants	received.

						To	expand	revenue	in	the	future,	we	have	recently	launched	a	series	of	new	products	that	we	expect	to	begin	selling	in	2004.	These	include	our	BeadStation	system for	moderate	throughput	genotyping	needs,	and	two	multi-sample	whole	genome	gene	expression	BeadChips	that	are	also	processed	on	a	BeadStation.	Our	BeadLab systems	address	a	limited	number	of	potential	high	throughput	genotyping	customers,	and	sales	of	these	systems	may	decline	in	2004	versus	2003.	We	expect	the	sales	of the	new	products	mentioned	above	to	offset	such	decline	and	for	overall	revenues	to	increase	above	2003	levels;	however,	we	cannot	be	assured	that	we	will	be successful	in	these	sales	efforts.

# Cost	of	Product	and	Service	Revenue

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Cost\tof\tproduct\tand\tservice\trevenue | $10,037 |  | $3,536 | 184% |

						Cost	of	revenue	represents	manufacturing	costs	incurred	in	the	production	process,	including	component	materials,	assembly	labor	and	overhead,	packaging	and delivery	cost.	Costs	related	to	research	revenue	is	included	in	research	and	development	expense.	Cost	of	product	and	service	revenue	increased	to	$10.0	million	the	year ended	December	28,	2003	from	$3.5	million	for	the	year	ended	December	29,	2002.	Substantially	all	of	this	increase	was	driven	by	the	sales	of	our	BeadLab	systems	and consumables,	of	which	we	had	none	in	2002,	as	well	as	the	higher	level	of	services	revenue	during	2003.	Gross	margins	on	product	and	service	revenues	were	60%	in the	year	ended	December	28,	2003,	compared	to	52%	for	the	year	ended	December	29,	2002.	This	increase	is	due

primarily	to	increased	sales	of	higher	margin	products	and	services	such	as	SNP	genotyping	services,	array	matrices	and	assay	reagents.	We	expect	product	mix	will continue	to	affect	our	future	gross	margins.	We	also	expect	our	total	cost	of	product	and	service	revenue	to	increase	in	the	next	year	as	we	sell	additional	products,	but	to decrease	as	a	percent	of	product	and	service	revenue	due	to	gains	in	manufacturing	efficiencies	and	the	sale	of	a	larger	proportion	of	higher	margin	products.

# Research	and	Development	Expenses

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Research\tand\tdevelopment | $22,511 |  | $26,848 | (16)% |

						Our	research	and	development	expenses	consist	primarily	of	salaries	and	other	personnel-related	expenses,	laboratory	supplies	and	other	expenses	related	to	the design,	development,	testing	and	enhancement	of	our	products.	We	expense	our	research	and	development	expenses	as	they	are	incurred.	Research	and	development expenses	decreased	$4.3	million	to	$22.5	million	for	the	year	ended	December	28,	2003	from	$26.8	million	for	the	year	ended	December	29,	2002.

						During	the	year	ended	December	28,	2003,	the	cost	of	BeadArray	research	activities	decreased	$3.8	million	as	compared	to	the	year	ended	December	29,	2002.	The decrease	occurred	primarily	as	a	result	of	completing	the	development	of	new	products	launched	in	2003:	the	BeadChip,	an	additional	microarray	platform,	a	gene expression	application	on	both	our	Array	Matrix	and	BeadChip	platforms	and	a	benchtop	SNP	genotyping	system,	the	BeadStation,	for	performing	moderate	scale genotyping.	In	addition,	as	we	completed	development	efforts	and	increased	our	BeadArray-driven	product	sales,	a	smaller	portion	of	our	manufacturing	resources	was charged	to	research	and	development	expense	in	2003	than	in	2002.

						Research	to	support	our	Oligator	technology	platform	decreased	$0.5	million	in	the	year	ended	December	28,	2003	as	compared	to	the	year	ended	December	29, 2002.	This	decline	is	primarily	due	to	higher	development	expenses	incurred	in	the	first	quarter	of	2002	for	a	major	upgrade	of	our	Oligator	technology,	which	resulted in	a	significant	increase	in	our	manufacturing	capacity.	In	the	second	quarter	of	2003,	we	implemented	additional	Oligator	manufacturing	enhancements	to	expand capacity,	increase	throughput,	and	further	reduce	operating	costs.	We	expect	that	our	research	and	development	expenses	will	remain	relatively	flat	over	the	next 12	months.

						Stock	based	compensation	related	to	research	and	development	employees	and	consultants	was	$1.3	million	for	the	year	ended	December	28,	2003	as	compared	to $2.4	million	for	the	year	ended	December	29,	2002.

# Selling,	General	and	Administrative	Expenses

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Selling,\tgeneral\tand\tadministrative | $18,899 |  | $9,099 | 108% |

						Our	selling,	general	and	administrative	expenses	consist	primarily	of	personnel	costs	for	sales	and	marketing,	finance,	human	resources,	business	development	and general	management,	as	well	as	professional	fees,	such	as	expenses	for	legal	and	accounting	services.	Selling,	general	and	administrative	expenses	increased	$9.8	million to	$18.9	million	for	the	year	ended	December	28,	2003	from	$9.1	million	for	the	year	ended	December	29,	2002.	Approximately	$4.4	million	of	this	increase	is	related to	higher	legal	expenses,	which	is	primarily	due	to	legal	proceedings	regarding	the	disputes	with	Applied	Biosystems.	Approximately	$4.1	million	of	the	increase	is	due to	higher	sales	and	marketing	costs,	of	which	$3.0	million	is	attributable	to	personnel	related	expenses	while	the	majority	of	the	remaining	$1.1	million	is	attributable	to an	increase	in	facility	related	expenses.	During	2003,	we

significantly	expanded	our	sales	and	marketing	resources	to	support	the	direct	sale	of	our	new	products,	including	establishing	additional	sales	operations	in	Japan	and Singapore.	We	expect	that	our	selling,	general	and	administrative	expenses	will	accelerate	as	we	expand	our	staff,	add	sales	and	marketing	infrastructure	and	incur additional	costs	to	support	the	commercialization	and	support	of	an	increasing	number	of	products.

						Stock	based	compensation	related	to	selling,	general	and	administrative	employees,	directors	and	consultants	was	$1.2	million	for	the	year	ended	December	28, 2003	as	compared	to	$2.0	million	for	the	year	ended	December	29,	2002.

| Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- |
|  | (In\tthousands) |  |  |
| $2,454 |  | $4,360 | (44)% |

						From	our	inception	through	July	27,	2000,	in	connection	with	the	grant	of	certain	stock	options	and	sales	of	restricted	stock	to	employees,	founders	and	directors, we	have	recorded	deferred	stock	compensation	totaling	$17.7	million,	representing	the	difference	between	the	exercise	or	purchase	price	and	the	fair	value	of	our common	stock	as	estimated	for	financial	reporting	purposes	on	the	date	such	stock	options	were	granted	or	such	restricted	stock	was	sold.	We	recorded	this	amount	as	a component	of	stockholders'	equity	and	amortize	the	amount	as	a	charge	to	operations	over	the	vesting	period	of	the	restricted	stock	and	options.

						We	recognize	compensation	expense	over	the	vesting	period	for	employees,	founders	and	directors,	using	an	accelerated	amortization	methodology	in	accordance with	Financial	Accounting	Standards	Board	Interpretation	No.	28.	For	consultants,	deferred	compensation	is	recorded	at	the	fair	value	for	the	options	granted	or	stock sold	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	123	and	is	periodically	re-measured	and	expensed	in	accordance	with	Emerging	Issues	Task Force	No.	96-18.

						We	recorded	amortization	of	deferred	compensation	of	$2.5	million	and	$4.4	million	for	the	years	ended	December	28,	2003	and	December	29,	2002,	respectively. We	expect	amortization	of	deferred	compensation	to	decrease	in	2004	due	to	the	nature	of	the	accelerated	depreciation	methodology	as	the	options	near	the	end	of	their vesting	period.

# Litigation	Judgment

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Litigation\tjudgment | $756 |  | $8,052 | (91)% |

						A	$7.7	million	charge	was	recorded	in	June	2002	to	cover	total	damages	and	estimated	expenses	related	to	a	termination-of-employment	lawsuit.	We	believe	that	the termination	was	lawful	in	all	respects	and	that	the	verdict	was	unsupported	by	evidence	presented	at	the	trial.	We	plan	to	vigorously	defend	our	position	on	appeal.	A notice	of	appeal	in	this	case	was	filed	on	October	10,	2002,	and	the	appeal	process	is	ongoing.	During	the	appeal	process,	the	court	requires	us	to	incur	interest	charges on	the	judgment	amount	at	statutory	rates	until	the	case	is	resolved.	For	the	years	ended	December	28,	2003	and	December	29,	2002,	we	recorded	litigation	expense	of $756,000	and	$352,000,	respectively,	for	interest.

# Interest	Income

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Interest\tincome | $1,821 |  | $3,805 | (52)% |

						Interest	income	on	our	cash	and	cash	equivalents	and	investments	was	$1.8	million	and	$3.8	million	for	the	years	ended	December	28,	2003	and	December	29, 2002,	respectively.	The	decrease	is	due	to	lower	average	levels	of	invested	funds	and	lower	effective	interest	rates.

# Interest	Expense

|  | Year	Ended<br>December	28,<br>2003 |  | Year	Ended<br>December	29,<br>2002 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Interest\texpense | $2,262 |  | $2,281 | (1)% |

						Interest	expense	was	$2.3	million	for	the	years	ended	December	28,	2003	and	December	29,	2002.	Interest	expense	relates	primarily	to	a	$26.0	million	fixed	rate loan	related	to	the	purchase	of	our	new	facility	during	the	first	quarter	of	2002.

# Provision	for	Income	Taxes

						We	incurred	net	operating	losses	for	the	years	ended	December	28,	2003	and	December	29,	2002,	and	accordingly,	we	did	not	pay	any	federal	or	state	income	taxes. We	have	recorded	a	valuation	allowance	for	the	full	amount	of	the	resulting	net	deferred	tax	asset,	as	the	future	realization	of	the	tax	benefit	is	uncertain.	As	of December	28,	2003,	we	had	net	operating	loss	carryforwards	for	federal	and	state	tax	purposes	of	approximately	$69.5	million	and	$27.0	million,	respectively,	which begin	to	expire	in	2018	and	2006.

						We	also	had	federal	and	state	research	and	development	tax	credit	carryforwards	of	approximately	$3.1	million	and	$2.6	million,	respectively,	which	begin	to	expire in	2018,	unless	previously	utilized.

						Our	utilization	of	the	net	operating	losses	and	credits	may	be	subject	to	substantial	annual	limitations	pursuant	to	Section	382	and	383	of	the	Internal	Revenue	Code, and	similar	state	provisions,	as	a	result	of	changes	in	our	ownership	structure.	These	annual	limitations	may	result	in	the	expiration	of	net	operating	losses	and	credits prior	to	utilization.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Product\trevenue | $4,103 |  | $897 | 357% |
| Service\trevenue | 3,305 |  | 99 | 3,238% |
| Research\trevenue | 2,632 |  | 1,490 | 77% |
| Total\trevenue | $10,040 |  | $2,486 | 304% |

						Revenue	for	the	years	ended	December	29,	2002	and	December	30,	2001	was	$10.0	million	and	$2.5	million,	respectively.	Product	revenue	increased	to	$4.1	million in	2002	from	$0.9	million	in	2001,	mostly	due	to	higher	sales	of	oligonucleotides.	SNP	genotyping	service	revenue	was	$3.3	million	in	2002	compared	to	$0.1	million	in 2001	as	a	result	of	several	contracts	that	were	signed	during	2002;	2001	was	the	first	year	of	operations	for	our	services	and	we	experienced	limited	revenues. Government	grants	and	other	research	funding	increased	to	$2.6	million	for	the	year	ended	Decem-

ber	29,	2002	from	$1.5	million	for	the	year	ended	December	30,	2001	due	to	a	larger	number	of	grants	that	were	awarded	to	us.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Cost\tof\tproduct\tand\tservice\trevenue | $3,536 |  | $557 | 535% |

						Cost	of	product	and	service	revenue	for	the	years	ended	December	29,	2002	and	December	30,	2001	was	$3.5	million	and	$0.6	million,	respectively.	The	increase was	driven	by	the	increased	sales	of	products	and	services.	Gross	margins	on	product	and	service	revenues	were	52%	in	2002,	versus	44%	in	2001,	driven	by	a	more favorable	cost	structure	in	oligo	manufacturing.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Research\tand\tdevelopment | $26,848 |  | $20,735 | 29% |

						Research	and	development	expenses	increased	$6.1	million	to	$26.8	million	for	the	year	ended	December	29,	2002,	from	$20.7	million	for	the	year	ended December	30,	2001.	The	increase	in	expenses	was	driven	primarily	by	higher	headcount,	related	personnel	costs	and	higher	laboratory	and	manufacturing	supplies required	to	continue	development	of	our	BeadArray	technology,	which	is	the	underlying	technology	on	which	Illumina	was	founded.	During	the	year	ended December	29,	2002,	the	research	expense	to	support	our	BeadArray	activities	increased	$5.4	million	over	the	same	period	in	2001.	These	additional	research	and development	expenses	were	related	to	activities	such	as	exploring	and	optimizing	assays	for	various	types	of	genetic	analysis	experiments,	increasing	the	multiplexing level	of	our	arrays,	continuing	development	of	our	arrays	and	the	scanning	instrumentation	required	to	read	arrays	and	building	up	and	optimizing	our	SNP	genotyping services	system.	Research	to	support	our	Oligator	technology	platform	increased	$0.7	million	during	the	year	ended	December	29,	2002,	as	compared	to	the	year	ended December	30,	2001.	During	2002,	we	introduced	upgrades	to	our	Oligator	technology	that	significantly	increased	capacity	and	quality	while	reducing	manufacturing cost.

						Stock	based	compensation	related	to	research	and	development	employees	and	consultants	was	$2.4	million	for	the	year	ended	December	29,	2002	as	compared	to $3.1	million	for	the	year	ended	December	30,	2001.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Selling,\tgeneral\tand\tadministrative | $9,099 |  | $5,663 | 61% |

						Selling,	general	and	administrative	expenses	increased	$3.4	million	to	$9.1	million	for	the	year	ended	December	29,	2002,	from	$5.7	million	for	the	year	ended December	30,	2001.	A	portion	of	this	increase	is	due	to	higher	legal	expenses	related	to	a	termination-of-employment	lawsuit	as	well	as	higher	legal	expenses	related	to securing	patents.	The	remaining	increase	was	due	to	increases	in	the	sales	and	marketing	costs	required	to	expand	and	support	our	custom	oligonucleotide	sales	and	SNP genotyping	services	operations.

						Stock	based	compensation	related	to	selling,	general	and	administrative	employees,	directors	and	consultants	was	$2.0	million	for	the	year	ended	December	29, 2002	as	compared	to	$2.7	million	for	the	year	ended	December	30,	2001.

# Amortization	of	Deferred	Compensation	and	Other	Stock-Based	Compensation	Charges

| Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- |
|  | (In\tthousands) |  |  |
| $4,360 |  | $5,850 | (25)% |

						In	connection	with	the	grant	of	stock	options	and	sale	of	restricted	common	stock	to	employees,	founders	and	directors	through	July	27,	2000,	we	recorded	deferred compensation	of	approximately	$17.7	million.	We	recorded	amortization	of	this	deferred	compensation	of	$4.4	million	and	$5.9	million	for	the	years	ended December	29,	2002	and	December	30,	2001,	respectively.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Interest\tincome | $3,805 |  | $6,198 | (39)% |

						Interest	income	on	our	cash	and	cash	equivalents	and	investments	was	$3.8	million	and	$6.2	million	for	the	years	ended	December	29,	2002	and	December	30, 2001,	respectively.	Interest	income	decreased	in	2002	due	to	lower	average	levels	of	invested	funds	and	lower	effective	interest	rates.

|  | Year	Ended<br>December	29,<br>2002 |  | Year	Ended<br>December	30,<br>2001 | Change |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |  |
| Interest\texpense | $2,281 |  | $702 | 225% |

						Interest	expense	was	$2.3	million	for	the	year	ended	December	29,	2002	as	compared	to	$0.7	million	for	the	year	ended	December	30,	2001.	Interest	expense	for	the year	ended	December	29,	2002	resulted	primarily	from	a	$26.0	million	loan	related	to	the	purchase	of	our	new	facility	during	the	first	quarter	of	2002.

# Liquidity	and	Capital	Resources

						As	of	December	28,	2003,	we	had	cash,	cash	equivalents	and	investments	(including	restricted	cash	and	investments	of	$100,000)	of	approximately	$32.9	million. In	addition,	we	had	long	term	restricted	investments	of	$12.2	million.	We	currently	invest	our	funds	in	U.S.	dollar	based	investment-grade	corporate	and	government debt	securities	with	average	maturities	of	approximately	22	months.

						Our	operating	activities	used	cash	of	$18.3	million	in	the	year	ended	December	28,	2003,	as	compared	to	$25.6	million	in	the	year	ended	December	29,	2002.	Net cash	used	in	operating	activities	in	2003	was	primarily	the	result	of	a	net	loss	from	operations	of	$27.1	million	reduced	by	non-cash	charges	of	$4.5	million	for depreciation	and	amortization	and	non-cash	charges	of	$2.5	million	for	amortization	of	deferred	stock	compensation.	Net	cash	used	in	operating	activities	in	2002	was primarily	the	result	of	a	net	loss	from	operations	of	$40.3	million	reduced	by	an	$8.1	million	increase	in	accrued	litigation	judgment,	non-cash	charges	of	$4.5	million for	depreciation	and	amortization	and	non-cash	charges	of	$4.4	million	for	amortization	of	deferred	stock	compensation.

						Our	investing	activities	provided	cash	of	$28.5	million	in	the	year	ended	December	28,	2003	as	compared	to	cash	used	of	$2.6	million	in	the	year	ended December	29,	2002.	Cash	provided	in	investing	activities	in	the	year	ended	December	28,	2003	was	due	primarily	to	the	sale	or	maturity	of	investment	securities	used	to provide	operating	funds	for	our	business,	while	cash	used	in	the	year	ended	December	29,	2002	was	due	primarily	to	the	purchase	of	a	new	facility	offset	by	maturities	of investment	securities.	Capital	expenditures	were	$2.0	million	in	2003	and	are	expected	to	increase	$1	to	$2	million	in	2004.

						Our	financing	activities	provided	$0.2	million	in	the	year	ended	December	28,	2003	as	compared	to	$26.1	million	in	the	year	ended	December	29,	2002.	Cash provided	by	financing	activities	in	the	year	ended	December	29,	2002	resulted	primarily	from	$26.0	million	in	loan	proceeds	related	to	the	purchase	of	our	new	facility.

						In	June	2002,	we	recorded	a	$7.7	million	charge	to	cover	total	damages	and	estimated	expenses	related	to	a	termination-of-employment	lawsuit.	As	a	result	of	our decision	to	appeal	the	ruling,	we	filed	a	surety	bond	with	the	court	on	October	25,	2002	of	1.5	times	the	judgment	amount,	or	approximately	$11.3	million.	Under	the terms	of	the	bond,	we	are	required	to	maintain	a	letter	of	credit	for	90%	of	the	bond	amount	to	secure	the	bond.	Further,	we	were	required	to	deposit	approximately $12.5	million	of	marketable	securities	as	collateral	for	the	letter	of	credit	and	accordingly,	these	funds	will	be	restricted	from	use	for	corporate	purposes	until	the	appeal process	is	completed.	If	a	judgment	is	due,	we	expect	payment	will	occur	within	12	to	18	months.

						As	of	the	end	of	2003,	we	had	funding	remaining	under	existing	NIH	grants	of	approximately	$6.5	million,	including	$5.4	million	available	under	the	International HapMap	Project.	All	of	these	amounts	are	scheduled	to	be	paid	in	2004,	subject	to	the	actual	amount	of	activities	we	perform	under	these	grants.

						Based	on	our	current	operating	plans,	we	expect	that	our	current	cash	and	cash	equivalents,	investments,	revenues	from	sales	and	funding	from	grants	will	be sufficient	to	fund	our	anticipated	operating	needs	for	at	least	18	to	24	months.	Operating	needs	include	the	planned	costs	to	operate	our	business	including	amounts required	to	fund	working	capital	and	capital	expenditures.	At	the	current	time,	we	have	no	material	commitments	for	capital	expenditures.	However,	our	future	capital requirements	and	the	adequacy	of	our	available	funds	will	depend	on	many	factors,	including	our	ability	to	successfully	commercialize	our	SNP	genotyping	laboratory and	gene	expression	systems	and	extensions	to	those	products	and	to	expand	our	oligonucleotide	and	SNP	genotyping	services	product	lines,	scientific	progress	in	our research	and	development	programs,	the	magnitude	of	those	programs,	competing	technological	and	market	developments,	the	successful	resolution	of	our	legal proceedings	with	Applied	Biosystems	and	the	successful	resolution	of	our	appeal	in	a	termination	of	employment	lawsuit.	Therefore,	we	may	require	additional	funding within	this	time	frame	and	the	additional	funding,	if	needed,	may	not	be	available	on	terms	that	are	acceptable	to	us,	or	at	all.	Further,	any	additional	equity	financing may	be	dilutive	to	our	then	existing	stockholders	and	may	adversely	affect	their	rights.

						On	December	23,	2003,	we	filed	a	shelf	registration	statement	that	would	allow	us	to	raise	up	to	$65	million	of	funding	through	the	sale	of	common	stock	in	one	or more	transactions.	We	currently	do	not	have	formal	arrangements	to	sell	securities	under	the	registration	statement,	but	if	market	and	other	business	conditions	become favorable	within	the	next	several	months,	we	could	put	such	arrangements	in	place	and	attempt	to	raise	at	least	a	portion	of	the	funds	covered	by	the	registration statement.

# Contractual	Obligations

						In	April	2000,	we	entered	into	a	$3.0	million	loan	arrangement	to	be	used	at	our	discretion	to	finance	purchases	of	capital	equipment,	$1.7	million	of	which	remains available	at	December	28,	2003.

						In	January	2002,	we	purchased	two	newly	constructed	buildings	and	assumed	a	$26.0	million,	10-year	mortgage	on	the	property	at	a	fixed	interest	rate	of	8.36% which	calls	for	principal	and	interest

payments	of	approximately	$2.5	million	per	year	until	the	loan	expires	in	January	2012	at	which	time	a	balloon	payment	of	$21.2	million	will	be	due.

						We	also	lease	office	space	under	non-cancelable	operating	leases	that	expire	at	various	times	through	December	2006.	These	leases	contain	renewal	options	ranging from	2	to	3	years.

