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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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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



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From
 to

Commission file No. 000-30369


VIROLOGIC, INC.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|DELAWARE                                                           |  | 94-3234479                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    identification no.)
|                                                                  
|345 Oyster Point Blvd
    South San Francisco, California          |  | 94080                                   
|(Address of principal executive
    offices)                       |  | (Zip code)                              

Registrants Telephone Number, Including
Area Code: (650) 635-1100

Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 Par Value


(Title of class)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K    o.

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes o        No x

The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of June 30,
2003 was $28,663,200.*

The number of shares outstanding of the
Registrants Common Stock was 53,397,100 as of
March 25, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

The registrants Definitive Proxy Statement,
to be filed with the Securities and Exchange Commission (the
Commission) pursuant to Regulation 14A in
connection with the 2004 Annual Meeting of Stockholders (the
2004 Annual Meeting), is incorporated by reference
into Part III of this Report.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes 9,678,888 shares of Common Stock
    held by directors, officers and stockholders whose beneficial
    ownership exceeds 5% of the Registrants Common Stock
    outstanding. The number of shares owned by such persons was
    determined based upon information supplied by such persons and
    upon Schedules 13D and 13G, if any, filed with the SEC.
    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, that such person is controlled by or
    under common control with the Registrant, or that such persons
    are affiliates for any other purpose.



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TABLE OF CONTENTS

|             |  |                                                                                                        |  |    
|------------ |  | ------------------------------------------------------------------------------------------------------ |  | ---
|PART I       |  |                                                                                                        |  |    
|Item 1.      |  | Business                                                                                               |  | 3  
|Item 2.      |  | Properties                                                                                             |  | 32 
|Item 3.      |  | Legal Proceedings                                                                                      |  | 32 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                                |  | 32 
|PART II      |  |                                                                                                        |  |    
|Item 5.      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  | 33 
|Item 6.      |  | Selected Financial Data                                                                                |  | 35 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  | 36 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  | 44 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                                        |  | F-1
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  | 46 
|Item 9A.     |  | Controls and Procedures                                                                                |  | 46 
|PART III     |  |                                                                                                        |  |    
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                                 |  | 46 
|Item 11.     |  | Executive Compensation                                                                                 |  | 46 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  | 46 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                                     |  | 46 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                             |  | 46 
|PART IV      |  |                                                                                                        |  |    
|Item 15.     |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  | 47 
|Signatures   |  |                                                                                                        |  | 50 
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



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This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 including, without limitation,
statements regarding our PhenoSense and GeneSeq testing
products, the growth of our pharmaceutical business, research
and development expenditures, adequacy of our capital resources,
and other financial matters. These statements, which sometimes
include words such as expect, goal,
may, anticipate, should,
continue, or will, reflect our
expectations and assumptions as of the date of this Annual
Report based on currently available operating, financial and
competitive information. Actual results could differ materially
from those in the forward-looking statements as a result of a
number of factors, including our ability to raise additional
capital, the market acceptance of our resistance testing
products, the effectiveness of our competitors existing
products and new products, the ability to effectively manage
growth and the risks associated with our dependence on patents
and proprietary rights. These factors and others are more fully
described in Risk Factors Related to Our Business
and elsewhere in this Form 10-K. We assume no obligation to
update any forward-looking statements.




PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a biotechnology company developing,
marketing and selling innovative products to guide and improve
treatment of viral diseases. We incorporated in the state of
Delaware on November 14, 1995 and commenced commercial
operations in 1999. We developed a practical way of directly
measuring the impact of genetic mutations on drug resistance and
using this information to guide therapy. We have proprietary
technology, called PhenoSense, for testing drug resistance in
viruses that cause serious viral diseases such as HIV/ AIDS and
hepatitis. Our products are used by physicians in selecting
optimal treatments for their HIV patients and by industry,
academia and government for clinical studies, drug screening and
characterization, and basic research.

