##### Table of Contents



United States

Securities and Exchange Commission


Washington, D.C. 20549

FORM 10-K

[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2003


or

[ ]Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934

For the transition period from

to
.


Commission File Number 0-27316

MOLECULAR DEVICES CORPORATION

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                        
|------------------------------------------------------------------ |  | ---------------------------------------
|DELAWARE                                                           |  | 94-2914362                             
|(State or other jurisdiction of
    Incorporation or organization) |  | (I.R.S. Employer Identification Number)
|1311 ORLEANS DRIVE, SUNNYVALE, CALIFORNIA                          |  | 94089                                  
|(Address of principal executive offices)                           |  | (Zip code)                             

(408) 747-1700

(Registrants telephone number, including
area code)


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

NONE


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

TITLE OF EACH CLASS


COMMON STOCK, $.001 PAR VALUE


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

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

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

The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of June 30,
2003, based upon the last sale price reported for such date on
the Nasdaq National Market, was $110,866,693. *

The number of outstanding shares of the
Registrants Common Stock as of March 5, 2004 was
14,215,003.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the Proxy Statement for
Registrants 2004 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K
Report.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes approximately 7,957,993 shares of common
    stock held by directors, officers and holders of 5% or more of
    the Registrants outstanding Common Stock at June 30,
    2003. 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 the
    management or policies of the Registrant, or that such person is
    controlled by or under common control with the Registrant.



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table of contents


molecular devices corporation

|             |  |                                                                                           |    |  |    | 
|------------ |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|             |  | part I                                                                                    |    |  |    | 
|Item 1.      |  | Business                                                                                  |    |  | 1  | 
|             |  | The Company                                                                               |    |  | 1  | 
|             |  | Industry Background                                                                       |    |  | 1  | 
|             |  | G-Protein Coupled
    Receptors                                                           |    |  | 2  | 
|             |  | Kinases                                                                                   |    |  | 2  | 
|             |  | Ion Channels                                                                              |    |  | 2  | 
|             |  | Our Products                                                                              |    |  | 2  | 
|             |  | Drug Discovery Products                                                                   |    |  | 3  | 
|             |  | Life Sciences Research
    Products                                                       |    |  | 5  | 
|             |  | Other Software and Customer
    Service                                                   |    |  | 7  | 
|             |  | Research and Development                                                                  |    |  | 7  | 
|             |  | Marketing and Customers                                                                   |    |  | 7  | 
|             |  | Manufacturing                                                                             |    |  | 8  | 
|             |  | Patents and Proprietary
    Technologies                                                  |    |  | 8  | 
|             |  | Competition                                                                               |    |  | 8  | 
|             |  | Government Regulation                                                                     |    |  | 9  | 
|             |  | Employees                                                                                 |    |  | 9  | 
|             |  | Business Risks                                                                            |    |  | 9  | 
|Item 2.      |  | Properties                                                                                |    |  | 18 | 
|Item 3.      |  | Legal Proceedings                                                                         |    |  | 19 | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                   |    |  | 19 | 
|             |  | part II                                                                                   |    |  |    | 
|Item 5.      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |    |  | 19 | 
|Item 6.      |  | Selected Consolidated
    Financial Data                                                  |    |  | 20 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |  | 21 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |    |  | 26 | 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                           |    |  | 26 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |  | 26 | 
|Item 9A.     |  | Controls and Procedures                                                                   |    |  | 26 | 
|             |  | part III                                                                                  |    |  |    | 
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                    |    |  | 27 | 
|Item 11.     |  | Executive Compensation                                                                    |    |  | 27 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management                        |    |  | 28 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                        |    |  | 28 | 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                |    |  | 28 | 
|             |  | part IV                                                                                   |    |  |    | 
|Item 15.     |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |    |  | 28 | 
|SIGNATURES   |  |                                                                                           | 31 | 
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1





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##### Table of Contents



1




part I




Item
1.    Business




THE COMPANY

Except for the historical information contained
herein, the following discussion contains
forward-looking statements. For this purpose, any
statements that are not statements of historical fact may be
deemed to be forward-looking statements. Words such as
believes, anticipates,
plans, predicts, expects,
estimates, intends, will,
continue, may, potential,
should and similar expressions are intended to
identify forward-looking statements. There are a number of
important factors that could cause our results to differ
materially from those indicated by these forward-looking
statements, including, among others, those discussed in this
item under Business Risks as well as under
Qualitative and Quantitative Disclosures about Market
Risk and the risks detailed from time to time in the
Companys future SEC reports.


We are a leading supplier of high-performance
bioanalytical measurement systems that accelerate and improve
drug discovery and other life sciences research. Our systems and
consumables enable pharmaceutical and biotechnology companies to
leverage advances in genomics, proteomics and combinatorial
chemistry by facilitating the high-throughput and cost-effective
identification and evaluation of drug candidates. Our solutions
are based on our advanced core technologies that integrate our
expertise in engineering, molecular and cell biology and
chemistry. We enable our customers to improve research
productivity and effectiveness, which ultimately accelerates the
complex process of discovering and developing new drugs.

We were incorporated in California in 1983 and
reincorporated in Delaware in 1995.




INDUSTRY BACKGROUND

Over the past decade, research in the life
sciences has accelerated as funding from major private and
public sources has more than doubled. This increase in research
activity has yielded discoveries that are currently fueling a
revolution in our understanding of human health and disease. One
recent milestone, the sequencing of the human genome, was widely
celebrated not only as an important scientific advance in
itself, but also as a starting point for a much broader
exploration of fundamental biological processes. The genome map
is significant because genes provide the code that cells use to
make proteins, and proteins play a central role in every aspect
of the bodys functioning. Learning which genes code for
various proteins, which proteins are involved in different
biological events, and how these proteins function or
malfunction are all challenges that are now being tackled by
scientists on an unprecedented scale. By better understanding
biology at the level of proteins and cells, researchers hope to
discover the underlying causes of human disease and determine
new ways to treat it.


Because of their critical role in the body,
proteins that malfunction or are present in abnormal quantities
can cause problems that are manifested as diseases. Drugs
typically fight illness by binding to such proteins, known as
targets, and modifying their behavior to reduce
their disease-causing effects. Collectively, all of the drugs
currently on the market are aimed at approximately 400 distinct
protein targets in the human body. The human genome map has
revealed the existence of an additional 3,000-5,000 targets that
may be associated with a variety of diseases. This expansion in
the number of potential drug targets is driving increased
activity in two areas of scientific inquiry, basic life sciences
research and drug discovery.

Understanding the role of proteins in human
health and disease is a goal of basic life sciences research,
which is conducted by a wide variety of pharmaceutical,
biotechnology, academic and other organizations. Once a
proteins role in disease is understood, the task of
finding a drug that acts on the protein and treats the disease
is undertaken primarily by pharmaceutical and biotechnology
companies. These companies typically own libraries
of drug candidates comprising hundreds of thousands, or even
millions, of chemical compounds. In order to determine which
compounds are effective against a particular target, a test must
be developed to detect whether a compound has modified the
behavior of the target, then this test must be repeated for each
compound in the library. In recent years, this
screening process has become industrialized as
companies have invested in automated, high-throughput equipment
to handle the increasing numbers of new targets and compounds.
The type of technology researchers use when they screen drug
candidates depends upon the class of target that they are
investigating.



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2

Drug targets can be grouped into several classes
based on their biological characteristics. The targets in a
particular class tend to share similar behaviors, such as their
ability to bind to small drug molecules. Researchers,
particularly in pharmaceutical companies, tend to focus their
efforts on those classes that are most involved in important
health conditions and most readily modified by drugs. Because
they fulfill these key requirements, three target classes known
as G-protein coupled receptors, kinases and ion channels are the
subject of over 60% of all drug discovery research.




G-PROTEIN COUPLED RECEPTORS

More than half of existing drugs act on G-protein
coupled receptors, or GPCRs, and more than 30% of current
research activity is focused on this target class. Residing on
the surfaces of cells, GPCRs are proteins that are involved in
critical biological processes such as cardiovascular and central
nervous system functioning. Diseases of these systems have been
linked to GPCRs, and GPCRs are also known to play a role in a
variety of other conditions such as diabetes and cancer.
Scientists have identified and characterized over 100 GPCRs.
However, genomic data now suggests that the number of distinct
human GPCRs may be as great as 1,000. This information has
resulted in increased research efforts to characterize the
hundreds of unknown GPCRs and understand their disease
associations.


We offer products that enable a full range of
GPCR-related research, from identifying new GPCRs to screening
drug candidates for GPCR activity. In drug discovery, the most
widely accepted GPCR test involves the detection of a calcium
release that occurs in cells when a GPCR is activated. We were
the pioneer in automating this assay and remain the industry
leader in GPCR screening. We provide customers with complete
instrument and reagent solutions including the Fluorometric
Imaging Plate Reader (FLIPR®), the FlexStation and
proprietary assay kits for performing GPCR analysis.




KINASES

Kinases are enzymes that control many of the
pathways through which cellular signals are conducted. Because
signaling is a key aspect of cell activity, kinases are
centrally involved in a large number of biological processes.
Genomic research indicates that humans have approximately 500
different kinases, and errors in their function can result in
conditions such as cancer, inflammation and diabetes. Kinases,
along with their counterparts phosphatases, account for over 21%
of research activity, and every pharmaceutical company is
currently developing kinase-inhibiting drugs.


We offer solutions for kinase screening that
avoid some of the major drawbacks of other technologies. Many
existing methods for testing kinases involve multiple steps and
require radioactive labels or the production of antibodies, a
time-consuming and expensive process. Our approach uses a
technology called fluorescence polarization (FP) to perform
kinase assays in a single step and without radioactivity or
antibodies. This technique is enabled by our Analyst instrument,
which is the industry standard for FP detection, and our
proprietary IMAP® reagent kits.




ION CHANNELS

Ion channels are proteins that reside on cell
membranes and control the flow of charged atoms through these
membranes. Disorders of the cardiovascular and central nervous
systems, as well as conditions such as diabetes and asthma, have
been linked to ion channels. Additionally, some severe and even
fatal side effects of drugs result from their unintended
interference with ion channel activity. In recent years, the
withdrawal of a number of high-profile drugs from the market due
to their impact on ion channels has dramatically increased the
interest of pharmaceutical companies in testing for this safety
problem early in the development process.


The influence of chemical compounds on the
activity of ion channels is difficult to test. While some
indirect methods are available, the most valuable information is
provided by a direct approach called patch clamping,
which is slow and tedious. To address this problem, we offer
IonWorks HT, an automated patch clamping system that
dramatically increases ion channel assay throughput.




OUR PRODUCTS

We offer a full range of high-performance
bioanalytical systems including specialized screening solutions
for the three major target classes and a variety of
general-purpose research instruments. We group our product
offerings into two categories, Drug Discovery and Life Sciences
Research, to reflect the markets they primarily address. We had
revenues of $115.6 million in 2003, $102.2 million in
2002, and $92.2 million in 2001. Most of our products use
optical technologies




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3

to detect the results of biological tests that
occur in microplates. A microplate is a disposable vessel
comprised of a standardized array of 96, 384 or 1,536 wells that
are similar to small test tubes. This format has been widely
adopted by scientists because it allows many experiments to be
performed in parallel, enhancing the efficiency of research
efforts. In recent years, customers have increasingly sought the
cost and throughput benefits of the higher-density 384 and 1,536
well configurations, a trend that we expect to continue.





DRUG DISCOVERY PRODUCTS

Our Drug Discovery systems, which represented 45%
of our total revenues in 2003 and 2002 and 48% of our total
revenues in 2001, are used to screen large numbers of chemical
compounds to assess their effects on disease targets.


FLIPR System and Reagent/ Assay Kits

Since its introduction in 1995, our FLIPR system
has become the industry standard for GPCR screening. FLIPR
addresses a key market need for automating a common GPCR test
based on the phenomenon of calcium flux. The activation of many
types of GPCRs triggers a release of calcium within the cell, an
event that can be detected using a calcium-sensitive fluorescent
dye. Because this assay requires live cells and produces only a
brief signal, it cannot be performed on standard bioanalytical
instruments. FLIPRs optical and fluidic systems are
specialized for this type of assay, automating the process and
enabling multiple experiments to be performed simultaneously in
microplates. Because of its unique configuration, FLIPR is also
able to perform other complex live cell assays, such as
detecting changes in cellular membrane potential. Our FLIPR
instrumentation is complemented by our FLIPR reagent kits, which
use a proprietary technology to reduce the number of steps
involved in GPCR or membrane potential testing.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FLIPR2. This product is the second
    generation FLIPR instrument. It combines all of the benefits of
    the original FLIPR with new automation capabilities and the
    ability to analyze samples in both 384 well and 96 well
    microplates. FLIPR2 can screen as many as 50,000
    samples daily, and offers optional integrated plate stacker and
    washer accessories that can dramatically reduce the need for
    human intervention during sample processing. In addition, the
    instrument also incorporates interfaces that enable it to
    integrate into automated screening lines.                                                                                                                                                                                                                                                                                                                                                                                          
| 
| | FLIPR3. The third generation FLIPR
    product, FLIPR3 is a more sensitive,
    higher-throughput version of FLIPR2. It also
    incorporates a new detection mode, luminescence, expanding the
    menu of applications that can be performed on the FLIPR platform.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| 
| | FLIPR Assay Kits. This product family includes
    the FLIPR Calcium Kit, the FLIPR Calcium Plus Kit, the FLIPR
    Calcium 3 Kit and the FLIPR Membrane Potential Kit. By
    eliminating a step in the assay protocol, these kits can
    significantly increase throughput, reduce costs and increase
    screening efficiency. The FLIPR Calcium Kit addresses the most
    popular assay performed on the FLIPR system for detecting the
    activation of GPCRs. The FLIPR Calcium Plus Kit and the FLIPR
    Calcium 3 Kit extend the applicability of this assay by allowing
    researchers to test problematic but important targets such as
    chemokines and other small peptides. In addition, these kits
    offer a significant improvement in data quality compared to
    traditional methods. The FLIPR Membrane Potential Kit allows
    researchers to measure changes in the electrical potential
    across live cell membranes, a key indicator of ion channel
    activity.

Analyst® System and Reagent Kits

Our Analyst family of products provides a novel
solution for kinase screening as well as industry-leading
flexibility and throughput for a wide range of other assays.
Instruments in this family feature several different detection
technologies, allowing customers to choose the one that is
optimal for their particular screen. One of these detection
modes, fluorescence polarization (FP), has become popular in
recent years because it enables assays to be performed with
greatly simplified protocols. We were pioneers in developing the
market for FP and we have successfully applied this technology
to the area of kinase screening. Traditionally, tests of kinase
activity have been performed using multi-step protocols that
involve radioactive labels or highly specific antibodies.
Because radioactivity is hazardous and antibody production is
practical for only a small number of kinases, customers have
sought better assays as the popularity of kinase targets has
increased. To address this, we developed IMAP, a simple,
non-radioactive, antibody-free technology that allows accurate
determination of enzyme activity for a wide variety of kinases,
and phosphatases.




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4



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Analyst HT. This instrument features seven
    detection modes and the ability to read 96 and 384 well
    microplates. Analyst HT is compatible with automation equipment
    and performs up to 70,000 tests per day.                                                                                                                                                                                                                                                                                                                      
| 
| | Analyst AD. Designed to complement the Analyst
    HT, this instrument allows researchers to develop tests for
    screening compounds against a target of interest.                                                                                                                                                                                                                                                                                                                                                                         
| 
| | Analyst GT. The next generation of the Analyst
    platform, this system features increased sensitivity, which
    allows it to read 1,536 well microplates. Analyst GT has the
    capacity to screen over 400,000 wells per day.                                                                                                                                                                                                                                                                                                           
| 
| | ScreenStation. This instrument integrates
    the detection capabilities of the Analyst platform with assay
    assembly, providing a highly automated screening system.                                                                                                                                                                                                                                                                                                                                                                    
| 
| | IMAP Assay Kits. A proprietary bead-based
    platform, IMAP allows researchers to determine the activity of
    kinases, phosphatases and phosphodiesterases in a simple,
    non-radioactive format. We currently offer 18 kits that feature
    the most popular kinases for screening. In addition to the kits,
    the IMAP platform is also available to customers through our
    technology access program, which allows researchers to apply
    this extremely flexible technology to a wide variety of protein
    kinase targets.
| 
| | HEFP Assay Kits. This family of kits is
    optimized for use on the Analyst platform and includes the
    STX-1 Assay Kit for measuring the activity of
    serine/threonine kinases, the TKXtra Assay Kit for
    detecting additional kinases and the cAMP Assay Kit for
    measuring an important indicator of cellular signaling.                                                                                                                                                                                                   
| 
| | CatchPoint Assay Kits. This product line
    uses a more sensitive and simpler format than traditional
    methods and includes assay kits for cAMP, cGMP and tyrosine
    kinase.                                                                                                                                                                                                                                                                                                                                                          

IonWorks HT and PatchPlate

In 2002, we launched IonWorks HT, a
first-of-a-kind product for ion channel screening.
Traditionally, the most valuable information on ion channel
activity has been obtained through patch clamping, a
time-consuming, low-throughput method that is best performed by
highly skilled scientists. The few higher-throughput
alternatives that are available use indirect methods to assay
ion channels, an approach that yields less useful data than
patch clamping. IonWorks HT is an automated system that obtains
the same high-quality information from cells as conventional
patch clamping, but at a much faster rate and requiring far less
operator skill. While traditional patch clamping may allow
researchers to test only 5-15 compounds per day, IonWorks HT
operates at speeds of up to 3,000 data points per day. The
system consists of an instrument and a proprietary consumable,
the PatchPlate.


Discovery-1

Discovery-1, our first generation
high-throughput, high-resolution imaging instrument, was
developed by our Universal Imaging Corporation (UIC)
subsidiary. The system comprises instrumentation and a
specialized version of our MetaMorph® software, which
together enable the automated imaging and analysis of individual
cells in microplates. Following the completion of the human
genome map, the acceleration of efforts to study the activity of
proteins within cells and to characterize the many unknown drug
targets has created a need for better ways to visualize cellular
events . Life sciences researchers generally use microscopes to
view activity inside a cell, using software such as MetaMorph to
capture and analyze the images they obtain. However, in a drug
screening environment, greater throughput is required than can
be achieved through traditional microscope studies. Discovery-1
automates the process of acquiring detailed images of individual
cells and allows researchers to do so in the automation-friendly
format of a microplate. The MetaMorph software that is included
in the Discovery-1 system provides efficient and flexible
analysis of the complex images captured by the instrument.


CLIPR System

Our Chemiluminescence Imaging Plate Reader, or
CLIPR, system was introduced in 1999. It satisfies a key demand
from pharmaceutical companies for live cell analysis at an ultra
high-throughput rate using luminescence technology. This allows
customers to perform popular assays, such as those involving
reporter genes, at rates of up to 200,000 wells per day.
CLIPRs applications also include non-cell-based assays
such as SPA, which is among the most frequently




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5

performed tests in the drug discovery market.
These applications complement those of our other Drug Discovery
systems, offering solutions for a wide range of different target
classes.





LIFE SCIENCES RESEARCH PRODUCTS

Our Life Sciences Research products, which
represented 55% of total revenues in 2003 and 2002 and 52% of
total revenues in 2001, encompass our Maxline,
FlexStation, Skatron, Threshold® and MetaMorph product
lines. The Maxline and FlexStation families of products consist
primarily of advanced microplate readers. Microplate readers
have become one of the most fundamental tools used in life
sciences research by addressing the increasing need for the
acquisition and processing of large quantities of biochemical
and biological data. Because of the productivity gains offered
by their multi-sample format, microplates have largely replaced
test tubes and cuvettes for many life sciences applications.


The basic principles of microplate readers are
that light from an appropriate source is directed to a
wavelength selection device, such as a monochromator, and its
intensity is measured either before and after, or just after,
passing through each of the sample wells of a microplate.
Application of a mathematical formula to the light intensity
measurements of each microplate well provides a measure of the
sample present in the well. One type of measurement, known as
optical density, is proportional to the concentration of the
substance that is being measured. Other important types of light
intensity measurement are fluorometry and luminometry, both of
which provide quantitative information comparing the different
samples in a microplate with each other.

Maxline Detection Systems

Our Maxline strategy has been to continue to
introduce new products that include first-of-a-kind features, as
well as to offer varying feature sets and price points to
address different market segments. We have historically focused
on the premium end of the microplate reader market through
offering products with advanced capabilities. Some of the
first-of-a-kind features that we have pioneered include the
first reader and software capable of kinetic analysis, the first
monochromator-based reader that enabled continuous wavelength
selection and the first reader capable of performance comparable
to a spectrophotometer. In each case, we believe that the
innovation helped expand the utility of microplate readers and,
more broadly, the available market for microplate readers. Our
Maxline family currently includes the following primary products:




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | EMax®. This product is aimed at the market
    for traditional microplate readers that do not require kinetic
    capability. We introduced it to provide a reader for customers
    in academia and other customers with restricted capital budgets.                                                                                                                                                                                                                                                              
| 
| | VMax®. This was the first microplate reader
    to offer kinetic read capability and is designed to address the
    needs of biochemists.                                                                                                                                                                                                                                                                                                                                                                          
| 
| | VersaMax. The VersaMax is our low cost
    variable wavelength offering that provides kinetic capability
    and temperature control.                                                                                                                                                                                                                                                                                                                                                                             
| 
| | SpectraMax® 340PC384. This
    product is a visible range microplate spectrophotometer,
    offering tunability and the additional capability of our
    patented PathCheck Sensor technology, which corrects common
    variability problems across wells of microplates.                                                                                                                                                                                                                                         
| 
| | SpectraMax 190. The predecessor to this product
    was the worlds first microplate reader that incorporated a
    monochromator for continuous wavelength selection. Wavelength
    selection provides for enhanced convenience and flexibility in
    assay design. In addition, the SpectraMax 190 also includes our
    patented PathCheck Sensor technology.                                                                                                                                                 
| 
| | SpectraMax Plus384. The SpectraMax
    Plus384 combines the high-throughput of a microplate
    reader with the performance of a cuvette-based spectrophotometer
    as a result of our patented PathCheck Sensor technology. It is
    capable of reading wavelengths as short as 190 nanometers and as
    long as 1,000 nanometers, the equivalent range to a
    spectrophotometer, and is compatible with both 96-well and
    384-well microplates.                                                          
| 
| | Gemini XS. Gemini was the worlds first
    dual-scanning microplate spectrofluorometer. By incorporating
    two scanning monochromators, the Gemini allows the user to
    automatically optimize the instrument setting for the particular
    assay characteristics as well as for every fluorophore that is
    in use today. Gemini also was our first microplate reader
    capable of multi-mode operation, in that the product is capable
    of fluorescence, luminescence and time-resolved fluorescence



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6

|  |                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | measurements. The Gemini XS (Extra Sensitive),
    introduced in 2000, extends the Gemini franchise by
    significantly improving sensitivity and adding well scanning
    capability which allows researchers to perform more complex cell
    based assays.                                                         
| 
| | Gemini EM. The Gemini EM expands the capabilities
    of the Gemini XS through several new features, including the
    ability to read microplates from either the top or the bottom.
    These features expand the menu of applications that can be
    performed on the Gemini platform to include cell-based assays.
| 
| | LMax II and Lmax II384. LMax is
    our first reader to offer customers sensitive luminescence
    detection in a bench-top instrument. In 2003, we introduced a
    new generation of LMax with improved sensitivity and the
    capability to integrate with laboratory robots.                                     
| 
| | SpectraMax M2. This multimode reader features
    both absorbance and fluorescence detection and includes two
    scanning monochrometers and PathCheck Sensor technology.                                                                                                                                             

FlexStation

Our FlexStation system is a benchtop workstation
that integrates liquid handling and detection and has
applications in drug discovery as well as life sciences
research. This product offers flexibility to address a wide
range of research applications by combining both multi-channel,
plate-to-plate fluid transfer and fluorescence measurement in
one system. For drug discovery applications, FlexStation
provides a convenient means of developing assays for later
transfer to higher-throughput screening. For basic and applied
research in life sciences, the flexibility of this system
enables scientists to develop, optimize, and run their assays on
one system with the same small footprint as a standard benchtop
microplate reader. In 2003, we introduced a new generation of
FlexStation comprising two instruments, FlexStation II and
FlexStation II384.