						As	of	December	28,	2003,	our	contractual	obligations	are	(in	thousands);

|  |  | Less	Than |  |  | More	Than |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Contractual\tObligation | Total | 1\tYear | 1\t–\t3\tYears | 3\t–\t5\tYears | 5\tYears |
| Long\tterm\tdebt | $41,519 | $2,508 | $5,016 | $5,016 | $28,979 |
| Capital\tlease\tobligations | 263 | 263 | — | — | — |
| Operating\tleases | 462 | 360 | 65 | 37 | — |
| Total | $42,244 | $3,131 | $5,081 | $5,053 | $28,979 |

# Critical	Accounting	Policies

						Revenue	Recognition.	We	recognize	revenue	in	accordance	with	the	guidelines	established	by	SEC	Staff	Accounting	Bulletin	(SAB)	No.	101.	Under	SAB	101, revenue	cannot	be	recorded	until	all	of	the	following	criteria	have	been	met:	persuasive	evidence	of	an	arrangement	exists;	delivery	has	occurred	or	services	have	been rendered;	the	seller's	price	to	the	buyer	is	fixed	or	determinable;	and	collectibility	is	reasonably	assured.	Product	revenue	consists	of	sales	of	oligonucleotides,	array matrices,	assay	reagents,	genotyping	systems	and	gene	expression	systems.	Services	revenue	consists	of	revenue	received	for	performing	genotyping	services.	Revenue for	product	sales	is	recognized	generally	upon	shipment	and	transfer	of	title	to	the	customer,	provided	no	significant	obligations	remain	and	collection	of	the	receivables is	reasonably	assured.	BeadLab	genotyping	system	revenue	is	recognized	when	earned,	which	is	generally	upon	shipment,	installation,	training	and	fulfillment	of contractually	defined	acceptance	criteria.	Reserves	are	provided	for	anticipated	product	warranty	expenses	at	the	time	the	associated	revenue	is	recognized.	Revenue	for genotyping	services	is	recognized	generally	at	the	time	the	genotyping	analysis	data	is	delivered	to	the	customer.	We	have	been	awarded	$9.1	million	from	the	National Institutes	of	Health	to	perform	genotyping	services	in	connection	with	the	International	HapMap	Project.	A	portion	of	the	revenue	from	this	project	is	earned	at	the	time the	related	costs	are	incurred	while	the	remainder	of	the	revenue	is	earned	upon	the	delivery	of	genotyping	data.	Research	revenue	consists	of	amounts	earned	under research	agreements	with	government	grants,	which	is	recognized	in	the	period	during	which	the	related	costs	are	incurred.	All	revenues	are	recorded	net	of	any applicable	allowances	for	returns	or	discounts.

						We	received	$10	million	of	non-refundable	research	funding	from	Applied	Biosystems	in	connection	with	a	licensing	and	development	contract	entered	into	in 1999.	This	amount	was	originally	recorded	as	deferred	revenue	in	accordance	with	the	provisions	of	SAB	101	and	would	have	been	recognized	as	revenue	at	a contractually	defined	rate	of	25%	of	the	defined	operating	profit	earned	from	sales	of	the	products	covered	by	the	collaboration	agreement,	had	such	sales	occurred.	At present,	we	do	not	believe	a	collaboration	product	will	be	commercialized	under	the	partnership	agreement,	and	there	are	legal	proceedings	between	the	parties	as	more fully	described	in	ITEM	3,	"Legal	Proceedings".	The	$10	million	of	research	funding	has	been	reclassified	to	an	advance	payment	from	former	collaborator	until	the legal	proceedings	have	been	resolved.

						Cash	&	Investments.	We	invest	our	excess	cash	balances	in	marketable	debt	securities,	primarily	government	securities	and	corporate	bonds	and	notes,	with	strong credit	ratings.	We	classify	our	investments	as	"Available-for-Sale"	under	SFAS	115	and	record	such	investments	at	the	estimated	fair	value	in	the	balance	sheet,	with gains	and	losses,	if	any,	reported	in	stockholders'	equity.	We	periodically	review	our	investments	for	other	than	temporary	impairment.

# Recently	Issued	Accounting	Standards

						In	November	2002,	the	FASB	Emerging	Issues	Task	Force	issued	its	consensus	concerning	Revenue	Arrangements	with	Multiple	Deliverables	("EITF	00-21"). EITF	00-21	addresses	how	to	determine	whether	a	revenue	arrangement	involving	multiple	deliverables	should	be	divided	into	separate	units	of	accounting,	and,	if separation	is	appropriate,	how	the	arrangement	consideration	should	be	measured	and	allocated	to	the	identified	accounting	units.	EITF	00-21	is	effective	for	revenue arrangements	entered	into	in	fiscal	periods	beginning	after	June	15,	2003.	The	adoption	of	EITF	00-21	did	not	have	a	material	impact	on	our	consolidated	financial statements.

						In	November	2002,	the	FASB	issued	FASB	Interpretation	No.	45	("FIN	45"),	Guarantor's	Accounting	and	Disclosure	Requirements	for	Guarantees,	Including Indirect	Guarantees	of	Indebtedness	of	Others.	FIN	45	requires	a	liability	to	be	recorded	in	the	guarantor's	balance	sheet	upon	issuance	of	a	guarantee.	In	addition, FIN	45	requires	disclosures	about	the	guarantees	that	an	entity	has	issued,	including	a	reconciliation	of	changes	in	the	entity's	product	warranty	liabilities.	The	initial recognition	and	initial	measurement	provisions	of	FIN	45	are	applicable	on	a	prospective	basis	to	guarantees	issued	or	modified	after	December	31,	2002.	The	disclosure requirements	of	FIN	45	are	effective	for	financial	statements	ending	after	December	15,	2002.	The	adoption	of	FIN	45	did	not	have	a	material	impact	on	our consolidated	financial	statements.

						In	April	2003,	the	FASB	issued	SFAS	No.	149,	Amendment	of	Statement	133	on	Derivative	Instruments	and	Hedging	Activities.	SFAS	No.	149	amends	and clarifies	accounting	for	derivative	instruments,	including	certain	derivative	instruments	embedded	in	other	contracts,	and	for	hedging	activities	under	SFAS	No.	133. SFAS	No.	149	clarifies	under	what	circumstances	a	contract	with	an	initial	net	investment	meets	the	characteristic	of	a	derivative	as	discussed	in	SFAS	No.	133	and when	a	derivative	contains	a	financing	component	that	warrants	special	reporting	in	the	statement	of	cash	flows.	SFAS	No.	149	is	effective	for	contracts	entered	into	or modified	after	June	30,	2003,	for	hedging	relationships	designated	after	June	30,	2003,	and	to	certain	pre-existing	contracts.	The	adoption	of	SFAS	No.	149	did	not	have a	material	impact	on	our	consolidated	financial	statements.

						In	May	2003,	the	FASB	issued	SFAS	No.	150,	Accounting	for	Certain	Financial	Instruments	with	Characteristics	of	both	Liabilities	and	Equity.	SFAS	No.	150 affects	the	issuer's	accounting	for	three	types	of	freestanding	financial	instruments;	(a)	mandatorily	redeemable	shares	which	the	issuing	company	is	obligated	to	buy back	in	exchange	for	cash	or	other	assets,	(b)	put	options	and	forward	purchase	contracts	that	do	or	may	require	the	issuer	to	buy	back	some	of	its	shares	in	exchange	for cash	or	other	assets,	and	(c)	obligations	that	can	be	settled	with	shares,	the	monetary	value	of	which	is	fixed,	ties	solely	or	predominantly	to	a	variable	such	as	a	market index,	or	varies	inversely	with	the	value	of	the	issuer's	shares.	SFAS	No.	150	also	requires	disclosures	about	alternative	ways	of	settling	the	instruments	and	the	capital structure	of	entities.	SFAS	No.	150	is	effective	for	all	financial	instruments	entered	into	or	modified	after	May	31,	2003	and	for	all	periods	beginning	after	June	15, 2003.	The	adoption	of	SFAS	150	did	not	have	a	material	impact	on	our	consolidated	financial	statements.

						In	December	2003,	the	FASB	issued	a	revision	to	FASB	Interpretation	No.	46	("FIN	46R"),	Consolidation	of	Variable	Interest	Entities.	FIN	46R	replaces	FASB Interpretation	No.	46,	Consolidation	of	Variable	Interest	Entities,	which	was	issued	in	January	2003.	FIN	46R	requires	a	variable	interest	entity	to	be	consolidated	by	a company	if	that	company	is	subject	to	a	majority	of	the	risk	of	loss	from	the	variable	interest	entity's	activities	or	entitled	to	receive	a	majority	of	the	entity's	residual returns	or	both.	A	variable	interest	entity	either	(a)	does	not	have	equity	investors	with	voting	rights	or	(b)	has	equity	investors	that	do	not	provide	sufficient	financial resources	to	the	entity	to	support	its	activities.	FIN	46R	is	effective	immediately	for	all	new	variable	interest	entities	created	or	acquired	after	December	31,	2003.	The adoption	of	FIN	46	is	not	expected	to	have	a	material	impact	on	our	consolidated	financial	statements.

# Factors	Affecting	Our	Operating	Results

						In	addition	to	the	items	mentioned	above,	the	following	issues	could	adversely	affect	our	operating	results	or	our	stock	price.

# We	have	generated	only	a	small	amount	of	revenue	from	product	and	service	offerings	to	date.	We	expect	to	continue	to	incur	net	losses	and	we	may	not achieve	or	maintain	profitability.

						We	have	incurred	net	losses	since	our	inception	and	expect	to	continue	to	incur	net	losses.	At	December	28,	2003,	our	accumulated	deficit	was	approximately $117.5	million,	and	we	incurred	a	net	loss	of	$27.1	million	for	the	fiscal	year	ended	December	28,	2003.	We	expect	to	continue	to	incur	net	losses	and	negative	cash	flow for	the	foreseeable	future.	The	magnitude	of	our	net	losses	will	depend,	in	part,	on	the	rate	of	growth,	if	any,	of	our	revenue	and	on	the	level	of	our	expenses.	We	expect to	continue	incurring	significant	expenses	for	research	and	development,	for	developing	our	manufacturing	capabilities	and	for	sales	and	marketing	efforts	to commercialize	our	products.	In	addition,	we	expect	that	our	selling	and	marketing	expenses	will	increase	at	a	higher	rate	in	the	future	as	a	result	of	the	launch	of	our BeadLab	and	BeadStation	SNP	genotyping	system	and	gene	expression	systems.	As	a	result,	we	expect	that	our	operating	expenses	will	increase	significantly	as	we grow	and,	consequently,	we	will	need	to	generate	significant	additional	revenue	to	achieve	profitability.	Even	if	we	achieve	profitability,	we	may	not	be	able	to	sustain	or increase	profitability	on	a	quarterly	or	annual	basis.

# Our	success	depends	upon	the	increasing	availability	of	genetic	information	and	the	continued	emergence	and	growth	of	markets	for	analysis	of	genetic variation	and	function.

						We	design	our	products	primarily	for	applications	in	the	life	sciences	and	pharmaceutical	industries.	The	usefulness	of	our	technology	depends	in	part	upon	the availability	of	genetic	data	and	its	usefulness	in	identifying	or	treating	disease.	We	are	initially	focusing	on	markets	for	analysis	of	genetic	variation	and	function,	namely SNP	genotyping	and	gene	expression	profiling.	Our	first	products	are	being	sold	into	the	SNP	genotyping	and	focused-gene	expression	markets.	Both	of	these	markets are	new	and	emerging,	and	they	may	not	develop	as	quickly	as	we	anticipate,	or	reach	their	full	potential.	Other	methods	of	analysis	of	genetic	variation	and	function may	emerge	and	displace	the	methods	we	are	developing.	Also,	researchers	may	not	seek	or	be	able	to	convert	raw	genetic	data	into	medically	valuable	information through	the	analysis	of	genetic	variation	and	function.	If	useful	genetic	data	is	not	available	or	if	our	target	markets	do	not	develop	in	a	timely	manner,	demand	for	our products	may	grow	at	a	slower	rate	than	we	expect,	and	we	may	never	become	profitable.

# We	are	an	early	stage	company	with	a	limited	history	of	commercial	sales	of	systems	and	consumable	products,	and	our	success	depends	on	our	ability	to develop	commercially	successful	products	and	on	market	acceptance	of	our	new	and	unproven	technologies.

						We	may	not	possess	all	of	the	resources,	capability	and	intellectual	property	necessary	to	develop	and	commercialize	all	the	products	or	services	that	may	result from	our	technologies.	We	only	recently	sold	our	first	genotyping	systems,	and	some	of	our	other	technologies	are	in	the	early	stages	of	commercialization	or	are	still	in development.	You	should	evaluate	us	in	light	of	the	uncertainties	and	complexities	affecting	an	early	stage	company	developing	tools	for	the	life	sciences	and pharmaceutical	industries.	We	must	conduct	a	substantial	amount	of	additional	research	and	development	before	some	of	our	products	will	be	ready	for	sale.	Problems frequently	encountered	in	connection	with	the	development	or	early	commercialization	of	products	and	services	using	new	and	unproven	technologies	might	limit	our ability	to	develop	and	successfully	commercialize	these	products	and	services.	In	addition,	we	may	need	to	enter	into	agreements	to	obtain	intellectual	property	necessary to	commercialize	some	of	our	products	or	services.

						Historically,	life	sciences	and	pharmaceutical	companies	have	analyzed	genetic	variation	and	function	using	a	variety	of	technologies.	Compared	to	the	existing technologies,	our	technologies	are	new	and	relatively	unproven.	In	order	to	be	successful,	our	products	must	meet	the	commercial	requirements	of	the	life	sciences	and pharmaceutical	industries	as	tools	for	the	large-scale	analysis	of	genetic	variation	and	function.

# 						Market	acceptance	will	depend	on	many	factors,	including:

•	our	ability	to	demonstrate	to	potential	customers	the	benefits	and	cost	effectiveness	of	our	products	and	services	relative	to	others	available	in	the	market;

•	the	extent	and	effectiveness	of	our	efforts	to	market,	sell	and	distribute	our	products;

•	our	ability	to	manufacture	products	in	sufficient	quantities	with	acceptable	quality	and	reliability	and	at	an	acceptable	cost;	and

•	the	willingness	and	ability	of	customers	to	adopt	new	technologies	requiring	capital	investments.

# We	have	limited	experience	in	manufacturing	commercial	products	and	services.

						We	have	limited	experience	manufacturing	our	products	in	the	volumes	that	will	be	necessary	for	us	to	achieve	significant	commercial	sales.	We	have	only	recently begun	manufacturing	products	on	a	commercial	scale	and	operating	our	internal	SNP	genotyping	service	product	line.	For	example,	in	the	past	we	have	experienced variations	in	manufacturing	conditions	that	have	temporarily	reduced	production	yields.	Due	to	the	intricate	nature	of	manufacturing	products	that	contain	DNA,	we may	encounter	similar	or	previously	unknown	manufacturing	difficulties	in	the	future	that	could	significantly	reduce	production	yields,	impact	our	ability	to	sell	these products,	or	to	produce	them	economically,	may	prevent	us	from	achieving	expected	performance	levels	or	cause	us	to	set	prices	that	hinder	wide	adoption	by customers.

# If	we	are	unable	to	develop	our	manufacturing	capability,	we	may	not	be	able	to	launch	or	support	our	products	in	a	timely	manner,	or	at	all.

						We	currently	possess	only	one	facility	capable	of	manufacturing	our	products	and	services	for	both	sale	to	our	customers	and	internal	use.	If	a	natural	disaster	were to	significantly	damage	our	facility	or	if	other	events	were	to	cause	our	operations	to	fail,	these	events	could	prevent	us	from	developing	and	manufacturing	our	products and	services.

# If	we	are	unable	to	find	third-party	manufacturers	to	manufacture	components	of	our	products,	we	may	not	be	able	to	launch	or	support	our	products	in	a timely	manner,	or	at	all.

						The	nature	of	our	products	requires	customized	components	that	currently	are	available	from	a	limited	number	of	sources.	For	example,	we	currently	obtain	the fiber	optic	bundles	and	BeadChip	slides	included	in	our	products	from	single	vendors.	If	we	are	unable	to	secure	a	sufficient	supply	of	those	or	other	product components,	we	will	be	unable	to	meet	demand	for	our	products.	We	may	need	to	enter	into	contractual	relationships	with	manufacturers	for	commercial-scale production	of	some	of	our	products,	or	develop	these	capabilities	internally,	and	we	cannot	assure	you	that	we	will	be	able	to	do	this	on	a	timely	basis,	for	sufficient quantities	or	on	commercially	reasonable	terms.	Accordingly,	we	may	not	be	able	to	establish	or	maintain	reliable,	high-volume	manufacturing	at	commercially reasonable	costs.

# Our	current	sales,	marketing	and	technical	support	organization	may	limit	our	ability	to	sell	our	products.

						We	currently	have	limited	sales	and	marketing	and	technical	support	services	and	have	only	recently	established	a	small	direct	sales	force	and	customer	support team.	In	order	to	effectively

commercialize	our	genotyping	and	gene	expression	systems	and	other	products	to	follow,	we	will	need	to	expand	our	sales,	marketing	and	technical	support	staff	both domestically	and	internationally.	We	may	not	be	successful	in	establishing	or	maintaining	either	a	direct	sales	force	or	distribution	arrangements	to	market	our	products and	services.	In	addition,	we	compete	primarily	with	much	larger	companies,	that	have	larger	sales	and	distribution	staffs	and	a	significant	installed	base	of	products	in place,	and	the	efforts	from	a	limited	sales	and	marketing	force	may	not	be	sufficient	to	build	the	market	acceptance	of	our	products	required	to	support	continued	growth of	our	business.

# We	expect	intense	competition	in	our	target	markets,	which	could	render	our	products	obsolete	or	substantially	limit	the	volume	of	products	that	we	sell.	This would	limit	our	ability	to	compete	and	achieve	profitability.	If	we	cannot	continuously	develop	and	commercialize	new	products,	our	revenues	may	not	grow	as intended.

						We	compete	with	life	sciences	companies	that	design,	manufacture	and	market	instruments	for	analysis	of	genetic	variation	and	function	and	other	applications using	technologies	such	as	two-dimensional	electrophoresis,	capillary	electrophoresis,	mass	spectrometry,	flow	cytometry,	microfluidics,	and	mechanically	deposited, inkjet	and	photolithographic	arrays.	We	anticipate	that	we	will	face	increased	competition	in	the	future	as	new	companies	enter	the	market	with	new	technologies.	The markets	for	our	products	are	characterized	by	rapidly	changing	technology,	evolving	industry	standards,	changes	in	customer	needs,	emerging	competition	and	new product	introductions.	For	example,	we	expect	Affymetrix	to	release	a	100k	SNP	genotyping	chip	and	several	competitors	have	begun	selling	a	single	chip	for	whole human	genome	expression	which	may	compete	with	our	SNP	genotyping	service	and	product	offerings	and	our	gene	expression	product	offerings.	One	or	more	of	our competitors	may	render	our	technology	obsolete	or	uneconomical.	Our	competitors	have	greater	financial	and	personnel	resources,	broader	product	lines,	a	more established	customer	base	and	more	experience	in	research	and	development	than	we	have.	Furthermore,	the	life	sciences	and	pharmaceutical	companies,	which	are	our potential	customers	and	strategic	partners,	could	develop	competing	products.	If	we	are	unable	to	develop	enhancements	to	our	technology	and	rapidly	deploy	new product	offerings,	our	business,	financial	condition	and	results	of	operations	will	suffer.

# We	may	encounter	difficulties	in	managing	our	growth.	These	difficulties	could	increase	our	losses.

						We	expect	to	experience	rapid	and	substantial	growth	in	order	to	achieve	our	operating	plans,	which	will	place	a	strain	on	our	human	and	capital	resources.	If	we are	unable	to	manage	this	growth	effectively,	our	losses	could	increase.	Our	ability	to	manage	our	operations	and	growth	effectively	requires	us	to	continue	to	expend funds	to	enhance	our	operational,	financial	and	management	controls,	reporting	systems	and	procedures	and	to	attract	and	retain	sufficient	numbers	of	talented employees.	If	we	are	unable	to	scale	up	and	implement	improvements	to	our	manufacturing	process	and	control	systems	in	an	efficient	or	timely	manner,	or	if	we encounter	deficiencies	in	existing	systems	and	controls,	then	we	will	not	be	able	to	make	available	the	products	required	to	successfully	commercialize	our	technology. Failure	to	attract	and	retain	sufficient	numbers	of	talented	employees	will	further	strain	our	human	resources	and	could	impede	our	growth.

# Any	inability	to	adequately	protect	our	proprietary	technologies	could	harm	our	competitive	position.

						Our	success	will	depend	in	part	on	our	ability	to	obtain	patents	and	maintain	adequate	protection	of	our	intellectual	property	in	the	United	States	and	other	countries. If	we	do	not	protect	our	intellectual	property	adequately,	competitors	may	be	able	to	use	our	technologies	and	thereby	erode	our	competitive	advantage.	The	laws	of some	foreign	countries	do	not	protect	proprietary	rights	to	the	same	extent	as	the	laws	of	the	United	States,	and	many	companies	have	encountered	significant	problems in	protecting	their	proprietary	rights	abroad.	These	problems	can	be	caused	by	the	absence	of	rules	and	methods	for	defending	intellectual	property	rights.

						The	patent	positions	of	companies	developing	tools	for	the	life	sciences	and	pharmaceutical	industries,	including	our	patent	position,	generally	are	uncertain	and involve	complex	legal	and	factual	questions.	We	will	be	able	to	protect	our	proprietary	rights	from	unauthorized	use	by	third	parties	only	to	the	extent	that	our proprietary	technologies	are	covered	by	valid	and	enforceable	patents	or	are	effectively	maintained	as	trade	secrets.	We	will	apply	for	patents	covering	our	technologies and	products,	as	we	deem	appropriate.	However,	our	patent	applications	may	be	challenged	and	may	not	result	in	issued	patents.	Our	existing	patents	and	any	future patents	we	obtain	may	not	be	sufficiently	broad	to	prevent	others	from	practicing	our	technologies	or	from	developing	competing	products.	There	also	is	risk	that	others may	independently	develop	similar	or	alternative	technologies	or	design	around	our	patented	technologies.

						In	April	2003,	Applied	Biosystems	served	us	with	an	amended	complaint	alleging	patent	infringement,	asserting	that	our	genotyping	products	infringe	several patents	owned	by	Applied	Biosystems.	Others	may	challenge	or	invalidate	our	patents	or	claim	that	we	infringe	the	rights	of	third	party	patents,	however,	we	are	not aware	of	any	other	such	parties	that	currently	intend	to	pursue	patent	infringement	claims	against	us.	Also,	our	patents	may	fail	to	provide	us	with	any	competitive advantage.	We	may	need	to	initiate	additional	lawsuits	to	protect	or	enforce	our	patents,	or	litigate	against	third	party	claims,	which	would	be	expensive	and,	if	we	lose, may	cause	us	to	lose	some	of	our	intellectual	property	rights	and	reduce	our	ability	to	compete	in	the	marketplace.