We currently market the following products:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PhenoSense HIV.This
    phenotypic test directly and quantitatively measures resistance
    of a patients HIV to anti-viral drugs. It is used by
    physicians in patient testing and by pharmaceutical customers in
    their research and development activities.                                                                                                                                                                                           
|
| |  | GeneSeq HIV.This
    genotypic test examines and evaluates the genetic sequences of a
    patients HIV. It is used by physicians in patient testing
    and by pharmaceutical customers in their research and
    development activities.                                                                                                                                                                                                                      
|
| |  | PhenoSense GT.This
    product combines our PhenoSense HIV and GeneSeq HIV tests into
    one integrated report to provide comprehensive drug resistance
    information to assist physicians in selecting optimal treatments
    for their HIV patients and by pharmaceutical customers in their
    research and development activities.                                                                                                                      
|
| |  | Replication Capacity
    HIV.This test measures viral fitness,
    or the ability of a virus to reproduce and infect new cells. We
    currently include this product free of charge when a physician
    or pharmaceutical customer orders one of the reports generated
    by our PhenoSense products. In the future, we may offer this
    product on a stand-alone basis.                                                                                   
|
| |  | PhenoScreen.This
    phenotypic product provides high-throughput screening for the
    identification of potential clinical drug candidates for
    pharmaceutical customers.                                                                                                                                                                                                                                                                                   
|
| |  | PhenoSense HIV Entry and GeneSeq HIV
    Entry.We currently market both a
    phenotypic entry assay and a genotypic entry assay, which
    measure HIV resistance to entry inhibitors, to pharmaceutical
    customers for use in their research and drug development
    activities. We intend to offer these tests to physicians for
    patient testing after pharmaceutical drugs become available for
    patient use and based on demand for the product.
|
| |  | PhenoSense HIV Co-Receptor
    Tropism.HIV enters and infects cells
    by attaching to a cellular receptor (CD4) and one of two
    co-receptors, either CCR5 or CXCR4. Several pharmaceutical                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | companies are developing drugs to block this
    co-receptor attachment. We have applied our PhenoSense HIV Entry
    technology to develop a test to assess which co-receptor the
    patients virus uses to enter cells (tropism). This test
    may play an important role in defining patient eligibility for
    treatment with these new HIV co-receptor inhibitors and
    monitoring their response to therapy. In addition, data exist
    which suggest that co-receptor tropism may be a prognostic
    factor in the pace of HIV disease progression.
|
| |  | PhenoSense HIV Antibody Neutralization for
    Vaccine Development.This application
    of the PhenoSense HIV Entry assay is available to pharmaceutical
    customers and researchers to aid in the development of HIV
    vaccines.                                                                                                                                                                                                                                                                                                                             
|
| |  | GeneSeq HCV.This
    genotypic test examines and evaluates the genetic sequence of
    hepatitis C and is currently available for pharmaceutical
    customers. We also intend to offer this test to physicians for
    patient testing after more pharmaceutical drugs become available
    for patient use.                                                                                                                                                                                                                                                     
|
| |  | GeneSeq HBV.Like
    our GeneSeq HIV product, this genotypic test is directed toward
    hepatitis B and currently available for pharmaceutical
    customers. We intend to offer this test to physicians for
    patient testing after more pharmaceutical drugs become available
    for patient use.                                                                                                                                                                                                                                                           

We are also developing additional products. Like
our other tests, we anticipate that these tests will be used
first by pharmaceutical companies in their research and drug
development activities, and later by physicians for patient
testing after drugs become available for patient use:



| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PhenoSense and GeneSeq HIV
    Integrase.We are currently applying
    our PhenoSense and GeneSeq HIV technologies to develop tests to
    evaluate resistance to a new class of HIV drugs called integrase
    inhibitors, which are designed to block a critical step in the
    lifecycle of HIV.
|
| |  | PhenoSense HCV.This
    is a phenotypic test directed toward hepatitis C.                                                                                                                                                                                                                           
|
| |  | PhenoSense HBV.This
    is a phenotypic test directed toward hepatitis B.                                                                                                                                                                                                                           

We are also collecting resistance test results
and related clinical data to create database products that are
sold to pharmaceutical customers to assist in drug development
and drug marketing. This database may be made available to
physicians for use in therapy guidance in the future.