We offer four proprietary reagent kits that are
based on our successful FLIPR assay technology and are optimized
to perform on the FlexStation system. These products are our
FlexStation Calcium Flux Assay Kit, FlexStation Calcium Plus
Assay Kit, FlexStation Calcium 3 Assay Kit and FlexStation
Membrane Potential Assay Kit.

MetaMorph Software

MetaMorph is a suite of software products for the
acquisition and analysis of detailed cellular images. The
software works in tandem with microscope and camera systems to
enable researchers to acquire images of cells and quantify and
analyze the images in a variety of ways. The product family,
developed by our UIC subsidiary, consists of the following
software packages:




|  |                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | MetaMorph. The latest version of UICs
    flagship product is a state-of-the-art software package for
    capturing and analyzing cellular images. MetaMorphs
    functions include control of a wide variety of imaging devices
    as well as a large menu of tools for image processing and
    analysis.
| 
| | MetaFluor®. MetaFluor software allows
    researchers to image and analyze ratiometric indicators of
    intracellular events.                                                                                                                                                                                
| 
| | MetaVue. A lower-cost version of MetaMorph,
    MetaVue is an entry-level product tailored to common imaging
    applications.                                                                                                                                                                               

We sell MetaMorph software either as a
stand-alone product or as part of an integrated system including
a camera, software and peripherals. We are an authorized
reseller of cameras and peripheral equipment for several major
manufacturers, including Nikon and Roper. Additionally, we have
authorized several value-added resellers, who integrate multiple
components to create complete imaging systems, to distribute
MetaMorph.

Skatron

We acquired a line of liquid handling systems,
primarily washers, through our acquisition of Skatron
Instruments AS in 1999. Washers are used to dispense and remove
fluid from microplates and are used as an integral step during
the course of many assays. The Skatron products bring a complete
line of state-of-the-art microplate washers and other related
tools, including cell harvesters, to the Life Sciences Research
product family. These products include a variety of cell and
plate washers that offer 96, 384 and 1536 well dispensing and
washing capabilities.




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7

Threshold System

Our Threshold system is comprised of a detection
instrument and proprietary reagents. Our Threshold system
incorporates a proprietary technology to quantitate a variety of
biomolecules such as DNA, proteins and mRNA rapidly and
accurately. The demand for systems that can quantitate
contaminants in the manufacturing and quality control of
bioengineered products is a result of the growing number of
biopharmaceutical therapeutics both entering clinical trials and
receiving regulatory approval for commercial sale. The Threshold
system emerged from a need by biopharmaceutical companies for
more sensitive and reproducible methods to detect contaminants
in biopharmaceuticals during the manufacturing and quality
control process. The Threshold family of products includes a
workstation, software and consumable reagent kits.





OTHER SOFTWARE AND CUSTOMER SERVICE

All of our instrument products incorporate
internally designed and developed software that is sold as an
integral part of the instrument system. We believe that our
software is an important differentiator for our instrument
products relative to the competition based on its ease-of-use
and advanced data analysis capabilities.


Our service and support offerings include field
service, customer support, applications assistance and training
through an organization of factory-trained and educated service
and application support personnel around the world. We offer
services to our installed base of customers on both a contract
and time and materials basis and we offer a variety of
post-warranty contract options for all our instrument offerings
that customers may purchase. Our installed base provides us with
stable, recurring after-market service and support revenue, as
well as product upgrade and replacement opportunities.




RESEARCH AND DEVELOPMENT

Our research and development team included
106 full time employees as of December 31, 2003. We
have typically invested 16% to 21% of our revenues in research
and development, which has resulted in a strong track record of
technological innovation. 60% of our revenues in 2003 were
derived from products that we introduced in the last three
years. Our research and development expenditures were
approximately $18.7 million in 2003, $18.0 million in
2002 and $15.1 million in 2001.


Our research and development activities are
focused on:



|  |                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | broadening our technology solution, including
    development of new proprietary reagent kits and additional
    solutions for automated cell electrophysiology measurements;
| 
| | providing more sensitive quantitative evaluation
    of biological events;                                                                                                   
| 
| | providing greater throughput capability,
    especially with smaller sample volumes; and                                                                                     
| 
| | developing increasingly sophisticated data
    management and analysis capability.                                                                                           




MARKETING AND CUSTOMERS

Our sales and marketing organization included 164
full time employees in North America, Europe and Japan as of
December 31, 2003. We distribute our products primarily
through direct sales representatives in North America. We have
subsidiaries in the United Kingdom, Germany and Japan
responsible for selling and servicing our products. Our direct
sales effort is supported by a team of service, technical and
applications specialists employed by us. We also sell our
products through international distributors, most of which enter
into distribution agreements with us that provide for exclusive
distribution arrangements and minimum purchase targets. Such
agreements also generally prohibit the distributors from
designing, manufacturing, promoting or selling any products that
are competitive with our products.


Our customers include leading pharmaceutical and
biotechnology companies as well as medical centers,
universities, government research laboratories and other
institutions throughout the world. One customer accounted for
approximately 5% of our total 2003 revenues.

Sales to customers outside the United States
accounted for 39%, 39% and 36% of total revenues in 2003, 2002
and 2001, respectively, and total sales denominated in foreign
currencies accounted for 32%, 31% and 31% of total revenues



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8

in 2003, 2002 and 2001, respectively. We
anticipate that international sales will account for an
increasing percentage of revenues in the future. We expect to
continue expanding our international operations in order to take
advantage of increasing international market opportunities
resulting from worldwide growth in the life sciences industry.





MANUFACTURING

We manufacture our products at our facilities in
Sunnyvale, California and Norway. Both of these facilities are
ISO 9000:2000 certified. We assemble the Discovery-1 system at
our facility in Downingtown, Pennsylvania, which is also ISO
9000:2000 certified. We manufacture our own components where we
believe it adds significant value, but we rely on suppliers for
the manufacture of selected components and subassemblies, which
are manufactured to our specifications. We conduct all final
testing and inspection of our products. We have established a
quality control program, including a set of standard
manufacturing and documentation procedures intended to ensure
that, where required, our products are manufactured to comply
with good manufacturing practices.





PATENTS AND PROPRIETARY TECHNOLOGIES

We protect our proprietary rights from
unauthorized use by third parties to the extent that our
proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. Patents and
other proprietary rights are an essential element of our
business. Our policy is to file patent applications and to
protect technology, inventions and improvements to inventions
that are commercially important to the development of our
business. As of December 31, 2003, we were maintaining 57
U.S. patents and other corresponding foreign patents based on
our discoveries that have been issued or allowed. These patents
expire at various dates between 2004 and 2021. In addition, as
of December 31, 2003, we had 32 patent applications pending
in the United States and had filed several corresponding foreign
patent applications.


We are a party to various license agreements that
give us rights to use certain technologies. We pay royalties to
the parties from which we licensed or acquired the core
technologies.

We also rely on trade secret, employee and
third-party nondisclosure agreements and other protective
measures to protect our intellectual property rights pertaining
to our products and technology.




COMPETITION

The market for bioanalytical instrumentation is
highly competitive, and we expect competition to increase. We
compete for the allocation of customer capital funds with many
other companies marketing capital equipment, including those not
directly competitive with any of our products. Some of our
products also compete directly with similar products from other
companies.


The drug discovery market is also characterized
by intense competition among a number of companies, including
Amersham Biosciences, Applied Biosystems, Axon Instruments,
PerkinElmer and Tecan, that offer, or may in the future offer,
products with performance capabilities generally similar to
those offered by our products. We believe that the primary
competitive factors in the market for our products are
throughput, quantitative accuracy, breadth of applications,
ease-of-use, productivity enhancement, quality, support and
price/performance. We believe that we compete favorably with
respect to these factors.

The life sciences research market is
characterized by intense competition among a number of
companies, including Bio-Tek Instruments, PerkinElmer, Tecan and
Thermo Electron, that offer, or may in the future offer,
products with performance capabilities generally similar to
those offered by our products. We expect that competition is
likely to increase in the future, as several current and
potential competitors have the technological and financial
ability to enter the microplate reader market. Our Maxline
products are generally priced at a premium to other microplate
readers. We compete in the microplate reader market primarily on
the basis of performance and productivity. Many companies,
research institutions and government organizations that might
otherwise be customers for our products employ methods for
bioanalytical analysis that are internally developed.



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9

Many of our competitors have significantly
greater financial, technical, marketing, sales and other
resources than we do. In addition to competing with us with
respect to product sales, these companies and institutions
compete with us in recruiting and retaining highly qualified
scientific and management personnel.




GOVERNMENT REGULATION

In the United States, the development,
manufacturing, distribution, labeling and advertising of
products intended for use in the diagnosis of disease or other
conditions is extensively regulated by the U.S. Food and Drug
Administration, known as the FDA. These products generally
require FDA clearance before they may be marketed, and also are
subject to postmarket manufacturing, reporting and labeling
requirements. With the exception of certain of our Maxline
microplate readers, none of our products is intended for use in
the diagnosis of disease or other conditions, and, therefore,
they are not currently subject to FDA regulation. The Maxline
readers intended for diagnostic uses are the subject of an FDA
marketing clearance. If we were to offer any of our other
products for diagnostic uses, those products would become
subject to FDA regulation.





EMPLOYEES

As of December 31, 2003, we employed 422
persons full time, including 106 in research and
development, 112 in manufacturing, 164 in marketing and
sales and 40 in general administration and finance. Of these
employees, 86 hold Ph.D. or other advanced degrees. None of our
employees is covered by collective bargaining agreements, and we
consider relations with our employees to be good.





BUSINESS RISKS

Our business faces significant risks and the
risks described below may not be the only risks we face.
Additional risks that we do not know of or that we currently
think are immaterial may also impair our business operations. If
any of the events or circumstances described in the following
risks actually occurs, our business, financial condition or
results of operations could be harmed and the trading price of
our common stock could decline.


VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US
TO SELL OUR PRODUCTS AND COLLECT ACCOUNTS RECEIVABLE AND THE
TIMING OF CUSTOMER ORDERS MAY CAUSE FLUCTUATIONS IN OUR
OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

The timing of capital equipment purchases by
customers has been and is expected to continue to be uneven and
difficult to predict. Our products represent major capital
purchases for our customers. The list prices for our instruments
range from $5,000 to $494,500. Accordingly, our customers
generally take a relatively long time to evaluate our products,
and a significant portion of our revenues is typically derived
from sales of a small number of relatively high-priced products.
Purchases are generally made by purchase orders and not
long-term contracts. Delays in receipt of anticipated orders for
our relatively high priced products could lead to substantial
variability from quarter to quarter. Furthermore, we have
historically received purchase orders and made a significant
portion of each quarters product shipments near the end of
the quarter. If that pattern continues, even short delays in the
receipt of orders or shipment of products at the end of a
quarter could have a material adverse affect on results of
operations for that quarter.

We expend significant resources educating and
providing information to our prospective customers regarding the
uses and benefits of our products. Because of the number of
factors influencing the sales process, the period between our
initial contact with a customer and the time when we recognize
revenues from that customer, if ever, varies widely. Our sales
cycles typically range from three to six months, but can be much
longer. During these cycles, we commit substantial resources to
our sales efforts in advance of receiving any revenues, and we
may never receive any revenues from a customer despite our sales
efforts.

The relatively high purchase price for a customer
order contributes to collection delays that result in working
capital volatility. While the terms of our sales orders
generally require payment within 30 days of product
shipment and do not provide return rights, in the past we have
experienced significant collection delays. We cannot predict
whether we will continue to experience similar or more severe
delays.



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10

The capital spending policies of our customers
have a significant effect on the demand for our products. Those
policies are based on a wide variety of factors, including
resources available to make purchases, spending priorities, and
policies regarding capital expenditures during industry
downturns or recessionary periods. Any decrease in capital
spending by our customers resulting from any of these factors
could harm our business.

WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED
IN THE SAME QUARTER AND THEREFORE HAVE LIMITED VISIBILITY OF
FUTURE PRODUCT SHIPMENTS.

Our net sales in any given quarter depend upon a
combination of orders received in that quarter for shipment in
that quarter and shipments from backlog. Our products are
typically shipped within ninety days of purchase order receipt.
As a result, we do not believe that the amount of backlog at any
particular date is indicative of our future level of sales. Our
backlog at the beginning of each quarter does not include all
product sales needed to achieve expected revenues for that
quarter. Consequently, we are dependent on obtaining orders for
products to be shipped in the same quarter that the order is
received. Moreover, customers may reschedule shipments, and
production difficulties could delay shipments. Accordingly, we
have limited visibility of future product shipments, and our
results of operations are subject to significant variability
from quarter to quarter.

MANY OF OUR CURRENT AND POTENTIAL COMPETITORS
HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO, AND INCREASED
COMPETITION COULD IMPAIR SALES OF OUR PRODUCTS.

We operate in a highly competitive industry and
face competition from companies that design, manufacture and
market instruments for use in the life sciences research
industry, from genomic, pharmaceutical, biotechnology and
diagnostic companies and from academic and research institutions
and government or other publicly-funded agencies, both in the
United States and abroad. We may not be able to compete
effectively with all of these competitors. Many of these
companies and institutions have greater financial, engineering,
manufacturing, marketing and customer support resources than we
do. As a result, our competitors may be able to respond more
quickly to new or emerging technologies or market developments
by devoting greater resources to the development, promotion and
sale of products, which could impair sales of our products.
Moreover, there has been significant merger and acquisition
activity among our competitors and potential competitors. These
transactions by our competitors and potential competitors may
provide them with a competitive advantage over us by enabling
them to rapidly expand their product offerings and service
capabilities to meet a broader range of customer needs. Many of
our customers and potential customers are large companies that
require global support and service, which may be easier for our
larger competitors to provide.

We believe that competition within the markets we
serve is primarily driven by the need for innovative products
that address the needs of customers. We attempt to counter
competition by seeking to develop new products and provide
quality products and services that meet customers needs.
We cannot assure you, however, that we will be able to
successfully develop new products or that our existing or new
products and services will adequately meet our customers
needs.

Rapidly changing technology, evolving industry
standards, changes in customer needs, emerging competition and
frequent new product and service introductions characterize the
markets for our products. To remain competitive, we will be
required to develop new products and periodically enhance our
existing products in a timely manner. We are facing increased
competition as new companies entering the market with new
technologies compete, or will compete, with our products and
future products. We cannot assure you that one or more of our
competitors will not succeed in developing or marketing
technologies or products that are more effective or commercially
attractive than our products or future products, or that would
render our technologies and products obsolete or uneconomical.
Our future success will depend in large part on our ability to
maintain a competitive position with respect to our current and
future technologies, which we may not be able to do. In
addition, delays in the launch of our new products may result in
loss of market share due to our customers purchases of
competitors products during any delay.

IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND
ENHANCED PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS.

The life sciences instrumentation market is
characterized by rapid technological change and frequent new
product introductions. In the year ended December 31, 2003,
60% of our revenues were derived from the sale of products that



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11

were introduced in the last three years, and our
future success will depend on our ability to enhance our current
products and to develop and introduce, on a timely basis, new
products that address the evolving needs of our customers. We
may experience difficulties or delays in our development efforts
with respect to new products, and we may not ultimately be
successful in developing or commercializing them, which would
harm our business. Any significant delay in releasing new
systems could cause our revenues to suffer, adversely affect our
reputation, give a competitor a first-to-market advantage or
cause a competitor to achieve greater market share. In addition,
our future success depends on our continued ability to develop
new applications for our existing products. If we are not able
to complete the development of these applications, or if we
experience difficulties or delays, we may lose our current
customers and may not be able to attract new customers, which
could seriously harm our business and our future growth
prospects.


WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND
RESOURCES TO DEVELOP NEW PRODUCTS, AND IF THESE PRODUCTS DO NOT
ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS MAY SUFFER.

We expect to spend a significant amount of time
and resources to develop new products and refine existing
products. In light of the long product development cycles
inherent in our industry, these expenditures will be made well
in advance of the prospect of deriving revenues from the sale of
new products. Our ability to commercially introduce and
successfully market new products is subject to a wide variety of
challenges during this development cycle that could delay
introduction of these products. In addition, since our customers
are not obligated by long-term contracts to purchase our
products, our anticipated product orders may not materialize, or
orders that do materialize may be canceled. As a result, if we
do not achieve market acceptance of new products, our operating
results will suffer. Our products are also generally priced
higher than competitive products, which may impair commercial
acceptance. We cannot predict whether new products that we
expect to introduce will achieve commercial acceptance.

We currently anticipate that our IonWorks product
family will include in the near term our recently launched
IonWorks HT system and an additional IonWorks system based on
technology acquired through the acquisition of Cytion S.A. in
2001. Our IonWorks product family may not achieve significant
commercial acceptance or generate significant revenues within
the time frame that we have anticipated, or at all. Any such
failure would adversely affect our financial performance. In
particular, we recently launched our IonWorks HT system. This
system has not achieved, and may not achieve or maintain,
significant commercial acceptance. The system could fail to
obtain significant commercial acceptance due to general economic
conditions, competitive conditions, customer concerns related to
the price or performance of the IonWorks HT system or other
factors. In addition, we recently completed the process of
transferring the manufacturing technology for the production of
PatchPlates, a component of our IonWorks HT system, from the
former manufacturer to us, and any failure or delay in
manufacturing sufficient commercial quantities of PatchPlates
could adversely affect the ability of the IonWorks HT system to
achieve or maintain significant commercial acceptance. It is
likely that any failure of the IonWorks HT system to achieve
commercial acceptance within the time frame that we have
anticipated would cause us to fail to meet our 2004 revenue
expectations, which would likely cause our stock price to
decline.

The successful commercialization of our IonWorks
product family, as well as the achievement of the benefits of
our 2001 acquisition of Cytion, will depend in part on our
ability to develop new products that include technology acquired
through the acquisition of Cytion, or enhancements thereto, in a
timely and efficient manner. Failure to develop new products in
a timely and efficient manner, or at all, may prevent us from
offering first-to-market products in segments of the
electrophysiology market. As a result, we may lose customers,
and our business and results of operations may be harmed. We
recently completed the closure of the Cytion facility in
Switzerland and are in the process of fully integrating
Cytions technology and operations into operations located
at our other facilities. While we believe that the technology
acquired through the acquisition of Cytion complements our
IonWorks HT system, we may not be able to develop and
commercialize any new products that include technology acquired
through the acquisition of Cytion and are complementary to the
IonWorks HT system. Further, successful product development may
place a significant burden on our existing management and our
internal resources, which could have a material adverse effect
on our business, financial condition and operating results, and
we cannot guarantee you that the full integration of
Cytions operations and technology will ultimately be
successful. Any failure to develop new products that include
technology acquired through the acquisition of Cytion, or
enhancements thereto, in a timely and efficient manner, or at
all, or any failure of such products to achieve



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commercial acceptance within the time frame that
we have anticipated would adversely affect our business and
financial performance.


WE OBTAIN SOME OF THE COMPONENTS AND
SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR A
LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF
ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A
SUBSTANTIAL LOSS OF REVENUES.

We rely on outside vendors to manufacture many
components and subassemblies. Certain components, subassemblies
and services necessary for the manufacture of our systems are
obtained from a sole supplier or limited group of suppliers,
some of which are our competitors. Additional components, such
as optical, electronic and pneumatic devices, are currently
purchased in configurations specific to our requirements and,
together with certain other components, such as computers, are
integrated into our products. We maintain only a limited number
of long-term supply agreements with our suppliers.

Our reliance on a sole or a limited group of
suppliers involves several risks, including the following:



|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
| | we may be unable to obtain an adequate supply of
    required components;                                                             
| 
| | we have reduced control over pricing and the
    timely delivery of components and subassemblies; and                                 
| 
| | our suppliers may be unable to develop
    technologically advanced products to support our growth and
    development of new systems.

Because the manufacturing of certain of these
components and subassemblies involves extremely complex
processes and requires long lead times, we may experience delays
or shortages caused by suppliers. We believe that alternative
sources could be obtained and qualified, if necessary, for most
sole and limited source parts. However, if we were forced to
seek alternative sources of supply or to manufacture such
components or subassemblies internally, we may be forced to
redesign our systems, which could prevent us from shipping our
systems to customers on a timely basis. Some of our suppliers
have relatively limited financial and other resources. Any
inability to obtain adequate deliveries, or any other
circumstance that would restrict our ability to ship our
products, could damage relationships with current and
prospective customers and could harm our business.

For example, we rely upon a single supplier for a
component of the PatchPlate consumable that is part of the
IonWorks HT system. This supplier might not be able to fulfill
our commercial needs, which would require us to seek new
manufacturing arrangements for this component, either by
bringing production of this component in-house or by seeking an
alternative supplier. We currently do not have the capability to
manufacture this component on a commercial scale, and are not
aware of any other supplier that currently has the capability to
supply us with commercial quantities of this component. Any
failure or delay in obtaining sufficient quantities of this
component could adversely affect the ability of the IonWorks HT
system to achieve or maintain significant commercial acceptance,
which would harm our business.

WE MAY ENCOUNTER MANUFACTURING AND ASSEMBLY
PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUES.

We assemble our systems in our manufacturing
facilities located in Sunnyvale, California, Downingtown,
Pennsylvania, and Norway. Our manufacturing and assembly
processes are highly complex and require sophisticated, costly
equipment and specially designed facilities. As a result, any
prolonged disruption in the operations of our manufacturing
facilities could seriously harm our ability to satisfy our
customer order deadlines. If we cannot deliver our systems in a
timely manner, our revenues will likely suffer.

Our product sales depend in part upon
manufacturing yields. We currently have limited manufacturing
capacity and experience variability in manufacturing yields. We
are currently manufacturing high-throughput instruments
in-house, in limited volumes and with largely manual assembly.
If demand for our high-throughput instruments increases, we will
either need to expand our in-house manufacturing capabilities or
outsource to other manufacturers. If we fail to deliver our
products in a timely manner, our relationships with our
customers could be seriously harmed, and our revenues could
decline.



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13

As we develop new products, we must transition
the manufacture of a new product from the development stage to
commercial manufacturing. We cannot predict whether we will be
able to complete these transitions on a timely basis and with
commercially reasonable costs. We cannot assure you that
manufacturing or quality control problems will not arise as we
attempt to scale-up our production for any future new products
or that we can scale-up manufacturing and quality control in a
timely manner or at commercially reasonable costs. If we are
unable to consistently manufacture our products on a timely
basis because of these or other factors, our product sales will
decline.

For example, we decided in 2002 to bring the
production of PatchPlates in-house. We previously relied on
Essen Instruments for the PatchPlate consumable, and Essen has
assisted us in transferring the PatchPlate manufacturing
technology to us. We have purchased from Essen the inventory we
believe is sufficient to meet our needs for PatchPlates until we
commence full scale manufacturing on our own. However, we may
not be successful in achieving full scale manufacturing
capabilities for the PatchPlate consumable in a timely manner or
at all, and any failure or delays in manufacturing sufficient
quantities of PatchPlates could harm our business.

IF WE DELIVER PRODUCTS WITH DEFECTS, OUR
CREDIBILITY WILL BE HARMED AND THE SALES AND MARKET ACCEPTANCE
OF OUR PRODUCTS WILL DECREASE.