						We	also	rely	upon	trade	secret	protection	for	our	confidential	and	proprietary	information.	We	have	taken	security	measures	to	protect	our	proprietary	information. These	measures,	however,	may	not	provide	adequate	protection	for	our	trade	secrets	or	other	proprietary	information.	We	seek	to	protect	our	proprietary	information	by entering	into	confidentiality	agreements	with	employees,	collaborators	and	consultants.	Nevertheless,	employees,	collaborators	or	consultants	may	still	disclose	our proprietary	information,	and	we	may	not	be	able	to	meaningfully	protect	our	trade	secrets.	In	addition,	others	may	independently	develop	substantially	equivalent proprietary	information	or	techniques	or	otherwise	gain	access	to	our	trade	secrets.

# Litigation	or	other	proceedings	or	third	party	claims	of	intellectual	property	infringement	could	require	us	to	spend	significant	time	and	money	and	could prevent	us	from	selling	our	products	or	services.

						Our	commercial	success	depends	in	part	on	our	non-infringement	of	the	patents	or	proprietary	rights	of	third	parties	and	the	ability	to	protect	our	own	intellectual property.	Applied	Biosystems	has	served	us	with	an	amended	complaint	alleging	patent	infringement	and	other	third	parties	have	or	may	assert	that	we	are	employing their	proprietary	technology	without	authorization.	In	addition,	third	parties	have	or	may	obtain	patents	in	the	future	and	claim	that	use	of	our	technologies	infringes these	patents.	We	could	incur	substantial	costs	and	divert	the	attention	of	our	management	and	technical	personnel	in	defending	ourselves	against	any	of	these	claims. We	may	incur	the	same	costs	and	diversions	in	enforcing	our	patents	against	others.	Furthermore,	parties	making	claims	against	us	may	be	able	to	obtain	injunctive	or other	relief,	which	effectively	could	block	our	ability	to	further	develop,	commercialize	and	sell	products,	and	could	result	in	the	award	of	substantial	damages	against us.	In	the	event	of	a	successful	claim	of	infringement	against	us,	we	may	be	required	to	pay	damages	and	obtain	one	or	more	licenses	from	third	parties,	or	be	prohibited from	selling	certain	products.	We	may	not	be	able	to	obtain	these	licenses	at	a	reasonable	cost,	or	at	all.	In	that	event,	we	could	encounter	delays	in	product	introductions while	we	attempt	to	develop	alternative	methods	or	products.	Defense	of	any	lawsuit	or	failure	to	obtain	any	of	these	licenses	could	prevent	us	from	commercializing available	products,	and	the	prohibition	of	sale	of	any	of	our	products	could	materially	affect	our	ability	to	grow	and	to	attain	profitability.

# We	may	need	additional	capital	in	the	future.	If	additional	capital	is	not	available	on	acceptable	terms,	we	may	have	to	curtail	or	cease	operations.

						Our	future	capital	requirements	will	be	substantial	and	will	depend	on	many	factors	including	our	ability	to	successfully	market	our	genetic	analysis	systems	and services,	the	need	for	capital	expenditures	to	support	and	expand	our	business,	the	progress	and	scope	of	our	research	and	development	projects,	the	filing,	prosecution and	enforcement	of	patent	claims,	the	success	of	our	legal	proceedings	with	Applied	Biosystems	and	the	appeal	of	a	wrongful	termination	lawsuit.	We	anticipate	that	our existing	capital	resources	will	enable	us	to	maintain	currently	planned	operations	for	at	least	18	to	24	months.	However,	we	premise	this	expectation	on	our	current operating	plan,	which	may	change	as	a	result	of	many	factors.	Consequently,	we	may	need	additional	funding	sooner	than	anticipated.	Our	inability	to	raise	capital would	seriously	harm	our	business	and	product	development	efforts.	In	addition,	we	may	choose	to	raise	additional	capital	due	to	market	conditions	or	strategic considerations	even	if	we	believe	we	have	sufficient	funds	for	our	current	or	future	operating	plans.	To	the	extent	that	additional	capital	is	raised	through	the	sale	of equity,	the	issuance	of	these	securities	could	result	in	dilution	to	our	stockholders.

						We	currently	have	no	credit	facility	or	committed	sources	of	capital	other	than	an	equipment	lease	line	with	$1.7	million	unused	and	available	as	of	December	28, 2003.	To	the	extent	operating	and	capital	resources	are	insufficient	to	meet	future	requirements;	we	will	have	to	raise	additional	funds	to	continue	the	development	and commercialization	of	our	technologies.	These	funds	may	not	be	available	on	favorable	terms,	or	at	all.	If	adequate	funds	are	not	available	on	attractive	terms,	we	may	be required	to	curtail	operations	significantly	or	to	obtain	funds	by	entering	into	financing,	supply	or	collaboration	agreements	on	unattractive	terms.

# If	we	lose	our	key	personnel	or	are	unable	to	attract	and	retain	additional	personnel,	we	may	be	unable	to	achieve	our	goals.

						We	are	highly	dependent	on	our	management	and	scientific	personnel,	including	Jay	Flatley,	our	president	and	chief	executive	officer,	David	Barker,	our	vice president	and	chief	scientific	officer,	and	John	Stuelpnagel,	our	senior	vice	president	of	operations.	The	loss	of	their	services	could	adversely	impact	our	ability	to achieve	our	business	objectives.	We	will	need	to	hire	additional	qualified	personnel	with	expertise	in	molecular	biology,	chemistry,	biological	information	processing, sales,	marketing	and	technical	support.	We	compete	for	qualified	management	and	scientific	personnel	with	other	life	science	companies,	universities	and	research institutions,	particularly	those	focusing	on	genomics.	Competition	for	these	individuals,	particularly	in	the	San	Diego	area,	is	intense,	and	the	turnover	rate	can	be	high. Failure	to	attract	and	retain	management	and	scientific	personnel	would	prevent	us	from	pursuing	collaborations	or	developing	our	products	or	technologies.

						Our	planned	activities	will	require	additional	expertise	in	specific	industries	and	areas	applicable	to	the	products	developed	through	our	technologies,	including	the life	sciences	and	healthcare	industries.	Thus,	we	will	need	to	add	new	personnel,	including	management,	and	develop	the	expertise	of	existing	management.	The	failure to	do	so	could	impair	the	growth	of	our	business.

# A	significant	portion	of	our	sales	are	to	international	customers.

						Approximately	$14.4	million	of	our	2003	revenues	were	derived	from	customers	outside	the	United	States.	We	intend	to	continue	to	expand	our	international presence	and	export	sales	to	international	customers	and	we	expect	the	total	amount	of	non-U.S.	sales	to	continue	to	grow.	Export	sales	entail	a	variety	of	risks, including:

# •	currency	exchange	fluctuations;

•	unexpected	changes	in	legislative	or	regulatory	requirements	of	foreign	countries	into	which	we	import	our	products;

•	difficulties	in	obtaining	export	licenses	or	other	trade	barriers	and	restrictions	resulting	in	delivery	delays;	and

•	significant	taxes	or	other	burdens	of	complying	with	a	variety	of	foreign	laws.

						In	addition,	sales	to	international	customers	typically	result	in	longer	payment	cycles	and	greater	difficulty	in	accounts	receivable	collection.	We	are	also	subject	to general	geopolitical	risks,	such	as	political,	social	and	economic	instability	and	changes	in	diplomatic	and	trade	relations.	One	or	more	of	these	factors	could	have	a material	adverse	effect	on	our	business,	financial	condition	and	operating	results.

# We	expect	that	our	results	of	operations	will	fluctuate.	This	fluctuation	could	cause	our	stock	price	to	decline.

						A	significant	portion	of	our	current	revenue	is	derived	from	a	few	large,	individual	transactions	such	as	the	sale	of	production	genotyping	systems	and	large genotyping	services	contracts,	including	our	work	on	the	International	HapMap	Project.	Because	these	transactions	do	not	occur	regularly	and	there	is	a	lengthy	sales cycle	for	such	transactions,	revenue	of	these	types	may	not	occur	on	a	consistent	or	frequent	basis.	In	addition,	our	total	amount	of	revenues	is	subject	to	fluctuations	in demand	from	seasonality	impacts,	the	timing	and	amount	of	U.S.	government	grant	funding	programs,	the	timing	and	size	of	research	projects	our	customers	perform and	changes	in	overall	spending	levels	in	the	life	sciences	industry.	Given	the	difficulty	in	predicting	the	timing	and	magnitude	of	sales	for	our	products,	we	may experience	quarter-to-quarter	fluctuations	in	revenue	resulting	in	the	potential	for	a	sequential	decline	in	quarterly	revenue.	A	large	portion	of	our	expenses	are	relatively fixed,	including	expenses	for	facilities,	equipment	and	personnel.	In	addition,	we	expect	operating	expenses	to	continue	to	increase	significantly.	Accordingly,	if	revenue does	not	grow	as	anticipated,	we	may	not	be	able	to	reduce	our	operating	losses.	Due	to	the	possibility	of	fluctuations	in	our	revenue	and	expenses,	we	believe	that quarterly	comparisons	of	our	operating	results	are	not	a	good	indication	of	our	future	performance.	If	our	operating	results	fluctuate	or	do	not	meet	the	expectations	of stock	market	analysts	and	investors,	our	stock	price	probably	would	decline.

# Item	7A. Quantitative	and	Qualitative	Disclosure	about	Market	Risk.

						Our	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily	to	our	investment	portfolio.	The	fair	market	value	of	fixed	rate	securities	may	be	adversely impacted	by	fluctuations	in	interest	rates	while	income	earned	on	floating	rate	securities	may	decline	as	a	result	of	decreases	in	interest	rates.	Under	our	current	policies, we	do	not	use	interest	rate	derivative	instruments	to	manage	exposure	to	interest	rate	changes.	We	ensure	the	safety	and	preservation	of	our	invested	principal	funds	by limiting	default	risk,	market	risk	and	reinvestment	risk.	We	mitigate	default	risk	by	investing	in	investment	grade	securities.	A	hypothetical	100	basis	point	adverse	move in	interest	rates	along	the	entire	interest	rate	yield	curve	would	not	materially	affect	the	fair	value	of	our	interest	sensitive	financial	instruments.

						Our	equipment	financings,	amounting	to	$0.3	million	as	of	December	28,	2003,	are	all	at	fixed	rates	and	therefore,	have	no	exposure	to	changes	in	interest	rates.	In January	2002,	we	assumed	a	$26.0	million	mortgage	in	connection	with	the	purchase	of	a	new	facility	and	related	land.	The	interest	rate	on	this	loan	is	fixed	for	a	10- year	period	and	consequently	there	is	no	exposure	to	increasing	market	interest	rates.

						We	have	not	had	any	significant	exposure	to	foreign	currency	rate	fluctuations,	nor	do	we	have	any	foreign	currency	hedging	instruments	in	place.

# Item	8. Financial	Statements	and	Supplementary	Data.

						The	Report	of	Independent	Auditors,	Financial	Statements	and	Notes	to	Financial	Statements	begin	on	page	F-1	immediately	following	the	signature	page	and	are incorporated	here	by	reference.

						Our	fiscal	year	is	52	or	53	weeks	ending	on	the	Sunday	closest	to	December	31.	Our	quarters	are	13	or	14	weeks	ending	on	the	Sunday	closest	to	March	31,	June	30 and	September	30.

# Item	9. Changes	In	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure.

# Item	9A. Controls	and	Procedures.

						We	have	established	and	maintain	disclosure	controls	and	procedures	to	ensure	that	we	record,	process,	summarize,	and	report	information	we	are	required	to disclose	in	our	periodic	reports	filed	with	the	Securities	and	Exchange	Commission	in	the	manner	and	within	the	time	periods	specified	in	the	SEC's	rules	and	forms.	We also	design	our	disclosure	controls	to	ensure	that	the	information	is	accumulated	and	communicated	to	our	management,	including	the	chief	executive	officer	and	the chief	financial	officer,	as	appropriate	to	allow	timely	decisions	regarding	required	disclosure.	We	also	maintain	internal	controls	and	procedures	to	ensure	that	we comply	with	applicable	laws	and	our	established	financial	policies.	We	design	our	internal	controls	to	provide	reasonable	assurance	that	(1)	our	transactions	are	properly authorized;	(2)	our	assets	are	safeguarded	against	unauthorized	or	improper	use;	and	(3)	our	transactions	are	properly	recorded	and	reported	in	conformity	with accounting	principles	generally	accepted	in	the	United	States.

						We	have	evaluated	the	design	and	operation	of	our	disclosure	controls	and	procedures	to	determine	whether	they	are	effective	in	ensuring	that	the	disclosure	of required	information	is	timely	made	in	accordance	with	the	Exchange	Act	and	the	rules	and	regulations	of	the	Securities	and	Exchange	Commission.	This	evaluation	was made	under	the	supervision	and	with	the	participation	of	management,	including	our	chief	executive	officer	and	chief	financial	officer	as	of	December	28,	2003.	Our management	does	not	expect	that	our	disclosure	controls	or	our	internal	controls	will	prevent	all	error	and	all	fraud.	A	control	system,	no	matter	how	well	conceived	and operated,	can	provide	only	reasonable,	not	absolute,	assurance	that	the	objectives	of	the	control	system	are	met.	Further,	the	design	of	a	control	system	must	reflect	the fact	that	there	are	resource	constraints,	and	the	benefits	of	controls	must	be	considered	relative	to	their	costs.	Because	of	the	inherent	limitations	in	all	control	systems, no	evaluation	of	controls	can	provide	absolute	assurance	that	all	control	issues	and	instances	of	fraud,	if	any,	have	been	detected.	These	inherent	limitations	include	the realities	that	judgments	in	decision-making	can	be	faulty,	and	that	breakdowns	can	occur	because	of	a	simple	error	or	mistake.	Additionally,	controls	can	be circumvented	by	the	individual	acts	of	some	persons,	by	collusion	of	two	or	more	people,	or	by	management	override	of	the	control.	The	design	of	any	system	of controls	also	is	based	in	part	upon	certain	assumptions	about	the	likelihood	of	future	events,	and	there	can	be	no	assurance	that	any	design	will	succeed	in	achieving	its stated	goals	under	all	potential	future	conditions;	over	time,	controls	may	become	inadequate	because	of	changes	in	conditions,	or	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.	Because	of	the	inherent	limitations	in	a	cost-effective	control	system,	misstatements	due	to	error	or	fraud	may	occur	and	not	be detected.	Notwithstanding,	we	have	designed	our	internal	control	system	with	a	level	of	controls	that	we	believe	will	prevent	material	errors	in	our	consolidated	financial statements.

						The	chief	executive	officer	and	chief	financial	officer	have	concluded,	based	on	their	review,	that	our	disclosure	controls	and	procedures,	as	defined	at	Exchange Act	Rules	13a-14(c)	and	15d-14(c),	are	effective	to	ensure	that	information	required	to	be	disclosed	by	us	in	reports	that	we	file	under	the	Exchange	Act	is	recorded, processed,	summarized	and	reported	within	the	time	periods	specified	in	Securities	and	Exchange	Commission	rules	and	forms	and	that	our	internal	controls	are effective	to	provide	reasonable	assurance	that	our	financial	statements	are	fairly	presented	in	conformity	with	accounting	principles	generally	accepted	in	the	United States.	No	significant	changes	were	made	to	our	internal	controls	or	other	factors	that	could	significantly	affect	these	controls	during	the	fourth	quarter	of	2003.

# Item	10. Directors	and	Executive	Officers	of	the	Registrant.

# Identification	of	Directors

						Our	certificate	of	incorporation	and	bylaws	provide	for	a	classified	board	of	directors	consisting	of	three	classes	of	directors	with	staggered	three-year	terms.	The board	currently	consists	of	seven	persons,	with	two	classes	consisting	of	two	directors	each	and	the	third	class	consisting	of	three	directors.	Robert	T.	Nelsen	has informed	the	board	that	he	will	not	serve	on	the	board	after	the	annual	meeting	to	be	held	on	May	20,	2004.	As	a	result,	his	term	will	expire	as	of	the	annual	meeting, and	the	board	will	consist	of	six	persons	following	the	2004	annual	meeting.

						Daniel	M.	Bradbury,	42,	has	been	a	director	since	January	2004.	Since	June	2003,	Mr.	Bradbury	has	served	as	Chief	Operating	Officer	of	Amylin	Pharmaceuticals, a	biopharmaceutical	company.	He	served	in	various	other	positions	with	that	company	from	1994	to	2003.	From	1984	to	1994,	Mr.	Bradbury	held	a	number	of	positions at	SmithKline	Beecham	Pharmaceuticals.	Mr.	Bradbury	is	a	director	of	Peninsula	Pharmaceuticals.	Mr.	Bradbury	holds	a	B.Pharm.	(Hons.)	from	Nottingham	University and	a	Diploma	in	Management	Studies	from	Harrow	and	Ealing	Colleges	of	Higher	Education	and	is	a	member	of	the	Royal	Pharmaceutical	Society	of	Great	Britain.

						R.	Scott	Greer,	45,	has	been	a	director	since	May	2001.	Mr.	Greer	has	served	as	Chairman	of	the	Board	of	Abgenix,	Inc.	since	May	2000,	as	a	director	since	June 1996	and	as	its	Chief	Executive	Officer	from	June	1996	to	May	2002.	From	June	1996	until	December	2000,	he	served	as	its	President.	He	also	serves	as	a	director	of CV	Therapeutics,	Inc.	and	Sirna	Therapeutics,	Inc.	From	July	1994	to	July	1996,	Mr.	Greer	was	Senior	Vice	President	of	Corporate	Development	at	Cell	Genesys,	Inc. From	April	1991	to	July	1994,	Mr.	Greer	was	Vice	President	of	Corporate	Development	and	from	April	1991	to	September	1993	Mr.	Greer	was	Chief	Financial	Officer of	Cell	Genesys.	From	1986	to	1991,	Mr.	Greer	held	various	positions	at	Genetics	Institute,	Inc.,	a	biotechnology	company,	including	Director,	Corporate	Development. Mr.	Greer	received	a	B.A.	in	Economics	from	Whitman	College	and	an	M.B.A.	from	Harvard	University	and	was	a	certified	public	accountant.

						Robert	T.	Nelsen,	40,	has	been	a	director	since	June	1998.	Since	July	1994,	Mr.	Nelsen	has	served	as	a	senior	principal	of	venture	capital	funds	associated	with ARCH	Venture	Partners,	a	venture	capital	firm,	including	ARCH	Venture	Fund	III,	L.P.,	a	stockholder	of	the	Company.	From	April	1987	to	July	1994,	Mr.	Nelsen	was Senior	Manager	at	ARCH	Development	Corporation,	a	company	affiliated	with	the	University	of	Chicago,	where	he	was	responsible	for	new	company	formation. Mr.	Nelsen	is	a	director	of	Adolor.	Mr.	Nelsen	holds	a	B.S.	in	Biology	and	Economics	from	the	University	of	Puget	Sound	and	an	M.B.A.	from	the	University	of Chicago.

						William	H.	Rastetter,	Ph.D.,	55,	has	been	a	director	since	November	1998.	Since	November	2003,	Dr.	Rastetter	has	served	as	the	Executive	Chairman	of	Biogen Idec	Inc,	a	biopharmaceutical	company.	He	served	as	Chief	Executive	Officer	of	IDEC	Pharmaceuticals	Corporation	from	December	1986	through	November	2003	and as	Chairman	of	the	board	of	directors	from	May	1996	to	November	2003.	Additionally,	he	served	as	President	of	IDEC	Pharmaceuticals	from	1986	through	2002.	From 1982	to	1986,	Dr.	Rastetter	served	in	various	positions	at	Genentech	and	previously	he	was	an	associate	professor	at	the	Massachusetts	Institute	of	Technology. Dr.	Rastetter	holds	a	S.B.	in

Chemistry	from	the	Massachusetts	Institute	of	Technology	and	received	his	M.A.	and	Ph.D.	in	Chemistry	from	Harvard	University.

						John	R.	Stuelpnagel,	D.V.M.,	46,	one	of	our	founders,	is	our	Sr.	Vice	President	of	Operations	and	has	been	a	director	since	April	1998.	From	October	1999	to April	2002,	he	served	as	our	Vice	President	of	Business	Development.	From	April	1998	to	October	1999,	he	served	as	our	acting	President	and	Chief	Executive	Officer and	was	acting	Chief	Financial	Officer	through	April	2000.	While	founding	Illumina,	Dr.	Stuelpnagel	was	an	associate	with	CW	Group,	a	venture	capital	firm,	from June	1997	to	September	1998	and	with	Catalyst	Partners,	a	venture	capital	firm,	from	August	1996	to	June	1997.	Dr.	Stuelpnagel	received	his	B.S.	in	Biochemistry	and his	Doctorate	in	Veterinary	Medicine	from	the	University	of	California,	Davis	and	his	M.B.A.	from	the	University	of	California,	Los	Angeles.

						David	R.	Walt,	Ph.D.,	51,	one	of	our	founders,	has	been	a	director	and	Chairman	of	our	Scientific	Advisory	Board	since	June	1998.	Dr.	Walt	has	been	the Robinson	Professor	of	Chemistry	at	Tufts	University	since	September	1995.	Dr.	Walt	has	published	over	100	papers	and	holds	over	20	patents.	Dr.	Walt	holds	a	B.S.	in Chemistry	from	the	University	of	Michigan	and	received	his	Ph.D.	in	Organic	Chemistry	and	Pharmacology	from	the	State	University	of	New	York	at	Stony	Brook.

# Board	Committees	and	Meetings

						The	board	of	directors	held	five	meetings	during	the	fiscal	year	ended	December	28,	2003.	The	board	of	directors	has	an	audit	committee	and	a	compensation committee.	Each	director	attended	or	participated	in	75%	or	more	of	the	aggregate	of	(i)	the	total	number	of	meetings	of	the	board	of	directors	and	(ii)	the	total	number of	meetings	held	by	all	committees	of	the	board	on	which	such	director	served	during	the	2003	fiscal	year.

						The	audit	committee	currently	consists	of	three	directors,	Mr.	Greer,	Mr.	Nelsen	and	Dr.	Rastetter,	each	of	whom	is	independent	as	defined	under	Rule	4200	of	the National	Association	of	Securities	Dealers'	listing	standards	and	Rule	10A-3	of	the	Exchange	Act.	The	Board	of	Directors	has	determined	that	all	audit	committee members	are	financially	literate	under	the	current	listing	standards	of	the	National	Association	of	Securities	Dealers.	The	Board	also	determined	that	R.	Scott	Greer qualifies	as	an	"audit	committee	financial	expert"	as	defined	by	the	SEC	rules	adopted	pursuant	to	the	Sarbanes-Oxley	Act	of	2002.	The	audit	committee	is	responsible for	approving	the	services	performed	by	our	independent	auditors	and	reviewing	our	accounting	practices	and	systems	of	internal	accounting	controls.	The	audit committee	held	eight	meetings	during	2003.	The	audit	committee	is	governed	by	a	written	charter	approved	by	the	board	of	directors.

						The	compensation	committee	currently	consists	of	Mr.	Nelsen	and	Dr.	Rastetter.	The	compensation	committee	is	primarily	responsible	for	reviewing	and	approving our	general	compensation	policies	and	setting	compensation	levels	for	our	executive	officers.	The	compensation	committee	also	has	the	authority	to	administer	our	2000 employee	stock	purchase	plan	and	our	2000	stock	plan.	The	compensation	committee	held	one	meeting	during	2003.

# Director	Compensation

						Each	non-employee	director	receives	an	annual	cash	retainer	fee	of	$10,000	per	year,	which	is	paid	quarterly.	Non-employee	directors	also	receive	$2,000	for	each Board	meeting	attended	and	$1,000	for	each	Board	committee	meeting	attended.	We	also	reimburse	our	non-employee	directors	for	their	expenses	incurred	in connection	with	attending	board	and	committee	meetings.	Several	directors	have	purchased	shares	of	our	common	stock	pursuant	to	restricted	stock	purchase agreements,	subject	to	repurchase	rights	in	our	favor	which	lapse	over	time.	David	R.	Walt,	as	a	member	of	our	Scientific	Advisory	Board,	has	received	an	annual consulting	fee	of	$50,000,	which	will	terminate	in	April	2004.

						Under	our	2000	stock	plan,	as	amended,	directors	who	are	not	our	officers	or	employees	receive:

•	one-time	option	grants	of	20,000	shares	vesting	annually	over	four	years	upon	joining	the	board,	which	are	to	be	automatically	granted	on	the	date	of	the	first board	meeting	attended,	with	exercise	prices	equal	to	the	fair	market	value	of	our	common	stock	on	the	date	of	grant;	and

•	annual	option	grants	of	10,000	shares	vesting	annually	over	four	years,	which	are	to	be	automatically	granted	on	the	date	of	each	annual	stockholder	meeting	with exercise	prices	equal	to	the	fair	market	value	of	our	common	stock	on	the	date	of	grant.

						On	the	date	of	the	annual	meeting,	our	existing	non-employee	board	members,	Mr.	Bradbury,	Mr.	Nelsen,	and	Dr.	Rastetter	and,	if	re-elected,	Mr.	Greer	and Dr.	Walt,	will	automatically	receive	option	grants	of	10,000	shares	of	our	common	stock.	The	exercise	price	per	share	under	each	such	option	will	be	equal	to	the	fair market	value	per	share	of	common	stock	on	the	grant	date.

# Identification	of	Executive	Officers

						Information	concerning	our	executive	officers	is	set	forth	under	"Executive	Officers"	in	Part	I	of	this	Annual	Report	on	Form	10-K.

# Compliance	with	Section	16(a)	of	the	Exchange	Act

						The	members	of	our	board	of	directors,	our	executive	officers	and	persons	who	hold	more	than	10%	of	our	outstanding	common	stock	are	subject	to	the	reporting requirements	of	Section	16(a)	of	the	Securities	Exchange	Act	which	require	them	to	file	reports	with	respect	to	their	ownership	of	our	common	stock	and	their transactions	in	such	common	stock.	Based	solely	upon	our	review	of	copies	of	Section	16(a)	reports,	which	we	received	from	such	persons	for	their	transactions	during the	2003	fiscal	year,	we	believe	that	all	reporting	requirements	under	Section	16(a)	for	such	fiscal	year	were	met	in	a	timely	manner	by	these	individuals,	with	the following	exception,	a	Form	4	covering	the	sale	of	5,275	shares	of	the	Company's	stock	by	Noemi	Espinosa	was	filed	15	days	late	on	December	11,	2003.

# Code	of	Ethics

						The	Company	has	adopted	a	Code	of	Ethics	that	applies	to	all	officers	and	employees,	including	its	principal	executive	officer	and	principal	accounting	and financial	officer.	This	code	of	ethics	is	filed	as	Exhibit	14	to	this	annual	report	on	Form	10-K.

# Item	11. Executive	Compensation.

# Summary	of	Cash	and	Certain	Other	Compensation

						The	following	table	provides	summary	information	concerning	the	compensation	earned	by	our	chief	executive	officer	and	each	of	our	four	other	most	highly compensated	executive	officers	whose	salary	and	bonus	for	the	2003	fiscal	year	was	in	excess	of	$100,000,	for	services	rendered	in	all	capacities,	to	Illumina.	No executive	officer	who	would	have	otherwise	been	includable	in	such	table	on	the	basis	of	salary	and	bonus	earned	for	the	2003	fiscal	year	has	been	excluded	by	reason of	his	or	her	termination	of	employment	or	change	in	executive	status	during	that	fiscal	year.	The	individuals	included	in	the	following	table	are	referred	to	as	named executive	officers.

# Summary	2003	Compensation	Table

| Name	and	Principal	Positions | Year | Salary | Bonus(1) | Other	Annual<br>Compensation | Underlying<br>Options	(#) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Jay\tT.\tFlatley, | 2003 | $360,400 | $96,107 | $22,453(2) | 150,000 |
| President\tand\tChief | 2002 | 340,000 | 119,000 | 7,547(2) | \t— |
| Executive\tOfficer | 2001 | 299,519 | 82,500 | — | 150,000 |
| David\tL.\tBarker, | 2003 | 220,000 | 22,000 | — | 40,000 |
| Vice\tPresident\tand | 2002 | 210,000 | 15,750 | — | — |
| Chief\tScientific\tOfficer | 2001 | 200,000 | 10,000 | — | 75,000 |
| Noemi\tC.\tEspinosa, | 2003 | 220,000 | 14,667 | 4,154(3) | 25,000 |
| Vice\tPresident\tof | 2002 | 210,000 | 12,600 | 4,038(3) | \t— |
| Intellectual\tProperty | 2001 | 200,000 | 10,000 | — | 25,000 |
| Timothy\tM.\tKish, | 2003 | 250,000 | 33,333 | — | 50,000 |
| Vice\tPresident\tof\tFinance | 2002 | 236,250 | 17,719 | — | — |
| and\tChief\tFinancial\tOfficer | 2001 | 225,000 | 11,250 | — | 75,000 |
| John\tR.\tStuelpnagel, | 2003 | 250,000 | 33,333 | 7,231(3) | 75,000 |
| Senior\tVice\tPresident | 2002 | 220,000 | 22,000 | 3,885(3) | \t— |
| of\tOperations | 2001 | 189,712 | 9,500 | 7,673(3) | 75,000 |

(1) Bonuses	are	earned	in	the	year	indicated	and	paid	in	February	of	the	following	year.

(2) This	amount	represents	an	allowance	for	relocation	and	housing.

(3) Payment	for	flexible	time	off.

# Stock	Option	Grants

						We	grant	options	to	our	executive	officers	under	our	2000	stock	plan.	As	of	January	31,	2004,	options	to	purchase	a	total	of	5,952,627	shares	of	our	common	stock were	outstanding	under	the	stock	plan	and	options	to	purchase	6,299,552	shares	of	our	common	stock	remained	available	for	future	grant.

						The	following	tables	show	for	the	2003	fiscal	year,	information	regarding	options	granted	to,	exercised	by,	and	held	at	year	end	by,	each	of	the	named	executive officers.	No	stock	appreciation	rights	were	granted	to	the	named	executive	officers	during	the	2003	fiscal	year.

						The	exercise	price	of	each	option	was	equal	to	the	closing	sales	price	of	our	common	stock	as	reported	on	the	Nasdaq	Stock	Market	on	the	date	of	grant.	The exercise	price	may	be	paid	in	cash	or	through	a	cashless	exercise	procedure	involving	a	same-day	sale	of	the	purchased	shares.	The	options	vest	ratably	over	a	60-month period,	beginning	March	2003.	Each	of	the	options	has	a	maximum	term	of	10	years	measured	from	the	applicable	grant	date,	subject	to	earlier	termination	if	the optionee's	service	with	us	ceases.	In	the	event	that	we	are	acquired	by	merger	or	asset	sale,	each	outstanding

option	which	is	not	to	be	assumed	by	the	acquiring	entity	will	become	immediately	fully	vested	and	exercisable.

						The	potential	realizable	value	is	calculated	based	on	the	10-year	term	of	the	option	at	the	time	of	grant.	Stock	price	appreciation	of	5%	and	10%	is	assumed	under the	SEC	rules	and	does	not	represent	our	prediction	of	our	stock	price	performance.	The	potential	realizable	value	at	5%	and	10%	appreciation	are	calculated	by assuming	that	the	stock	price	on	the	date	of	grant	appreciates	at	the	indicated	annual	rate,	compounded	annually	for	the	entire	term	of	the	option	and	that	the	option	is exercised	and	sold	on	the	last	day	of	its	term	for	the	appreciated	stock	price.	There	can	be	no	assurance	provided	to	any	named	executive	officer	or	other	holder	of	our securities	that	the	actual	stock	price	appreciation	over	the	10-year	term	will	be	at	the	assumed	5%	and	10%	levels	or	at	any	other	defined	level.	Unless	the	market	price of	the	common	stock	appreciates	over	the	option	term,	no	value	will	be	realized	from	the	option	grants	made	to	the	named	executive	officers.	On	December	26,	2003,	the last	trading	day	of	our	2003	fiscal	year,	the	closing	sales	price	of	our	common	stock,	as	reported	on	the	Nasdaq	National	Market,	was	$7.01.

						Percentages	shown	under	"Percentage	of	Total	Options	Granted	in	2003"	are	based	on	an	aggregate	of	1,199,275	options	granted	to	employees	of	Illumina	under our	stock	option	plans	during	2003.

|  | Number	of<br>Securities<br>Underlying | Percentage	of<br>Total	Options<br>Granted	to | Exercise |  | Annual	Rates	of<br>Stock	Appreciation<br>for	Option	Term |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Options | Employees\tin | Price | Expiration |  |  |
| Name | Granted | Fiscal\tYear | ($/Share) | Date | 5%\t($) | 10%\t($) |
| Jay\tT.\tFlatley | 150,000 | 12.51% | $2.77 | 02/10/2013 | 261,306 | 662,200 |
| David\tL.\tBarker,\tPh.D. | 40,000 | 3.34% | 2.77 | 02/10/2013 | 69,682 | 176,587 |
| Noemi\tC.\tEspinosa | 25,000 | 2.08% | 2.77 | 02/10/2013 | 43,551 | 110,367 |
| Timothy\tM.\tKish | 50,000 | 4.17% | 2.77 | 02/10/2013 | 87,102 | 220,733 |
| John\tR.\tStuelpnagel,\tD.V.M | 75,000 | 6.25% | 2.77 | 02/10/2013 | 130,653 | 331,100 |

# Aggregate	Option	Exercises	in	2003	and	Option	Values	at	December	28,	2003

						The	following	table	presents	the	number	and	value	of	securities	underlying	unexercised	options	that	are	held	by	each	of	the	named	executive	officers.	No	options were	exercised	by	any	of	the	named	executive	officers	and	no	stock	appreciation	rights	were	outstanding	during	the	2003	fiscal	year.

						Amounts	shown	under	the	column	"Value	of	Unexercised	In-the-Money	Options	at	December	28,	2003"	are	based	on	the	closing	price	of	our	common	stock	of $7.01	on	December	26,	2003,	the	last	trading	day	of	our	2003	fiscal	year,	as	reported	on	the	Nasdaq	National	Market,	less	the	exercise	price	paid	for	such	shares,	without taking	into	account	any	taxes	that	may	be	payable	in	connection	with	the	transaction,	multiplied	by	the	number	of	shares	underlying	the	option.

| Name | Exercisable | Unexercisable | Exercisable | Unexercisable |
| :--- | :--- | :--- | :--- | :--- |
| Jay\tT.\tFlatley | 51,694 | 248,406 | $133,126 | $655,874 |
| David\tL.\tBarker,\tPh.D. | 18,123 | 96,877 | 39,950 | 206,150 |
| Noemi\tC.\tEspinosa | 9,061 | 40,939 | 22,657 | 108,843 |
| Timothy\tM.\tKish | 8,333 | 116,667 | 35,332 | 253,168 |
| John\tR.\tStuelpnagel,\tD.V.M | 23,540 | 126,460 | 64,261 | 330,239 |

# Employment	Contracts,	Termination	of	Employment	and	Change	in	Control	Arrangements

						We	have	not	entered	into	employment	agreements	with	any	of	our	named	executive	officers.

						We	have	entered	into	restricted	stock	purchase	agreements	with	several	of	our	executive	officers,	including	each	of	our	named	executive	officers,	providing	that upon	the	closing	of	an	acquisition	of	Illumina	for	cash	or	publicly	traded	securities,	the	lapsing	of	our	repurchase	right	accelerates	as	to	50%	of	each	officer's	shares	of common	stock	then	subject	to	our	repurchase	right	and,	with	respect	to	the	remaining	50%,	on	the	first	anniversary	of	the	closing	date	of	the	acquisition.	If	the	acquirer terminates	the	officer's	employment	without	cause	within	one	year	of	the	closing	date,	our	repurchase	right	lapses	with	respect	to	all	shares.

						The	compensation	committee	of	the	board	of	directors,	as	plan	administrator	of	our	stock	plans,	has	the	authority	to	provide	for	accelerated	vesting	of	any outstanding	options	or	waiver	of	forfeiture	restrictions	of	unvested	stock	held	by	our	executive	officers,	for	any	reason,	including	upon	a	change	of	control.

# Compensation	Committee	Interlocks	and	Insider	Participation

						Our	executive	compensation	program	has	been	administered	by	the	compensation	committee	of	our	board	of	directors.	As	of	December	28,	2003,	the	compensation committee	consisted	of	Mr.	Nelsen	and	Dr.	Rastetter.	Neither	of	these	individuals	was	an	employee	or	an	officer	of	ours.

						None	of	our	current	executive	officers	has	ever	served	as	a	member	of	a	board	of	directors	or	compensation	committee	of	any	other	entity	that	has	or	has	had	one	or more	executive	officers	serving	as	a	member	of	our	board	of	directors	or	compensation	committee	during	the	last	fiscal	year.

# Board	Compensation	Committee	Report	on	Executive	Compensation

						The	compensation	committee's	responsibility	is	to	administer	and	review	the	base	salaries,	annual	incentive	compensation	and	long-term	incentives	of	our	executive officers,	including	our	chief	executive	officer,	and	to	establish	the	general	compensation	policies	for	such	individuals.	The	compensation	committee	also	has	the authority	to	make	discretionary	option	grants	to	our	executive	officers	under	our	2000	stock	plan.

						Compensation	Philosophy.	Our	philosophy	is	to	maintain	an	executive	compensation	program	that	allows	us	to	attract,	retain	and	reward	executive	officers	who contribute	to	our	long-term	success	and	to	link	that	compensation	to	both	individual	performance	and	the	value	created	for	our	stockholders.	We	have	adopted	a challenging	strategy	with	an	aggressive	set	of	underlying	goals	and	our	success	will	in	large	part	be	determined	by	the	quality	of	personnel	we	are	able	to	recruit.	A competitive	compensation	program	will	be	a	crucial	part	of	recruiting	the	people	required	to	help	us	achieve	these	goals.

						Our	compensation	program	consist	of	three	elements;	base	salary,	incentive	bonuses	and	long-term	equity	incentives.	In	general,	our	goal	is	to	provide	a	total compensation	package	that	is	competitive	with	the	biotechnology	and	life	science	instrumentation	companies	with	which	we	compete	for	talent.

						Base	Salary.	The	salaries	for	executive	officers	for	2003	were	generally	determined	on	an	individual	basis	by	the	compensation	committee.	Determinations	of appropriate	base	salary	levels	are	made	based	on	level	of	responsibility,	prior	experience	and	breadth	of	knowledge	as	well	as	competitive	pay	practices	in	our	industry. Initial	salary	levels	are	set	at	the	market	average	when	compared	to	leading	companies	in	our	industry,	adjusted	for	size.	Subsequent	changes	to	base	salary	are	based	on individual	performance	measured	against	pre-established	objectives	and	competitive	factors	at	the	time.

						Incentive	Bonus.	The	compensation	committee	in	its	discretion	may	award	bonuses	to	executive	officers.	The	intent	of	the	bonus	program	is	to	motivate	and	reward executives	for	performance	as

measured	against	well	defined	performance	goals.	The	goals	are	based	on	both	individual	milestones	that	vary	with	the	individual's	position	as	well	as	our	overall financial	performance.

						Long-Term	Equity	Incentives.	Stock	options	and	stock	ownership	are	a	key	element	in	our	total	compensation	program	as	it	links	the	interests	of	the	executive	with the	long-term	interests	of	the	stockholders	and	emphasizes	the	creation	of	stockholder	value.	Prior	to	our	initial	public	offering,	executives	were	provided	the opportunity	to	purchase	restricted	stock	at	the	date	of	hire	and	at	other	times	after	that	date.	Subsequent	to	our	initial	public	offering,	we	have	granted	stock	options	to executives	under	the	2000	stock	plan	at	both	the	time	of	hire	and	as	subsequent	awards.	Grants	are	awarded	based	on	a	number	of	factors,	including	our	achievement	of specific	milestones,	the	individual's	level	of	responsibility,	the	amount	and	term	of	stock	or	options	already	held	by	the	individual,	the	individual's	contributions	to	the achievement	of	our	financial	and	strategic	objectives,	and	industry	practices	and	norms.	The	size	of	option	grants	to	executives	is	determined	by	the	compensation committee.	Options	are	granted	at	100%	of	the	fair	market	value	on	the	date	of	grant.	Option	grants	to	executives	generally	vest	over	periods	ranging	from	five	to	eight years,	with	opportunities	in	some	cases	for	earlier	vesting	based	upon	the	achievement	of	specified	goals.

						CEO	Compensation.	The	compensation	of	Jay	T.	Flatley,	our	chief	executive	officer,	is	established	consistent	with	Illumina's	general	compensation	philosophy.	In setting	that	salary,	the	compensation	committee	considered	several	factors,	including	the	achievement	of	company	goals	during	2003,	such	as	exceeding	the	2003	sales goal	for	SNP	genotyping	systems	and	the	launch	of	several	new	products,	as	well	as	the	level	of	leadership	and	management	required	to	complete	development	of	our technology	and	commercialize	our	products.	Mr.	Flatley's	salary	was	increased	from	$340,000	in	2002	to	$360,400	in	2003	in	recognition	of	these	and	other	competitive factors.	Mr.	Flatley	also	received	a	$96,107	bonus	in	2003	based	on	the	same	incentive	plan	as	the	other	executive	officers.

						Compliance	with	Internal	Revenue	Code	Section	162(m).	Section	162(m)	of	the	Internal	Revenue	Code	disallows	a	tax	deduction	to	publicly	held	companies	for compensation	paid	to	specified	executive	officers,	to	the	extent	that	compensation	exceeds	$1	million	per	covered	officer	in	any	fiscal	year.	The	limitation	applies	only	to compensation	that	is	not	considered	to	be	performance-based.	Non-performance	based	compensation	paid	to	our	executive	officers	for	the	2003	fiscal	year	did	not exceed	the	$1	million	limit	per	officer.	The	compensation	committee	does	not	anticipate	that	the	non-performance	based	compensation	to	be	paid	to	our	executive officers	for	fiscal	year	2004	will	exceed	that	limit.	Our	stock	option	plans	have	been	structured	so	that	any	compensation	deemed	paid	in	connection	with	the	exercise	of option	grants	made	under	those	plan	with	an	exercise	price	equal	to	the	fair	market	value	of	the	option	shares	on	the	grant	date	will	qualify	as	performance-based compensation	which	will	not	be	subject	to	the	$1	million	limitation.	The	compensation	committee's	present	intention	is	to	grant	future	compensation	that	does	not	exceed the	limitations	of	Section	162(m),	although	the	compensation	committee	reserves	the	right	to	award	compensation	that	does	not	comply	with	these	limits	on	a	case-by- case	basis.

						It	is	the	opinion	of	the	compensation	committee	that	the	executive	compensation	policies	and	plans	provide	the	necessary	total	remuneration	program	to	properly align	our	performance	and	the	interests	of	our	stockholders	through	the	use	of	competitive	and	equitable	executive	compensation	in	a	balanced	and	reasonable	manner, for	both	the	short	and	long-term.

						We	conclude	our	report	with	the	acknowledgement	that	no	member	of	the	compensation	committee	is	a	current	officer	or	employee	of	Illumina.

# COMPENSATION	COMMITTEE

Robert	T.	Nelsen

William	H.	Rastetter,	Ph.D.

# Audit	Committee	Report

						The	audit	committee	oversees	our	financial	reporting	process	on	behalf	of	our	board	of	directors.	Management	has	primary	responsibility	for	the	financial	reporting process	including	the	systems	of	internal	controls.	In	fulfilling	its	oversight	role,	the	audit	committee	monitors	and	advises	the	board	of	directors	on	the	integrity	of	the Company's	financial	statements	and	disclosures,	the	independent	auditor's	qualifications	and	independence,	the	adequacy	of	the	Company's	internal	controls,	and	the Company's	compliance	with	legal	and	regulatory	requirements.	The	audit	committee	has	the	following	responsibilities,	among	others:

•	reviewing	with	management	and	the	independent	auditor	the	audited	financial	statements	in	the	Annual	Report	and	the	reviewed	financial	statements	in	the quarterly	reports,	including	a	discussion	of	the	quality,	not	just	the	acceptability,	of	the	accounting	principles,	the	reasonableness	of	significant	judgments,	and	the clarity	of	disclosures	in	the	financial	statements;

•	reviewing	with	management	and	the	independent	auditor	the	earnings	press	releases	as	well	as	other	financial	information	provided	to	the	public;

•	reviewing	with	management	and	the	independent	auditor	significant	financial	reporting	issues	and	judgments	made	in	connection	with	the	preparation	of	the Company's	financial	statements;

•	reviewing	with	management	and	the	independent	auditor	the	Company's	application	of	critical	accounting	policies	including	consistency	from	period	to	period and	compatibility	with	generally	accepted	accounting	principles;

•	reviewing	with	the	independent	auditor	matters	relating	to	the	conduct	of	the	audit,	including	the	overall	scope	of	the	audit,	any	difficulties	encountered	in	the course	of	the	audit	work,	any	restriction	on	the	scope	of	the	audit,	and	any	significant	disagreements	with	management;

•	assessing	auditor	independence	and	absence	of	conflicts	of	interest;

•	recommending,	for	shareholder	approval,	the	independent	auditor	to	examine	the	Company's	accounts,	controls	and	financial	statements;

•	pre-approving	any	audit	and	permitted	non-audit	services	provided	to	the	Company	by	its	independent	auditor;

•	obtaining	from	the	independent	auditor	a	written	report	on	the	Company's	internal	accounting	controls;

•	reviewing	with	management	the	Company's	system	of	internal	accounting	controls	and	disclosure	controls;	and

•	establishing	procedures	for	the	receipt,	retention	and	treatment	of	complaints	received	by	the	Company	regarding	accounting,	internal	accounting	controls	or auditing	matters.