Our products are complex and have at times
contained errors, defects and bugs when introduced. If we
deliver products with errors, defects or bugs, our credibility
and the market acceptance and sales of our products would be
harmed. Further, if our products contain errors, defects or
bugs, we may be required to expend significant capital and
resources to alleviate such problems. Defects could also lead to
product liability as a result of product liability lawsuits
against us or against our customers. We have agreed to indemnify
our customers in some circumstances against liability arising
from defects in our products. In the event of a successful
product liability claim, we could be obligated to pay damages
significantly in excess of our product liability insurance
limits.

MOST OF OUR CURRENT AND POTENTIAL CUSTOMERS ARE
FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES AND ARE
SUBJECT TO RISKS FACED BY THOSE INDUSTRIES.

We derive a significant portion of our revenues
from sales to pharmaceutical and biotechnology companies. We
expect that sales to pharmaceutical and biotechnology companies
will continue to be a primary source of revenues for the
foreseeable future. As a result, we are subject to risks and
uncertainties that affect the pharmaceutical and biotechnology
industries, such as availability of capital and reduction and
delays in research and development expenditures by companies in
these industries, pricing pressures as third-party payers
continue challenging the pricing of medical products and
services, government regulation, and the uncertainty resulting
from technological change.

In addition, our future revenues may be adversely
affected by the ongoing consolidation in the pharmaceutical and
biotechnology industries, which would reduce the number of our
potential customers. Furthermore, we cannot assure you that the
pharmaceutical and biotechnology companies that are our
customers will not develop their own competing products or
in-house capabilities.

OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO ENGAGE IN
COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD ALSO
CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING
OUR PRODUCTS.

Third parties may assert infringement or other
intellectual property claims against us. We may have to pay
substantial damages for infringement if it is ultimately
determined that our products infringe a third partys
proprietary rights. Further, any legal action against us could,
in addition to subjecting us to potential liability for damages,
prohibit us from selling our products before we obtain a license
to do so from the party owning the intellectual property, which,
if available at all, may require us to pay substantial
royalties. Even if these claims are without merit, defending a
lawsuit takes significant time, may be expensive and may divert
management attention from other business concerns. There may be
third-party patents that may relate to our technology or
potential products. Any public announcements related to
litigation or interference proceedings initiated or threatened
against us could cause our stock price to decline. We believe
that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If we
become involved in litigation, it could consume a substantial
portion of our managerial and financial resources.



---



##### Table of Contents



14

WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR
ENFORCE OUR PATENTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE,
MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS,
WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.

We rely on patents to protect a large part of our
intellectual property and our competitive position. In order to
protect or enforce our patent rights, we may initiate patent
litigation against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
| | assert claims of infringement;                                                           
| 
| | enforce our patents;                                                                     
| 
| | protect our trade secrets or know-how; or                                                
| 
| | determine the enforceability, scope and validity
    of the proprietary rights of others.

Lawsuits could be expensive, take significant
time and divert managements attention from other business
concerns. They would put our patents at risk of being
invalidated or interpreted narrowly and our patent applications
at risk of not issuing. We may also provoke third parties to
assert claims against us. Patent law relating to the scope of
claims in the technology fields in which we operate is still
evolving and, consequently, patent positions in our industry are
generally uncertain. If initiated, we cannot assure you that we
would prevail in any of these suits or that the damages or other
remedies awarded, if any, would be commercially valuable. During
the course of these suits, there could be public announcements
of the results of hearings, motions and other interim
proceedings or developments in the litigation. If securities
analysts or investors were to perceive any of these results to
be negative, our stock price could decline.

THE RIGHTS WE RELY UPON TO PROTECT OUR
INTELLECTUAL PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE
ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR TECHNOLOGY
AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.

Our success will depend in part on our ability to
obtain commercially valuable patent claims and to protect our
intellectual property. Our patent position is generally
uncertain and involves complex legal and factual questions.
Legal standards relating to the validity and scope of claims in
our technology field are still evolving. Therefore, the degree
of future protection for our proprietary rights is uncertain.

The risks and uncertainties that we face with
respect to our patents and other proprietary rights include the
following:



|  |                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the pending patent applications we have filed or
    to which we have exclusive rights may not result in issued
    patents or may take longer than we expect to result in issued
    patents;
| 
| | the claims of any patents which are issued may
    not provide meaningful protection;                                                                                                         
| 
| | we may not be able to develop additional
    proprietary technologies that are patentable;                                                                                                    
| 
| | the patents licensed or issued to us or our
    customers may not provide a competitive advantage;                                                                                            
| 
| | other companies may challenge patents licensed or
    issued to us or our customers;                                                                                                          
| 
| | patents issued to other companies may harm our
    ability to do business;                                                                                                                    
| 
| | other companies may independently develop similar
    or alternative technologies or duplicate our technologies; and                                                                          
| 
| | other companies may design around technologies we
    have licensed or developed.                                                                                                             

In addition to patents, we rely on a combination
of trade secrets, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual
property rights. Nevertheless, these measures may not be
adequate to safeguard the proprietary technology underlying our
products. If these measures do not protect our rights, third
parties could use our technology, and our ability to compete in
the market would be reduced. In addition, employees, consultants
and others who participate in the development of our products
may breach their agreements with us regarding our intellectual
property, and we may not have adequate remedies for the breach.
We also may not be able to effectively protect our intellectual
property rights in some foreign countries. For a variety of
reasons, we may decide



---



##### Table of Contents



15

not to file for patent, copyright or trademark
protection or prosecute potential infringements of our patents.
We also realize that our trade secrets may become known through
other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors
may design around our proprietary technologies or may
independently develop similar or alternative technologies or
products that are equal or superior to our technology and
products without infringing on any of our intellectual property
rights.


WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.

We expect to experience significant growth in the
number of our employees and customers and the scope of our
operations, including as a result of potential acquisitions.
This growth may continue to place a significant strain on our
management and operations. Our ability to manage this growth
will depend upon our ability to broaden our management team and
our ability to attract, hire and retain skilled employees. Our
success will also depend on the ability of our officers and key
employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer
relationships and to hire, train and manage our employees. Our
future success is heavily dependent upon growth and acceptance
of new products. If we cannot scale our business appropriately
or otherwise adapt to anticipated growth and new product
introductions, a key part of our strategy may not be successful.

WE RELY UPON DISTRIBUTORS FOR PRODUCT SALES AND
SUPPORT OUTSIDE NORTH AMERICA.

In 2003, approximately 8% of our sales were made
through distributors. We often rely upon distributors to provide
customer support to the ultimate end users of our products. As a
result, our success depends on the continued sales and customer
support efforts of our network of distributors. The use of
distributors involves certain risks, including risks that
distributors will not effectively sell or support our products,
that they will be unable to satisfy financial obligations to us
and that they will cease operations. Any reduction, delay or
loss of orders from our significant distributors could harm our
revenues. We also do not currently have distributors in a number
of significant international markets that we have targeted and
will need to establish additional international distribution
relationships. There can be no assurance that we will engage
qualified distributors in a timely manner, and the failure to do
so could have a material adverse affect on our business,
financial condition and results of operations.

IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY
BUSINESSES, PRODUCTS OR TECHNOLOGIES INSTEAD OF DEVELOPING THEM
OURSELVES, WE MAY BE UNABLE TO COMPLETE THESE ACQUISITIONS OR
MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AN ACQUIRED BUSINESS
OR TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER.

Our success depends on our ability to continually
enhance and broaden our product offerings in response to
changing technologies, customer demands and competitive
pressures. To this end, from time to time we have acquired
complementary businesses, products or technologies instead of
developing them ourselves, and we may choose to do so in the
future. For example, we acquired Cytion S.A. in 2001, and in
June 2002, we acquired Universal Imaging Corporation. We do not
know if we will be able to complete any additional acquisitions,
or whether we will be able to successfully integrate any
acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we
acquire could be expensive and time consuming, disrupt our
ongoing business and distract our management, and if we do not
achieve the perceived benefits of any acquisition as rapidly or
to the extent anticipated by financial analysts or investors,
the market price of our common stock could decline. In addition,
in order to finance any acquisitions, we might need to raise
additional funds through public or private equity or debt
financings. In that event, we could be forced to obtain
financing on terms that are not favorable to us and, in the case
of equity financing, that may result in dilution to our
stockholders. If we are unable to integrate any acquired
entities, products or technologies effectively, our business
will suffer. In addition, any impairment of goodwill and
amortization of other intangible assets or charges resulting
from the costs of acquisitions could harm our business and
operating results.

WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM
WOULD IMPAIR OUR ABILITY TO COMPETE.

We are highly dependent on the principal members
of our management, engineering and scientific staff. The loss of
the service of any of these persons could seriously harm our
product development and commercialization efforts. In addition,
research, product development and commercialization will require
additional skilled personnel in areas such as chemistry and
biology, and software and electronic engineering. Our corporate
headquarters are located in Sunnyvale, California,



---



##### Table of Contents



16

where demand for personnel with these skills is
extremely high and is likely to remain high. As a result,
competition for and retention of personnel, particularly for
employees with technical expertise, is intense and the turnover
rate for qualified personnel is high. If we are unable to hire,
train and retain a sufficient number of qualified employees, our
ability to conduct and expand our business could be seriously
reduced. The inability to retain and hire qualified personnel
could also hinder the planned expansion of our business.


WE ARE DEPENDENT ON INTERNATIONAL SALES AND
OPERATIONS, WHICH EXPOSES US TO FOREIGN CURRENCY EXCHANGE RATE,
POLITICAL AND ECONOMIC RISKS.

We maintain facilities in Norway, the United
Kingdom, Germany and Japan, and sales to customers outside the
United States accounted for approximately 39% our revenues in
the 2003. We anticipate that international sales will continue
to account for a significant portion of our revenues.

All of our sales to international distributors
are denominated in U.S. dollars. Most of our direct sales in the
United Kingdom, Germany, France, Canada and Japan are
denominated in local currencies and totaled $37.4 million
(32% of total revenues) in 2003. To the extent that our sales
and operating expenses are denominated in foreign currencies,
our operating results may be adversely affected by changes in
exchange rates. Historically, foreign exchange gains and losses
have been immaterial to our results of operations. However, we
cannot predict whether these gains and losses will continue to
be immaterial, particularly as we increase our direct sales
outside North America. For example, we cannot predict whether
other foreign exchange gains or losses in the future would have
a material effect on our income. Owing to the number of
currencies involved, the substantial volatility of currency
exchange rates, and our constantly changing currency exposures,
we cannot predict the effect of exchange rate fluctuations on
our future operating results. We do not currently engage in
foreign currency hedging transactions, but may do so in the
future.

Our reliance on international sales and
operations exposes us to foreign political and economic risks,
including:



|  |                                                                    
|- | -------------------------------------------------------------------
| | political, social and economic instability;                        
| 
| | trade restrictions and changes in tariffs;                         
| 
| | import and export license requirements and
    restrictions;       
| 
| | difficulties in staffing and managing
    international operations;
| 
| | disruptions in international transport or
    delivery;            
| 
| | difficulties in collecting receivables; and                        
| 
| | potentially adverse tax consequences.                              

If any of these risks materialize, our
international sales could decrease and our foreign operations
could suffer.

OUR OPERATING RESULTS FLUCTUATE AND ANY FAILURE
TO MEET FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES
ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK PRICE.

We have experienced and in the future may
experience a shortfall in revenues or earnings or otherwise fail
to meet public market expectations, which could materially and
adversely affect our business and the market price of our common
stock. Our total revenues and operating results may fluctuate
significantly because of a number of factors, many of which are
outside of our control. These factors include:



|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
| | customer confidence in the economy, evidenced, in
    part, by stock market levels;       
| 
| | changes in the domestic and international
    economic, business and political conditions;
| 
| | economic conditions within the pharmaceutical and
    biotechnology industries;           
| 
| | levels of product and price competition;                                                  
| 
| | the length of our sales cycle and customer buying
    patterns;                           
| 
| | the size and timing of individual transactions;                                           



---



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17



|  |                                                                      
|- | ---------------------------------------------------------------------
| | the timing of new product introductions and
    product enhancements;
| 
| | the mix of products sold;                                            
| 
| | levels of international transactions;                                
| 
| | activities of and acquisitions by competitors;                       
| 
| | the timing of new hires and the allocation of our
    resources;     
| 
| | changes in foreign currency exchange rates; and                      
| 
| | our ability to develop and market new products
    and control costs.

One or more of the foregoing factors may cause
our operating expenses to be disproportionately high during any
given period or may cause our revenues and operating results to
fluctuate significantly. In particular, we typically experience
a decrease in the level of sales in the first calendar quarter
as compared to the fourth quarter of the preceding year because
of budgetary and capital equipment purchasing patterns in the
life sciences industry. Our quarterly operating results have
fluctuated in the past, and we expect they will fluctuate in the
future as a result of many factors, some of which are outside of
our control.

In addition, we manufacture our products based on
forecasted orders rather than on outstanding orders.
Accordingly, our expense levels are based, in part, on expected
future sales, and we generally cannot quickly adjust operating
expenses. For example, research and development and general and
administrative expenses are not directly affected by variations
in revenues. As a result, if sales levels in a particular
quarter do not meet expectations, we may not be able to adjust
operating expenses in a sufficient timeframe to compensate for
the shortfall, and our results of operations for that quarter
may be seriously harmed. Likewise, our manufacturing procedures
may in certain instances create a risk of excess or inadequate
inventory levels if orders do not match forecasts.

Based upon the preceding factors, we may
experience a shortfall in revenues or earnings or otherwise fail
to meet public market expectations, which could materially and
adversely affect our business, financial condition, results of
operations and the market price of our common stock. Because our
revenues and operating results are difficult to predict, we
believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance.

OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE
STOCKHOLDERS TO LOSE A SUBSTANTIAL PART OF THEIR INVESTMENT IN
OUR STOCK.

The stock market in general, and the stock prices
of technology companies in particular, have recently experienced
volatility which has often been unrelated to the operating
performance of any particular company or companies. In the year
ended December 31, 2003, the closing sales price of our
common stock ranged from $10.97 to $20.38. Our stock price could
decline regardless of our actual operating performance, and
stockholders could lose a substantial part of their investment
as a result of industry or market-based fluctuations. In the
past, our stock has traded relatively thinly. If a more active
public market for our stock is not sustained, it may be
difficult for stockholders to resell shares of our common stock.
Because we do not anticipate paying cash dividends on our common
stock for the foreseeable future, stockholders will not be able
to receive a return on their shares unless they sell them.

The market price of our common stock will likely
fluctuate in response to a number of factors, including the
following:



|  |                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | domestic and international economic, business and
    political conditions;                                                                                                                   
| 
| | economic conditions within the pharmaceutical and
    biotechnology industries;                                                                                                               
| 
| | our failure to meet our performance estimates or
    the performance estimates of securities analysts;                                                                                        
| 
| | changes in financial estimates of our revenues
    and operating results by us or securities analysts;                                                                                        
| 
| | changes in buy/sell recommendations by securities
    analysts; and                                                                                                                           
| 
| | the timing of announcements by us or our
    competitors of significant products, contracts or acquisitions
    or publicity regarding actual or potential results or
    performance thereof.



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18

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE
LAW MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE
INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON
STOCK.

Provisions in our certificate of incorporation
and bylaws may have the effect of delaying or preventing an
acquisition, or merger in which we are not the surviving company
or which results in changes in our management. For example, our
certificate of incorporation gives our board of directors the
authority to issue shares of preferred stock and to determine
the price, rights, preferences and privileges and restrictions,
including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of
common stock will be subject to, and may harmed by, the rights
of the holders of any shares of preferred stock that may be
issued in the future. The issuance of preferred stock may delay,
defer or prevent a change in control, as the terms of the
preferred stock that might be issued could potentially prohibit
our consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other
extraordinary corporate transaction without the approval of the
holders of the outstanding shares of preferred stock. The
issuance of preferred stock could also have a dilutive effect on
our stockholders. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law. These provisions may
prohibit large stockholders, in particular those owning 15% or
more of the outstanding voting stock, from consummating a merger
or combination involving us. Further, in October 2001, our Board
of Directors adopted a stockholder rights plan, commonly known
as a poison pill. These provisions described above
and our poison pill could limit the price that investors might
be willing to pay in the future for our common stock.

OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS.

This report contains forward-looking statements
within the meaning of the federal securities laws that relate to
future events or our future financial performance. When used in
this report, you can identify forward-looking statements by
terminology such as anticipates, plans,
predicts, expects,
estimates, intends, will,
continue, may, potential,
should and the negative of these terms or other
comparable terminology. These statements are only predictions.
Our actual results could differ materially from those
anticipated in our forward-looking statements as a result of
many factors, including those set forth above and elsewhere in
this report.

Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Neither we nor any other person assumes
responsibility for the accuracy and completeness of these
statements. We assume no duty to update any of the
forward-looking statements after the date of this report or to
conform these statements to actual results. Accordingly, we
caution readers not to place undue reliance on these statements.

AVAILABLE INFORMATION

We maintain a site on the world wide web at
www.moleculardevices.com, however, information found on our web
site is not incorporated by reference into this report. We make
available free of charge on or through our website our annual
report of Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.




Item 2. Properties

We lease two facilities in Sunnyvale, California
and one facility in Downingtown, Pennsylvania which include
laboratory, manufacturing and administrative space. We also
lease sales and service offices in the United Kingdom, Germany
and



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##### Table of Contents



19

Japan, and a manufacturing facility in Norway. We
believe that our current facilities will be sufficient for our
operations through at least 2003. These properties are described
below:


|                                             |  |           |        |            |  |                                                                        |  |  |                   | 
|-------------------------------------------- |  | --------- | ------ | ---------- |  | ---------------------------------------------------------------------- |  |  | ----------------- | 
|LOCATION                                     |  | OWNERSHIP |        | FACILITIES |  | LEASE EXPIRATION                                                      
|                                            
|                                            
|1311 Orleans Drive
    Sunnyvale, CA 94089   |  |           | Leased |            |  | Approximately 60,000 square feet of office and
    manufacturing space |  |  | October 31, 2007  | 
|1312 Crossman Avenue
    Sunnyvale, CA 94089 |  |           | Leased |            |  | Approximately 54,500 square feet of office and
    manufacturing space |  |  | October 31, 2007  | 
|402 Boot Road
    Downingtown, PA 19335      |  |           | Leased |            |  | Approximately 27,900 square feet of office and
    manufacturing space |  |  | November 15, 2010 | 
|Oslo, Norway                                 |  |           | Leased |            |  | Approximately 17,500 square feet of office and
    manufacturing space |  |  | January 1, 2007   | 
|Wokingham, England                           |  |           | Leased |            |  | Approximately 4,200 square feet of office space                        |  |  | August 20, 2009   | 
|Munich, Germany                              |  |           | Leased |            |  | Approximately 3,500 square feet of office space                        |  |  | October 31, 2006  | 
|Osaka, Japan                                 |  |           | Leased |            |  | Approximately 3,700 square feet of office space                        |  |  | March 31, 2005    | 
|Tokyo, Japan                                 |  |           | Leased |            |  | Approximately 4,300 square feet of office space                        |  |  | June 30, 2005     | 



Item 3.    Legal
Proceedings

On April 16, 2002, Caliper Technologies
Corp. filed a patent infringement lawsuit against us in U.S.
District Court for the Northern District of California alleging
that our IMAP assay kits infringe U.S. patents held by Caliper.
We settled the patent infringement lawsuit with Caliper in
November 2003. In connection with the settlement, we entered
into a nonexclusive license agreement with Caliper pursuant to
which we have agreed to pay Caliper a one-time licensing fee as
well as royalties based on future sales of IMAP products.



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

None.





part II



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

Our common stock is traded on the Nasdaq National
Market under the symbol MDCC.

The prices per share reflected on the table below
represent the range of high and low closing sales prices of the
common stock on the Nasdaq National Market, for the period
indicated.

|               |  |           |       |     |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | --------- | ----- | --- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |           |       |    
|               |  |          
|               |  |          
|               |  | 2003 2002
|               |  | HIGH      |       | LOW |  | HIGH |       | LOW
|               |  |          
|               |  |          
|First Quarter  |  | $         | 17.05 |     |  | $    | 10.97 |     |  | $ | 21.47 |  |  | $ | 17.83 | 
|Second Quarter |  |           | 18.03 |     |  |      | 11.20 |     |  |   | 19.64 |  |  |   | 14.40 | 
|Third Quarter  |  |           | 20.31 |     |  |      | 15.51 |     |  |   | 16.15 |  |  |   | 10.22 | 
|Fourth Quarter |  |           | 20.38 |     |  |      | 17.76 |     |  |   | 19.32 |  |  |   | 10.87 | 

Historically, we have not paid cash dividends on
our common stock and do not intend to pay any cash dividends in
the foreseeable future. The Board of Directors will determine
any future cash dividends. As of March 5, 2004, we had
approximately 164 stockholders of record. On March 5, 2004,
the last sale price reported on the Nasdaq National Market for
our common stock was $18.35 per share.



---



##### Table of Contents



20




Item 6.    Selected
Consolidated Financial Data

The following table sets forth selected
historical financial information for Molecular Devices, certain
portions of which are based on, and should be read in
conjunction with, our audited consolidated financial statements
that are being filed as a part of this report.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

|                                                                 |                                                 |                          |         |        |  |      |         |        |  |      |        |        |  |   |        |        |  |   |        |        | 
|---------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ------- | ------ |  | ---- | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                 |                                                 |                         
|                                                                 |                                                 | YEARS ENDED DECEMBER 31,
|                                                                 |                                                 |                         
|                                                                 |                                                 | 2003                     |         | 2002   |  | 2001 |         | 2000   |  | 1999
|                                                                 |                                                 |                         
|                                                                 |                                                 |                         
|Revenues                                                         |                                                 | $                        | 115,581 |        |  | $    | 102,157 |        |  | $    | 92,231 |        |  | $ | 96,035 |        |  | $ | 71,902 |       
|Cost of revenues                                                 |                                                 |                          | 43,256  |        |  |      | 40,561  |        |  |      | 35,538 |        |  |   | 35,583 |        |  |   | 26,299 |       
|                                                                 |                                                 |                         
|Gross profit                                                     |                                                 |                          | 72,325  |        |  |      | 61,596  |        |  |      | 56,693 |        |  |   | 60,452 |        |  |   | 45,603 |       
|Operating expenses:                                              |                                                 |                          |         |        |  |      |         |        |  |      |        |        |  |   |        |        |  |   |        |       
|                                                                 | Research and development                        |                          |         | 18,679 |  |      |         | 18,002 |  |      |        | 15,105 |  |   |        | 16,796 |  |   |        | 14,150 | 
|                                                                 | Selling, general and administrative             |                          |         | 43,457 |  |      |         | 35,435 |  |      |        | 33,381 |  |   |        | 31,906 |  |   |        | 25,630 | 
|                                                                 | Acquired in-process research and development(1) |                          |         |       |  |      |         |       |  |      |        | 12,625 |  |   |        |       |  |   |        | 2,037  | 
|                                                                 | Merger expenses(1)                              |                          |         |       |  |      |         |       |  |      |        |       |  |   |        | 15,181 |  |   |        |       | 
|                                                                 |                                                 |                         
|Total operating expenses                                         |                                                 |                          | 62,136  |        |  |      | 53,437  |        |  |      | 61,111 |        |  |   | 63,883 |        |  |   | 41,817 |       
|                                                                 |                                                 |                         
|Income (loss) from operations(1)                                 |                                                 |                          | 10,189  |        |  |      | 8,159   |        |  |      | (4,418 | )      |  |   | (3,431 | )      |  |   | 3,786  |       
|Other income, net                                                |                                                 |                          | 872     |        |  |      | 1,562   |        |  |      | 3,806  |        |  |   | 4,912  |        |  |   | 1,921  |       
|                                                                 |                                                 |                         
|Income (loss) before income taxes                                |                                                 |                          | 11,061  |        |  |      | 9,721   |        |  |      | (612   | )      |  |   | 1,481  |        |  |   | 5,707  |       
|Income tax provision                                             |                                                 |                          | 3,319   |        |  |      | 2,916   |        |  |      | 4,625  |        |  |   | 6,415  |        |  |   | 2,056  |       
|                                                                 |                                                 |                         
|Net income (loss)                                                |                                                 | $                        | 7,742   |        |  | $    | 6,805   |        |  | $    | (5,237 | )      |  | $ | (4,934 | )      |  | $ | 3,651  |       
|                                                                 |                                                 |                         
|Basic net income (loss) per share                                |                                                 | $                        | 0.51    |        |  | $    | 0.44    |        |  | $    | (0.32  | )      |  | $ | (0.32  | )      |  | $ | 0.27   |       
|                                                                 |                                                 |                         
|Diluted net income (loss) per share                              |                                                 | $                        | 0.51    |        |  | $    | 0.44    |        |  | $    | (0.32  | )      |  | $ | (0.32  | )      |  | $ | 0.26   |       
|                                                                 |                                                 |                         
|Shares used in computing basic net income
    (loss) per share   |                                                 |                          | 15,067  |        |  |      | 15,348  |        |  |      | 16,192 |        |  |   | 15,246 |        |  |   | 13,347 |       
|                                                                 |                                                 |                         
|Shares used in computing diluted net income
    (loss) per share |                                                 |                          | 15,179  |        |  |      | 15,457  |        |  |      | 16,192 |        |  |   | 15,246 |        |  |   | 14,149 |       
|                                                                 |                                                 |                         

CONSOLIDATED BALANCE SHEET DATA:

|                                                               |  |                    |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        | 
|-------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                               |  |                   
|                                                               |  | AS OF DECEMBER 31,
|                                                               |  |                   
|                                                               |  | 2003               |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                               |  |                   
|                                                               |  |                   
|Cash, cash equivalents and short and long-term
    investments |  | $                  | 60,110  |      |  | $    | 53,783  |      |  | $    | 67,257  |   |  | $ | 97,091  |   |  | $ | 36,650 | 
|Working capital                                                |  |                    | 87,305  |      |  |      | 84,851  |      |  |      | 99,422  |   |  |   | 138,184 |   |  |   | 65,748 | 
|Total assets                                                   |  |                    | 166,913 |      |  |      | 162,901 |      |  |      | 152,361 |   |  |   | 180,033 |   |  |   | 86,849 | 
|Retained earnings (accumulated deficit)                        |  |                    | (26,106 | )    |  |      | (33,848 | )    |  |      | (40,653 | ) |  |   | (4,833  | ) |  |   | 101    | 
|Total stockholders equity                                     |  |                    | 145,538 |      |  |      | 142,804 |      |  |      | 137,485 |   |  |   | 163,633 |   |  |   | 74,304 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our 2001 loss from operations included a
    $12.6 million write-off for the acquisition of in-process
    research and development costs relating to our acquisition of
    Cytion S.A. Our 2000 loss from operations included a
    $15.2 million charge related to direct costs incurred due
    to the merger with LJL BioSystems, which was accounted for as a
    pooling of interests. Our 1999 income from operations included a
    $2.0 million write-off for the acquisition of in-process
    research and development costs relating to our acquisition of
    Skatron Instruments AS.