						The	audit	committee	meets	with	the	independent	auditors,	with	and	without	our	management	present,	to	discuss	the	results	of	their	examinations,	their	evaluations of	our	internal	controls,	and	the	overall	quality	of	our	financial	reporting.

						Based	on	the	reviews	and	discussions	referred	to	above,	the	audit	committee	recommended	to	the	board	of	directors	that	the	audited	financial	statements	be	included in	our	annual	report	on	Form	10-K	for	the	fiscal	year	ended	December	28,	2003,	for	filing	with	the	Securities	and	Exchange	Commission.

						The	undersigned	members	of	the	audit	committee	have	submitted	this	report	to	the	board	of	directors:

AUDIT	COMMITTEE R.	Scott	Greer Robert	T.	Nelsen William	H.	Rastetter,	Ph.D.

# Stock	Performance	Graph

						The	graph	depicted	below	shows	a	comparison	of	our	cumulative	total	stockholder	returns	for	our	common	stock,	the	NASDAQ	Stock	Market	Index,	and	the NASDAQ	Pharmaceutical	Index,	from	the	date	of	our	initial	public	offering	on	July	27,	2000	through	December	26,	2003.	The	graph	assumes	that	$100	was	invested	on July	27,	2000,	in	our	common	stock	and	in	each	index,	and	that	all	dividends	were	reinvested.	No	cash	dividends	have	been	declared	on	our	common	stock.	Stockholder returns	over	the	indicated	period	should	not	be	considered	indicative	of	future	stockholder	returns.

# COMPARISON	OF	TOTAL	RETURN	AMONG

# THE	NASDAQ	COMPOSITE	INDEX	AND

# THE	NASDAQ	PHARMACEUTICAL	INDEX

|  | July	27,<br>2000 | December	29,<br>2000 | December	28,<br>2001 | December	27,<br>2002 | December	26,<br>2003 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| \tIllumina,\tInc. | 100.00 | 100.39 | 71.44 | 19.50 | 43.81 |
| \tNASDAQ\tComposite\tIndex | 100.00 | 63.84 | 51.60 | 35.34 | 51.73 |
| \tNASDAQ\tPharmaceutical\tIndex | 100.00 | 93.20 | 82.08 | 51.96 | 74.57 |

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management.

						The	following	table	sets	forth	information	known	to	us	with	respect	to	the	beneficial	ownership	of	our	common	stock	as	of	January	31,	2004	for:

•	each	of	our	directors;

•	each	of	the	named	executive	officers	listed	in	the	summary	compensation	table;

•	each	stockholder	known	by	us	to	own	beneficially	more	than	5%	of	our	common	stock;	and

•	all	of	our	directors	and	executive	officers	as	a	group.

						Beneficial	ownership	is	determined	in	accordance	with	the	rules	of	the	Securities	and	Exchange	Commission	and	generally	includes	voting	or	investment	power with	respect	to	securities.	Shares	of	common	stock	subject	to	stock	options	and	warrants	currently	exercisable	or	exercisable	within	60	days	from	January	31,	2004	are deemed	to	be	outstanding	for	computing	the	percentage	ownership	of	the	person	holding	these	options	and	the	percentage	ownership	of	any	group	of	which	the	holder	is a	member,	but	are	not	deemed	outstanding	for	computing	the	percentage	of	any	other	person.	Except	as	indicated	by	footnote,	and	subject	to	community	property	laws where	applicable,	the	persons	named	in	the	table	have	sole	voting	and	investment	power	with	respect	to	all	shares	of	common	stock	shown	as	beneficially	owned	by them.	Except	as	otherwise	noted	below,	the	address	of	each	person	listed	on	the	table	is	9885	Towne	Centre	Drive,	San	Diego,	CA	92121.	Some	of	the	shares	of common	stock	held	by	our	directors,	officers	and	consultants	are	subject	to	repurchase	rights	in	our	favor.	For	a	description	of	these	repurchase	rights,	see	the	footnotes below.

| Name	and	Address | Pursuant	to	Options<br>Exercisable	Within<br>60	days	of<br>January	31,	2004 | Number	of	Shares<br>(including<br>number	shown	in<br>first	column) | Percentage<br>of	Total(1) |
| :--- | :--- | :--- | :--- |
| DIRECTORS\tAND\tEXECUTIVE\tOFFICERS |  |  |  |
| Jay\tT.\tFlatley(2) | 67,219 | 1,059,722 | 3.2 |
| David\tL.\tBarker,\tPh.D.(3) | 22,081 | 275,256 | * |
| Noemi\tC.\tEspinosa(4) | 11,561 | 229,924 | * |
| Timothy\tM.\tKish(5) | 12,833 | 407,397 | 1.2 |
| John\tR.\tStuelpnagel,\tD.V.M.(6) | 31,248 | 748,211 | 2.3 |
| Daniel\tM.\tBradbury | — | — | * |
| R.\tScott\tGreer | 12,500 | 16,500 | * |
| Robert\tT.\tNelsen(7) | 7,500 | 3,333,193 | 10.1 |
| William\tH.\tRastetter,\tPh.D.(8) | 7,500 | 83,012 | * |
| David\tR.\tWalt,\tPh.D.(9) | 7,500 | 1,409,838 | 4.3 |
| All\tdirectors\tand\texecutive\tofficers\tas\ta\tgroup\t(15 |  |  |  |
| persons) | 619,884 | 8,180,078 | 24.4 |
| 5%\tSTOCKHOLDERS |  |  |  |
| ARCH\tVenture\tPartners,\tLLC(10) | — | 3,315,298 | 10.1 |
| 8725\tWest\tHiggins\tRoad,\tSuite\t290 |  |  |  |
| Chicago,\tIL\t60631 |  |  |  |
| Capital\tGroup\tInternational,\tInc.(11) | — | 3,293,750 | 10.0 |
| 11100\tSanta\tMonica\tBlvd. |  |  |  |
| Los\tAngeles,\tCA\t90025 |  |  |  |
| Entities\taffiliated\twith\tCW\tGroup(12) | — | 3,005,511 | 9.1 |

	* Represents	beneficial	ownership	of	less	than	1%	of	the	outstanding	shares	of	our	common	stock.

(1) Percentage	ownership	is	based	on	the	32,900,523	shares	of	common	stock	outstanding	on	January	31,	2004.

(2) Includes	16,500	shares	beneficially	owned	by	Mr.	Flatley's	children.	As	of	January	31,	2004,	we	have	the	right	to	repurchase	170,833	of	Mr.	Flatley's	shares	upon termination	of	Mr.	Flatley's	services	to	the	Company,	which	repurchase	right	lapses	over	time.

(3) Includes	3,300	shares	beneficially	owned	by	a	trust	for	which	Dr.	Barker	is	the	trustee.	As	of	January	31,	2004,	we	have	the	right	to	repurchase	58,334	of Dr.	Barker's	shares	upon	termination	of	Dr.	Barker's	services	to	the	Company,	which	repurchase	right	lapses	over	time.

(4) As	of	January	31,	2004,	we	have	the	right	to	repurchase	53,750	of	Ms.	Espinosa's	shares	upon	termination	of	Ms.	Espinosa's	services	to	the	Company,	which repurchase	right	lapses	over	time.

(5) Includes	6,000	shares	beneficially	owned	by	Mr.	Kish's	children.	As	of	January	31,	2004,	we	have	the	right	to	repurchase	93,750	of	Mr.	Kish's	shares	upon termination	of	Mr.	Kish's	services	to	the	Company,	which	repurchase	right	lapses	over	time.

(6) As	of	January	31,	2004,	we	have	the	right	to	repurchase	60,500	of	Dr.	Stuelpnagel's	shares	upon	termination	of	Dr.	Stuelpnagel's	services	to	the	Company,	which repurchase	right	lapses	over	time.

(7) Consists	of	3,315,298	shares	owned	by	ARCH	Venture	Fund	III,	L.P.,	10,395	shares	owned	by	Mr.	Nelsen	and	7,500	shares	exercisable	within	60	days	under options	held	by	Mr.	Nelsen.	Mr.	Nelsen,	a	director	of	Illumina,	is	a	managing	director	of	the	general	partner	of	ARCH	Venture	Fund	III,	L.P.	and	disclaims beneficial	ownership	of	the	shares	owned	by	that	fund,	except	shares	attributable	to	his	partnership	interests.

(8) As	of	January	31,	2004,	we	have	the	right	to	repurchase	1,042	of	Dr.	Rastetter's	shares	upon	termination	of	Dr.	Rastetter's	services	to	the	Company,	which repurchase	right	lapses	over	time.

(9) Includes	303,980	shares	beneficially	owned	by	Dr.	Walt's	wife,	60,000	shares	owned	by	OSCI,	Inc.	and	31,540	shares	beneficially	owned	by	Dr.	Walt's	children. Dr.	Walt	is	a	principal	in	OSCI,	Inc.	Dr.	Walt	disclaims	beneficial	ownership	of	the	shares	held	by	OSCI,	Inc.

(10) Based	solely	on	information	contained	in	Schedule	13G	filed	by	Arch	Venture	Partners,	LLC	on	February	11,	2004.

(11) Based	solely	on	information	contained	in	Schedule	13G	filed	by	Capital	Group	International,	Inc.	on	February	13,	2004.

(12) Based	solely	on	information	contained	in	Form	4	filed	by	CW	Ventures	III	LP	on	November	12,	2003.

In	February	2004,	three	of	our	executive	officers,	Jay	T.	Flatley,	David	L.	Barker	and	John	R.	Stuelpnagel,	and	one	of	our	directors,	David	R.	Walt,	adopted	prearranged stock	trading	plans	for	the	purpose	of	selling	limited	amounts	of	their	company	stock	during	a	period	of	approximately	18	months.	These	written	plans	were	adopted	in accordance	with	Rule	10b5-1	under	the	Securities	and	Exchange	Act	of	1934.

# Equity	Compensation	Plan	Information

						The	following	table	presents	information	about	our	common	stock	that	may	be	issued	upon	the	exercise	of	options,	warrants	and	rights	under	all	our	existing	equity compensation	plans	as	of	December	28,	2003.	We	currently	have	two	equity	compensation	plans,	the	2000	employee	stock	purchase	plan	and	the	2000	stock	plan,	Prior to	our	initial	public	offering	we	granted	options	under	the	1998	stock	incentive	plan.	All	of	these	plans	have	been	approved	by	our	stockholders.	Options

outstanding	include	options	granted	under	both	the	1998	stock	incentive	plan	and	the	2000	stock	plan.

# (c)	Number	of

# Securities

Remaining

| Plan	Category | (a)	Number	of<br>Securities	to	be<br>Issued	Upon<br>Exercise	of<br>Outstanding<br>Options | (b)	Weighted-<br>Average<br>Exercise	Price<br>of	Outstanding<br>Options | Future	Issuance<br>Under	Equity<br>Compensation<br>Plans	(Excluding<br>Securities<br>Reflected	in<br>Column	(a) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity |  |  |  |
| holders | 5,229,874 | $6.95 | 5,536,135 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity |  |  |  |
| holders | — | — | — |
| Total | 5,229,874 | $6.95 | 5,536,135 |

						Please	refer	to	Footnote	5	in	notes	to	consolidated	financial	statements	included	in	our	annual	report	on	Form	10-K	for	the	year	ended	December	28,	2003	for	a description	of	our	equity	compensation	plans.

# Item	13. Certain	Relationships	and	Related	Transactions.

						We	entered	into	a	license	agreement	with	Tufts	University	in	1998	in	connection	with	the	license	of	patents	filed	by	Dr.	David	Walt,	one	of	our	directors.	Dr.	Walt	is the	Robinson	Professor	of	Chemistry	at	Tufts.	Under	that	agreement,	we	pay	royalties	to	Tufts	upon	the	commercial	sale	of	products	based	on	the	licensed	technology.	It is	our	understanding	that	Tufts	University	pays	a	portion	of	the	royalties	received	from	us	to	Dr.	Walt,	the	amount	of	which	is	controlled	solely	by	Tufts	University.	We also	provided	Tufts	University	with	$100,000	per	year	in	funding	for	five	years	ending	in	July	2003	for	research	support.	All	future	transactions	between	us	and	our officers,	directors,	principal	stockholders	and	affiliates	will	be	approved	by	a	majority	of	the	independent	and	disinterested	members	of	our	board	of	directors,	and	will be	on	terms	no	less	favorable	to	us	than	could	be	obtained	from	unaffiliated	third	parties.

						Our	bylaws	provide	that	we	will	indemnify	our	directors	and	executive	officers	and	may	indemnify	other	officers,	employees	and	other	agents	to	the	fullest	extent permitted	by	the	Delaware	law.	We	are	also	empowered	under	our	bylaws	to	enter	into	indemnification	contracts	with	our	directors	and	officers	and	to	purchase insurance	on	behalf	of	any	person	whom	we	are	required	or	permitted	to	indemnify.	Pursuant	to	this	provision,	we	have	entered	into	indemnity	agreements	with	each	of our	directors	and	officers.

						In	addition,	our	certificate	of	incorporation	provides	that	to	the	fullest	extent	permitted	by	Delaware	law,	our	directors	will	not	be	liable	for	monetary	damages	for breach	of	their	fiduciary	duty	of	care	to	Illumina	and	its	stockholders.	This	provision	in	the	certificate	of	incorporation	does	not	eliminate	the	duty	of	care,	and	in appropriate	circumstances	equitable	remedies	such	as	an	injunction	or	other	forms	of	nonmonetary	relief	would	remain	available	under	Delaware	law.	Each	director	will continue	to	be	subject	to	liability	for	breach	of	the	director's	duty	of	loyalty	to	Illumina,	for	acts	or	omissions	not	in	good	faith	or	involving	intentional	misconduct	or knowing	violations	of	law,	for	acts	or	omissions	that	the	director	believes	to	be	contrary	to	the	best	interests	of	Illumina	or	its	stockholders,	for	any	transaction	from which	the	director	derived	an	improper	personal	benefit,	for	acts	or	omissions	involving	a	reckless	disregard	for	the	director's	duty	to	Illumina	or	its	stockholders	when the	director	was	aware	or	should	have	been	aware	of	a	risk	of	serious	injury	to	Illumina	or	its	stockholders,	for	acts	or	omissions	that	constitute	an	unexcused	pattern	of inattention	that	amounts	to	an	abdication	of	the	director's	duty	to	Illumina	or	its	stockholders,	for	improper	transactions	between	the	director	and

Illumina	and	for	improper	distributions	to	stockholders	and	loans	to	directors	and	officers.	This	provision	also	does	not	affect	a	director's	responsibilities	under	any	other laws,	such	as	the	federal	securities	laws	or	state	or	federal	environmental	laws.

# Item	14. Principal	Accountant	Fees	and	Services.

# Audit	Fees

						The	aggregate	fees	billed	by	Ernst	&	Young	LLP	for	professional	services	rendered	for	the	audit	of	our	annual	financial	statements,	the	quarterly	reviews	of	the financial	statements	included	in	our	Forms	10-Q	and	an	A-133	audit	required	by	our	government	grants	were	$118,000	and	$90,113	for	fiscal	years	2003	and	2002, respectively.

# Audit-Related	Fees

						The	aggregate	fees	billed	by	Ernst	&	Young	LLP	for	audit-related	services	as	defined	by	the	commission	were	$17,720	and	$3,500	for	fiscal	years	2003	and	2002, respectively.

# Tax	Fees

						The	aggregate	fees	billed	by	Ernst	&	Young	LLP	for	professional	services	rendered	for	the	preparation	of	our	tax	returns	and	tax	planning	and	advice	were	$25,520 and	$20,278	for	fiscal	years	2003	and	2002,	respectively.	In	2004	and	beyond,	all	tax	related	services	will	be	performed	by	parties	other	than	Ernst	&	Young.

# All	Other	Fees

						Ernst	&	Young	LLP	did	not	perform	any	professional	services	other	than	as	stated	under	the	captions	Audit	Fees,	Audit-Related	Fees	and	Tax	Fees	for	fiscal	year 2003	or	2002.

# Pre	Approval	Policies	and	Procedures

						The	audit	committee	has	adopted	a	policy	that	requires	advance	approval	of	all	audit	services	and	permitted	non-audit	services	to	be	provided	by	the	independent auditor	as	required	by	the	Exchange	Act.	The	audit	committee	must	approve	the	permitted	service	before	the	independent	auditor	is	engaged	to	perform	it.

# Item	15. Exhibits,	Financial	Statement	Schedules	and	Reports	on	Form	8-K.

						(a)	The	following	documents	are	filed	as	a	part	of	this	report:

# 						(1)	Consolidated	Financial	Statements:

10.4(1) Sublease	Agreement	dated	August	1998	between	Registrant	and	Gensia	Sicor	Inc.	for	Illumina's	principal	offices.

10.5(1) Joint	Development	Agreement	dated	November	1999	between	Registrant	and	PE	Corporation	(with	certain	confidential	portions	omitted).

10.6(1) Asset	Purchase	Agreement	dated	November	1998	between	Registrant	and	nGenetics,	Inc.	(with	certain	confidential	portions	omitted).

10.7(1) Asset	Purchase	Agreement	dated	March	2000	between	Registrant	and	Spyder	Instruments,	Inc.	(with	certain	confidential	portions omitted).

10.11(1) Eastgate	Pointe	Lease,	dated	July	6,	2000,	between	Diversified	Eastgate	Venture	and	Registrant.

10.12(1) Option	Agreement	and	Joint	Escrow	Instructions,	dated	July	6,	2000,	between	Diversified	Eastgate	Venture	and	Registrant.

10.13(4) First	Amendment	to	Joint	Development	Agreement	dated	March	27,	2001	between	Registrant	and	PE	Corporation,	now	known	as	Applied Biosystems	Group	(with	certain	confidential	portions	omitted).

	+					Management	contract	or	corporate	plan	or	arrangement

(1) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Registration	Statement	on	Form	S-1	(333-33922)	filed	April	3,	2000,	as	amended.

(2) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2000.

(3) Incorporated	by	reference	to	the	corresponding	exhibit	filed	with	our	Registration	Statement	on	Form	S-8	filed	March	29,	2001.

(4) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Form	10-Q	for	the	quarterly	period	ended	March	31,	2001	filed	May	8,	2001.

(5) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Registration	Statement	on	Form	8-A	(000-30361)	filed	May	14,	2001.

(6) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Form	10-Q	for	the	quarterly	period	ended	June	30,	2001	filed	August	13,	2001.

(7) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	our	Form	10-Q	for	the	quarterly	period	ended	September	30,	2001	filed	November	14,	2001.

(9) Incorporated	by	reference	to	the	same	numbered	exhibit	filed	with	Amendment	No.	1	to	our	Registration	Statement	on	Form	S-3	(333-111496)	filed	March	2,	2004.

						Report	on	Form	8-K	filed	on	October	16,	2003	for	press	release	dated	October	16,	2003	announcing	Illumina,	Inc.'s	financial	results	for	the	three	and	nine	months ended	September	28,	2003.

# Supplemental	Information

						No	Annual	Report	to	stockholders	or	proxy	materials	has	been	sent	to	stockholders	as	of	the	date	of	this	report.	The	Annual	Report	to	stockholders	and	proxy material	will	be	furnished	to	our	stockholders	subsequent	to	the	filing	of	this	report	and	we	will	furnish	such	material	to	the	SEC	at	that	time.

# SIGNATURES

						Pursuant	to	the	requirements	of	the	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	Registrant	has	duly	caused	this	Report	to	be	signed	on	its	behalf by	the	undersigned,	thereunto	duly	authorized,	on	March	12,	2004.

# POWER	OF	ATTORNEY

						KNOW	ALL	PERSONS	BY	THESE	PRESENT,	that	each	person	whose	signature	appears	below	constitutes	and	appoints	Jay	T.	Flatley	and	Timothy	M.	Kish,	and each	or	any	one	of	them,	his	true	and	lawful	attorney-in-fact	and	agent,	with	full	power	of	substitution	and	resubstitution,	for	him	and	in	his	name,	place	and	stead,	in	any and	all	capacities,	to	sign	any	and	all	amendments	to	this	Annual	Report	on	Form	10-K,	and	to	file	the	same,	with	all	exhibits	thereto,	and	other	documents	in	connection therewith,	with	the	Securities	and	Exchange	Commission,	granting	unto	said	attorneys-in-fact	and	agents,	and	each	of	them,	full	power	and	authority	to	do	and	perform each	and	every	act	and	thing	requisite	and	necessary	to	be	done	in	connection	therewith,	as	fully	to	all	intents	and	purposes	as	he	might	or	could	do	in	person,	hereby ratifying	and	confirming	all	that	said	attorneys-in-fact	and	agents,	or	any	of	them,	or	their	or	his	substitutes	or	substitute,	may	lawfully	do	or	cause	to	be	done	by	virtue hereof.

						Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	Annual	Report	on	Form	10-K	has	been	signed	below	by	the	following	persons	on	behalf of	the	registrant	and	in	the	capacities	and	on	the	dates	indicated.

# INDEX	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# REPORT	OF	ERNST	&	YOUNG	LLP,	INDEPENDENT	AUDITORS

# The	Board	of	Directors	and	Stockholders

						We	have	audited	the	accompanying	consolidated	balance	sheets	of	Illumina,	Inc.	as	of	December	28,	2003	and	December	29,	2002,	and	the	related	consolidated statements	of	operations,	stockholders'	equity,	and	cash	flows	for	the	years	ended	December	28,	2003,	December	29,	2002	and	December	30,	2001.	Our	audits	also include	the	financial	statement	schedule	listed	in	the	Index	at	Item	15(a).	These	financial	statements	and	schedule	are	the	responsibility	of	the	Company's	management. Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	and	schedule	based	on	our	audits.

						We	conducted	our	audits	in	accordance	with	auditing	standards	generally	accepted	in	the	United	States.	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,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Illumina,	Inc.	at	December	28, 2003	and	December	29,	2002,	and	the	results	of	its	operations	and	its	cash	flows	for	the	years	ended	December	28,	2003,	December	29,	2002	and	December	30,	2001,	in conformity	with	accounting	principles	generally	accepted	in	the	United	States.	Also,	in	our	opinion,	the	related	financial	statement	schedule,	when	considered	in	relation to	the	basic	consolidated	financial	statements	taken	as	a	whole,	presents	fairly	in	all	material	respects	the	information	set	forth	therein.

# /s/	ERNST	&	YOUNG	LLP

# CONSOLIDATED	BALANCE	SHEETS

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

| Product	revenue | $18,378 | $4,103 | $897 |
| :--- | :--- | :--- | :--- |
| Service\trevenue | 6,496 | 3,305 | 99 |
| Research\trevenue | 3,161 | 2,632 | 1,490 |
| Total\trevenue | 28,035 | 10,040 | 2,486 |
| Costs\tand\texpenses: |  |  |  |
| Cost\tof\tproduct\tand\tservice\trevenue | 10,037 | 3,536 | 557 |
| Research\tand\tdevelopment | 22,511 | 26,848 | 20,735 |
| Selling,\tgeneral\tand\tadministrative | 18,899 | 9,099 | 5,663 |
| Amortization\tof\tdeferred\tcompensation\tand\tother\tstock-based |  |  |  |
| compensation\tcharges | 2,454 | 4,360 | 5,850 |
| Litigation\tjudgment | 756 | 8,052 | — |
| Total\tcosts\tand\texpenses | 54,657 | 51,895 | 32,805 |
| Loss\tfrom\toperations | (26,622) | (41,855) | (30,319) |
| Interest\tincome | 1,821 | 3,805 | 6,198 |
| Interest\texpense | (2,262) | (2,281) | (702) |
| Net\tloss | $(27,063) | $(40,331) | $(24,823) |
| Net\tloss\tper\tshare,\tbasic\tand\tdiluted | $(0.85) | $(1.31) | $(0.83) |
| Shares\tused\tin\tcalculating\tnet\tloss\tper\tshare,\tbasic\tand\tdiluted | 31,925 | 30,890 | 29,748 |
| The\tcomposition\tof\tstock-based\tcompensation\tis\tas\tfollows: |  |  |  |
| Research\tand\tdevelopment | $1,289 | $2,399 | $3,114 |
| Selling,\tgeneral\tand\tadministrative | 1,165 | 1,961 | 2,736 |
|  | $2,454 | $4,360 | $5,850 |

See	accompanying	notes.

# CONSOLIDATED	STATEMENTS	OF	STOCKHOLDERS	EQUITY

|  | Common	stock<br>Shares | Amount | Additional<br>Paid-in<br>Capital | Deferred<br>Compensation | Other<br>Comprehensive<br>Income	(Loss) | Accumulated<br>Deficit | Total<br>Stockholders'<br>Equity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (In\tthousands) |  |  |  |
| Balance\tat\tDecember\t31, |  |  |  |  |  |  |  |
| 2000 | 31,965 | $ 320 | $163,079 | $(14,029) | $— | $(25,270) | $124,100 |
| Issuance\tof\tcommon |  |  |  |  |  |  |  |
| stock\tfor\tcash,\tnet\tof |  |  |  |  |  |  |  |
| repurchased\tshares | 269 | 2 | 913 | — | — | — | 915 |
| Amortization\tof\tdeferred |  |  |  |  |  |  |  |
| compensation | — | — | — | 5,850 | — | — | 5,850 |
| Reversal\tof\tdeferred |  |  |  |  |  |  |  |
| compensation\trelated |  |  |  |  |  |  |  |
| to\tunvested\tstock |  |  |  |  |  |  |  |
| options\tand\trestricted |  |  |  |  |  |  |  |
| stock\tof\tterminated |  |  |  |  |  |  |  |
| employees | — | — | (96) | 96 | — | — | — |
| Comprehensive\tloss: |  |  |  |  |  |  |  |
| Unrealized\tgain\ton |  |  |  |  |  |  |  |
| investments | — | — | — | — | 749 | — | 749 |
| Net\tloss | — | — | — | — | — | (24,823) | (24,823) |
| Comprehensive\tloss | — | — | — | — | — | — | (24,074) |
| Balance\tat\tDecember\t30, |  |  |  |  |  |  |  |
| 2001 | 32,234 | 322 | 163,896 | (8,083) | 749 | (50,093) | 106,791 |
| Issuance\tof\tcommon |  |  |  |  |  |  |  |
| stock\tfor\tcash,\tnet\tof |  |  |  |  |  |  |  |
| repurchased\tshares | 266 | 3 | 693 | — | — | — | 696 |
| Amortization\tof\tdeferred |  |  |  |  |  |  |  |
| compensation | — | — | — | 4,360 | — | — | 4,360 |
| Reversal\tof\tdeferred |  |  |  |  |  |  |  |
| compensation\trelated |  |  |  |  |  |  |  |
| to\tunvested\tstock |  |  |  |  |  |  |  |
| options\tand\trestricted |  |  |  |  |  |  |  |
| stock\tof\tterminated |  |  |  |  |  |  |  |
| employees | — | — | (106) | 106 | — | — | — |
| Comprehensive\tloss: |  |  |  |  |  |  |  |
| Unrealized\tgain\ton |  |  |  |  |  |  |  |
| investments | — | — | — | — | 228 | — | 228 |
| Net\tloss | — | — | — | — | — | (40,331) | (40,331) |
| Comprehensive\tloss | — | — | — | — | — | — | (40,103) |
| Balance\tat\tDecember\t29, |  |  |  |  |  |  |  |
| 2002 | 32,500 | 325 | 164,483 | (3,617) | 977 | (90,424) | 71,744 |
| Issuance\tof\tcommon |  |  |  |  |  |  |  |
| stock\tfor\tcash | 408 | 4 | 899 | — | — | — | 903 |
| Repurchase\tof\trestricted |  |  |  |  |  |  |  |
| common\tstock | (21) | — | (8) | — | — | — | (8) |
| Amortization\tof\tdeferred |  |  |  |  |  |  |  |
| compensation | — | — | 12 | 2,442 | — | — | 2,454 |
| Reversal\tof\tdeferred |  |  |  |  |  |  |  |
| compensation\trelated |  |  |  |  |  |  |  |
| to\tunvested\tstock |  |  |  |  |  |  |  |
| options\tand\trestricted |  |  |  |  |  |  |  |
| stock\tof\tterminated |  |  |  |  |  |  |  |
| employees |  |  |  |  |  |  |  |
|  | — | — | (72) | 72 | — | — | — |
| Comprehensive\tloss: |  |  |  |  |  |  |  |
| Unrealized\tloss\ton |  |  |  |  |  |  |  |
| investments | — | — | — | — | (702) | — | (702) |
| Foreign\tcurrency |  |  |  |  |  |  |  |
| translation\tadjustment | — | — | — | — | 60 | — | 60 |
| Net\tloss | — | — | — | — | — | (27,063) | (27,063) |
| Comprehensive\tloss | — | — | — | — | — | — | (27,705) |
| Balance\tat\tDecember\t28,\n2003 | 32,887 | $ 329 | $165,314 | $(1,103) | $335 | $(117,487) | $47,388 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

| Net	loss | $(27,063) | $(40,331) | $(24,823) |
| :--- | :--- | :--- | :--- |
| Adjustments\tto\treconcile\tnet\tloss\tto\tnet\tcash\tused\tin\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 4,545 | 4,531 | 1,474 |
| Loss\ton\tdisposal\tof\tproperty\tand\tequipment | 175 | — | — |
| Amortization\tof\tpremium\ton\tinvestments | 432 | 609 | 439 |
| Amortization\tof\tdeferred\tcompensation\tand\tother\tstock-based |  |  |  |
| compensation\tcharges | 2,454 | 4,360 | 5,850 |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Accounts\treceivable | (1,296) | (2,878) | (119) |
| Interest\treceivable | 229 | 413 | (215) |
| Inventory | 277 | (1,328) | (900) |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | (221) | (258) | (39) |
| Advance\tpayment\tfrom\tformer\tcollaborator | — | — | 5,000 |
| Other\tassets | (151) | 211 | 166 |
| Accounts\tpayable | 260 | (205) | 1,248 |
| Accrued\tliabilities | 1,742 | 1,262 | 718 |
| Accrued\tlitigation\tjudgment | 606 | 8,052 | — |
| Other\tlong\tterm\tliabilities | (245) | (31) | 276 |
| Net\tcash\tused\tin\toperating\tactivities | (18,256) | (25,593) | (10,925) |
| Cash\tflows\tfrom\tinvesting\tactivities |  |  |  |
| Purchase\tof\tinvestment\tsecurities | (1,940) | (116,568) | (166,762) |
| Sales\tand\tmaturities\tof\tinvestment\tsecurities | 32,456 | 141,551 | 80,068 |
| Purchase\tof\tproperty\tand\tequipment | (2,032) | (26,830) | (14,972) |
| Acquisition\tof\tintangible\tassets | (16) | (794) | — |
| Net\tcash\tprovided\tby\t(used\tin)\tinvesting\tactivities | 28,468 | (2,641) | (101,666) |
| Cash\tflows\tfrom\tfinancing\tactivities |  |  |  |
| Proceeds\tfrom\tlong-term\tdebt | — | 26,000 | — |
| Payments\ton\tlong-term\tdebt | (342) | (293) | — |
| Payments\tof\tequipment\tfinancing | (337) | (297) | (261) |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock,\tnet\tof\trepurchased\tshares | 895 | 696 | 915 |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 216 | 26,106 | 654 |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | 10,428 | (2,128) | (111,937) |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tthe\tyear | 2,037 | 4,165 | 116,102 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tthe\tyear | $12,465 | $2,037 | $4,165 |
| Supplemental\tdisclosures\tof\tcash\tflow\tinformation:\nCash\tpaid\tduring\tthe\tyear\tfor\tinterest | $2,222 | $2,263 | $133 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# 1. Organization	and	Summary	of	Significant	Accounting	Policies

# Organization	and	Business

						Illumina,	Inc.	(the	"Company")	was	incorporated	on	April	28,	1998.	The	Company	is	developing	next-generation	tools	that	will	permit	the	large-scale	analysis	of genetic	variation	and	function.	The	information	provided	by	these	analyses	will	help	to	enable	the	development	of	personalized	medicine,	a	key	goal	of	genomics.	The Company	believes	its	proprietary	BeadArray TM 	technology	will	provide	the	throughput,	cost	effectiveness	and	flexibility	necessary	to	enable	researchers	in	the	life sciences	and	pharmaceutical	industries	to	perform	the	billions	of	tests	necessary	to	extract	medically	valuable	information	from	advances	in	genomics.	This	information is	expected	to	correlate	genetic	variation	and	gene	function	with	particular	disease	states,	enhancing	drug	discovery,	allowing	diseases	to	be	detected	earlier	and	more specifically	and	permitting	better	choices	of	drugs	for	individual	patients.

# Basis	of	Presentation

						The	consolidated	financial	statements	of	the	Company	have	been	prepared	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of America	and	include	the	accounts	of	the	Company	and	its	wholly-owned	subsidiaries.	All	intercompany	transactions	and	balances	have	been	eliminated	in consolidation.

# Use	of	Estimates

						The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	requires	that	management	make	estimates and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial	statements	and	the reported	amount	of	revenue	and	expenses	incurred	during	the	reporting	period.	Actual	results	could	differ	from	those	estimates

# Certain	Risks	and	Uncertainties

						As	further	discussed	in	Note	6,	Applied	Biosystems	sent	a	notification	to	the	Company	alleging	that	the	Company	had	breached	the	joint	development	agreement entered	into	in	November	1999	and	seeking	to	compel	arbitration	pursuant	to	that	agreement.	This	notification	alleged	that	the	Company's	production-scale	genotyping products	and	services	are	collaboration	products	developed	under	the	joint	development	agreement,	and	that	the	Company's	commercial	activities	with	respect	to	its genotyping	products	and	services	are	unlawful,	unfair	or	fraudulent.	Among	other	relief,	Applied	Biosystems	is	seeking	compensatory	damages	of	$30	million, disgorgement	of	all	revenues	received	from	sales	of	these	products	and	services	and	a	prohibition	of	future	sales	of	these	products	or	services.	The	Company	has	been directed	to	enter	into	a	binding	arbitration	with	Applied	Biosystems	to	resolve	the	dispute,	which	could	be	completed	as	early	as	September	2004.	This	arbitration	could result	in	a	range	of	potential	outcomes,	based	solely	on	the	judgment	and	discretion	of	the	arbitrator,	including	(1)	the	award	of	all	damages	and	injunctive	relief	sought by	Applied	Biosystems;	(2)	the	award	of	all	damages	and	relief	sought	by	the	Company;	or	(3)	a	partial	award	of	damages	and/or	injunctive	relief	to	either	party.	The Company	has	not	accrued	for	any	potential	losses	in	this	case	because	it	believes	that	an	adverse	determination	is	not	probable,	and	potential	losses	cannot	be	reasonably estimated.	In	addition,	the	Company's	financial	statements	include	a	$10	million	advance	payment	from	Applied	Biosystems	that	would	have	been	deducted	from	the profits	otherwise	payable	to	the	Company	from	Applied	Biosystems	had	the	collaboration	been	successful	and	which	could	offset	the	impact	on	the	Company's consolidated	results	of	operations	of	an	adverse	arbitration	determination	up	to	that	amount.	However,	any	unfavorable	arbitration	determination,	and	in	particular	any significant	cash	amounts	required	to	be	paid	by	the	Company	or	prohibition	of	the	sale	of	its	products	or	services,

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	—		(Continued)

could	result	in	a	material	adverse	effect	on	the	Company's	business,	financial	condition	and	results	of	operations.

# Cash	and	Cash	Equivalents

						Cash	and	cash	equivalents	are	comprised	of	highly	liquid	investments	with	a	remaining	maturity	of	less	than	three	months	from	the	date	of	purchase.

# Investments

						The	Company	applies	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	115,	Accounting	for	Certain	Investments	in	Debt	and	Equity	Securities,	to	its investments.	Under	SFAS	No.	115,	the	Company	classifies	its	investments	as	"Available-for-Sale"	and	records	such	assets	at	estimated	fair	value	in	the	balance	sheet, with	unrealized	gains	and	losses,	if	any,	reported	in	stockholders'	equity.	The	Company	invests	its	excess	cash	balances	in	marketable	debt	securities,	primarily government	securities	and	corporate	bonds	and	notes,	with	strong	credit	ratings.	The	Company	limits	the	amount	of	investment	exposure	as	to	institutions,	maturity	and investment	type.	The	cost	of	securities	sold	is	determined	based	on	the	specific	identification	method.	Gross	realized	gains	totaled	$342,693	and	$810,201	for	the	years ended	December	28,	2003	and	December	29,	2002,	respectively.	Gross	realized	losses	totaled	$141	and	$27,467	for	the	years	ended	December	28,	2003	and December	29,	2002,	respectively.

# Restricted	Cash	and	Investments

						At	December	28,	2003,	restricted	cash	and	investments	consist	of	$100,000	in	a	money	market	fund	for	a	bond	deposit	with	the	San	Diego	Superior	Court	related	to the	Applied	Biosystems	litigation	(see	note	6).	At	December	29,	2002,	restricted	cash	and	investments	also	included	securities	that	are	used	as	collateral	against	a	letter of	credit	that	have	since	been	classified	as	long	term.

						Long-term	restricted	investments	consist	of	corporate	debt	securities	that	are	used	as	collateral	against	a	letter	of	credit	(see	note	7).

# Fair	Value	of	Financial	Instruments

						Financial	instruments,	including	cash	and	cash	equivalents,	investments,	accounts	receivable,	accounts	payable,	and	accrued	liabilities	are	carried	at	cost,	which management	believes	approximates	fair	value.

# Collectibility	of	Accounts	Receivable

						We	evaluate	the	collectibility	of	our	trade	and	financing	receivables	based	on	a	combination	of	factors.	We	regularly	analyze	our	customer	accounts,	and,	when	we become	aware	of	a	specific	customer's	inability	to	meet	its	financial	obligations	to	us,	we	record	a	specific	reserve	for	bad	debt	to	reduce	the	related	receivable	to	the amount	we	reasonably	believe	is	collectible.	We	also	record	reserves	for	bad	debt	for	all	other	customers	based	on	historical	experience.	We	re-evaluate	such	reserves	on a	regular	basis	and	adjust	our	reserves	as	needed.

# Inventories

						Inventories	are	stated	at	the	lower	of	standard	cost	(which	approximates	actual	cost)	or	market.	Inventory	includes	raw	materials	and	finished	goods	that	may	be used	in	the	research	and	development	process	and	such	items	are	expensed	as	consumed.

# Property	and	Equipment

						Property	and	equipment	are	stated	at	cost,	subject	to	review	of	impairment,	and	depreciated	over	the	estimated	useful	lives	of	the	assets	(generally	three	to	seven years	for	equipment	and	five	to	forty	years	for	buildings)	using	the	straight-line	method.	Amortization	of	leasehold	improvements	is	computed	over	the	shorter	of	the lease	term	or	the	estimated	useful	life	of	the	related	assets.

# License	Agreements

						Intangible	assets	consist	of	three	license	agreements.	In	accordance	with	Accounting	Principles	Board	("APB")	Opinion	No.	17,	Accounting	for	Intangible	Assets, license	agreements	are	recorded	at	cost.	The	rights	related	to	one	of	the	license	agreements	are	amortized	over	its	estimated	useful	life	(five	years)	and	the	rights	related to	the	other	two	agreements	are	amortized	based	on	sales	of	related	product	and	are	expected	to	be	fully	amortized	by	the	end	of	fiscal	2005.	The	cost	of	these	license agreements	was	$809,450	and	the	Company	has	amortized	$193,333	through	December	28,	2003.	Amortization	expense	for	the	years	ending	December	28,	2003	and December	29,	2002	was	$185,000	and	$8,333,	respectively.	The	Company	recorded	no	amortization	expense	related	to	these	license	agreements	in	the	year	ended December	30,	2001.

# Long-Lived	Assets

						In	accordance	with	SFAS	No.	144,	Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets,	if	indicators	of	impairment	exist,	the	Company	assesses	the recoverability	of	the	affected	long-lived	assets	by	determining	whether	the	carrying	value	of	such	assets	can	be	recovered	through	undiscounted	future	operating	cash flows.	If	impairment	is	indicated,	the	Company	measures	the	future	discounted	cash	flows	associated	with	the	use	of	the	asset	and	adjusts	the	value	of	the	asset accordingly.	While	the	Company's	current	and	historical	operating	and	cash	flow	losses	are	indicators	of	impairment,	the	Company	believes	the	future	cash	flows	to	be received	from	the	long-lived	assets	recorded	at	December	28,	2003	will	exceed	the	assets'	carrying	value,	and	accordingly	the	Company	has	not	recognized	any impairment	losses	through	December	28,	2003.

# Reserve	for	Product	Warranties

						The	Company	generally	provides	a	one	year	warranty	on	genotyping	and	gene	expression	systems.	At	the	time	revenue	is	recognized,	the	Company	establishes	an accrual	for	estimated	warranty	expenses	associated	with	system	sales.	This	expense	is	recorded	as	a	component	of	cost	of	revenue.

# Revenue	Recognition

						The	Company	records	revenue	in	accordance	with	the	guidelines	established	by	SEC	Staff	Accounting	Bulletin	No.	101	("SAB	101").	Under	SAB	101,	revenue cannot	be	recorded	until	all	the	following	criteria	are	met:	persuasive	evidence	of	an	arrangement	exists;	delivery	has	occurred	or	services	have	been	rendered;	the seller's	price	to	the	buyer	is	fixed	or	determinable;	and	collectibility	is	reasonably	assured.	Product	revenue	consists	of	sales	of	oligonucleotides,	array	matrices,	assay reagents,	genotyping	systems	and	gene	expression	systems.	Service	revenue	consists	of	revenue	received	for	performing	SNP	genotyping	services.	Revenue	for	product sales	is	recognized	generally	upon	shipment	and	transfer	of	title	to	the	customer,	provided	no	significant	obligations	remain	and	collection	of	the	receivables	is reasonably	assured.	BeadLab	genotyping	system	revenue	is	recognized	when	earned,	which	is	generally	upon	shipment,	installation,	training	and	fulfillment	of contractually	defined	acceptance	criteria.	Reserves	are	provided	for	anticipated	product	warranty	expenses	at	the	time	the	associated	revenue	is	recognized.	Revenue	for genotyping	services	is	recognized	generally	at	the	time	the	genotyping	analysis	data	is	delivered	to	the	customer.	The	Company	has	been	awarded

$9.1	million	from	the	National	Institutes	of	Health	to	perform	genotyping	services	in	connection	with	the	International	HapMap	Project.	A	portion	of	the	revenue	from this	project	is	earned	at	the	time	the	related	costs	are	incurred	while	the	remainder	of	the	revenue	is	earned	upon	the	delivery	of	genotyping	data.	Research	revenue consists	of	amounts	earned	under	research	agreements	with	government	grants,	which	is	recognized	in	the	period	during	which	the	related	costs	are	incurred.	All revenues	are	recognized	net	of	applicable	allowances	for	returns	or	discounts.

						The	Company	received	$10	million	of	non-refundable	research	funding	from	Applied	Biosystems	in	connection	with	a	licensing	and	development	contract	entered into	in	1999.	This	amount	was	originally	recorded	as	deferred	revenue	in	accordance	with	the	provisions	of	SAB	101	and	would	have	been	recognized	as	revenue	at	a contractually	defined	rate	of	25%	of	the	defined	operating	profit	earned	from	sales	of	the	products	covered	by	the	collaboration	agreement,	had	such	sales	occurred.	At present,	the	Company	does	not	believe	a	collaboration	product	will	be	commercialized	under	the	partnership	agreement,	and	there	are	legal	proceedings	between	the parties	as	more	fully	described	in	Note	6.	The	$10	million	of	research	funding	has	been	reclassified	to	an	advance	payment	from	former	collaborator	until	the	legal proceedings	have	been	resolved.

# Shipping	and	Handling	Expenses

						Expenditures	relating	to	research	and	development,	including	costs	related	to	patent	prosecution,	are	expensed	in	the	period	incurred.

# Software	Development	Costs

						The	Company	applies	Statement	of	Financial	Accounting	Standards	No.	86,	Accounting	for	the	Costs	of	Computer	Software	to	be	Sold,	Leased	or	Otherwise Marketed,	to	capitalize	costs	related	to	marketed	software.	To	date,	the	Company	has	only	marketed	software	that	is	an	incidental	component	to	its	SNP	genotyping	and gene	expression	systems.	Accordingly,	the	Company	capitalizes	software	costs	that	are	incurred	after	the	later	of	1)	the	establishment	of	technological	feasibility	of	the software	or	2)	the	completion	of	all	research	and	development	activities	for	the	other	components	of	the	product.	Through	December	28,	2003,	the	period	between achieving	either	of	these	milestones	and	the	general	release	date	of	the	products	has	been	very	brief	and	production	costs	thereafter	were	not	significant.	Accordingly,	the Company	has	not	capitalized	any	qualifying	software	development	costs	in	the	accompanying	consolidated	financial	statements.	The	costs	of	developing	routine enhancements	are	expensed	as	research	and	development	costs	as	incurred	because	of	the	short	time	between	the	determination	of	technological	feasibility	and	the	date of	general	release	of	the	related	products.