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21



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

OVERVIEW

Except for the historical information contained
herein, the following discussion contains
forward-looking statements. For this purpose, any
statements that are not statements of historical fact may be
deemed to be forward-looking statements. Words such as
believes, anticipates,
plans, predicts, expects,
estimates, intends, will,
continue, may, potential,
should and similar expressions are intended to
identify forward-looking statements. There are a number of
important factors that could cause our results to differ
materially from those indicated by these forward-looking
statements, including, among others, those discussed in this
section as well as under Item I.
BusinessBusiness Risks and
Item 7Qualitative and Quantitative Disclosures
about Market Risk and the risks detailed from time to time
in the Companys future SEC reports.


We are a leading supplier of high-performance
bioanalytical measurement systems which accelerate and improve
drug discovery and other life sciences research. Our systems and
consumables enable pharmaceutical and biotechnology companies to
leverage advances in genomics, proteomics and combinatorial
chemistry by facilitating the high-throughput and cost-effective
identification and evaluation of drug candidates. Our solutions
are based on advanced core technologies that integrate our
expertise in engineering, molecular and cell biology, and
chemistry. We enable our customers to improve research
productivity and effectiveness, which ultimately accelerates the
complex process of discovering and developing new drugs.

Our customers include small and large
pharmaceutical, biotechnology and industrial companies as well
as medical centers, universities, government research
laboratories and other institutions throughout the world. The
success of our business is impacted by research and development
spending trends of these customers, which has been unpredictable
over the last three years and remains unpredictable in the near
term. We focus on generating revenue growth through the
development of innovative products for these customers. In each
of the last three years, our internal research and development
efforts have enabled us to exceed our goal of generating over
50% of annual revenues from products that are introduced in the
last three years.

We divide our revenues into two product families
based primarily on the customers to which they are sold into.
The Drug Discovery product family includes systems that
integrate detection, liquid handling and automation, have price
points in excess of $100,000, and are primarily sold to large
pharmaceutical and biotechnology companies. Product lines
included in the Drug Discovery family are IonWorks, FLIPR,
Analyst and Discovery-1 systems. The Life Sciences product
family, which includes bench-top detection and liquid handling
products, consists of Maxline, MetaMorph, Skatron and Threshold
product lines. These single-purpose instruments generally cost
less than $50,000 and are sold throughout our entire customer
base. We recognize revenue on the sale of these products, when
collectibility is reasonably assured, at the time of shipment
and transfer of title to customers and distributors. There are
no significant customer acceptance requirements or post shipment
obligations on our part.

In June 2002, we acquired Universal Imaging
Corporation, a developer and distributor of cellular imaging
software and drug discovery tools. As a result, our 2003
operating results include five additional months of UIC revenues
and expenses not present in our 2002 results.

CRITICAL ACCOUNTING ESTIMATES

Managements discussion and analysis of our
financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates its
estimates, including those related to revenue recognition, bad
debts, inventories, intangible assets, equity investments,
income taxes and warranty obligations. Management bases its
estimates on historical experience and on various assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.




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##### Table of Contents



22

We believe the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our consolidated financial statements:

Revenue Recognition and Warranty

We recognize product revenue at the time of
shipment and transfer of title when collectibility is reasonably
assured. Software revenue is recognized at the time of sale and
in accordance with AICPA Statement of Position No. 97-2,
Software Revenue Recognition (SOP 97-2).
There are no significant customer acceptance requirements or
post-shipment obligations on our part for product or software
sales.


Future warranty costs are estimated based on
historical experience and provided for at the time of sale.
Freight costs for revenue-generating shipments are charged to
costs of goods sold. Amounts received prior to completion of the
earnings process are recorded as customer deposits or deferred
revenue, as appropriate. Service contract revenue is deferred at
the time of sale and recognized ratably over the period of
performance.

Accounts Receivable

We sell our products primarily to corporations,
academic institutions, government entities and distributors
within the drug discovery and life sciences research markets. We
perform ongoing credit evaluations of our customers and
generally do not require collateral. We maintain reserves for
potential credit losses, which are based on a number of factors
including, but not limited to, the current financial condition
of specific customers, payment trends and the overall economic
environment. Such losses have been historically within our
expectations.


Inventories

Inventories are stated on a first-in, first-out
basis at the lower of cost or market. We write down our
inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are
less favorable than those we project, additional inventory write
downs may be required. Such write-downs have historically been
within our expectations.


Equity Investments

We invest in equity instruments of privately held
companies for business and strategic purposes. These investments
are included in other long-term assets and are accounted for
under the cost method when ownership is less than
20 percent of voting securities and we do not have the
ability to exercise significant influence over operations. When
our ownership exceeds 20 percent of voting securities but
is less than 50 percent, or we have the ability to exercise
significant influence, the investment is accounted for under the
equity method. Under the equity method, the investees
proportionate share of net income or loss and amortization of
the investees net excess investment over its equity in net
assets is included in net income or loss. As of
December 31, 2003, we did not hold any investments
accounted for under the equity method. We regularly review the
assumptions underlying the operating performance and cash flow
forecasts in assessing the fair values. We monitor the preceding
factors to identify events or circumstances that would cause us
to test for other than temporary impairment and revise our
assumptions for the estimated recovery of equity investments.


Income Taxes

Income taxes are accounted for under the
liability method whereby deferred tax asset or liability account
balances are calculated at the balance sheet date using current
tax laws and rates in effect for the year in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized in the future.


At December 31, 2003, we had net deferred
tax assets of $7.4 million. Realization of these assets is
dependent on our ability to generate significant future taxable
income. We believe that sufficient income will be earned in the
future to realize these assets. We will evaluate the
realizability of the deferred tax assets and assess the need for
valuation allowances periodically.

Various factors may have favorable or unfavorable
effects upon our effective tax rate in the future. These factors
include, but are not limited to, interpretations of existing tax
laws, changes in tax laws and rates, future levels of R&D
spending, future levels of capital expenditures, and our success
in R&D and commercializing products.



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##### Table of Contents



23

RESULTS OF OPERATIONS

The following table summarizes our consolidated
statement of operations as a percentage of revenues:


|                                                              |  |                          |       |      |  |      |       |   |  |  |       |   
|------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                                              |  |                         
|                                                              |  | YEARS ENDED DECEMBER 31,
|                                                              |  |                         
|                                                              |  | 2003                     |       | 2002 |  | 2001
|                                                              |  |                         
|                                                              |  |                         
|Revenues                                                      |  |                          | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | % 
|Cost of revenues                                              |  |                          | 37.4  |      |  |      | 39.7  |   |  |  | 38.5  |   
|                                                              |  |                         
|Gross profit                                                  |  |                          | 62.6  |      |  |      | 60.3  |   |  |  | 61.5  |   
|Research and development                                      |  |                          | 16.2  |      |  |      | 17.6  |   |  |  | 16.4  |   
|Selling, general and administrative                           |  |                          | 37.6  |      |  |      | 34.7  |   |  |  | 36.2  |   
|Write-off of acquired in-process research and
    development |  |                          |      |      |  |      |      |   |  |  | 13.7  |   
|                                                              |  |                         
|Income (loss) from operations                                 |  |                          | 8.8   |      |  |      | 8.0   |   |  |  | (4.8  | ) 
|Other income, net                                             |  |                          | 0.8   |      |  |      | 1.5   |   |  |  | 4.1   |   
|                                                              |  |                         
|Income (loss) before income taxes                             |  |                          | 9.6   |      |  |      | 9.5   |   |  |  | (0.7  | ) 
|Income tax provision                                          |  |                          | 2.9   |      |  |      | 2.8   |   |  |  | 5.0   |   
|                                                              |  |                         
|Net income (loss)                                             |  |                          | 6.7   | %    |  |      | 6.7   | % |  |  | (5.7  | )%
|                                                              |  |                         

YEARS ENDED DECEMBER 31, 2003 AND 2002

Revenues for 2003 increased by 13% to
$115.6 million from $102.2 million in 2002. This
increase was primarily due to the inclusion of a full year of
revenues for UIC. Drug Discovery product family revenues
increased 13% in 2003 due to the addition of the Discovery-1
product line from UIC as well as the continued success of our
IonWorks HT product line, which was launched in late 2002.
Revenues in the Life Sciences Research product family also
increased 13% in 2003 largely due to the addition of the
MetaMorph product line from UIC and the growth in our Maxline
product line, which was driven by the launch of the SpectraMax
M2.


Gross margin increased to 62.6% in 2003, from
60.3% in 2002. This increase was primarily due to the increased
sales of higher margin products, including IonWorks HT,
MetaMorph, and Discovery-1 systems, as well as consumable
products.

Research and development expenses remained
relatively stable in 2003, increasing only 4% to
$18.7 million from $18.0 million in 2002. This
increase was largely due to a full year of research and
development expenses at UIC. In 2003, we continued to fund
development programs related to IonWorks, FLIPR and SpectraMax
products. In 2004, we plan to continue to invest in these
programs and keep research and development spending
approximately flat in absolute dollars compared to 2003.

Selling, general and administrative expenses
increased by 23% to $43.5 million in 2003 from
$35.4 million in 2002. This increase resulted from a full
year of selling expenses at UIC, movements in exchange rates
that negatively affected spending at our European and Japanese
subsidiaries and legal expenses stemming from a patent lawsuit
related to our IMAP program (which was settled in November
2003). Furthermore, we increased spending related to sales and
service worldwide in an effort to enhance market acceptance of
IonWorks, take UIC products direct in Japan, and to increase the
effectiveness of our worldwide service organization. In 2004, we
expect selling, general and administrative expenses to increase
in absolute dollars due to variable expenses associated with
increased revenues, but to decrease as a percentage of revenues.

Other income, net, consisting primarily of
interest income, decreased by 44% to $872,000 in 2003 from
$1.6 million in 2002. This was due to lower interest rates
received on our cash and investments portfolio in 2003.

We recorded tax provisions of $3.3 million
(an effective tax rate of 30%) and $2.9 million (an
effective tax rate of 30%) for 2003 and 2002, respectively. The
relative stability in our effective tax rate resulted from tax
benefits recognized in 2002 and 2003 associated with our
international operations. We expect our effective tax rate for
2004 to be approximately 34%-36%.



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##### Table of Contents



24

YEARS ENDED DECEMBER 31, 2002 AND 2001

Revenues for 2002 increased by 11% to
$102.2 million from $92.2 million in 2001. This
increase was due to the launch of the IonWorks HT, along with
the inclusion of seven months of revenue from UIC, acquired on
June 1, 2002. Drug Discovery revenues increased 4% in 2002
due to launch of IonWorks HT in the third quarter, increased
sales of FLIPR products and the addition of the Discovery-1
product line from UIC. Revenues in the Life Sciences Research
product family increased 16% in 2002 largely due to the addition
of the MetaMorph product line from UIC and growth in sales of
the Threshold and Skatron product lines.


Gross margin decreased to 60.3% in 2002, from
61.5% in 2001. This decrease was primarily due to overall
product sales that were more heavily weighted in lower margin
products.

Research and development expenses increased by
19% to $18.0 million in 2002 from $15.1 million in
2001. This increase was primarily driven by inclusion of a full
years research and development expenses at Cytion S.A.
(Cytion), which we acquired in July 2001, and the
research and development expenses incurred at UIC.

Selling, general and administrative expenses
increased by 6% to $35.4 million in 2002 from $33.4 million
in 2001. This increase resulted from the inclusion of the
selling, general and administrative expenses of UIC.

Other income, net, consisting primarily of
interest income, decreased by 59% to $1.6 million in 2002
from $3.8 million in 2001. This was due to lower average
cash and short-term investment balances (due to the share
repurchase plan executed in the first quarter and the UIC
acquisition in the second quarter) and decreased interest rates
in 2002.

We recorded tax provisions of $2.9 million
(an effective tax rate of 30%) and $4.6 million (an
effective tax rate of 38.5%) for 2002 and 2001, respectively.
The decrease in our effective tax rate resulted from tax
benefits recognized in 2002 associated with our international
operations. The effective tax rates for 2002 and 2001 are
calculated on profit before tax excluding the write-off of
acquired in-process research and development expenses in 2001,
which is not deductible for income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

We had cash, cash equivalents and short and
long-term investments of $60.1 million at December 31, 2003
compared to $53.8 million at December 31, 2002. In
2003, operating activities provided $18.7 million in cash.


Net cash used by investing activities was
$3.5 million in 2003, which included $2.4 million of
capital expenditures.

Net cash used in financing activities was
$9.0 million in 2003, due to $10.3 million spent to
repurchase 632,000 shares of our common stock, partially offset
by $1.3 million of proceeds from the issuance of common
stock for options exercised and employee stock purchases. The
share repurchases occurred throughout 2003, and accounted for
approximately 4.3% of the shares outstanding as of
December 31, 2003. Approximately 636,000 shares remained
available for repurchase at December 31, 2003 under the
stock repurchase program approved by our Board of Directors in
October 2001.

In February 2004, 630,000 shares of our
common stock were repurchased for approximately $12 million.

We believe that our existing cash and investment
securities and anticipated cash flow from our operations will be
sufficient to support our current operating plan for the
foreseeable future. Our ability to generate our anticipated cash
flow from operations is subject to the risks and uncertainties
discussed above under Business Risks, including, in
particular, variations in the amount of time it takes for us to
sell our products and collect accounts receivable, the timing of
customer orders, competition, risks associated with the
pharmaceutical and biotechnology industries, supplier or
manufacturing problems or delays, and risks associated with past
and potential future acquisitions.

Likewise, our forecast of the period of time
through which our financial resources will be adequate to
support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary
as a result of a number of factors. We have based this estimate
on our current plans which may change and assumptions that may
prove to be wrong. Our future capital requirements will depend
on many factors, including:



|  |                                               
|- | ----------------------------------------------
| | the progress of our research and development; 
| 
| | the number and scope of our research programs;



---



##### Table of Contents



25



|  |                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------
| | market acceptance and demand for our products;                                                                     
| 
| | the costs that may be involved in enforcing our
    patent claims and other intellectual property rights;          
| 
| | potential acquisition and technology licensing
    opportunities;                                                  
| 
| | the costs associated with repurchasing shares of
    our common stock;                                             
| 
| | manufacturing capacity requirements; and                                                                           
| 
| | the costs of expanding our sales, marketing and
    distribution capabilities both in the United States and abroad.

We have generated sufficient cash flow to fund
our capital requirements primarily through operating and
financing activities over the last three years. However, we
cannot assure you that we will not require additional financing
in the future to support our existing operations or potential
acquisition and technology licensing opportunities that may
arise. Therefore, we may in the future seek to raise additional
funds through bank facilities, debt or equity offerings or other
sources of capital. Additional financing may not be available on
favorable terms or at all, and may be dilutive to our
then-current stockholders.

Our cash and investments policy emphasizes
liquidity and preservation of principal over other portfolio
considerations. We select investments that maximize interest
income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in
securities with different maturities to match projected cash
needs and limit concentration of credit risk by diversifying our
investments among a variety of high credit-quality issuers. We
believe that our existing cash and investment securities and
anticipated cash flow from our operations will be sufficient to
support our current operating plan for the foreseeable future.

Our facilities are leased under noncancelable
operating leases. In addition, we have contractual commitments
for the purchase of certain resale products and manufacturing
components with certain vendors ending in 2004. As of
December 31, 2003, the following is a summary of our
contractual obligations (in millions):

|                                   |  |                        |      |         |  |         |     |          |  |            |      |  |  |   |     |  |  |   |     | 
|---------------------------------- |  | ---------------------- | ---- | ------- |  | ------- | --- | -------- |  | ---------- | ---- |  |  | - | --- |  |  | - | --- | 
|                                   |  |                       
|                                   |  | PAYMENTS DUE BY PERIOD
|                                   |  |                       
|                                   |  |                        |      | 2005 to |  | 2007 to |     | 2009 and
|                                   |  | Total                  |      | 2004    |  | 2006    |     | 2008     |  | thereafter
|                                   |  |                       
|                                   |  |                       
|Operating leases                   |  | $                      | 22.2 |         |  | $       | 5.5 |          |  | $          | 10.8 |  |  | $ | 5.0 |  |  | $ | 0.9 | 
|Unconditional purchase obligations |  |                        | 1.7  |         |  |         | 1.7 |          |  |            |     |  |  |   |    |  |  |   |    | 
|                                   |  |                       
|Total contractual cash obligations |  | $                      | 23.9 |         |  | $       | 7.2 |          |  | $          | 10.8 |  |  | $ | 5.0 |  |  | $ | 0.9 | 
|                                   |  |                       

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the Financial Accounting
Standards Board (FASB) issued a revision to Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51
(FIN 46R). FIN 46R clarifies the application of
ARB No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
provided by any parties, including the equity holders. FIN 46R
requires the consolidation of these entities, known as variable
interest entities (VIEs), by the primary beneficiary
of the entity. The primary beneficiary is the entity, if any,
that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected
residual returns, or both. We do not have any interests in VIEs.


In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21
Accounting for Revenue Arrangements with Multiple Deliverables.
The EITF concluded that revenue arrangements with multiple
elements should be divided into separate units of accounting if
the deliverables in the arrangement have value to the customer
on a standalone basis, if there is objective and reliable
evidence of the fair value of the undelivered elements, and as
long as there are no rights of return or additional performance
guarantees by the Company. The provisions of EITF Issue
No. 00-21 are applicable to agreements entered into after
June 15, 2003. Adoption of the consensus in the third
quarter of fiscal 2003 did not have a material effect on the
Companys results of operations or financial condition.



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##### Table of Contents



26



Item 7A.    Quantitative
and Qualitative Disclosures About Market Risk

We are exposed to market risk, including changes
in interest rates and foreign currency exchange rates. The
primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we
receive from our investments without significantly increasing
risk. A discussion of our accounting policies for financial
instruments and further disclosures relating to financial
investments is included in the Summary of Significant Accounting
Policies note in the Notes to Consolidated Financial Statements
included in this report.

Our interest income is sensitive to changes in
the general level of interest rates, primarily U.S. interest
rates. In this regard, changes in U.S. interest rates affect the
interest earned on our cash equivalents and short-term
investments. We invest our excess cash primarily in demand
deposits with United States banks and money market accounts and
short-term securities. These securities, consisting of
$2.1 million of commercial paper and $7.7 million of
U.S. government agency securities, are carried at market value,
which approximate cost, typically mature or are redeemable
within 90 days to two years, and bear minimal risk. We have
not experienced any significant losses on the investments.

We are exposed to changes in foreign currency
exchange rates primarily in the United Kingdom, France, Japan,
Germany and Canada, where we sell direct in local currencies.
All other foreign sales are denominated in U.S. dollars and bear
no exchange rate risk. However, a strengthening of the U.S.
dollar could make our products less competitive in overseas
markets. Gains and losses resulting from foreign currency
transactions have historically been immaterial. Translation
gains and losses related to our foreign subsidiaries in the
United Kingdom, Japan, Germany, Switzerland and Norway are
accumulated as a separate component of stockholders
equity. We do not currently engage in foreign currency hedging
transactions, but may do so in the future.



Item 8.    Financial
Statements and Supplementary Data

The following consolidated financial statements
of Molecular Devices and financial statement schedules are
attached to this report as pages 32 through 51.

Financial Statements:



|  |                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------
| | Report of Ernst & Young LLP, Independent
    Auditors                                                            
| 
| | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                 
| 
| | Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2003      
| 
| | Consolidated Statements of Stockholders
    Equity for the three years in the period ended December 31,
    2003
| 
| | Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003      
| 
| | Notes to Consolidated Financial Statements                                                                       

Financial Statement Schedules:

Schedule II  Valuation and
Qualifying Accounts

All other schedules are omitted because they are
not applicable or the required information is shown in the
consolidated financial statements or notes thereto.



Item 9.    Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

None



Item 9A.    Controls and
Procedures

Evaluation of disclosure controls and
procedures.Based on our
managements evaluation (with the participation of our
chief executive officer and chief financial officer), as of the
end of the period covered by this report, our chief executive
officer and chief financial officer have concluded that, subject
to limitations described below, our disclosure controls and
procedures (as defined in Securities Exchange Act
Rules 13a-15(e) and 15d-15(e)) are effective to ensure that
the information required to be disclosed by us in reports that
we file or submit under the Securities Exchange



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27

Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission rules and forms.


Changes in internal controls.There was no change in our
internal control over financial reporting during our fourth
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.