						The	Company	applies	Statement	of	Position	("SOP")	No.	98-1,	Accounting	for	the	Costs	of	Computer	Software	Developed	or	Obtained	for	Internal	Use.	For	the years	ended	2003	and	2002,	the	Company	capitalized	approximately	$94,000	and	$833,000,	respectively,	in	costs	incurred	to	acquire	and	develop	software	associated with	the	implementation	of	its	Enterprise	Resource	Planning	and	Laboratory	Information	Management	systems.	These	costs	are	amortized	over	the	estimated	useful	life of	the	software	of	seven	years,	beginning	when	the	software	is	ready	for	its	intended	use.

# Advertising	Costs

# Income	Taxes

						A	deferred	income	tax	asset	or	liability	is	computed	for	the	expected	future	impact	of	differences	between	the	financial	reporting	and	tax	bases	of	assets	and liabilities,	as	well	as	the	expected	future	tax	benefit	to	be	derived	from	tax	loss	and	credit	carryforwards.	Deferred	income	tax	expense	is	generally	the	net	change	during the	year	in	the	deferred	income	tax	asset	or	liability.	Valuation	allowances	are	established	when	realizability	of	deferred	tax	assets	is	uncertain.	The	effect	of	tax	rate changes	is	reflected	in	tax	expense	during	the	period	in	which	such	changes	are	enacted.

# Foreign	Currency	Translation

						The	functional	currencies	of	the	Company's	wholly	owned	subsidiaries	are	their	respective	local	currencies.	Accordingly,	all	balance	sheet	accounts	of	these operations	are	translated	to	U.S.	dollars	using	the	exchange	rates	in	effect	at	the	balance	sheet	date,	and	revenues	and	expenses	are	translated	using	the	average	exchange rates	in	effect	during	the	period.	The	gains	and	losses	from	foreign	currency	translation	of	these	subsidiaries'	financial	statements	are	recorded	directly	as	a	separate component	of	stockholders'	equity	under	the	caption	"Accumulated	other	comprehensive	income."

# Stock-Based	Compensation

						At	December	28,	2003,	the	Company	has	three	stock-based	employee	and	non-employee	director	compensation	plans,	which	are	described	more	fully	in	Note	5.	As permitted	by	SFAS	No.	123,	Accounting	for	Stock-Based	Compensation,	the	Company	accounts	for	common	stock	options	granted,	and	restricted	stock	sold,	to employees,	founders	and	directors	using	the	intrinsic	value	method	and,	thus,	recognizes	no	compensation	expense	for	options	granted,	or	restricted	stock	sold,	with exercise	prices	equal	to	or	greater	than	the	fair	value	of	the	Company's	common	stock	on	the	date	of	the	grant.	The	Company	has	recorded	deferred	stock	compensation related	to	certain	stock	options,	and	restricted	stock,	which	were	granted	prior	to	the	Company's	initial	public	offering	with	exercise	prices	below	estimated	fair	value (see	Note	5),	which	is	being	amortized	on	an	accelerated	amortization	methodology	in	accordance	with	Financial	Accounting	Standards	Board	Interpretation	Number ("FIN")	28.

						Pro	forma	information	regarding	net	loss	is	required	by	SFAS	No.	123	and	has	been	determined	as	if	the	Company	had	accounted	for	its	employee	stock	options and	employee	stock	purchases	under	the	fair	value	method	of	that	statement.	The	fair	value	for	these	options	was	estimated	at	the	dates	of	grant	using	the	fair	value option	pricing	model	(Black	Scholes)	with	the	following	weighted-average	assumptions	for	2003,	2002	and	2001:

|  | Year	Ended<br>December	28,<br>2003 | Year	Ended<br>December	29,<br>2002 | Year	Ended<br>December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\trisk-free\tinterest\trate | 3.03% | 3.73% | 4.65% |
| Expected\tdividend\tyield | 0% | 0% | 0% |
| Weighted\taverage\tvolatility | 103% | 104% | 119% |
| Estimated\tlife\t(in\tyears) | 5 | 5 | 5 |
| Weighted\taverage\tfair\tvalue\tof\toptions\tgranted | $3.31 | $4.39 | $7.51 |

						For	purposes	of	pro	forma	disclosures,	the	estimated	fair	value	of	the	options	is	amortized	to	expense	over	the	vesting	period.	The	Company's	pro	forma	information is	as	follows	(in	thousands	except	per	share	amounts):

|  | Year	Ended<br>December	28,<br>2003 | Year	Ended<br>December	29,<br>2002 | Year	Ended<br>December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
| Net\tloss\tas\treported | $(27,063) | $(40,331) | $(24,823) |
| Add:\tStock-based\tcompensation\texpense\trecorded | 2,454 | 4,360 | 5,850 |
| Less:\tAssumed\tstock\tcompensation\texpense | (8,576) | (8,479) | (7,059) |
| Pro\tforma\tnet\tloss | $(33,185) | $(44,450) | $(26,032) |
| Basic\tand\tDiluted\tnet\tloss\tper\tshare: |  |  |  |
| As\treported | $(0.85) | $(1.31) | $(0.83) |
| Pro\tforma | $(1.04) | $(1.44) | $(0.88) |

						The	pro	forma	effect	on	net	loss	presented	is	not	likely	to	be	representative	of	the	pro	forma	effects	on	reported	net	income	or	loss	in	future	years	because	these amounts	reflect	less	than	five	years	of	vesting.

						Deferred	compensation	for	options	granted,	and	restricted	stock	sold,	to	consultants	has	been	determined	in	accordance	with	SFAS	No.	123	and	Emerging	Issues Task	Force	96-18	as	the	fair	value	of	the	consideration	received	or	the	fair	value	of	the	equity	instruments	issued,	whichever	is	more	reliably	measured.	Deferred	charges for	options	granted,	and	restricted	stock	sold,	to	consultants	are	periodically	remeasured	as	the	underlying	options	vest.

# Comprehensive	Loss

						In	accordance	with	SFAS	No.	130,	Reporting	Comprehensive	Income,	the	Company	has	disclosed	comprehensive	loss	as	a	component	of	stockholders'	equity.

# Net	Loss	per	Share

						Basic	and	diluted	net	loss	per	common	share	are	presented	in	conformity	with	SFAS	No.	128,	Earnings	per	Share,	for	all	periods	presented.	In	accordance	with SFAS	No.	128,	basic	and	net	loss	per	share	is	computed	using	the	weighted-average	number	of	shares	of	common	stock	outstanding	during	the	period,	less	shares subject	to	repurchase.	Diluted	net	loss	per	share	is	typically	computed	using	the	weighted	average	number	of	common	and	dilutive	common	equivalent	shares	from stock	options	using	the	treasury	stock	method.	However,	for	all	periods	presented,	diluted	net	loss	per	share	is	the	same	as	basic	net	loss	per	share	because	the	Company reported	a	net	loss	and	therefore	the	inclusion

of	weighted	average	shares	of	common	stock	issuable	upon	the	exercise	of	stock	options	would	be	antidilutive.

|  | Year	Ended<br>December	28,<br>2003 | Year	Ended<br>December	29,<br>2002 | Year	Ended<br>December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |
| Weighted-average\tshares\toutstanding | 32,733 | 32,390 | 32,136 |
| Less:\tWeighted-average\tshares\tof\tcommon\tstock\tsubject\tto |  |  |  |
| repurchase | (808) | (1,500) | (2,388) |
| Weighted-average\tshares\tused\tin\tcomputing\tnet\tloss\tper\tshare,\nbasic\tand\tdiluted | 31,925 | 30,890 | 29,748 |

# Fiscal	Year

						The	Company's	fiscal	year	is	52	or	53	weeks	ending	the	Sunday	closest	to	December	31.

# Effect	of	New	Accounting	Standards

						In	November	2002,	the	FASB	Emerging	Issues	Task	Force	("EITF")	issued	its	consensus	concerning	Revenue	Arrangements	with	Multiple	Deliverables	("EITF 00-21").	EITF	00-21	addresses	how	to	determine	whether	a	revenue	arrangement	involving	multiple	deliverables	should	be	divided	into	separate	units	of	accounting, and,	if	separation	is	appropriate,	how	the	arrangement	consideration	should	be	measured	and	allocated	to	the	identified	accounting	units.	EITF	00-21	is	effective	for revenue	arrangements	entered	into	in	fiscal	periods	beginning	after	June	15,	2003.	The	adoption	of	EITF	00-21	did	not	have	a	material	impact	on	the	Company's consolidated	financial	statements.

						In	November	2002,	the	FASB	issued	FIN	45,	Guarantor's	Accounting	and	Disclosure	Requirements	for	Guarantees,	Including	Indirect	Guarantees	of	Indebtedness of	Others.	FIN	45	requires	a	liability	to	be	recorded	in	the	guarantor's	balance	sheet	upon	issuance	of	a	guarantee.	In	addition,	FIN	45	requires	disclosures	about	the guarantees	that	an	entity	has	issued,	including	a	reconciliation	of	changes	in	the	entity's	product	warranty	liabilities.	The	initial	recognition	and	initial	measurement provisions	of	FIN	45	are	applicable	on	a	prospective	basis	to	guarantees	issued	or	modified	after	December	31,	2002.	The	disclosure	requirements	of	FIN	45	are effective	for	financial	statements	ending	after	December	15,	2002.	The	adoption	of	FIN	45	did	not	have	a	material	impact	on	the	Company's	consolidated	financial statements.

						In	April	2003,	the	FASB	issued	SFAS	No.	149,	Amendment	of	Statement	133	on	Derivative	Instruments	and	Hedging	Activities.	SFAS	No.	149	amends	and clarifies	accounting	for	derivative	instruments,	including	certain	derivative	instruments	embedded	in	other	contracts,	and	for	hedging	activities	under	SFAS	No.	133. SFAS	No.	149	clarifies	under	what	circumstances	a	contract	with	an	initial	net	investment	meets	the	characteristic	of	a	derivative	as	discussed	in	SFAS	No.	133	and when	a	derivative	contains	a	financing	component	that	warrants	special	reporting	in	the	statement	of	cash	flows.	SFAS	No.	149	is	effective	for	contracts	entered	into	or modified	after	June	30,	2003,	for	hedging	relationships	designated	after	June	30,	2003,	and	to	certain	pre-existing	contracts.	The	adoption	of	SFAS	No.	149	did	not	have a	material	impact	on	the	Company's	consolidated	financial	statements.

						In	May	2003,	the	FASB	issued	SFAS	No.	150,	Accounting	for	Certain	Financial	Instruments	with	Characteristics	of	both	Liabilities	and	Equity.	SFAS	No.	150 affects	the	issuer's	accounting	for	three	types	of	freestanding	financial	instruments;	(a)	mandatorily	redeemable	shares	which	the	issuing	company	is	obligated	to	buy back	in	exchange	for	cash	or	other	assets,	(b)	put	options	and	forward	purchase	contracts	that	do	or	may	require	the	issuer	to	buy	back	some	of	its	shares	in	exchange	for cash	or	other	assets,	and	(c)	obligations	that	can	be	settled	with	shares,	the	monetary	value	of	which	is	fixed,	ties	solely	or	predominantly	to	a	variable	such	as	a	market index,	or	varies	inversely	with	the	value	of	the	issuer's	shares.	SFAS	No.	150	also	requires	disclosures	about	alternative	ways	of	settling	the	instruments	and	the	capital structure	of	entities.	SFAS	No.	150	is	effective	for	all	financial	instruments	entered	into	or	modified	after	May	31,	2003	and	for	all	periods	beginning	after	June	15, 2003.	The	adoption	of	SFAS	150	did	not	have	a	material	impact	on	the	Company's	consolidated	financial	statements.

						In	December	2003,	the	FASB	issued	a	revision	to	FASB	Interpretation	No.	46	("FIN	46R"),	Consolidation	of	Variable	Interest	Entities.	FIN	46R	replaces	FASB Interpretation	No.	46,	Consolidation	of	Variable	Interest	Entities,	which	was	issued	in	January	2003.	FIN	46R	requires	a	variable	interest	entity	to	be	consolidated	by	a company	if	that	company	is	subject	to	a	majority	of	the	risk	of	loss	from	the	variable	interest	entity's	activities	or	entitled	to	receive	a	majority	of	the	entity's	residual returns	or	both.	A	variable	interest	entity	either	(a)	does	not	have	equity	investors	with	voting	rights	or	(b)	has	equity	investors	that	do	not	provide	sufficient	financial resources	to	the	entity	to	support	its	activities.	FIN	46R	is	effective	immediately	for	all	new	variable	interest	entities	created	or	acquired	after	December	31,	2003.	The adoption	of	FIN	46	is	not	expected	to	have	a	material	impact	on	the	Company's	consolidated	financial	statements.

# 2. Balance	Sheet	Account	Details

						Investments,	including	restricted	investments,	consist	of	the	following	(in	thousands):

|  | Amortized<br>Cost | Gross<br>Unrealized<br>Gain | Gross<br>Unrealized<br>Loss | Market<br>Value |
| :--- | :--- | :--- | :--- | :--- |
| US\tTreasury\tsecurities | $6,340 | $253 | $— | $6,593 |
| Corporate\tdebt\tsecurities | 13,480 | 244 | — | 13,724 |
|  | 19,820 | 497 | — | 20,317 |
| Long\tterm\trestricted\tcorporate\tdebt\tsecurities | 12,413 | — | (222) | 12,191 |
| Total | $32,233 | $497 | $(222) | $32,508 |

|  | Amortized<br>Cost | Gross<br>Unrealized<br>Gain | Gross<br>Unrealized<br>Loss | Market<br>Value |
| :--- | :--- | :--- | :--- | :--- |
| US\tTreasury\tsecurities | $9,359 | $113 | $— | $9,472 |
| Corporate\tdebt\tsecurities | 41,328 | 961 | (34) | 42,255 |
|  | 50,687 | 1,074 | (34) | 51,727 |
| Restricted\tcorporate\tdebt\tsecurities | 12,493 | — | (63) | 12,430 |
| Total | $63,180 | $1,074 | $(97) | $64,157 |

						Investment	maturities	at	December	28,	2003	are	as	follows:

|  | Investments | Investments | Total |
| :--- | :--- | :--- | :--- |
| Within\tone\tyear | $3,280 | $— | $3,280 |
| After\tone\tyear\tthrough\tfive\tyears | 14,549 | 12,191 | 26,740 |
| After\tfive\tyears\tthrough\tten\tyears | 685 | — | 685 |
| Mortgage\tbacked\tsecurities | 1,803 | — | 1,803 |
| Total | $20,317 | $12,191 | $32,508 |

						Accounts	receivable	consist	of	the	following	(in	thousands):

|  | December	28,<br>2003 | December	29,<br>2002 |
| :--- | :--- | :--- |
| Accounts\treceivable\tfrom\tproduct\tand\tservice\tsales | $4,388 | $3,076 |
| Accounts\treceivable\tfrom\tgovernment\tgrants | 260 | 263 |
| Other\treceivables | 79 | 59 |
|  | 4,727 | 3,398 |
| Allowance\tfor\tdoubtful\taccounts | (178) | (145) |
| Total | $4,549 | $3,253 |

						Inventory	consists	of	the	following	(in	thousands):

|  | December	28,<br>2003 | December	29,<br>2002 |
| :--- | :--- | :--- |
| Raw\tmaterials | $829 | $1,552 |
| Work\tin\tprocess | 931 | 407 |
| Finished\tgoods | 262 | 340 |
| Total | $2,022 | $2,299 |

						Property	and	equipment	consist	of	the	following	(in	thousands):

|  | December	28,<br>2003 | December	29,<br>2002 |
| :--- | :--- | :--- |
| Land | $10,361 | $10,361 |
| Buildings | 29,479 | 29,477 |
| Leasehold\timprovements | 174 | — |
| Laboratory\tand\tmanufacturing\tequipment | 9,221 | 8,373 |
| Computer\tequipment\tand\tsoftware | 5,130 | 4,599 |
| Furniture\tand\tfixtures | 1,966 | 1,821 |
|  | 56,331 | 54,631 |
| Accumulated\tdepreciation\tand\tamortization | (10,554) | (6,352) |
| Total | $45,777 | $48,279 |

						Accrued	liabilities	consist	of	the	following	(in	thousands):

|  | December	28,<br>2003 | December	29,<br>2002 |
| :--- | :--- | :--- |
| Compensation | $2,608 | $2,156 |
| Professional\tfees | 1,437 | 965 |
| Taxes | 523 | 366 |
| Reserve\tfor\tproduct\twarranties | 230 | — |
| Other | 742 | 311 |
| Total | $5,540 | $3,798 |

# 3. Warranties

						Changes	in	the	Company's	warranty	liability	during	the	year	ended	December	28,	2003	are	as	follows	(in	thousands):

# 4. Commitments	and	Long-term	Debt

# Building	Loan

						In	July	2000,	the	Company	entered	into	a	10-year	lease	to	rent	space	in	two	newly	constructed	buildings	that	are	now	occupied	by	the	Company.	That	lease contained	an	option	to	purchase	the	buildings	together	with	certain	adjacent	land	that	has	been	approved	for	construction	of	an	additional	building.	The	Company exercised	that	option	and	purchased	the	properties	in	January	2002	and	assumed	a	$26	million,	10-year	mortgage	on	the	property	at	a	fixed	interest	rate	of	8.36%.	The Company	is	required	to	make	monthly	payments	of	$208,974	representing	interest	and	principal	through	February	2012	at	which	time	a	balloon	payment	of $21.2	million	will	be	due.

						At	December	28,	2003,	annual	future	minimum	payments	under	the	building	loan	are	as	follows	(in	thousands):

| 2004 | $2,508 |
| :--- | :--- |
| 2005 | 2,508 |
| 2006 | 2,508 |
| 2007 | 2,508 |
| 2008 | 2,508 |
| Thereafter | 28,979 |
| Total\tminimum\tpayments | 41,519 |
| Less\tamount\trepresenting\tinterest | (16,154) |
| Total\tpresent\tvalue\tof\tminimum\tpayments | 25,365 |
| Less\tcurrent\tportion | (366) |
| Non-current\tportion | $24,999 |

# Capital	Leases

						In	April	2000,	the	Company	entered	into	a	$3,000,000	loan	arrangement	to	be	used	at	its	discretion	to	finance	purchases	of	capital	equipment.	The	loan	is	secured by	the	capital	equipment	financed.	As	of	December	28,	2003,	$1,682,318	remains	available	under	this	loan	arrangement.	Cost	and	accumulated	depreciation	of equipment	under	capital	leases	at	December	28,	2003	is	$1,287,789	and	$1,060,278,	respectively.	Depreciation	of	equipment	under	capital	leases	is	included	in depreciation	expense.

						At	December	28,	2003,	annual	future	minimum	rental	payments	under	the	Company's	capital	leases	are	as	follows	(in	thousands):

| 2004 | $263 |
| :--- | :--- |
| Total\tminimum\tpayments\nLess\tamount\trepresenting\tinterest | 263\n(10) |
| Total\tpresent\tvalue\tof\tminimum\tpayments | 253 |
| Less\tcurrent\tportion | (253) |
| Non-current\tportion | $0 |

# Operating	Leases

						The	Company	leases	office	space	under	non-cancelable	operating	leases	that	expire	at	various	times	through	December	2006.	These	leases	contain	renewal	options ranging	from	2	to	3	years.	At

December	28,	2003,	annual	future	minimum	payments	under	these	operating	leases	are	as	follows	(in	thousands):

# 5. Stockholders'	Equity

# Common	stock

						As	of	December	28,	2003,	the	Company	had	32,886,693	shares	of	common	stock	outstanding,	of	which	4,888,500	shares	were	sold	to	employees	and	consultants subject	to	restricted	stock	agreements.	The	restricted	common	shares	vest	in	accordance	with	the	provisions	of	the	agreements,	generally	over	five	years.	All	unvested shares	are	subject	to	repurchase	by	the	Company	at	the	original	purchase	price.	As	of	December	28,	2003,	579,775	shares	of	common	stock	were	subject	to	repurchase.

# Warrants

						In	connection	with	a	lease	financing	facility	in	1998,	the	Company	issued	the	lessor	warrants	to	purchase	43,183	shares	of	common	stock	at	$.926	per	share.	These warrants	were	exercised	in	February	2001.

# Stock	Options

						In	June	2000,	the	Company's	board	of	directors	and	stockholders	adopted	the	2000	Stock	Plan.	The	2000	Stock	Plan	amended	and	restated	the	1998	Incentive	Stock Plan	and	increased	the	shares	reserved	for	issuance	by	4,000,000	shares.	In	addition,	the	2000	Stock	Plan	provides	for	an	automatic	annual	increase	in	the	shares	reserved for	issuance	by	the	lesser	of	5%	of	outstanding	shares	of	the	Company's	common	stock	on	the	last	day	of	the	immediately	preceding	fiscal	year,	1,500,000	shares	or	such lesser	amount	as	determined	by	the	Company's	board	of	directors.

						In	1998,	the	Company	adopted	the	1998	Incentive	Stock	Plan	(the	"Plan")	and	had	reserved	5,750,000	shares	of	common	stock	for	grants	under	the	Plan.	The	Plan provided	for	the	grant	of	incentive	and	nonstatutory	stock	options,	stock	bonuses	and	rights	to	purchase	stock	to	employees,	directors	or	consultants	of	the	Company. The	Plan	provided	that	incentive	stock	options	to	be	granted	only	to	employees	at	no	less	than	the	fair	value	of	the	Company's	common	stock,	as	determined	by	the board	of	directors	at	the	date	of	the	grant.	Options	generally	vest	20%	one	year	from	the	date	of	grant	and	ratably	each	month	thereafter	for	a	period	of	48	months	and expire	ten	years	from	date	of	grant.	In	December	1999,	the	Company	modified	the	plan	to	allow	for	acceleration	of	vesting	in	the	event	of	an	acquisition	or	merger.

						A	summary	of	the	Company's	stock	option	activity	from	December	31,	2000	through	December	28,	2003	follows:

|  | Options | Exercise	Price |
| :--- | :--- | :--- |
| Outstanding\tat\tDecember\t31,\t2000 | 1,507,396 | $8.57 |
| Granted | 2,166,100 | $8.78 |
| Exercised | (163,523) | $0.84 |
| Cancelled | (129,177) | $11.26 |
| Outstanding\tat\tDecember\t30,\t2001 | 3,380,796 | $8.97 |
| Granted | 1,467,500 | $5.62 |
| Exercised | (137,727) | $0.46 |
| Cancelled | (287,788) | $11.81 |
| Outstanding\tat\tDecember\t29,\t2002 | 4,422,781 | $7.94 |
| Granted | 1,241,175 | $3.31 |
| Exercised | (102,590) | $1.25 |
| Cancelled | (331,492) | $8.36 |
| Outstanding\tat\tDecember\t28,\t2003 | 5,229,874 | $6.95 |

						At	December	28,	2003,	options	to	purchase	approximately	1,794,872	shares	were	exercisable	and	5,536,135	shares	remain	available	for	future	grant.