Limitations on the effectiveness of
controls.Our management,
including our chief executive officer and chief financial
officer, does not expect that our control systems 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, within Molecular
Devices Corporation have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of 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.
Accordingly, our disclosure controls and procedures are designed
to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met and, as set
forth above, our chief executive officer and chief financial
officer have concluded, based on their evaluation as of the end
of the period covered by this report, that our disclosure
controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure
control system were met.




part III




Item 10.    Directors and
Executive Officers of the Registrant



| |                                                       
| | ------------------------------------------------------
| | Identification of Directors and Executive
    Officers

Information with respect to Directors and
Executive Officers may be found in the sections entitled
Proposal 1  Election of Directors,
and Executive Officers of the Company, respectively,
appearing in the definitive Proxy Statement to be delivered to
stockholders in connection with the solicitation of proxies for
our Annual Meeting of Stockholders to be held on May 27,
2004 (the Proxy Statement). Such information is
incorporated herein by reference.




| |                                                            
| | -----------------------------------------------------------
| | Section 16(a) Beneficial Ownership
    Reporting Compliance

The information required by this Item with
respect to compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference from the section
captioned Section 16(a) Beneficial Ownership
Reporting Compliance contained in the Proxy Statement.



| |                
| | ---------------
| | Code of Conduct

The information required by this Item with
respect to our code of conduct is incorporated herein by
reference from the section captioned
Proposal 1  Election of
Directors  Code of Conduct contained in the
Proxy Statement.

The code is available on our Internet website at:
www.moleculardevices.com. If we make any substantive amendments
to the code or grant any waiver from a provision of the code
applicable to any executive officer or director, we will
promptly disclose the nature of the amendment or waiver on our
website.



Item 11.    Executive
Compensation

The information required by this item is set
forth in the Proxy Statement under the heading Executive
Compensation, which information is incorporated herein by
reference.



---



##### Table of Contents



28



Item 12.    Security
Ownership of Certain Beneficial Owners and Management

The information required by this item is set
forth in the Proxy Statement under the heading Security
Ownership of Certain Beneficial Owners and Management,
which information is incorporated herein by reference.



Item 13.    Certain
Relationships and Related Transactions

The information required by this item is set
forth in the Proxy Statement under the heading Certain
Transactions, which information is incorporated herein by
reference.



Item 14.    Principal
Accountant Fees and Services

The information required by this Item is
incorporated herein by reference from the section captioned
Ratification of Independent Auditors contained in
the Proxy Statement.

Consistent with Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, we are responsible for listing
the non-audit services approved by our Audit Committee to be
performed by Ernst & Young LLP, our external auditor.
Non-audit services are defined as services other than those
provided in connection with an audit or a review of our
financial statements. Our Audit Committee currently has approved
the engagement of Ernst & Young to perform up to $50,000 in
non-audit services in 2004, and authorized the Chairman of the
Audit Committee to pre-approve the engagement of Ernst &
Young to perform additional non-audit and non-tax services in
excess of $50,000.



part IV



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. Financial Statements  See
    Index to Consolidated Financial Statements as Item 8 on
    page 26 of this report.        
|
| | 2. Financial Statement Schedule 
    See Index to Consolidated Financial Statements as Item 8 on
    page 26 of this report.
|
| | 3. Exhibits                                                                                                                  



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##### Table of Contents



29

|        |    |                         |  |                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |    |                        
|NUMBER  |    | DESCRIPTION OF DOCUMENT
|       
|       
|        | 2  | .1(1)                   |  | Form of Agreement and Plan of Merger between the
    Registrant and Molecular Devices Corporation, a California
    Corporation                                                                                                                                                                                                                 
|        | 2  | .2(2)                   |  | Stock and Asset Purchase Agreement, dated as of
    May 17, 1999, among Molecular Devices Corporation, a Delaware
    corporation, Helge Skare, Wiel Skare, Steinar Faanes and Sten
    Skare, each an individual resident in Norway, Skatron
    Instruments AS, a Norwegian company, and Skatron Instruments,
    Inc., a Virginia corporation
|        | 2  | .4(5)                   |  | Agreement and Plan of Merger and Reorganization
    dated as of June 7, 2000 by and among Molecular Devices
    Corporation, Mercury Acquisition Sub, Inc. and LJL BioSystems,
    Inc.                                                                                                                                                         
|        | 2  | .5(11)                  |  | Stock Purchase Agreement dated as of November 14,
    2000 by and among JCR Pharmaceuticals, K.K. and Molecular
    Devices Corporation                                                                                                                                                                                                         
|        | 2  | .6(12)                  |  | Stock Purchase Agreement dated as of July 6, 2001
    by and among Molecular Devices, Cytion S.A., Jean-Pierre Rosat
    (as agent for the stockholders of Cytion) and each of the
    stockholders of Cytion.                                                                                                                                  
|        | 2  | .7(13)                  |  | Stock Purchase Agreement dated as of June 1, 2002
    by and among Molecular Devices, Universal Imaging Corporation,
    Theodore Inoue (as agent for the stockholders of Universal
    Imaging Corporation) and each of the stockholders of Universal
    Imaging Corporation.                                                                 
|        | 3  | .1(1)                   |  | Amended and Restated Certificate of Incorporation
    of Registrant                                                                                                                                                                                                                                                                             
|        | 3  | .2(1)                   |  | Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                        
|        | 3  | .3(8)                   |  | Certificate of Amendment to Certificate of
    Incorporation                                                                                                                                                                                                                                                                                    
|        | 4  | .1(1)                   |  | Specimen Certificate of Common Stock of Registrant                                                                                                                                                                                                                                                                                              
|        | 10 | .1(1)*                  |  | 1988 Stock Option Plan                                                                                                                                                                                                                                                                                                                          
|        | 10 | .2(1)*                  |  | Form of Incentive Stock Option under the 1988
    Stock Option Plan                                                                                                                                                                                                                                                                             
|        | 10 | .3(1)*                  |  | Form of Supplemental Stock Option under the 1988
    Stock Option Plan                                                                                                                                                                                                                                                                          
|        | 10 | .4(8)*                  |  | 1995 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                               
|        | 10 | .6(1)*                  |  | Form of Nonstatutory Stock Option under the 1995
    Non-Employee Directors Stock Option Plan                                                                                                                                                                                                                                                  
|        | 10 | .8(1)*                  |  | Form of Incentive Stock Option under the 1995
    Stock Option Plan                                                                                                                                                                                                                                                                             
|        | 10 | .9(1)*                  |  | Form of Nonstatutory Stock Option under the 1995
    Stock Option Plan                                                                                                                                                                                                                                                                          
|        | 10 | .10(1)*                 |  | Form of Early Exercise Stock Purchase Agreement
    under the 1995 Stock Option Plan                                                                                                                                                                                                                                                            
|        | 10 | .11(1)*                 |  | Form of Indemnity Agreement between the
    Registrant and its Directors and Executive Officers                                                                                                                                                                                                                                                 
|        | 10 | .19(2)*                 |  | Key Employee Agreement for Joseph D. Keegan,
    Ph.D., dated March 11, 1998, as amended                                                                                                                                                                                                                                                        
|        | 10 | .20(3)                  |  | Exclusive License and Technical Support Agreement
    dated August 28, 1998 by and between the Registrant and Affymax                                                                                                                                                                                                                           
|        | 10 | .21(3)*                 |  | Employee Offer Letter for Tim Harkness                                                                                                                                                                                                                                                                                                          
|        | 10 | .23(3)*                 |  | Employee Offer Letter for John Senaldi                                                                                                                                                                                                                                                                                                          
|        | 10 | .24(4)*                 |  | 1995 Non-Employee Directors Stock Option
    Plan, as amended                                                                                                                                                                                                                                                                                  
|        | 10 | .25(14)*                |  | 1995 Stock Option Plan, as amended                                                                                                                                                                                                                                                                                                              
|        | 10 | .26(6)*                 |  | Employee Offer Letter for Patricia Sharp                                                                                                                                                                                                                                                                                                        
|        | 10 | .27(7)*                 |  | LJL BioSystems 1994 Equity Incentive Plan and
    Forms of Agreements                                                                                                                                                                                                                                                                           
|        | 10 | .28(7)*                 |  | LJL BioSystems 1997 Stock Plan and Forms of
    Agreements                                                                                                                                                                                                                                                                                      
|        | 10 | .29(7)*                 |  | LJL BioSystems 1998 Directors Stock Option
    Plan and Forms of Agreements                                                                                                                                                                                                                                                                    
|        | 10 | .33(9)                  |  | Lease Agreement dated May 26, 2000 by and between
    Aetna Life Insurance Company and the Registrant                                                                                                                                                                                                                                           
|        | 10 | .34(10)*                |  | Change in Control Severance Benefit Plan                                                                                                                                                                                                                                                                                                        
|        | 10 | .35(12)                 |  | Rights Agreement, dated October 25, 2001, among
    the Registrant and EquiServe Trust Company, N.A.                                                                                                                                                                                                                                            
|        | 10 | .36(8)*                 |  | Key Employee Agreement for Stephen Oldfield                                                                                                                                                                                                                                                                                                     
|        | 10 | .37(8)*                 |  | Key Employee Agreement for Tom OLenic                                                                                                                                                                                                                                                                                                          
|        | 10 | .38(14)*                |  | 2001 Stock Option Plan                                                                                                                                                                                                                                                                                                                          
|        | 10 | .39(14)                 |  | Lease dated May 28, 2002 by and between The
    Irvine Company and the Registrant                                                                                                                                                                                                                                                               
|        | 10 | .40(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and Joseph D. Keegan, Ph.D.                                                                                                                                                                                                                                             



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##### Table of Contents



30

|        |    |                         |  |                                                                                                                                                          
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |    |                        
|NUMBER  |    | DESCRIPTION OF DOCUMENT
|       
|       
|        | 10 | .41(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and Timothy A. Harkness                                                          
|        | 10 | .42(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and John S. Senaldi                                                              
|        | 21 | .1                      |  | Subsidiaries of the Registrant                                                                                                                           
|        | 23 | .1                      |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                   
|        | 31 | .1                      |  | Certification required by Rule 13a-14(a) or
    Rule 15d-14(a).                                                                                          
|        | 31 | .2                      |  | Certification required by Rule 13a-14(a) or
    Rule 15d-14(a).                                                                                          
|        | 32 | .1**                    |  | Certifications required by Rule 13a-14(b) or
    Rule 15d-14(b) and Section 1350 of Chapter 63 of
    Title 18 of the United States Code (18 U.S.C 1350).



---



|     |  |                                                                                                                                                                                                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  |  | Incorporated by reference to the similarly
    described exhibit in our Registration Statement on Form S-1
    (File No. 33-98926), as amended.                                                                                                                                                            
|    
|(2)  |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    June 30, 1998, and filed August 13, 1998.                                                                                                                                                     
|    
|(3)  |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    September 30, 1998, and filed November 13, 1998.                                                                                                                                              
|    
|(4)  |  | Incorporated by reference to the similarly
    described exhibit in our Registration Statement on Form S-8
    (File No. 333-86159), as amended.                                                                                                                                                           
|    
|(5)  |  | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    June 12, 2000.                                                                                                                                                                                
|    
|(6)  |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    September 30, 2000 and filed on November 13, 2000.                                                                                                                                            
|    
|(7)  |  | Incorporated by reference to the similarly
    described exhibit filed with LJL BioSystems Registration
    Statement on Form S-1 (File No. 333-43529) declared
    effective on March 12, 1998.                                                                                                          
|    
|(8)  |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2001 and filed on April 1, 2002.                                                                                                                                                    
|    
|(9)  |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2000 and filed on March 30, 2001.                                                                                                                                                   
|    
|(10) |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    March 31, 2001 and filed on May 11, 2001.                                                                                                                                                     
|    
|(11) |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    June 30, 2001 and filed on August 14, 2001.                                                                                                                                                   
|    
|(12) |  | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    October 30, 2001.                                                                                                                                                                             
|    
|(13) |  | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    on June 12, 2002.                                                                                                                                                                             
|    
|(14) |  | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2003 and filed on March 27, 2003.                                                                                                                                                   
|    
|*    |  | Management contract or compensatory plan or
    arrangement.                                                                                                                                                                                                                                               
|    
|**   |  | The certification attached as Exhibit 32.1
    accompanies the Annual Report on Form 10-K pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
    deemed filed by the Company for purposes of
    Section 18 of the Securities Exchange Act of 1934, as
    amended.          
|    
|(b)  |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                        
|    
|     |  | We filed a current report on Form 8-K, dated
    October 14, 2003, to furnish our public announcement of our
    fiscal third quarter results for the period ended
    September 30, 2003, which announcement included our
    consolidated balance sheets and statements of operations for the
    period.
|    
|(c)  |  | Exhibits                                                                                                                                                                                                                                                                                                   
|    
|     |  | See Item 15(a) above.                                                                                                                                                                                                                                                                                      
|    
|(d)  |  | Financial Statement Schedule                                                                                                                                                                                                                                                                               
|    
|     |  | See Item 15(a) above.                                                                                                                                                                                                                                                                                      



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##### Table of Contents



31




SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized on
March 9, 2004.



| |                              
| | -----------------------------
| | MOLECULAR DEVICES CORPORATION



| |     |                            
| | --- | ---------------------------
| | BY: | /s/ JOSEPH D. KEEGAN, PH.D.

| |                                      
| | -------------------------------------
| |                                      
| | JOSEPH D. KEEGAN, PH.D.              
| | PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                         |  |                                                                                                      |  |      |               | 
|-------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ---- | ------------- | 
|SIGNATURE                                                |  | TITLE                                                                                                |  | DATE
|                                                        
|                                                        
|/s/ JOSEPH D. KEEGAN, PH.D.Joseph D. Keegan, Ph.D.       |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                    |  |      | March 9, 2004 | 
|                                                        
|/s/ TIMOTHY A. HARKNESSTimothy A. Harkness               |  | Vice President, Finance and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  |      | March 9, 2004 | 
|                                                        
|/s/ MOSHE H. ALAFIMoshe H. Alafi                         |  | Director                                                                                             |  |      | March 9, 2004 | 
|                                                        
|/s/ DAVID L. ANDERSONDavid L. Anderson                   |  | Director                                                                                             |  |      | March 9, 2004 | 
|                                                        
|/s/ A. BLAINE BOWMANA. Blaine Bowman                     |  | Director                                                                                             |  |      | March 9, 2004 | 
|                                                        
|/s/ PAUL GODDARD, PH.D.Paul Goddard, Ph.D.               |  | Director                                                                                             |  |      | March 9, 2004 | 
|                                                        
|Andre F. Marion                                          |  | Director                                                                                             |  |      |               | 
|                                                        
|/s/ HARDEN M. MCCONNELL, PH.D.Harden M. McConnell, Ph.D. |  | Director                                                                                             |  |      | March 9, 2004 | 
|                                                        
|/s/ J. ALLAN WAITZ, PH.D.J. Allan Waitz, Ph.D.           |  | Director                                                                                             |  |      | March 9, 2004 | 



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##### Table of Contents



32

REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS


The Board of Directors and Stockholders

Molecular Devices Corporation and Subsidiaries


We have audited the accompanying consolidated
balance sheets of Molecular Devices Corporation and its
subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). 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 Molecular Devices Corporation
and its subsidiaries as of December 31, 2003 and 2002, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States. 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.

As discussed in Note 1 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill and other intangible assets.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Palo Alto, California

January 30, 2004,


except for Note 12, as to


which the date is


February 25, 2004




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##### Table of Contents



33

MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


|                                          |                                                                                                                                                                                                        |                            |         |         |         |   |         |         |         | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | DECEMBER 31,              
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | 2003                       |         | 2002   
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        |                           
|ASSETS                                    |                                                                                                                                                                                                        |                            |         |        
|Current assets:                           |                                                                                                                                                                                                        |                            |         |         |         |   |         |        
|                                          | Cash and cash equivalents                                                                                                                                                                              |                            | $       | 50,260  |         |   | $       | 43,733  |        
|                                          | Short-term investments                                                                                                                                                                                 |                            |         | 8,114   |         |   |         | 10,050  |        
|                                          | Accounts receivable, net of allowance for
    doubtful accounts of $408 and $434                                                                                                                       |                            |         | 26,209  |         |   |         | 26,443  |        
|                                          | Inventories, net                                                                                                                                                                                       |                            |         | 17,025  |         |   |         | 17,722  |        
|                                          | Deferred tax assets                                                                                                                                                                                    |                            |         | 5,223   |         |   |         | 5,230   |        
|                                          | Other current assets                                                                                                                                                                                   |                            |         | 1,849   |         |   |         | 1,770   |        
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | Total current assets       |         |         | 108,680 |   |         |         | 104,948 | 
|Long-term investments                     |                                                                                                                                                                                                        |                            | 1,736   |         |         |   |        |        
|Equipment and leasehold improvements, net |                                                                                                                                                                                                        |                            | 9,706   |         |         |   | 10,943  |        
|Goodwill                                  |                                                                                                                                                                                                        |                            | 26,017  |         |         |   | 26,017  |        
|Intangible and other assets               |                                                                                                                                                                                                        |                            | 20,774  |         |         |   | 20,993  |        
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | $                          | 166,913 |         |         | $ | 162,901 |        
|                                          |                                                                                                                                                                                                        |                           
|LIABILITIES AND STOCKHOLDERS EQUITY      |                                                                                                                                                                                                        |                            |         |        
|Current liabilities:                      |                                                                                                                                                                                                        |                            |         |         |         |   |         |        
|                                          | Accounts payable                                                                                                                                                                                       |                            | $       | 4,019   |         |   | $       | 2,863   |        
|                                          | Accrued compensation                                                                                                                                                                                   |                            |         | 6,295   |         |   |         | 4,610   |        
|                                          | Other accrued liabilities                                                                                                                                                                              |                            |         | 5,942   |         |   |         | 8,361   |        
|                                          | Deferred revenue                                                                                                                                                                                       |                            |         | 5,119   |         |   |         | 4,263   |        
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | Total current liabilities  |         |         | 21,375  |   |         |         | 20,097  | 
|                                          |                                                                                                                                                                                                        |                           
|Stockholders equity:                     |                                                                                                                                                                                                        |                            |         |         |         |   |         |        
|                                          | Preferred stock, $.001 par value; 3,000,000
    shares authorized                                                                                                                                      |                            |         |        |         |   |         |        |        
|                                          | Common stock, $.001 par value; 60,000,000 shares
    authorized; 15,653,283 and 15,555,190 shares issued and
    14,778,837 and 15,312,892 outstanding at December 31, 2003
    and 2002, respectively |                            |         | 16      |         |   |         | 15      |        
|                                          | Additional paid-in capital                                                                                                                                                                             |                            |         | 184,956 |         |   |         | 181,773 |        
|                                          | Accumulated deficit                                                                                                                                                                                    |                            |         | (26,106 | )       |   |         | (33,848 | )      
|                                          | Treasury stock, at cost; 874,446 and 242,298
    shares at December 31, 2003 and 2002, respectively                                                                                                    |                            |         | (14,968 | )       |   |         | (4,632  | )      
|                                          | Accumulated other comprehensive income (loss)                                                                                                                                                          |                            |         | 1,640   |         |   |         | (504    | )      
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | Total stockholders equity |         |         | 145,538 |   |         |         | 142,804 | 
|                                          |                                                                                                                                                                                                        |                           
|                                          |                                                                                                                                                                                                        | $                          | 166,913 |         |         | $ | 162,901 |        
|                                          |                                                                                                                                                                                                        |                           

See accompanying notes.



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##### Table of Contents



34

MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


|                                    |                                              |                          |         |        |        |      |         |        |        |   |        |        |        | 
|----------------------------------- | -------------------------------------------- | ------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                    |                                              |                         
|                                    |                                              | YEARS ENDED DECEMBER 31,
|                                    |                                              |                         
|                                    |                                              | 2003                     |         | 2002   |        | 2001
|                                    |                                              |                         
|                                    |                                              |                         
|Revenues                            |                                              | $                        | 115,581 |        |        | $    | 102,157 |        |        | $ | 92,231 |       
|Cost of revenues                    |                                              |                          | 43,256  |        |        |      | 40,561  |        |        |   | 35,538 |       
|                                    |                                              |                         
|Gross profit                        |                                              |                          | 72,325  |        |        |      | 61,596  |        |        |   | 56,693 |       
|                                    |                                              |                         
|Operating expenses:                 |                                              |                          |         |        |        |      |         |        |        |   |        |       
|                                    | Research and development                     |                          |         | 18,679 |        |      |         | 18,002 |        |   |        | 15,105 |       
|                                    | Selling, general and administrative          |                          |         | 43,457 |        |      |         | 35,435 |        |   |        | 33,381 |       
|                                    | Acquired in-process research and development |                          |         |       |        |      |         |       |        |   |        | 12,625 |       
|                                    |                                              |                         
|                                    |                                              | Total operating expenses |         |        | 62,136 |      |         |        | 53,437 |   |        |        | 61,111 | 
|                                    |                                              |                         
|Income (loss) from operations       |                                              |                          | 10,189  |        |        |      | 8,159   |        |        |   | (4,418 | )     
|Other income, net                   |                                              |                          | 872     |        |        |      | 1,562   |        |        |   | 3,806  |       
|                                    |                                              |                         
|Income (loss) before income taxes   |                                              |                          | 11,061  |        |        |      | 9,721   |        |        |   | (612   | )     
|Income tax provision                |                                              |                          | 3,319   |        |        |      | 2,916   |        |        |   | 4,625  |       
|                                    |                                              |                         
|Net income (loss)                   |                                              | $                        | 7,742   |        |        | $    | 6,805   |        |        | $ | (5,237 | )     
|                                    |                                              |                         
|Basic net income (loss) per share   |                                              | $                        | 0.51    |        |        | $    | 0.44    |        |        | $ | (0.32  | )     
|                                    |                                              |                         
|Diluted net income (loss) per share |                                              | $                        | 0.51    |        |        | $    | 0.44    |        |        | $ | (0.32  | )     
|                                    |                                              |                         

See accompanying notes.



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35

MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |        |        |  
|------------------------------------------------------------------------- | -------------------- | -------------------------- | ---------- | ---------- | - | ----------- | -- | -------------- | - | --------- | ------- | ----------------- | - | ------------- | ------- | ------ | - | - | ------- | - | - | - | ---- | - | - | - | ------ | ------ | - | - | ------- | ------ | ------ | -
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |              
|                                                                          |                      | Common Stock               |            | Additional |   |             |    |                |   |           |         | Accumulated Other |   | Total        
|                                                                          |                      |                            |            | Paid-In    |   | Accumulated |    | Treasury Stock |   | Deferred  |         | Comprehensive     |   | Stockholders
|                                                                          |                      | Shares                     |            | Amount     |   | Capital     |    | Deficit        |   | (at cost) |         | Compensation      |   | Income (Loss) |         | Equity
|                                                                          |                      |                           
|                                                                          |                      |                           
|Balance at December 31, 2000                                              |                      |                            | 16,331,167 |            |   | $           | 17 |                |   | $         | 169,820 |                   |   | $             | (4,833  | )      |   | $ |        |   |   | $ | (443 | ) |   | $ | (928   | )      |   | $ | 163,633 |       
|                                                                          |                      |                           
|Comprehensive income:                                                     |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          | Net loss             |                            |            |           |   |             |    |               |   |           |         |                  |   |               |         | (5,237 | ) |   |         |  |   |   |      |  |   |   |        |        |   |   |         | (5,237 | )     
|                                                                          | Currency translation |                            |            |           |   |             |    |               |   |           |         |                  |   |               |         |       |   |   |         |  |   |   |      |  |   |   |        | (1,690 | ) |   |         | (1,690 | )     
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          |                      | Total comprehensive loss   |            |            |  |             |    |                |  |           |         |                   |  |               |         |        |  |   |         |   |  |   |      |   |  |   |        |        |  |   |         |        | (6,927 | )
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|Issuance of shares of common stock to acquire
    Cytion S.A.             |                      |                            | 400,000    |            |   |             |   |                |   |           | 7,376   |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 7,376   |       
|Issuance of shares of common stock for options
    exercised              |                      |                            | 210,204    |            |   |             |   |                |   |           | 3,384   |                   |   |               |        |        |   |   |         |   |   |   | 111  |   |   |   |       |        |   |   | 3,495   |       
|Issuance of shares of common stock under Employee
    Stock Purchase Plan |                      |                            | 37,714     |            |   |             |   |                |   |           | 653     |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 653     |       
|Issuance of shares of common stock for cashless
    warrant exercise      |                      |                            | 12,759     |            |   |             |   |                |   |           |        |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   |        |       
|Repurchase of shares of common stock                                      |                      |                            | (1,510,000 | )          |   |             |   |                |   |           |        |                   |   |               |        |        |   |   | (30,745 | ) |   |   |      |   |   |   |       |        |   |   | (30,745 | )     
|Retirement of common stock in treasury                                    |                      |                            |           |            |   |             | (2 | )              |   |           |        |                   |   |               | (30,583 | )      |   |   | 30,585  |   |   |   |     |   |   |   |       |        |   |   |        |       
|                                                                          |                      |                           
|Balance at December 31, 2001                                              |                      |                            | 15,481,844 |            |   |             | 15 |                |   |           | 181,233 |                   |   |               | (40,653 | )      |   |   | (160    | ) |   |   | (332 | ) |   |   | (2,618 | )      |   |   | 137,485 |       
|                                                                          |                      |                           
|Comprehensive income:                                                     |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          | Net income           |                            |            |           |   |             |    |                |   |           |         |                  |   |               |         | 6,805  |   |   |         |  |   |   |      |  |   |   |        |       |   |   |         | 6,805  |       
|                                                                          | Currency translation |                            |            |           |   |             |    |               |   |           |         |                  |   |               |         |       |   |   |         |  |   |   |      |  |   |   |        | 2,114  |   |   |         | 2,114  |       
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          |                      | Total comprehensive income |            |            |  |             |    |                |  |           |         |                   |  |               |         |        |  |   |         |   |  |   |      |   |  |   |        |        |  |   |         |        | 8,919  |  
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|Issuance of shares of common stock for options
    exercised              |                      |                            | 25,107     |            |   |             |   |                |   |           | 371     |                   |   |               |        |        |   |   |        |   |   |   | 74   |   |   |   |        |        |   |   | 445     |       
|Issuance of shares of common stock under Employee
    Stock Purchase Plan |                      |                            | 28,194     |            |   |             |   |                |   |           | 427     |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 427     |       
|Repurchase of shares of common stock                                      |                      |                            | (222,253   | )          |   |             |   |                |   |           |        |                   |   |               |        |        |   |   | (4,472  | ) |   |   |     |   |   |   |       |        |   |   | (4,472  | )     
|Reversal of deferred compensation for terminated
    employees            |                      |                            |           |            |   |             |   |                |   |           | (258    | )                 |   |               |        |        |   |   |        |   |   |   | 258  |   |   |   |       |        |   |   |        |       
|                                                                          |                      |                           
|Balance at December 31, 2002                                              |                      |                            | 15,312,892 |            |   |             | 15 |                |   |           | 181,773 |                   |   |               | (33,848 | )      |   |   | (4,632  | ) |   |   |     |   |   |   | (504   | )      |   |   | 142,804 |       
|                                                                          |                      |                           
|Comprehensive income:                                                     |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          | Net income           |                            |            |           |   |             |    |               |   |           |         |                  |   |               |         | 7,742  |   |   |         |  |   |   |      |  |   |   |        |       |   |   |         | 7,742  |       
|                                                                          | Currency translation |                            |            |           |   |             |    |               |   |           |         |                  |   |               |         |       |   |   |         |  |   |   |      |  |   |   |        | 2,144  |   |   |         | 2,144  |       
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|                                                                          |                      | Total comprehensive income |            |            |  |             |    |                |  |           |         |                   |  |               |         |        |  |   |         |   |  |   |      |   |  |   |        |        |  |   |         |        | 9,886  |  
|                                                                          |                      |                            |            |            |   |             |    |                |   |           |         |                   |   |               |         |        |   |   |         |   |   |   |      |   |   |   |        |        |   |   |         |       
|Issuance of shares of common stock for options
    exercised              |                      |                            | 28,792     |            |   |             |   |                |   |           | 305     |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 305     |       
|Issuance of shares of common stock under Employee
    Stock Purchase Plan |                      |                            | 69,301     |            |   |             | 1  |                |   |           | 992     |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 993     |       
|Income tax benefit associated with the exercise
    of stock options      |                      |                            |           |            |   |             |   |                |   |           | 1,886   |                   |   |               |        |        |   |   |        |   |   |   |     |   |   |   |       |        |   |   | 1,886   |       
|Repurchase of shares of common stock                                      |                      |                            | (632,148   | )          |   |             |   |                |   |           |        |                   |   |               |        |        |   |   | (10,336 | ) |   |   |     |   |   |   |       |        |   |   | (10,336 | )     
|                                                                          |                      |                           
|Balance at December 31, 2003                                              |                      |                            | 14,778,837 |            |   | $           | 16 |                |   | $         | 184,956 |                   |   | $             | (26,106 | )      |   | $ | (14,968 | ) |   | $ |     |   |   | $ | 1,640  |        |   | $ | 145,538 |       
|                                                                          |                      |                           



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##### Table of Contents



36

MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


|                                                                                                               |                                                                                    |                           |         |       |        |      |         |       |       |   |         |        |        |  
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------- | ------- | ----- | ------ | ---- | ------- | ----- | ----- | - | ------- | ------ | ------ | -
|                                                                                                               |                                                                                    |                          
|                                                                                                               |                                                                                    | YEARS ENDED DECEMBER 31, 
|                                                                                                               |                                                                                    |                          
|                                                                                                               |                                                                                    | 2003                      |         | 2002  |        | 2001
|                                                                                                               |                                                                                    |                          
|                                                                                                               |                                                                                    |                          
|Cash flows from operating
    activities:                                                                      |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|Net income (loss)                                                                                              |                                                                                    | $                         | 7,742   |       |        | $    | 6,805   |       |       | $ | (5,237  | )     
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities:                   |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|                                                                                                               | Depreciation and amortization                                                      |                           |         | 5,304 |        |      |         | 3,847 |       |   |         | 3,710  |       
|                                                                                                               | Charge for acquired in-process research and
    development                        |                           |         |      |        |      |         |      |       |   |         | 12,625 |       
|                                                                                                               | Amortization of deferred compensation                                              |                           |         |      |        |      |         | 74    |       |   |         | 111    |       
|                                                                                                               | Amortization of goodwill (in 2001) and other
    intangible assets                 |                           |         | 425   |        |      |         | 280   |       |   |         | 624    |       
|                                                                                                               | Income tax benefit realized as a result of
    employee exercises of stock options |                           |         | 1,886 |        |      |         |      |       |   |         |       |       
|                                                                                                               | Deferred tax assets                                                                |                           |         | 1,140 |        |      |         | 827   |       |   |         | 942    |       
|                                                                                                               | (Increase) decrease in assets:                                                     |                           |         |       |        |      |         |       |       |   |         |        |       
|                                                                                                               |                                                                                    | Accounts receivable       |         |       | 1,740  |      |         |       | (345  | ) |         |        | 3,949  |  
|                                                                                                               |                                                                                    | Inventories               |         |       | (412   | )    |         |       | 10    |   |         |        | (5,069 | )
|                                                                                                               |                                                                                    | Other current assets      |         |       | (41    | )    |         |       | 594   |   |         |        | 3,639  |  
|                                                                                                               | Increase (decrease) in liabilities:                                                |                           |         |       |        |      |         |       |       |   |         |        |       
|                                                                                                               |                                                                                    | Accounts payable          |         |       | 1,147  |      |         |       | (145  | ) |         |        | (3,015 | )
|                                                                                                               |                                                                                    | Accrued compensation      |         |       | 1,662  |      |         |       | 1,030 |   |         |        | (875   | )
|                                                                                                               |                                                                                    | Other accrued liabilities |         |       | (2,560 | )    |         |       | 1,690 |   |         |        | 1,286  |  
|                                                                                                               |                                                                                    | Deferred revenue          |         |       | 714    |      |         |       | 595   |   |         |        | 1,083  |  
|                                                                                                               |                                                                                    |                          
|Net cash provided by operating activities                                                                      |                                                                                    |                           | 18,747  |       |        |      | 15,262  |       |       |   | 13,773  |       
|                                                                                                               |                                                                                    |                          
|Cash flows from investing
    activities:                                                                      |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|Purchases of investments                                                                                       |                                                                                    |                           | (15,275 | )     |        |      | (17,680 | )     |       |   | (14,818 | )     
|Proceeds from sales and maturities of investments                                                              |                                                                                    |                           | 15,475  |       |        |      | 18,515  |       |       |   | 59,192  |       
|Capital expenditures                                                                                           |                                                                                    |                           | (2,399  | )     |        |      | (2,295  | )     |       |   | (3,784  | )     
|Acquisitions, net of cash on hand                                                                              |                                                                                    |                           |        |       |        |      | (22,927 | )     |       |   | (10,367 | )     
|Increase in other assets                                                                                       |                                                                                    |                           | (1,294  | )     |        |      | (372    | )     |       |   | (472    | )     
|                                                                                                               |                                                                                    |                          
|Net cash provided by (used in) investing
    activities                                                        |                                                                                    |                           | (3,493  | )     |        |      | (24,759 | )     |       |   | 29,751  |       
|                                                                                                               |                                                                                    |                          
|Cash flows from financing
    activities:                                                                      |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|Repayment of borrowings                                                                                        |                                                                                    |                           |        |       |        |      |        |       |       |   | (586    | )     
|Issuance of common stock                                                                                       |                                                                                    |                           | 1,299   |       |        |      | 798     |       |       |   | 4,037   |       
|Purchase of treasury stock                                                                                     |                                                                                    |                           | (10,336 | )     |        |      | (4,472  | )     |       |   | (30,745 | )     
|                                                                                                               |                                                                                    |                          
|Net cash (used in) financing activities                                                                        |                                                                                    |                           | (9,037  | )     |        |      | (3,674  | )     |       |   | (27,294 | )     
|                                                                                                               |                                                                                    |                          
|Effect of exchange rate changes on
    cash                                                                    |                                                                                    |                           | 310     |       |        |      | 532     |       |       |   | (1,690  | )     
|                                                                                                               |                                                                                    |                          
|Net increase (decrease) in cash and cash
    equivalents                                                       |                                                                                    |                           | 6,527   |       |        |      | (12,639 | )     |       |   | 14,540  |       
|Cash and cash equivalents at beginning of year                                                                 |                                                                                    |                           | 43,733  |       |        |      | 56,372  |       |       |   | 41,832  |       
|                                                                                                               |                                                                                    |                          
|Cash and cash equivalents at end of year                                                                       |                                                                                    | $                         | 50,260  |       |        | $    | 43,733  |       |       | $ | 56,372  |       
|                                                                                                               |                                                                                    |                          
|Supplemental cash flow information:                                                                            |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|Cash paid during the year for:                                                                                 |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|                                                                                                               | Interest                                                                           |                           | $       |      |        |      | $       |      |       |   | $       | 44     |       
|                                                                                                               |                                                                                    |                          
|                                                                                                               | Income taxes                                                                       |                           | $       | 2,143 |        |      | $       | 496   |       |   | $       | 802    |       
|                                                                                                               |                                                                                    |                          
|Supplemental schedule of noncash investing and
    financing activities:                                       |                                                                                    |                           |         |       |        |      |         |       |       |   |         |       
|Issuance of 400,000 shares of common stock in
    conjunction with the acquisition of Cytion S.A. in July 2001 |                                                                                    | $                         |        |       |        | $    |        |       |       | $ | 7,376   |       
|                                                                                                               |                                                                                    |                          

See accompanying notes.



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37

MOLECULAR DEVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Summary of
Significant Accounting Policies

BASIS OF PRESENTATION

Molecular Devices Corporation (Molecular
Devices, our, us or
we), a Delaware corporation, is principally involved
in the design, development, manufacture, sale and service of
bioanalytical measurement systems for life sciences and drug
discovery applications. The principal customers for our products
include leading pharmaceutical and biotechnology companies as
well as medical centers, universities, government research
laboratories and other institutions throughout the world.


The consolidated financial statements include the
accounts of Molecular Devices and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated.

USE OF ESTIMATES

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.


CASH EQUIVALENTS

Cash equivalents consist of highly liquid
investments, principally money market accounts and marketable
debt securities, with maturities of three months or less at the
time of purchase.


INVESTMENTS

Our short-term and long-term investments consist
of marketable securities classified as
available-for-sale. Investments with maturities
within twelve months of the balance sheet date are considered
short-term. Those investments maturing beyond twelve months from
the balance sheet date are considered long-term.
Available-for-sale securities are carried at fair market value,
with unrealized gains and losses, net of tax, included in
accumulated other comprehensive income (loss) in
stockholders equity. Gains and losses on securities sold
are based on the specific identification method and are included
in the results of operations. Realized gains and losses have
been historically immaterial and combined with interest income
in the other income, net line of the consolidated
statement of operations.


Fair values of marketable securities are based on
quoted market values at December 31, 2003 and 2002. At
December 31, 2003, the difference between the fair value
and amortized cost of marketable securities was not significant.
Investments consisted the following:

|                        |                               |                |       |       |  |   |        |       | 
|----------------------- | ----------------------------- | -------------- | ----- | ----- |  | - | ------ | ----- | 
|                        |                               |               
|                        |                               | DECEMBER 31,  
|                        |                               |               
|                        |                               | 2003           |       | 2002 
|                        |                               |               
|                        |                               |               
|                        |                               | (In thousands)
|Short-term investments: |                               |                |       |       |  |   |        |      
|                        | Federal government securities |                | $     | 5,960 |  |   | $      | 6,659 | 
|                        | Corporate securities          |                |       | 2,154 |  |   |        | 3,391 | 
|                        |                               |               
|                        |                               | $              | 8,114 |       |  | $ | 10,050 |      
|                        |                               |               
|Long-term investments:  |                               |                |       |       |  |   |        |      
|                        | Federal government securities |                | $     | 1,736 |  |   | $      |      | 
|                        |                               |               

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us
to concentrations of credit risk, are primarily cash, cash
equivalents, short-term investments and accounts receivable. We
deposit cash with high credit quality financial institutions.
Our cash equivalents and marketable securities are primarily
invested in federal government agency obligations and corporate
securities that have various maturities during 2003 and 2004.




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38

We sell our products primarily to corporations,
academic institutions, government entities and distributors
within the drug discovery and life sciences research markets. We
perform ongoing credit evaluations of our customers and
generally do not require collateral. We maintain reserves for
potential credit losses and such losses have been historically
within our expectations. In 2003, one customer accounted for
approximately 5% of sales.

INVENTORIES

Inventories are stated on a first-in, first-out
basis at the lower of cost or market. We write down our
inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are
less favorable than those projected by management, additional
inventory write downs may be required.


CAPITALIZED SOFTWARE COSTS

Software development costs incurred subsequent to
the establishment of technological feasibility are capitalized
in accordance with SFAS No. 86; Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed. No amounts have been capitalized to date as
costs incurred after the establishment of technological
feasibility have not been material.


EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment is recorded at cost and depreciated
using the straight-line method over the estimated useful lives
of the assets (ranging from three to five years). Leasehold
improvements are amortized over the remaining term of the lease,
or the life of the asset, whichever is shorter. Maintenance and
repairs are expensed as incurred. Depreciation expense for 2003,
2002 and 2001 was $3.7 million, $3.2 million, and
$2.6 million, respectively.


GOODWILL

Goodwill represents the difference between the
purchase price and the fair value of net assets when accounted
for by the purchase method of accounting. Prior to 2002,
goodwill was amortized using the straight-line method over 10 to
15 years. In January 2002, we adopted FAS 142 and,
accordingly, ceased amortizing goodwill. In conjunction with the
adoption of FAS 142, we performed an initial impairment test of
goodwill and found no impairment. The gross amount of goodwill
was $27.0 million at December 31, 2003 and 2002,
respectively.


The following table presents the impact of
adopting of FAS 142 had the standard been in effect for the year
ended December 31, 2001 (in thousands, except per share
data):

|                                      |                                 |              |        |        |  
|------------------------------------- | ------------------------------- | ------------ | ------ | ------ | -
|                                      |                                 | YEAR ENDED  
|                                      |                                 | DECEMBER 31,
|                                      |                                 |             
|                                      |                                 | 2001        
|                                      |                                 |             
|Reported net loss                     |                                 | $            | (5,237 | )     
|                                      | Add back: Goodwill amortization |              |        | 338    |  
|                                      |                                 |              |        |       
|                                      | Adjusted net loss               |              | $      | (4,899 | )
|                                      |                                 |              |        |       
|Basic and diluted earnings per share: |                                 |              |        |       
|                                      | Reported net loss               |              | $      | (0.32  | )
|                                      | Add back: Goodwill amortization |              |        | 0.02   |  
|                                      |                                 |              |        |       
|                                      | Adjusted net loss               |              | $      | (0.30  | )
|                                      |                                 |              |        |       

OTHER ASSETS

Other assets include patents, developed
technology, license fees, tradename and strategic investments in
privately held companies that have been accounted for under the
cost method. Patents, developed technology and license fees are
amortized over their expected useful life of ten years.
Tradename is assessed to have an indefinite life and therefore
is not subject to amortization.


IMPAIRMENT OF LONG-LIVED ASSETS

We evaluate long-lived assets, including goodwill
and investments accounted for under the cost method, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based




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39

on expected undiscounted cash flows attributable
to that asset. The amount of any impairment is measured as the
difference between the carrying value and the fair value of the
impaired asset. For long-lived assets, fair value would be
measured based on discounted expected cash flows. There were no
long-lived assets that were considered to be impaired during any
period presented.


EQUITY INVESTMENTS

We invest in equity instruments of privately held
companies for business and strategic purposes. These investments
are included in other long-term assets and are accounted for
under the cost method when ownership is less than
20 percent of voting securities and we do not have the
ability to exercise significant influence over operations. When
our ownership exceeds 20 percent of voting securities but
is less than 50 percent, or we have the ability to exercise
significant influence, the investment is accounted for under the
equity method. Under the equity method, the investees
proportionate share of net income or loss and amortization of
the investees net excess investment over its equity in net
assets is included in our net income or loss. As of
December 31, 2003, we did not hold any investments
accounted for under the equity method. We regularly review the
assumptions underlying the operating performance and cash flow
forecasts in assessing the fair values. We monitor the preceding
factors to identify events or circumstances which would cause us
to test for other than temporary impairment and revise our
assumptions for the estimated recovery of equity investments.
There were no investments considered impaired during any of the
periods presented.


INCOME TAXES

Income taxes are accounted for under the
liability method whereby deferred tax asset or liability account
balances are calculated at the balance sheet date using current
tax laws and rates in effect for the year in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized in the future.


FOREIGN CURRENCY TRANSLATION

We translate the assets and liabilities of our
foreign subsidiaries into dollars at the rates of exchange in
effect at the end of the period and translate revenues and
expenses using rates in effect during the period. Gains and
losses from these translations are accumulated as a separate
component of stockholders equity. Gains and losses
resulting from foreign currency transactions are immaterial and
are included in the statements of operations.


REVENUE RECOGNITION AND WARRANTY

We recognize product revenue at the time of
shipment and transfer of title when collectibility is reasonably
assured. Software revenue is recognized at the time of sale and
in accordance with AICPA Statement of Position No. 97-2,
Software Revenue Recognition (SOP 97-2).
There are no significant customer acceptance requirements or
post-shipment obligations on the part of Molecular Devices for
product or software sales.


Future warranty costs are estimated and provided
for at the time of sale. Freight costs for revenue-generating
shipments are charged to costs of goods sold. Amounts received
prior to completion of the earnings process are recorded as
customer deposits or deferred revenue, as appropriate. Service
contract revenue is deferred at the time of sale and recognized
ratably over the period of performance.

ADVERTISING COSTS

We expense the cost of advertising as incurred.
Such costs approximated $782,000, $1.1 million and
$1.2 million for 2003, 2002 and 2001, respectively.


RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the Financial Accounting
Standards Board (FASB) issued a revision to Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51 (FIN
46R). FIN 46R clarifies the application of ARB
No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
provided by any parties, including the equity holders. FIN 46R
requires the consolidation of these entities, known as variable
interest entities (VIEs), by the primary beneficiary
of the entity. The primary beneficiary is the entity, if any,
that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected
residual returns, or both. We do not have any interests in VIEs.




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40

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21
Accounting for Revenue Arrangements with Multiple Deliverables.
The EITF concluded that revenue arrangements with multiple
elements should be divided into separate units of accounting if
the deliverables in the arrangement have value to the customer
on a standalone basis, if there is objective and reliable
evidence of the fair value of the undelivered elements, and as
long as there are no rights of return or additional performance
guarantees by the Company. The provisions of EITF Issue
No. 00-21 are applicable to agreements entered into after
June 15, 2003. Adoption of the consensus in the third
quarter of fiscal 2003 did not have a material effect on our
results of operations or financial condition.

PER SHARE DATA

Basic net income (loss) per share is
computed based on the weighted average number of shares of our
common stock outstanding. Diluted net income (loss) per
share is computed based on the weighted average number of shares
of our common stock and other dilutive securities. Dilutive
securities consist of the incremental common shares issuable
upon the exercise of stock options and warrants (using the
treasury stock method).


Computation of diluted earnings (loss) per
share is as follows (in thousands, except per share amounts):

|                                                                                                |  |                          |        |      |  |      |        |  |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                                                                                |  |                         
|                                                                                                |  | YEARS ENDED DECEMBER 31,
|                                                                                                |  |                         
|                                                                                                |  | 2003                     |        | 2002 |  | 2001
|                                                                                                |  |                         
|                                                                                                |  |                         
|Weighted average common shares outstanding for
    the period                                   |  |                          | 15,067 |      |  |      | 15,348 |  |  |   | 16,192 |  
|Common equivalent shares assuming exercise of
    stock options under the treasury stock method |  |                          | 112    |      |  |      | 109    |  |  |   |       |  
|                                                                                                |  |                         
|Shares used in diluted per share calculation                                                    |  |                          | 15,179 |      |  |      | 15,457 |  |  |   | 16,192 |  
|                                                                                                |  |                         
|Net income (loss)                                                                               |  | $                        | 7,742  |      |  | $    | 6,805  |  |  | $ | (5,237 | )
|                                                                                                |  |                         
|Basic net income (loss) per share                                                               |  | $                        | 0.51   |      |  | $    | 0.44   |  |  | $ | (0.32  | )
|                                                                                                |  |                         
|Diluted net income (loss) per share                                                             |  | $                        | 0.51   |      |  | $    | 0.44   |  |  | $ | (0.32  | )
|                                                                                                |  |                         

Options to purchase 2,085,413 shares of common
stock at a weighted average per share exercise price of $30.33
were outstanding during 2003, but were not included in the
computation of diluted earnings per share for that year as the
options weighted-average exercise price was greater than
the average market price of the common shares and, therefore,
the effect would have been anti-dilutive. In 2002 and 2001, the
total number of shares excluded from the calculations of diluted
net income (loss) per share was 2,115,476 and 307,000,
respectively. Such securities, had they been dilutive, would
have been included in the computations of diluted net income
(loss) per share using the treasury stock method.