						Following	is	a	further	breakdown	of	the	options	outstanding	as	of	December	28,	2003:

| Range	of<br>Exercise	Prices | Options<br>Outstanding | Weighted<br>Average<br>Remaining<br>Life	in	Years | Weighted<br>Average<br>Exercise	Price | Options<br>Exercisable | Average<br>Exercise	Price<br>of	Options<br>Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
| $0.03\t-\t2.62 | 514,311 | 6.45 | $0.81 | 293,233 | $0.36 |
| $2.75\t-\t2.77 | 569,500 | 9.12 | $2.77 | 92,495 | $2.77 |
| $2.91\t-\t4.09 | 723,857 | 9.28 | $3.74 | 68,732 | $3.72 |
| $4.10\t-\t5.00 | 612,410 | 8.29 | $4.57 | 213,594 | $4.68 |
| $5.25\t-\t5.99 | 837,000 | 7.87 | $5.94 | 156,395 | $5.96 |
| $6.00\t-\t8.30 | 676,344 | 7.79 | $7.28 | 290,480 | $7.39 |
| $8.35\t-\t10.25 | 637,700 | 7.53 | $9.26 | 296,280 | $9.29 |
| $10.30\t-\t16.25 | 290,500 | 7.30 | $12.50 | 157,839 | $12.67 |
| $18.75\t-\t22.56 | 181,500 | 7.02 | $20.52 | 106,440 | $20.51 |
| $30.06\t-\t45.00 | 186,752 | 6.78 | $30.47 | 119,384 | $30.49 |
|  | 5,229,874 |  |  | 1,794,872 |  |

# 2000	Employee	Stock	Purchase	Plan

						In	February	2000,	the	board	of	directors	and	stockholders	adopted	the	2000	Employee	Stock	Purchase	Plan	(the	"Purchase	Plan").	A	total	of	1,458,946	shares	of	the Company's	common	stock	have	been	reserved	for	issuance	under	the	Purchase	Plan.	The	Purchase	Plan	permits	eligible	employees	to	purchase	common	stock	at	a discount,	but	only	through	payroll	deductions,	during	defined	offering

periods.	The	price	at	which	stock	is	purchased	under	the	Purchase	Plan	is	equal	to	85%	of	the	fair	market	value	of	the	common	stock	on	the	first	or	last	day	of	the offering	period,	whichever	is	lower.	The	initial	offering	period	commenced	in	July	2000.	In	addition,	the	Purchase	Plan	provides	for	annual	increases	of	shares	available for	issuance	under	the	Purchase	Plan	beginning	with	fiscal	2001.	304,714,	128,721	and	64,674	shares	were	issued	under	the	2000	Employee	Stock	Purchase	Plan	during fiscal	2003,	2002	and	2001,	respectively.

# Deferred	Stock	Compensation

						Since	the	inception	of	the	Company,	in	connection	with	the	grant	of	certain	stock	options	and	sales	of	restricted	stock	to	employees,	founders	and	directors	through July	25,	2000,	the	Company	has	recorded	deferred	stock	compensation	totaling	approximately	$17.7	million,	representing	the	difference	between	the	exercise	or purchase	price	and	the	fair	value	of	the	Company's	common	stock	as	estimated	by	the	Company's	management	for	financial	reporting	purposes	on	the	date	such	stock options	were	granted	or	restricted	common	stock	was	sold.	Deferred	compensation	is	included	as	a	reduction	of	stockholders'	equity	and	is	being	amortized	to	expense over	the	vesting	period	of	the	options	and	restricted	stock.	During	the	year	ended	December	28,	2003,	the	Company	recorded	amortization	of	deferred	stock compensation	expense	of	approximately	$2.5	million.

# Shares	Reserved	for	Future	Issuance

						At	December	28,	2003,	the	Company	has	reserved	shares	of	common	stock	for	future	issuance	as	follows	(in	thousands):

# Stockholder	Rights	Plan

						On	May	3,	2001,	the	Board	of	Directors	of	the	Company	declared	a	dividend	of	one	preferred	share	purchase	right	(a	"Right")	for	each	outstanding	share	of common	stock	of	the	Company.	The	dividend	was	payable	on	May	14,	2001	(the	"Record	Date")	to	the	stockholders	of	record	on	that	date.	Each	Right	entitles	the registered	holder	to	purchase	from	the	Company	one	unit	consisting	of	one-thousandth	of	a	share	of	its	Series	A	Junior	Participating	Preferred	Stock	at	a	price	of $100	per	unit.	The	Rights	will	be	exercisable	if	a	person	or	group	hereafter	acquires	beneficial	ownership	of	15%	or	more	of	the	outstanding	common	stock	of	the Company	or	announces	an	offer	for	15%	or	more	of	the	outstanding	common	stock.	If	a	person	or	group	acquires	15%	or	more	of	the	outstanding	common	stock	of	the Company,	each	Right	will	entitle	its	holder	to	purchase,	at	the	exercise	price	of	the	right,	a	number	of	shares	of	common	stock	having	a	market	value	of	two	times	the exercise	price	of	the	right.	If	the	Company	is	acquired	in	a	merger	or	other	business	combination	transaction	after	a	person	acquires	15%	or	more	of	the	Company's common	stock,	each	Right	will	entitle	its	holder	to	purchase,	at	the	Right's	then-current	exercise	price,	a	number	of	common	shares	of	the	acquiring	company	which	at the	time	of	such	transaction	have	a	market	value	of	two	times	the	exercise	price	of	the	right.	The	Board	of	Directors	will	be	entitled	to	redeem	the	Rights	at	a	price	of $0.01	per	Right	at	any	time	before	any	such	person	acquires	beneficial	ownership	of	15%	or	more	of	the	outstanding	common	stock.	The	rights	expire	on	May	14,	2011 unless	such	date	is	extended	or	the	rights	are	earlier	redeemed	or	exchanged	by	the	Company.

# 6. Collaborative	Agreements

# Applied	Biosystems	Group	(part	of	Applera	Corporation)

						In	November	1999,	the	Company	entered	into	a	joint	development	agreement	with	Applied	Biosystems	Group	("Applied	Biosystems")	under	which	the	companies would	jointly	develop	a	SNP	genotyping	system	that	would	combine	the	Company's	BeadArray	technology	with	Applied	Biosystems'	assay	chemistry	and	scanner technology.	Under	this	agreement,	the	Company	was	primarily	responsible	for	developing	and	manufacturing	the	arrays	and	Applied	Biosystems	was	primarily responsible	for	developing	and	manufacturing	the	instruments,	SNP	assay	reagents,	and	software	and	for	marketing	the	system	worldwide.	In	conjunction	with	the agreement,	Applied	Biosystems	purchased	1,250,000	shares	of	Series	C	convertible	preferred	stock	at	$4.00	per	share.	In	addition,	Applied	Biosystems	agreed	to provide	the	Company	with	non-refundable	research	and	development	support	of	$10	million,	all	of	which	was	provided	by	December	2001.	Upon	commercialization	of the	system,	the	Company	would	have	received	a	share	of	the	operating	profits	resulting	from	the	sale	of	all	components	of	these	systems.	The	Company	had	originally deferred	recognition	of	revenue	from	the	research	funding	of	$10	million	provided	by	Applied	Biosystems,	and	would	have	recognized	such	amounts	as	revenue	at	a contractually	defined	rate	of	25%	of	the	total	profit	share	the	Company	earned	from	the	sales	of	collaboration	products,	had	such	sales	occurred.	As	of	December	28, 2003	this	amount	has	been	reclassified	to	an	advance	payment	from	former	collaborator.

						In	July	2002,	Applied	Biosystems	indicated	that	the	planned	mid-2002	launch	of	this	genotyping	system	would	be	delayed	a	second	time.	This	delay	was	related	to Applied	Biosystems'	inability	to	optimize	and	multiplex	the	SNP	assay	reagents.	The	Company	does	not	believe	that	Applied	Biosystems	has	any	intention	of continuing	to	develop	a	collaboration	product	with	the	Company,	and	Applied	Biosystems	has	recently	launched	a	competing	product.	As	a	result	of	the	delay	in developing	the	collaboration	product,	the	Company	launched	its	own	production	scale	genotyping	system	in	July	2002	utilizing	the	Company's	arrays	and	an independently	developed	scanner	and	assay	method.

						In	December	2002,	Applied	Biosystems	filed	a	complaint,	then	later	in	March	2003	amended	and	refiled	a	complaint,	for	a	patent	infringement	suit	against	the Company	in	the	federal	court	in	Northern	California	asserting	infringement	of	several	patents	related	to	Applied	Biosystems'	patented	assay	intended	for	use	in	the collaboration.	Applied	Biosystems	seeks	a	judgment	granting	it	damages	for	infringement,	treble	damages	alleging	that	such	infringement	is	willful	and	a	permanent injunction	restraining	the	Company	from	the	alleged	infringement.	The	Company	has	answered	the	complaint,	asserting	various	defenses,	including	that	it	does	not infringe	the	patents	or	that	the	patents	are	invalid,	and	asserting	counterclaims	against	Applied	Biosystems	seeking	declaratory	judgment	relief	related	to	the	patents being	asserted	against	it,	and	seeking	damages	from	Applied	Biosystems	for	its	unfair	and	unlawful	conduct	which	constitutes	attempted	monopolization	in	violation	of the	antitrust	laws.

						Also	in	December	2002,	Applied	Biosystems	sent	a	notification	to	the	Company	alleging	that	the	Company	had	breached	the	joint	development	agreement	entered into	in	November	1999	and	seeking	to	compel	arbitration	pursuant	to	that	agreement.	This	notification	alleged	that	the	Company's	production-scale	genotyping	products and	services	are	collaboration	products	developed	under	the	joint	development	agreement,	and	that	the	Company's	commercial	activities	with	respect	to	its	genotyping products	and	services	are	unlawful,	unfair	or	fraudulent.	Among	other	relief,	Applied	Biosystems	is	seeking	compensatory	damages	of	$30	million,	disgorgement	of	all revenues	received	from	sales	of	these	products	and	services	and	a	prohibition	of	future	sales	of	these	products	or	services.

						In	December	2002,	the	Company	filed	a	suit	alleging	breach	of	contract,	breach	of	the	implied	covenant	of	good	faith	and	fair	dealing,	unfair	competition	and	other allegations	against	Applied

Biosystems	in	San	Diego	Superior	Court,	and	a	motion	for	a	temporary	restraining	order	to	prevent	the	arbitration	of	our	joint	development	agreement	sought	by	Applied Biosystems.	In	December	2003,	the	Company	notified	Applied	Biosystems	that	it	terminated	the	joint	development	agreement.

						In	December	2003,	after	having	granted	temporary	and	preliminary	injunctions	staying	the	arbitration,	the	San	Diego	Superior	Court	directed	Applied	Biosystems and	the	Company	to	resolve	the	contract	dispute	in	a	binding	arbitration	procedure.	While	a	definitive	schedule	has	not	yet	been	set,	the	Company	believes	that	the arbitration	process	could	be	completed	as	early	as	September	2004.	The	Company	will	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	but	the outcome	of	an	arbitration	proceeding	is	inherently	uncertain	and	the	Company	cannot	be	sure	that	it	will	prevail.	This	arbitration	could	result	in	a	range	of	potential outcomes,	based	solely	on	the	judgment	and	discretion	of	the	arbitrator,	including	(1)	the	award	of	all	damages	and	injunctive	relief	sought	by	Applied	Biosystems; (2)	the	award	of	all	damages	and	relief	sought	by	the	Company;	or	(3)	a	partial	award	of	damages	and/or	injunctive	relief	to	either	party.	The	Company	has	not	accrued for	any	potential	losses	in	this	case	because	it	believes	that	an	adverse	determination	is	not	probable,	and	potential	losses	cannot	be	reasonably	estimated.	In	addition,	the Company's	financial	statements	include	a	$10	million	advance	payment	from	Applied	Biosystems	that	would	have	been	deducted	from	the	profits	otherwise	payable	to the	Company	from	Applied	Biosystems	had	the	collaboration	been	successful	and	which	could	offset	the	impact	on	the	Company's	consolidated	results	of	operations	of an	adverse	arbitration	determination	up	to	that	amount.	However,	any	unfavorable	arbitration	determination,	and	in	particular	any	significant	cash	amounts	required	to	be paid	by	the	Company	or	prohibition	of	the	sale	of	its	products	or	services,	could	result	in	a	material	adverse	effect	on	the	Company's	business,	financial	condition	and results	of	operations.

						The	Company	is	in	the	early	stages	of	proceedings	in	the	patent	case.	In	February	2004,	the	federal	district	court	in	Northern	California	ordered	that	the	patent	case be	stayed	pending	completion	of	the	arbitration	process.	The	Company	intends	to	vigorously	defend	against	the	claims	alleged	by	Applied	Biosystems	and	continue	to pursue	its	counterclaims	against	Applied	Biosystems.	However,	the	Company	cannot	be	sure	that	it	will	prevail	in	these	matters.	Any	unfavorable	determination,	and	in particular	any	significant	cash	amounts	required	to	be	paid	by	us	or	prohibition	of	the	sale	of	the	Company's	products	or	services,	could	result	in	a	material	adverse effect	on	its	business,	financial	condition	and	results	of	operations.

# Other	Agreements

						The	Company	is	the	recipient	of	a	grant	from	the	National	Institutes	of	Health	covering	its	participation	in	the	International	HapMap	Project,	which	is	a $100	million,	internationally	funded	successor	project	to	the	Human	Genome	Project	that	will	help	identify	a	map	of	genetic	variations	that	may	be	used	to	perform disease-related	research.	The	Company	could	receive	up	to	$9.1	million	of	funding	for	this	project	which	covers	basic	research	activities,	the	development	of	SNP	assays and	the	genotyping	to	be	performed	on	those	assays.	The	Company	recognized	revenue	under	this	grant	of	$3.7	million	in	2003	and,	as	of	the	end	of	2003,	had approximately	$5.4	million	of	funding	remaining	related	to	this	project	which	is	expected	to	be	received	in	2004,	depending	on	the	actual	amount	of	work	that	is performed	by	the	Company.

						In	June	2002,	the	Company	recorded	a	$7.7	million	charge	to	cover	total	damages	and	estimated	expenses	awarded	by	a	jury	related	to	a	termination-of-employment lawsuit.	The	Company	believes	that	the	termination	was	lawful	in	all	respects	and	that	the	verdict	was	unsupported	by	evidence	presented	at	the	trial.	The	Company plans	to	vigorously	defend	its	position	on	appeal.	A	notice	of

appeal	in	this	case	was	filed	on	October	10,	2002,	and	the	appeal	process	is	ongoing.	During	the	appeal	process,	the	court	requires	the	Company	to	incur	interest	charges on	the	judgment	amount	at	statutory	rates	until	the	case	is	resolved.	For	the	years	ended	December	28,	2003	and	December	29,	2002,	the	Company	recorded	litigation expense	of	$756,000	and	$352,000,	respectively,	for	interest.

						As	a	result	of	the	Company's	decision	to	appeal	the	ruling,	the	Company	filed	a	surety	bond	with	the	court	equal	to	1.5	times	the	judgment	amount	or	approximately $11.3	million.	Under	the	terms	of	the	bond,	the	Company	is	required	to	maintain	a	letter	of	credit	for	90%	of	the	bond	amount	to	secure	the	bond.	Further,	the	Company was	required	to	deposit	approximately	$12.5	million	of	marketable	securities	as	collateral	for	the	letter	of	credit	and	accordingly,	these	funds	will	be	restricted	from	use for	general	corporate	purposes	until	the	appeal	process	is	completed.	If	a	judgment	is	due,	the	Company	expects	payment	will	occur	within	12	to	18	months.	In	2003,	the Company	reclassified	the	restricted	investments	to	long	term	on	the	balance	sheet	along	with	the	accrued	litigation	judgment.

						At	December	28,	2003,	the	Company	has	federal	and	state	tax	net	operating	loss	carryforwards	of	approximately	$69,475,000	and	$27,008,000,	respectively.	The federal	and	state	tax	loss	carryforwards	will	begin	expiring	in	2018	and	2006	respectively,	unless	previously	utilized.	The	Company	also	has	federal	and	state	research and	development	tax	credit	carryforwards	of	approximately	$3,116,000	and	$2,586,000	respectively,	which	will	begin	to	expire	in	2018,	unless	previously	utilized.

						Pursuant	to	Sections	382	and	383	of	the	Internal	Revenue	Code,	annual	use	of	the	Company's	net	operating	loss	and	credit	carryforwards	may	be	limited	in	the event	of	a	cumulative	change	in	ownership	of	more	than	50%	within	a	three	year	period.

						Significant	components	of	the	Company's	deferred	tax	assets	as	of	December	28,	2003	and	December	29,	2002	are	shown	below	(in	thousands).	A	valuation allowance	has	been	established	as	of	December	28,	2003	and	December	29,	2002	to	offset	the	net	deferred	tax	assets	as	realization	of	such	assets	has	not	met	the	"more likely	than	not"	threshold	required	under	FAS	109.

|  | December	28,<br>2003 | December	29,<br>2002 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Net\toperating\tloss\tcarryforwards | $25,869 | $21,222 |
| Research\tand\tdevelopment\tand\tother\tcredit\tcarryforwards | 5,111 | 3,873 |
| Advance\tpayment\tfrom\tformer\tcollaborator | 4,074 | 4,078 |
| Capitalized\tresearch\tand\tdevelopment | 1,348 | — |
| Other | 7,032 | 2,131 |
| Total\tdeferred\ttax\tassets | 43,434 | 31,304 |
| Valuation\tallowance\tfor\tdeferred\ttax\tassets | (43,434) | (31,304) |
| Net\tdeferred\ttaxes | $— | $— |

						Reconciliation	of	the	statutory	federal	income	tax	to	the	Company's	effective	tax:

|  | December	28,<br>2003 | December	29,<br>2002 | December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
| Tax\tat\tfederal\tstatutory\trate | $(9,472) | $(14,116) | $(8,688) |
| State,\tnet\tof\tfederal\tbenefit | (1,434) | (2,115) | (1,138) |
| Research\tand\tdevelopment\tcredits | (1,374) | (1,239) | (1,368) |
| Change\tin\tvaluation\tallowance | 11,893 | 14,241 | 8,604 |
| Permanent\tdifferences | 738 | 1,234 | 1,757 |
| Other | (351) | 1,995 | 833 |
| Provision\tfor\tincome\ttaxes | $— | $— | $— |

# 9. Retirement	Plan

						The	Company	has	a	401(k)	savings	plan	covering	substantially	all	of	its	employees.	Company	contributions	to	the	plan	are	discretionary	and	no	such	contributions were	made	during	the	years	ended	December	28,	2003,	December	29,	2002	and	December	30,	2001.

# 10. Segment	Information	and	Geographic	Data

						The	Company	has	determined	that,	in	accordance	with	SFAS	No.	131,	Disclosures	about	Segments	of	an	Enterprise	and	Related	Information	it	operates	in	one segment	as	it	only	reports	operating	results	on	an	aggregate	basis	to	chief	operating	decision	makers	of	the	Company.	The	Company	had	sales	by	region	as	follows	for	the years	ended	December	28,	2003,	December	29,	2002	and	December	30,	2001	(in	thousands):

|  | December	28,<br>2003 | December	29,<br>2002 | December	30,<br>2001 |
| :--- | :--- | :--- | :--- |
| United\tStates | $13,666 | $8,731 | $2,486 |
| Europe | 5,909 | 1,047 | — |
| Asia | 5,557 | 246 | — |
| Other | 2,903 | 16 | — |
| Total | $28,035 | $10,040 | $2,486 |

						Exclusive	of	revenue	recorded	from	the	National	Institutes	of	Health,	the	Company	had	one	customer	that	provided	approximately	18%	of	total	revenue	in	the	year ended	December	28,	2003,	another	customer	that	contributed	approximately	22%	of	total	revenue	in	the	year	ended	December	29,	2002	and	no	customers	that contributed	10%	or	more	of	revenue	in	the	year	ended	December	30,	2001.	Revenue	from	the	National	Institutes	of	Health	accounted	for	21%,	19%	and	48%	of	total revenue	for	the	years	ended	December	28,	2003,	December	29,	2002	and	December	30,	2001,	respectively.

# 11. Quarterly	Financial	Information	(unaudited)

						The	following	financial	information	reflects	all	normal	recurring	adjustments,	except	as	noted	below,	which	are,	in	the	opinion	of	management,	necessary	for	a	fair statement	of	the	results	of	interim

periods.	Summarized	quarterly	data	for	fiscal	2003	and	2002	are	as	follows	(in	thousands	except	per	share	data):

|  | First	Quarter | Second	Quarter | Third	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| 2003: |  |  |  |  |
| Total\trevenues | $4,276 | $4,769 | $8,249 | $10,741 |
| Total\tcost\tof\trevenue | 1,910 | 2,026 | 2,681 | 3,420 |
| Net\tloss | (8,960) | (8,592) | (5,511) | (4,000) |
| Historical\tnet\tloss\tper\tshare,\tbasic\tand |  |  |  |  |
| diluted | (0.28) | (0.27) | (0.17) | (0.12) |
| 2002: |  |  |  |  |
| Total\trevenues | $1,269 | $1,900 | $2,985 | $3,886 |
| Total\tcost\tof\trevenue | 339 | 596 | 965 | 1,636 |
| Net\tloss | (8,667) | (16,447) | (7,602) | (7,615) |
| Historical\tnet\tloss\tper\tshare,\tbasic\tand |  |  |  |  |
| diluted | (0.28) | (0.54) | (0.24) | (0.24) |

						In	the	second	quarter	of	2002	the	Company	recorded	a	$7.7	million	charge	to	cover	total	damages	and	estimated	expenses	related	to	a	termination-of-employment lawsuit.

# SCHEDULE	II	—	VALUATION	AND	QUALIFYING	ACCOUNTS	AND	RESERVES

# FOR	THE	THREE	YEARS	ENDED	DECEMBER	28,	2003

| Balance	at	December	31,	2000 | $— | $— | $— |
| :--- | :--- | :--- | :--- |
| Charged\tto\texpense | 32 | — | — |
| Balance\tat\tDecember\t30,\t2001 | 32 | — | — |
| Charged\tto\texpense | 115 | 73 | — |
| Utilizations | (2) | — | — |
| Balance\tat\tDecember\t29,\t2002 | 145 | 73 | — |
| Charged\tto\texpense | 118 | 466 | 230 |
| Utilizations | (85) | (73) | — |
| Balance\tat\tDecember\t28,\t2003 | $178 | $466 | $230 |



Question: what was the difference in cumulative total stockholder return percentage for illumina inc . common stock versus the nasdaq pharmaceutical index for the four years end 2003?
Calculation:   illumina_return = 43.81
 nasdaq_composite_return = 51.73
 nasdaq_pharmaceutical_return = 74.57
difference = illumina_return - nasdaq_pharmaceutical_return
answer = difference
Answer: -30.76%