STOCK BASED COMPENSATION

As permitted by Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, as amended, we apply the
intrinsic value method of accounting as described in APB Opinion
25 and related interpretations in accounting for our stock
option plans and, accordingly, recognize no compensation expense
for stock option grants with an exercise price equal to the fair
market value of the shares at the date of grant. If we had
elected to recognize compensation cost based on the fair value
of the options granted at grant date and shares issued




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41

under stock purchase plans as prescribed by SFAS
123, net income (loss) and net income (loss) per share
would have been changed to the pro forma amounts indicated in
the table below (in thousands, except per share amounts):


|                                                                                                 |  |                          |       |      |  |      |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                 |  |                         
|                                                                                                 |  | YEARS ENDED DECEMBER 31,
|                                                                                                 |  |                         
|                                                                                                 |  | 2003                     |       | 2002 |  | 2001
|                                                                                                 |  |                         
|                                                                                                 |  |                         
|Net income (loss)  as reported                                                                  |  | $                        | 7,742 |      |  | $    | 6,805  |   |  | $ | (5,237  | )
|Stock based employee compensation expense
    determined using the fair value method, net of tax |  |                          | 7,520 |      |  |      | 7,886  |   |  |   | 6,552   |  
|                                                                                                 |  |                         
|Net income (loss)  pro forma                                                                    |  | $                        | 222   |      |  | $    | (1,081 | ) |  | $ | (11,789 | )
|                                                                                                 |  |                         
|Net income (loss) per share:                                                                     |  |                          |       |      |  |      |        |   |  |   |         |  
|Basic  as reported                                                                              |  | $                        | 0.51  |      |  | $    | 0.44   |   |  | $ | (0.32   | )
|Basic  pro forma                                                                                |  |                          | 0.01  |      |  |      | (0.07  | ) |  |   | (0.73   | )
|Diluted   as reported                                                                           |  |                          | 0.51  |      |  |      | 0.44   |   |  |   | (0.32   | )
|Diluted   pro forma                                                                             |  |                          | 0.01  |      |  |      | (0.07  | ) |  |   | (0.73   | )

The pro forma net income (loss) and net
income (loss) per share disclosed above are not likely to
be representative of the effects on net income (loss) and net
income (loss) per share on a pro forma basis in future
years, as subsequent years may include additional grants and
years of vesting.

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:

|                                |  |      |           |      |  |      |           |   |  |  |           |  
|------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                                |  | 2003 |           | 2002 |  | 2001
|                                |  |     
|                                |  |     
|Expected dividend yield         |  |      | 0         | %    |  |      | 0         | % |  |  | 0         | %
|Expected stock price volatility |  |      | 81        | %    |  |      | 85        | % |  |  | 94        | %
|Risk-free interest rate         |  |      | 2.9       | %    |  |      | 4.4       | % |  |  | 4.6       | %
|Expected life of options        |  |      | 6.2 years |      |  |      | 5.6 years |   |  |  | 3.5 years |  

The weighted average fair value of options
granted during the years ended December 31, 2003, 2002 and
2001 was $11.50, $14.06, and $18.05 per share, respectively.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of
net income (loss) and other items of comprehensive income
(loss). Other comprehensive income (loss) includes cumulative
translation adjustments from the translation of foreign
subsidiaries financial statements, and unrealized gains
and losses on available-for-sale securities, if material.




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42

Note 2.    Balance Sheet
Amounts

|                                               |                                            |                |         |        |  |   |         |        | 
|---------------------------------------------- | ------------------------------------------ | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                                               |                                            |               
|                                               |                                            | DECEMBER 31,  
|                                               |                                            |               
|                                               |                                            | 2003           |         | 2002  
|                                               |                                            |               
|                                               |                                            |               
|                                               |                                            |               
|                                               |                                            | (In thousands)
|Inventories:                                   |                                            |                |         |        |  |   |         |       
|                                               | Raw materials                              |                | $       | 6,213  |  |   | $       | 6,462  | 
|                                               | Work-in-process                            |                |         | 600    |  |   |         | 1,840  | 
|                                               | Finished goods and demonstration equipment |                |         | 10,212 |  |   |         | 9,420  | 
|                                               |                                            |               
|                                               |                                            | $              | 17,025  |        |  | $ | 17,722  |       
|                                               |                                            |               
|Equipment and leasehold improvements:          |                                            |                |         |        |  |   |         |       
|                                               | Machinery and equipment                    |                | $       | 15,170 |  |   | $       | 14,683 | 
|                                               | Software                                   |                |         | 3,727  |  |   |         | 2,817  | 
|                                               | Furniture and fixtures                     |                |         | 3,028  |  |   |         | 2,716  | 
|                                               | Leasehold improvements                     |                |         | 6,225  |  |   |         | 5,887  | 
|                                               |                                            |               
|                                               |                                            |                | 28,150  |        |  |   | 26,103  |       
|Less accumulated depreciation and amortization |                                            |                | (18,444 | )      |  |   | (15,160 | )     
|                                               |                                            |               
|                                               |                                            | $              | 9,706   |        |  | $ | 10,943  |       
|                                               |                                            |               
|Intangible and other assets:                   |                                            |                |         |        |  |   |         |       
|                                               | Equity investments                         |                | $       | 12,353 |  |   | $       | 12,353 | 
|                                               | Long-term deferred tax asset               |                |         | 2,145  |  |   |         | 3,278  | 
|                                               | Patents and developed technology           |                |         | 2,285  |  |   |         | 2,569  | 
|                                               | Other                                      |                |         | 3,991  |  |   |         | 2,793  | 
|                                               |                                            |               
|                                               |                                            | $              | 20,774  |        |  | $ | 20,993  |       
|                                               |                                            |               
|Other accrued liabilities:                     |                                            |                |         |        |  |   |         |       
|                                               | Accrued income tax                         |                | $       | 939    |  |   | $       | 3,060  | 
|                                               | Warranty accrual                           |                |         | 1,502  |  |   |         | 1,295  | 
|                                               | Other                                      |                |         | 3,501  |  |   |         | 4,006  | 
|                                               |                                            |               
|                                               |                                            | $              | 5,942   |        |  | $ | 8,361   |       
|                                               |                                            |               

Note
3.    Commitments

Our facilities are leased under noncancelable
operating leases. The leases generally require payment of taxes,
insurance and maintenance costs on leased facilities. Minimum
annual rental commitments under these noncancelable operating
leases for the years ending 2004, 2005, 2006, 2007, 2008 and
thereafter, are approximately $5.5 million,
$5.4 million, $5.4 million, $4.5 million, and
$1.4 million, respectively.

Net rental expense under operating leases related
to our facilities was approximately $5.3 million,
$5.0 million, and $2.8 million, respectively, for each
of the three years ended December 31, 2003, 2002 and 2001.

We have contractual commitments for the purchase
of certain resale products and manufacturing components with
vendors, ending in 2004. The minimum purchase commitments are
based on a set percentage of our forecasted production, and for
2004, at current prices, is approximately $1.7 million.
These purchase commitments are not expected to result in a loss.



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43

At the time of sale, we record an estimate for
warranty costs that may be incurred under product warranties.
Warranty expense and activity are estimated based on historical
experience. The warranty accrual is evaluated periodically and
adjusted for changes in experience. Changes in the warranty
liability during 2003 were as follows (in thousands):

|                                                   |  |   |        |  
|-------------------------------------------------- |  | - | ------ | -
|Balance December 31, 2001                          |  | $ | 1,183  |  
|New warranties issued during the year              |  |   | 1,323  |  
|Cost of warranties incurred during the year        |  |   | (1,140 | )
|Changes in liabilities for pre-existing warranties |  |   | (71    | )
|                                                   |  |   |        |  
|Balance December 31, 2002                          |  | $ | 1,295  |  
|New warranties issued during the year              |  |   | 1,472  |  
|Cost of warranties incurred during the year        |  |   | (1,265 | )
|                                                   |  |   |        |  
|Balance December 31, 2003                          |  | $ | 1,502  |  
|                                                   |  |   |        |  

Note 4.    Acquisitions
and Investments

UNIVERSAL IMAGING CORPORATION

On June 1, 2002, we acquired Universal
Imaging Corporation (UIC) pursuant to a Stock
Purchase Agreement, in exchange for $22 million in cash. In
addition, we incurred $1.2 million of acquisition costs. As
a result of the acquisition, UIC became a wholly-owned
subsidiary of Molecular Devices. The results of operations for
UIC were included in our results of operations beginning
June 1, 2002. The excess of the purchase price over the
identified net assets of UIC has been allocated to goodwill,
tradename and developed technology as follows (in thousands):

|                                                                                   |  |   |        | 
|---------------------------------------------------------------------------------- |  | - | ------ | 
|Acquired goodwill                                                                  |  | $ | 18,846 | 
|Acquired developed technology (amortized over ten
    years)                       |  |   | 1,468  | 
|Acquired tradename                                                                 |  |   | 707    | 
|Net book value of acquired assets and liabilities
    which approximate fair value |  |   | 2,179  | 
|                                                                                   |  |   |        | 
|                                                                                   |  | $ | 23,200 | 
|                                                                                   |  |   |        | 

The condensed balance sheet of UIC as of
May 31, 2002 was as follows (in thousands):

|                                               |                      |                    |       |       | 
|---------------------------------------------- | -------------------- | ------------------ | ----- | ----- | 
|                                               |                      | AS OF MAY 31, 2002
|                                               |                      |                   
|Cash and cash equivalents                      |                      | $                  | 274   |      
|Accounts receivable                            |                      |                    | 1,351 |      
|Inventory                                      |                      |                    | 1,000 |      
|Other current assets                           |                      |                    | 91    |      
|                                               |                      |                    |       |      
|                                               | Total current assets |                    |       | 2,716 | 
|Fixed assets                                   |                      |                    | 1,141 |      
|                                               |                      |                    |       |      
|Total assets                                   |                      | $                  | 3,857 |      
|                                               |                      |                    |       |      
|Accounts payable and other current liabilities |                      | $                  | 895   |      
|Long-term liabilities                          |                      |                    | 783   |      
|                                               |                      |                    |       |      
|                                               | Total liabilities    |                    |       | 1,678 | 
|Stockholders equity                           |                      |                    | 2,179 |      
|                                               |                      |                    |       |      
|Total liabilities and stockholders equity     |                      | $                  | 3,857 |      
|                                               |                      |                    |       |      



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44

OTHER ACQUISITIONS

On July 19, 2001, we acquired all of the
capital stock of Cytion S.A. (Cytion) in exchange
for $7.5 million in cash and 400,000 shares of Molecular
Devices common stock. A one-time charge of
$12.6 million for purchased in-process research and
development expenses was recorded upon closing of the
acquisition in 2001.


On January 5, 2001, we acquired all of the
capital stock of Nihon Molecular Devices (NMD), our Japanese
distributor, in exchange for $3.2 million in cash.

PRO FORMA RESULTS

The unaudited pro forma results of operations for
the years ended December 31, 2003, 2002, and 2001 for Molecular
Devices are set forth below. This presentation assumes that the
UIC, Cytion, and NMD acquisitions had been consummated on
January 1, 2001. In accordance with FAS 141 and SEC
regulations, this presentation excludes the charges for acquired
in-process research and development (in thousands, except per
share amounts):


|                             |  |                          |         |      |  |      |         |  |  |   |         | 
|---------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                             |  |                         
|                             |  | YEARS ENDED DECEMBER 31,
|                             |  |                         
|                             |  | 2003                     |         | 2002 |  | 2001
|                             |  |                         
|                             |  |                         
|Revenue                      |  | $                        | 115,581 |      |  | $    | 107,143 |  |  | $ | 101,900 | 
|Net income                   |  | $                        | 7,742   |      |  | $    | 7,039   |  |  | $ | 6,729   | 
|Diluted net income per share |  | $                        | 0.51    |      |  | $    | 0.46    |  |  | $ | 0.41    | 

The unaudited pro forma information does not
purport to be indicative of the results that actually would have
occurred had the above noted acquisitions been consummated on
January 1, 2001 or of results that may occur in the future.

Note 5.    Goodwill,
Purchased Intangible Assets and License Fees

Goodwill and purchased intangible assets not
subject to amortization, principally a tradename, were
$26.0 million and $707,000, at December 31, 2003 and
2002, respectively.

Purchased intangible assets subject to
amortization include patents and developed technology acquired
through our acquisitions of Cytion and UIC. In 2002 and 2003, we
entered into numerous licensing arrangements that required up
front payments of license fees. These purchased intangible
assets and license fees, which are being amortized over their
useful lives of ten years, consisted of the following (in
thousands):

|                     |  |                   |       |                   |  |          |     |          |  |              |       |          |  |   |       |  |  |   |     |  |  |   |       | 
|-------------------- |  | ----------------- | ----- | ----------------- |  | -------- | --- | -------- |  | ------------ | ----- | -------- |  | - | ----- |  |  | - | --- |  |  | - | ----- | 
|                     |  |                   |       |                  
|                     |  | DECEMBER 31, 2003 |       | DECEMBER 31, 2002
|                     |  |                   |       |                  
|                     |  | Gross             |       |                   |  | Net      |     | Gross    |  |              |       | Net     
|                     |  | Carrying          |       | Accumulated       |  | Carrying |     | Carrying |  | Accumulated  |       | Carrying
|                     |  | Value             |       | Amortization      |  | Value    |     | Value    |  | Amortization |       | Value   
|                     |  |                  
|                     |  |                  
|Patents              |  | $                 | 1,372 |                   |  | $        | 335 |          |  | $            | 1,037 |          |  | $ | 1,372 |  |  | $ | 198 |  |  | $ | 1,174 | 
|Developed Technology |  |                   | 1,468 |                   |  |          | 220 |          |  |              | 1,248 |          |  |   | 1,468 |  |  |   | 73  |  |  |   | 1,395 | 
|License Fees         |  |                   | 2,588 |                   |  |          | 253 |          |  |              | 2,335 |          |  |   | 939   |  |  |   | 113 |  |  |   | 826   | 
|                     |  |                  
|Total                |  | $                 | 5,428 |                   |  | $        | 808 |          |  | $            | 4,620 |          |  | $ | 3,779 |  |  | $ | 384 |  |  | $ | 3,395 | 
|                     |  |                  



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45

The estimated future amortization expense of
purchased intangible assets and license fees is as follows (in
thousands):

|                                 |  |              |       | 
|-------------------------------- |  | ------------ | ----- | 
|                                 |  | Amortization
|FOR THE YEAR ENDING DECEMBER 31, |  | Expense     
|                                 |  |             
|2004                             |  | $            | 544   | 
|2005                             |  |              | 544   | 
|2006                             |  |              | 544   | 
|2007                             |  |              | 544   | 
|2008                             |  |              | 544   | 
|Thereafter                       |  |              | 1,900 | 
|                                 |  |              |       | 
|                                 |  | $            | 4,620 | 
|                                 |  |              |       | 

Note
6.    Stockholders Equity

TREASURY STOCK

In 2003, we repurchased 632,148 shares of our
common stock. These repurchases occurred at various times
throughout the year. As of December 31, 2003, 874,446
repurchased shares remained on our balance sheet as treasury
stock, at cost. As of December 31, 2003, approximately
636,000 shares remained available for repurchase under the stock
repurchase program approved by our Board of Directors in October
2001.


Note 7.    Equity
Incentive Plans

Under our 1995 Stock Option Plan (1995
Plan), a total of 3,750,000 shares of common stock have
been reserved for issuance as either incentive or nonqualified
stock options to officers, directors, employees and consultants.
Option grants expire in ten years and generally become
exercisable in increments over a period of four to five years
from the date of grant. Options may be granted with different
vesting terms from time to time.

In September 1995, we established the 1995
Non-Employee Directors Stock Option Plan (the
Directors Plan). Under the Directors
Plan, we are authorized to grant nonqualified stock options to
purchase up to 347,500 shares of common stock at the fair market
value of the common shares at the date of grant. Options granted
under the Directors Plan vest and become exercisable in
three equal annual installments commencing one year from the
date of the grant.

In July 2001, we established the 2001 Stock
Option Plan (the 2001 Plan). Under the 2001 Plan, a
total of 100,000 shares of common stock have been reserved for
issuance to employees who are working or residing outside of the
United States and are not officers or directors. Option grants
expire in twelve years and generally become exercisable in
increments over a period of four to five years from the date of
grant. Options may be granted with different vesting terms from
time to time.



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46

The following table summarizes the activity under
all of our plans, including the plans of companies that we
acquired:

|                          |              |               |           |             |   |                |           |          |   |   |       |       | 
|------------------------- | ------------ | ------------- | --------- | ----------- | - | -------------- | --------- | -------- | - | - | ----- | ----- | 
|                          |              | Shares        |           |             |   | Weighted      
|                          |              | Available for |           | Options     |   | Average       
|                          |              | Future Grant  |           | Outstanding |   | Exercise Price
|                          |              |              
|                          |              |              
|Balance December 31, 2000 |              |               | 951,805   |             |   |                | 1,847,468 |          |   | $ | 29.89 |      
|                          | Authorized   |               |           | 1,100,000   |   |                |           |         |   |   |       |      | 
|                          | Granted      |               |           | (884,950    | ) |                |           | 884,950  |   |   |       | 27.75 | 
|                          | Exercised    |               |           |            |   |                |           | (208,954 | ) |   |       | 15.43 | 
|                          | Cancelled    |               |           | 298,107     |   |                |           | (298,107 | ) |   |       | 30.48 | 
|                          | Plan Expired |               |           | (610,391    | ) |                |           |         |   |   |       |      | 
|                          |              |               |           |             |   |               
|Balance December 31, 2001 |              |               | 854,571   |             |   |                | 2,225,357 |          |   |   | 30.32 |      
|                          | Authorized   |               |           | 500,000     |   |                |           |         |   |   |       |      | 
|                          | Granted      |               |           | (591,813    | ) |                |           | 591,813  |   |   |       | 19.41 | 
|                          | Exercised    |               |           |            |   |                |           | (24,169  | ) |   |       | 14.28 | 
|                          | Cancelled    |               |           | 227,669     |   |                |           | (227,669 | ) |   |       | 33.76 | 
|                          | Plan Expired |               |           | (24,130     | ) |                |           |         |   |   |       |      | 
|                          |              |               |           |             |   |               
|Balance December 31, 2002 |              |               | 966,297   |             |   |                | 2,565,332 |          |   |   | 27.87 |      
|                          | Authorized   |               |           | 500,000     |   |                |           |         |   |   |       |      | 
|                          | Granted      |               |           | (562,855    | ) |                |           | 562,855  |   |   |       | 16.08 | 
|                          | Exercised    |               |           |            |   |                |           | (28,792  | ) |   |       | 10.62 | 
|                          | Cancelled    |               |           | 139,054     |   |                |           | (139,054 | ) |   |       | 32.93 | 
|                          | Plan Expired |               |           | (7,770      | ) |                |           |         |   |   |       |      | 
|                          |              |               |           |             |   |               
|Balance December 31, 2003 |              |               | 1,034,726 |             |   |                | 2,960,341 |          |   | $ | 25.55 |      
|                          |              |               |           |             |   |               

The following table is a summary of our
outstanding and exercisable options at December 31, 2003:

|                         |  |                     |           |                  |  |                |     |                  |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ---------------- |  | -------------- | --- | ---------------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                    
|Options Outstanding      |  | Options Exercisable
|                         |  |                    
|                         |  | Weighted-           |           |                  |  |               
|                         |  | average             |           |                  |  |               
|                         |  | remaining           |           |                  |  |               
|                         |  | contractual         |           | Weighted-average |  |                |     | Weighted-average
|Range of exercise prices |  | Number              |           | life (Yrs.)      |  | exercise price |     | Number           |  | exercise price
|                        
|                        
|$ 0.33 to $ 3.33         |  |                     | 14,493    |                  |  |                | 2.5 |                  |  | $              | 3.03  |  |  |  | 14,493    |  |  | $ | 3.03  | 
|$ 5.25 to $ 8.54         |  |                     | 101,781   |                  |  |                | 2.6 |                  |  |                | 6.37  |  |  |  | 101,781   |  |  |   | 6.37  | 
|$10.22 to $14.69         |  |                     | 200,724   |                  |  |                | 5.3 |                  |  |                | 13.80 |  |  |  | 170,780   |  |  |   | 14.16 | 
|$15.00 to $19.50         |  |                     | 845,923   |                  |  |                | 8.0 |                  |  |                | 16.80 |  |  |  | 225,931   |  |  |   | 18.11 | 
|$20.00 to $25.90         |  |                     | 1,004,243 |                  |  |                | 7.6 |                  |  |                | 21.77 |  |  |  | 586,391   |  |  |   | 22.02 | 
|$26.63 to $29.19         |  |                     | 245,503   |                  |  |                | 5.3 |                  |  |                | 26.79 |  |  |  | 245,503   |  |  |   | 26.79 | 
|$35.25 to $39.69         |  |                     | 110,675   |                  |  |                | 6.2 |                  |  |                | 38.54 |  |  |  | 90,112    |  |  |   | 38.28 | 
|$48.00 to $53.33         |  |                     | 288,850   |                  |  |                | 6.1 |                  |  |                | 48.06 |  |  |  | 219,056   |  |  |   | 48.06 | 
|$74.94 to $78.75         |  |                     | 148,149   |                  |  |                | 6.9 |                  |  |                | 76.73 |  |  |  | 108,344   |  |  |   | 76.76 | 
|                         |  |                     |           |                  |  |                |     |                  |  |                |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 2,960,341 |                  |  |                |     |                  |  | $              | 25.55 |  |  |  | 1,762,391 |  |  | $ | 27.80 | 
|                         |  |                     |           |                  |  |                |     |                  |  |                |       |  |  |  |           |  |  |   |       | 

There were, 1,215,510 and 684,296 options
exercisable under the various plans at December 31, 2002
and 2001, respectively.



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##### Table of Contents



47

DEFERRED COMPENSATION

During 2000, we granted 2,500 shares of
restricted stock to an employee. These restricted shares vested
in quarterly increments from the date of grant over two years.
We recognized $223,000 of deferred compensation for the total
value of these shares on the date of grant. The deferred
compensation expense was recognized ratably over the two-year
vesting period.


EMPLOYEE STOCK PURCHASE PLANS

Under our Employee Stock Purchase Plan (the
ESPP), 400,000 shares of common stock have been
authorized for issuance. Shares may be purchased under the ESPP
at 85% of the lesser of the fair market value of the common
stock on the grant or the purchase date. As of December 31,
2003, 146,798 shares remained available for purchase under the
ESPP.


401(k) PLAN

Our 401(k) Plan (the Plan) covers
substantially all of our U.S. based employees. Under the Plan,
as amended in February 2001, eligible employees may contribute
up to 25% of their eligible compensation, subject to certain
Internal Revenue Service restrictions. We began matching a
portion of employee contributions in 1997, up to a maximum of 3%
or $2,500, whichever is less, of each employees eligible
compensation. The match, which is subject to board approval
based on a number of factors, is effective December 31 of
each year and vests over a period of four years of service. For
the years ended December 31, 2003, 2002 and 2001, we recognized
as expense approximately $492,000, $388,000 and $406,000,
respectively, under the Plan.


LJL BioSystems maintained the tax deferred LJL
BioSystems, Inc. 401(k) Plan (the
LJL Plan), for its eligible employees.
Effective November 1, 2001, the LJL Plan was
discontinued and employee account balances were merged into the
Plan.

Note 8.  Income Taxes

The components of the provisions for income taxes
consist of the following (in thousands):

|          |         |                          |       |        |   |      |       |       |   |   |       |       |  
|--------- | ------- | ------------------------ | ----- | ------ | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|          |         |                         
|          |         | YEARS ENDED DECEMBER 31,
|          |         |                         
|          |         | 2003                     |       | 2002   |   | 2001
|          |         |                         
|          |         |                         
|Current:  |         |                          |       |        |   |      |       |       |   |   |       |      
|          | Federal |                          | $     | 150    |   |      | $     | 760   |   |   | $     | 2,042 |  
|          | State   |                          |       | 215    |   |      |       | 315   |   |   |       | 300   |  
|          | Foreign |                          |       | 1,815  |   |      |       | 1,025 |   |   |       | 1,340 |  
|          |         |                         
|          |         |                          | 2,180 |        |   |      | 2,100 |       |   |   | 3,682 |      
|          |         |                         
|Deferred: |         |                          |       |        |   |      |       |       |   |   |       |      
|          | Federal |                          |       | 1,938  |   |      |       | 1,209 |   |   |       | 1,572 |  
|          | State   |                          |       | 437    |   |      |       | (393  | ) |   |       | (577  | )
|          | Foreign |                          |       | (1,236 | ) |      |       |      |   |   |       | (52   | )
|          |         |                         
|          |         |                          | 1,139 |        |   |      | 816   |       |   |   | 943   |      
|          |         |                         
|          |         | $                        | 3,319 |        |   | $    | 2,916 |       |   | $ | 4,625 |      
|          |         |                         



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##### Table of Contents



48

The provisions for income taxes differ from the
amounts computed by applying the statutory federal income tax
rate to income (loss) before income taxes. The source and
tax effects of the differences are as follows:

|                                                                        |  |                          |        |      |  |      |       |   |  |   |       |  
|----------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                        |  |                         
|                                                                        |  | YEARS ENDED DECEMBER 31,
|                                                                        |  |                         
|                                                                        |  | 2003                     |        | 2002 |  | 2001
|                                                                        |  |                         
|                                                                        |  |                         
|Income (loss) before provisions for income taxes                        |  | $                        | 11,061 |      |  | $    | 9,721 |   |  | $ | (612  | )
|                                                                        |  |                         
|Income tax at statutory rate (35%)                                      |  |                          | 3,871  |      |  |      | 3,402 |   |  |   | (214  | )
|Non-deductible in-process research and development                      |  |                          |       |      |  |      |      |   |  |   | 4,417 |  
|State income tax, net of federal benefit                                |  |                          | 424    |      |  |      | 205   |   |  |   | 383   |  
|Foreign sales corporation/extraterritorial income
    exclusion benefit |  |                          | (147   | )    |  |      | (109  | ) |  |   | (251  | )
|Research and development credits                                        |  |                          | (197   | )    |  |      | (318  | ) |  |   | (381  | )
|Foreign losses currently (benefited) not benefited                      |  |                          | (708   | )    |  |      | (419  | ) |  |   | 530   |  
|Other                                                                   |  |                          | 76     |      |  |      | 155   |   |  |   | 141   |  
|                                                                        |  |                         
|                                                                        |  | $                        | 3,319  |      |  | $    | 2,916 |   |  | $ | 4,625 |  
|                                                                        |  |                         

Foreign pretax income was $5.7 million,
$3.9 million, and $1.3 million in 2003, 2002 and 2001,
respectively.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amount used for
income tax purposes. The tax effects of temporary differences
and carryforwards which give rise to significant portions of the
deferred tax assets and liabilities are as follows:

|                                             |  |              |        |      |  |   |        |  
|-------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                             |  |             
|                                             |  | DECEMBER 31,
|                                             |  |             
|                                             |  | 2003         |        | 2002
|                                             |  |             
|                                             |  |             
|Deferred tax assets:                         |  |              |        |      |  |   |        |  
|Deferred revenue and non-deductible reserves |  | $            | 449    |      |  | $ | 1,564  |  
|Warranty and accrued expenses                |  |              | 2,218  |      |  |   | 2,510  |  
|Net operating loss carryforwards             |  |              | 4,150  |      |  |   | 3,738  |  
|Foreign loss carryforwards                   |  |              | 163    |      |  |   | 709    |  
|Tax credit carryforwards                     |  |              | 2,617  |      |  |   | 2,827  |  
|Other                                        |  |              | 677    |      |  |   | 802    |  
|Valuation allowances                         |  |              | (2,906 | )    |  |   | (3,642 | )
|                                             |  |             
|Net deferred tax assets                      |  | $            | 7,368  |      |  | $ | 8,508  |  
|                                             |  |             

The valuation allowance decreased by $736,000 and
$970,000 in 2003 and 2002, respectively. Approximately
$2.9 million of the valuation allowance relates to stock
option deductions that will be credited to stockholders
equity when realized.

As of December 31, 2003, we had net
operating loss carryforwards for federal income tax purposes of
approximately $11.1 million, which expire in the years 2012
through 2019 and federal research and development tax credits of
approximately $1.5 million which expire in the years 2012
through 2023. We had net operating loss carryforwards for state
income tax purposes of approximately $8.5 million which
expire in the years 2004 through 2012 and research and
development credits of approximately $1.1 million for state
income tax purposes which carryforward indefinitely. Utilization
of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code and
similar state provisions. Such an annual limitation could result
in the expiration of the net operating loss and tax credit
carryforwards before utilization.



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##### Table of Contents



49

Note 9.    Industry
Segment, Geographic and Customer Information

We operate in a single industry segment, and the
chief operating decision maker views its operations as follows:
the design, development, manufacture, sale and service of
bioanalytical measurement systems for drug discovery and life
sciences research applications.

Foreign subsidiaries operations consist of
research and development, sales, service, manufacturing and
distribution. Summarized data for our domestic and international
operations was as follows (in thousands):

|                             |                               |               |   |               |      |                 |   |        |  |  |   |         |   |  |   |         |  
|---------------------------- | ----------------------------- | ------------- | - | ------------- | ---- | --------------- | - | ------ |  |  | - | ------- | - |  | - | ------- | -
|                             |                               |               |   |               |      | Adjustments and |   |       
|                             |                               | United States |   | International |      | eliminations    |   | Total 
|                             |                               |              
|                             |                               |              
|Year-Ended December 31, 2003 |                               |               |   |               |      |                 |   |        |  |  |   |         |   |  |   |        
|                             | Revenues                      |               | $ | 98,884        |      |                 | $ | 37,193 |  |  | $ | (20,497 | ) |  | $ | 115,580 |  
|                             | Income (loss) from operations |               |   | 5,768         |      |                 |   | 4,545  |  |  |   | (124    | ) |  |   | 10,189  |  
|                             | Total assets                  |               |   | 157,950       |      |                 |   | 25,754 |  |  |   | (16,791 | ) |  |   | 166,913 |  
|Year-Ended December 31, 2002 |                               |               |   |               |      |                 |   |        |  |  |   |         |   |  |   |        
|                             | Revenues                      |               |   | 92,058        |      |                 |   | 30,278 |  |  |   | (20,179 | ) |  |   | 102,157 |  
|                             | Income (loss) from operations |               |   | 8,438         |      |                 |   | 261    |  |  |   | (540    | ) |  |   | 8,159   |  
|                             | Total assets                  |               |   | 162,698       |      |                 |   | 22,114 |  |  |   | (21,911 | ) |  |   | 162,901 |  
|Year-Ended December 31, 2001 |                               |               |   |               |      |                 |   |        |  |  |   |         |   |  |   |        
|                             | Revenues                      |               |   | 82,934        |      |                 |   | 29,490 |  |  |   | (20,193 | ) |  | $ | 92,231  |  
|                             | Income (loss) from operations |               |   | (6,350        | )(1) |                 |   | 1,925  |  |  |   | 7       |   |  |   | (4,418  | )
|                             | Total assets                  |               |   | 151,848       |      |                 |   | 19,601 |  |  |   | (19,088 | ) |  |   | 152,361 |  



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Includes the write-off of acquired in-process
    research and development.

Our products are broken into two product
families. The Drug Discovery family includes the IonWorks HT,
FLIPR, CLIPR, Cytosensor, Analyst, and Discovery-1 product
lines, and related consumables. The Life Sciences Research
family includes the Maxline, Threshold, MetaMorph and Skatron
product lines. Consolidated revenue from our product families
was as follows (in thousands):

|                       |                |                          |        |         |  |      |        |         |  |   |        |        | 
|---------------------- | -------------- | ------------------------ | ------ | ------- |  | ---- | ------ | ------- |  | - | ------ | ------ | 
|                       |                |                         
|                       |                | YEARS ENDED DECEMBER 31,
|                       |                |                         
|                       |                | 2003                     |        | 2002    |  | 2001
|                       |                |                         
|                       |                |                         
|Drug Discovery         |                | $                        | 51,864 |         |  | $    | 45,826 |         |  | $ | 43,859 |       
|Life Sciences Research |                |                          | 63,717 |         |  |      | 56,331 |         |  |   | 48,372 |       
|                       |                |                         
|                       | Total revenues |                          | $      | 115,581 |  |      | $      | 102,157 |  |   | $      | 92,231 | 
|                       |                |                         

Sources of consolidated revenue from significant
geographic regions were as follows (in thousands):

|              |                |                          |        |         |  |      |        |         |  |   |        |        | 
|------------- | -------------- | ------------------------ | ------ | ------- |  | ---- | ------ | ------- |  | - | ------ | ------ | 
|              |                |                         
|              |                | YEARS ENDED DECEMBER 31,
|              |                |                         
|              |                | 2003                     |        | 2002    |  | 2001
|              |                |                         
|              |                |                         
|North America |                | $                        | 72,403 |         |  | $    | 64,819 |         |  | $ | 61,649 |       
|Europe        |                |                          | 28,090 |         |  |      | 25,331 |         |  |   | 20,136 |       
|Rest of World |                |                          | 15,088 |         |  |      | 12,007 |         |  |   | 10,446 |       
|              |                |                         
|              | Total revenues |                          | $      | 115,581 |  |      | $      | 102,157 |  |   | $      | 92,231 | 
|              |                |                         



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##### Table of Contents



50

Note 10.    Legal
Proceeding

On April 16, 2002, Caliper Technologies
Corp. filed a patent infringement lawsuit against us in U.S.
District Court for the Northern District of California alleging
that our IMAP assay kits infringe U.S. patents held by Caliper.
We settled the patent infringement lawsuit with Caliper in
November 2003. In connection with the settlement, we entered
into a nonexclusive license agreement with Caliper pursuant to
which we paid Caliper a one-time licensing fee and will pay
royalties based on future sales of IMAP products.

Note 11.    Related Party
Transactions

We paid Essen Instruments (Essen)
$2.2 million and $700,000, primarily for inventory in 2003
and 2002, respectively. Our Chief Executive Officer is a member
of the Board of Directors of Essen and Molecular Devices is also
a minority investor in Essen.

In December 2003, Molecular Devices and Essen
entered into a services agreement whereby Essen will provide
certain services for two years in exchange for the return of a
portion of the Essen shares owned by Molecular Devices. No
consideration had been earned under this agreement as of
December 31, 2003.

Note 12.    Subsequent
Event

In February 2004, we repurchased 630,000 shares
of common stock for approximately $12.0 million. These
shares will be accounted for as treasury stock, at cost.

Note 13.    Quarterly
Financial Data (Unaudited)

Summarized quarterly financial data is as follows:

|            |                                     |                                          |   |        |  |       |   |        |  |  |   |         |      |  |   |        | 
|----------- | ----------------------------------- | ---------------------------------------- | - | ------ |  | ----- | - | ------ |  |  | - | ------- | ---- |  | - | ------ | 
|            |                                     | First                                    |   | Second |  | Third |   | Fourth
|            |                                     |                                         
|            |                                     |                                         
|            |                                     |                                         
|            |                                     | (In thousands, except per share amounts)
|Fiscal 2003 |                                     |                                          |   |        |  |       |   |        |  |  |   |         |      |  |   |       
|            | Revenues                            |                                          | $ | 24,550 |  |       | $ | 28,505 |  |  | $ | 29,276  |      |  | $ | 33,250 | 
|            | Gross profit                        |                                          |   | 15,022 |  |       |   | 17,921 |  |  |   | 18,513  |      |  |   | 20,870 | 
|            | Net income                          |                                          |   | 721    |  |       |   | 1,781  |  |  |   | 2,279   |      |  |   | 2,961  | 
|            | Basic net income per share          |                                          |   | 0.05   |  |       |   | 0.12   |  |  |   | 0.15    |      |  |   | 0.20   | 
|            | Diluted net income per share        |                                          |   | 0.05   |  |       |   | 0.12   |  |  |   | 0.15    |      |  |   | 0.20   | 
|Fiscal 2002 |                                     |                                          |   |        |  |       |   |        |  |  |   |         |      |  |   |       
|            | Revenues                            |                                          | $ | 20,625 |  |       | $ | 25,440 |  |  | $ | 25,907  |      |  | $ | 30,184 | 
|            | Gross profit                        |                                          |   | 12,575 |  |       |   | 14,985 |  |  |   | 15,534  |      |  |   | 18,502 | 
|            | Net income                          |                                          |   | 723    |  |       |   | 1,680  |  |  |   | 1,795   |      |  |   | 2,607  | 
|            | Basic net income per share          |                                          |   | 0.05   |  |       |   | 0.11   |  |  |   | 0.12    |      |  |   | 0.17   | 
|            | Diluted net income per share        |                                          |   | 0.05   |  |       |   | 0.11   |  |  |   | 0.12    |      |  |   | 0.17   | 
|Fiscal 2001 |                                     |                                          |   |        |  |       |   |        |  |  |   |         |      |  |   |       
|            | Revenues                            |                                          | $ | 20,732 |  |       | $ | 23,981 |  |  | $ | 22,140  |      |  | $ | 25,378 | 
|            | Gross profit                        |                                          |   | 12,756 |  |       |   | 14,648 |  |  |   | 13,487  |      |  |   | 15,802 | 
|            | Net income (loss)                   |                                          |   | 1,644  |  |       |   | 2,435  |  |  |   | (11,212 | )(1) |  |   | 1,896  | 
|            | Basic net income (loss) per share   |                                          |   | 0.10   |  |       |   | 0.15   |  |  |   | (0.69   | )    |  |   | 0.12   | 
|            | Diluted net income (loss) per share |                                          |   | 0.10   |  |       |   | 0.15   |  |  |   | (0.69   | )    |  |   | 0.12   | 



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a charge of approximately
    $12.6 million for the write-off of acquired in-process
    research and development related to the acquisition of Cytion
    S.A.



---



##### Table of Contents



51

SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


(IN THOUSANDS)


|                                                                                        |  |            |       |            |  |            |     |            |  |   |      |   |  |   |       | 
|--------------------------------------------------------------------------------------- |  | ---------- | ----- | ---------- |  | ---------- | --- | ---------- |  | - | ---- | - |  | - | ----- | 
|                                                                                        |  | BALANCE AT |       |            |  |            |     | BALANCE AT
|                                                                                        |  | BEGINNING  |       | CHARGED TO |  |            |     | END OF    
|Description                                                                             |  | OF YEAR    |       | COSTS      |  | DEDUCTIONS |     | YEAR      
|                                                                                        |  |            |       |            |  |            |     |           
|                                                                                       
|                                                                                       
|Allowance for doubtful accounts receivable for
    the year ended
    December 31, 2001 |  | $          | 561   |            |  | $          | 597 |            |  | $ | (10  | ) |  | $ | 1,148 | 
|Allowance for doubtful accounts receivable for
    the year ended
    December 31, 2002 |  | $          | 1,148 |            |  | $          |    |            |  | $ | (714 | ) |  | $ | 434   | 
|Allowance for doubtful accounts receivable for
    the year ended
    December 31, 2003 |  | $          | 434   |            |  | $          | 77  |            |  | $ | (103 | ) |  | $ | 408   | 



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##### Table of Contents



52

exhibit index


|        |    |                         |  |                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |    |                        
|NUMBER  |    | DESCRIPTION OF DOCUMENT
|        |    |                        
|        | 2  | .1(1)                   |  | Form of Agreement and Plan of Merger between the
    Registrant and Molecular Devices Corporation, a California
    Corporation                                                                                                                                                                                                                 
|        | 2  | .2(2)                   |  | Stock and Asset Purchase Agreement, dated as of
    May 17, 1999, among Molecular Devices Corporation, a
    Delaware corporation, Helge Skare, Wiel Skare, Steinar Faanes
    and Sten Skare, each an individual resident in Norway, Skatron
    Instruments AS, a Norwegian company, and Skatron Instruments,
    Inc., a Virginia corporation
|        | 2  | .4(5)                   |  | Agreement and Plan of Merger and Reorganization
    dated as of June 7, 2000 by and among Molecular Devices
    Corporation, Mercury Acquisition Sub, Inc. and LJL BioSystems,
    Inc.                                                                                                                                                         
|        | 2  | .5(11)                  |  | Stock Purchase Agreement dated as of November 14,
    2000 by and among JCR Pharmaceuticals, K.K. and Molecular
    Devices Corporation                                                                                                                                                                                                         
|        | 2  | .6(12)                  |  | Stock Purchase Agreement dated as of July 6, 2001
    by and among Molecular Devices, Cytion S.A., Jean-Pierre Rosat
    (as agent for the stockholders of Cytion) and each of the
    stockholders of Cytion.                                                                                                                                  
|        | 2  | .7(13)                  |  | Stock Purchase Agreement dated as of June 1, 2002
    by and among Molecular Devices, Universal Imaging Corporation,
    Theodore Inoue (as agent for the stockholders of Universal
    Imaging Corporation) and each of the stockholders of Universal
    Imaging Corporation.                                                                 
|        | 3  | .1(1)                   |  | Amended and Restated Certificate of Incorporation
    of Registrant                                                                                                                                                                                                                                                                             
|        | 3  | .2(1)                   |  | Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                        
|        | 3  | .3(8)                   |  | Certificate of Amendment to Certificate of
    Incorporation                                                                                                                                                                                                                                                                                    
|        | 4  | .1(1)                   |  | Specimen Certificate of Common Stock of Registrant                                                                                                                                                                                                                                                                                              
|        | 10 | .1(1)*                  |  | 1988 Stock Option Plan                                                                                                                                                                                                                                                                                                                          
|        | 10 | .2(1)*                  |  | Form of Incentive Stock Option under the 1988
    Stock Option Plan                                                                                                                                                                                                                                                                             
|        | 10 | .3(1)*                  |  | Form of Supplemental Stock Option under the 1988
    Stock Option Plan                                                                                                                                                                                                                                                                          
|        | 10 | .4(8)*                  |  | 1995 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                               
|        | 10 | .6(1)*                  |  | Form of Nonstatutory Stock Option under the 1995
    Non-Employee Directors Stock Option Plan                                                                                                                                                                                                                                                  
|        | 10 | .8(1)*                  |  | Form of Incentive Stock Option under the 1995
    Stock Option Plan                                                                                                                                                                                                                                                                             
|        | 10 | .9(1)*                  |  | Form of Nonstatutory Stock Option under the 1995
    Stock Option Plan                                                                                                                                                                                                                                                                          
|        | 10 | .10(1)*                 |  | Form of Early Exercise Stock Purchase Agreement
    under the 1995 Stock Option Plan                                                                                                                                                                                                                                                            
|        | 10 | .11(1)*                 |  | Form of Indemnity Agreement between the
    Registrant and its Directors and Executive Officers                                                                                                                                                                                                                                                 
|        | 10 | .19(2)*                 |  | Key Employee Agreement for Joseph D. Keegan,
    Ph.D., dated March 11, 1998, as amended                                                                                                                                                                                                                                                        
|        | 10 | .20(3)                  |  | Exclusive License and Technical Support Agreement
    dated August 28, 1998 by and between the Registrant and Affymax                                                                                                                                                                                                                           
|        | 10 | .21(3)*                 |  | Employee Offer Letter for Tim Harkness                                                                                                                                                                                                                                                                                                          
|        | 10 | .23(3)*                 |  | Employee Offer Letter for John Senaldi                                                                                                                                                                                                                                                                                                          
|        | 10 | .24(4)*                 |  | 1995 Non-Employee Directors Stock Option
    Plan, as amended                                                                                                                                                                                                                                                                                  
|        | 10 | .25(14)*                |  | 1995 Stock Option Plan, as amended                                                                                                                                                                                                                                                                                                              
|        | 10 | .26(6)*                 |  | Employee Offer Letter for Patricia Sharp                                                                                                                                                                                                                                                                                                        
|        | 10 | .27(7)*                 |  | LJL BioSystems 1994 Equity Incentive Plan and
    Forms of Agreements                                                                                                                                                                                                                                                                           
|        | 10 | .28(7)*                 |  | LJL BioSystems 1997 Stock Plan and Forms of
    Agreements                                                                                                                                                                                                                                                                                      
|        | 10 | .29(7)*                 |  | LJL BioSystems 1998 Directors Stock Option
    Plan and Forms of Agreements                                                                                                                                                                                                                                                                    
|        | 10 | .33(9)                  |  | Lease Agreement dated May 26, 2000 by and between
    Aetna Life Insurance Company and the Registrant                                                                                                                                                                                                                                           
|        | 10 | .34(10)*                |  | Change in Control Severance Benefit Plan                                                                                                                                                                                                                                                                                                        
|        | 10 | .35(12)                 |  | Rights Agreement, dated October 25, 2001, among
    the Registrant and EquiServe Trust Company, N.A.                                                                                                                                                                                                                                            
|        | 10 | .36(8)*                 |  | Key Employee Agreement for Stephen Oldfield                                                                                                                                                                                                                                                                                                     
|        | 10 | .37(8)*                 |  | Key Employee Agreement for Tom OLenic                                                                                                                                                                                                                                                                                                          
|        | 10 | .38(14)*                |  | 2001 Stock Option Plan                                                                                                                                                                                                                                                                                                                          
|        | 10 | .39(14)                 |  | Lease dated May 28, 2002 by and between The
    Irvine Company and the Registrant                                                                                                                                                                                                                                                               
|        | 10 | .40(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and Joseph D. Keegan, Ph.D.                                                                                                                                                                                                                                             
|        | 10 | .41(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and Timothy A. Harkness                                                                                                                                                                                                                                                 



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##### Table of Contents



53

|        |    |                         |  |                                                                                                                                                          
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |    |                        
|NUMBER  |    | DESCRIPTION OF DOCUMENT
|        |    |                        
|        | 10 | .42(14)*                |  | Letter Agreement dated April 11, 2002 by and
    between the Registrant and John S. Senaldi                                                              
|        | 21 | .1                      |  | Subsidiaries of the Registrant                                                                                                                           
|        | 23 | .1                      |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                   
|        | 31 | .1                      |  | Certification required by Rule 13a-14(a) or Rule
    15d-14(a).                                                                                          
|        | 31 | .2                      |  | Certification required by Rule 13a-14(a) or Rule
    15d-14(a).                                                                                          
|        | 32 | .1**                    |  | Certifications required by Rule 13a-14(b) or Rule
    15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
    United States Code (18 U.S.C 1350).



---



| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the similarly
    described exhibit in our Registration Statement on Form S-1
    (File No. 33-98926), as amended.                                                  
|
| | (2) | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    June 30, 1998, and filed August 13, 1998.                                           
|
| | (3) | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    September 30, 1998, and filed November 13, 1998.                                    
|
| | (4) | Incorporated by reference to the similarly
    described exhibit in our Registration Statement on Form S-8
    (File No. 333-86159), as amended.                                                 
|
| | (5) | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    June 12, 2000.                                                                      
|
| | (6) | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    September 30, 2000 and filed on November 13, 2000.                                  
|
| | (7) | Incorporated by reference to the similarly
    described exhibit filed with LJL BioSystems Registration
    Statement on Form S-1 (File No. 333-43529) declared
    effective on March 12, 1998.
|
| | (8) | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2001 and filed on April 1, 2002.                                          
|
| | (9) | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2000 and filed on March 30, 2001.                                         



|     |                                                                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    March 31, 2001 and filed on May 11, 2001.  
|    
|(11) | Incorporated by reference to the similarly
    described exhibit in our Form 10-Q Quarterly Report dated
    June 30, 2001 and filed on August 14, 2001.
|    
|(12) | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    October 30, 2001.                          
|    
|(13) | Incorporated by reference to the similarly
    described exhibit in our Current Report on Form 8-K filed
    on June 12, 2002.                          
|    
|(14) | Incorporated by reference to the similarly
    described exhibit in our Form 10-K Annual Report dated
    December 31, 2003 and filed on March 27, 2003.



|   |                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Management contract or compensatory plan or
    arrangement.                                                                                                                                                                                                                                     
|  
|** | The certification attached as Exhibit 32.1
    accompanies the Annual Report on Form 10-K pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 and shall not
    be deemed filed by the Company for purposes of
    Section 18 of the Securities Exchange Act of 1934, as
    amended.