2003 Highlights

In 2003, we completed development of our GeneSeq
HCV assay for use by pharmaceutical companies in their research
and drug development activities. In addition, we were awarded
four Small Business Innovation Research (SBIR)
grants from the National Institute of Allergy and Infectious
Diseases (NIAID), a division of the
U.S. National Institutes of Health (NIH),
totaling more than $4 million over three years. The grants
will help support the development of analytical and database
tools to facilitate the identification and characterization of
drug resistant strains of HIV and assays that will aid in the
pre-clinical and clinical evaluation of the next generation of
anti-viral therapeutics.

Background

Viruses

Viruses are microorganisms that must infect
living cells to reproduce, or replicate. Many viruses cause
disease in people. These viruses infect human cells and
replicate, making new viruses that can infect other cells. There
are many different types of viruses, but all viruses share
structural and functional characteristics associated with their
ability to replicate. During the replication cycle, viruses
often change slightly, or mutate. For example, in an untreated
HIV patient, as many as ten billion new viruses are produced
each day, and at least one quarter of the new viruses have
errors, or mutations, in their genes. At any given time there
can be many different variants of the virus present within the
body, each with a slightly different genetic sequence.

The Viral Drug Resistance Crisis

Currently available anti-viral drugs interfere
with key viral functions to prevent viruses from replicating and
therefore slow the progression of disease. However, these drugs
are typically effective for only a limited time because viruses
develop resistance to them through mutation, making the therapy
less effective and

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making many serious viral diseases almost
impossible to cure. A resistant virus is one that is less
sensitive to the drug that is administered. Mutant viruses
resistant to a particular drug therapy continue to replicate
while the others are eliminated. Over time the mutant, resistant
virus predominates and the drug therapy fails. In response to
this effect, physicians now use anti-viral drugs in combination,
attacking different targets within a virus simultaneously.
Combination therapy slows replication more effectively than a
single drug, further delaying the development of drug
resistance. In the short term, combination therapy has helped
many patients. However, even combination therapy eventually
fails in a great majority of patients, due in large part to the
fact that the virus becomes resistant to some or all of the
drugs used in combination.


Resistance to anti-viral drugs is the most
serious impediment to successful treatment of HIV/ AIDS
patients. There are currently nineteen drugs approved by the
U.S. Food and Drug Administration (FDA) that
are generally used in various combinations to treat HIV
infections. Combination therapy requires each drug in the
combination to be active (in other words, interfere with key
viral functions) for therapy to be most effective. If any of the
drugs are not active, the therapy will likely fail more quickly.
Each treatment failure increases the risk that the next drug
combination will not work, or work for a shorter period of time,
and leaves the patient with fewer future treatment options.
Additionally, drug resistant viruses can be transmitted to newly
infected individuals, increasing the risk that initial treatment
for those individuals will not work. New drugs with increased
potency and activity against drug resistant viruses are not
becoming available in time to overcome this crisis.
Consequently, physicians are faced with the challenge of
tailoring therapy to individual patients numerous times per year
for many patients.

Resistance Testing

When anti-viral therapy does not completely
suppress viral replication, drug resistant variants can emerge
rapidly, within days to weeks. If left unchecked, patients may
be at greater risk of becoming more seriously ill unless
effective drugs are promptly administered. Until a few years
ago, physicians chose drugs based on a patients treatment
history without the benefits of information regarding drug
resistance of the patients virus, and frequently changed
all drugs in a treatment regimen even when some might have still
been effective. When physicians inadvertently select ineffective
drugs, patients become more seriously ill, suffer toxic side
effects, and unnecessarily bear the costs of the drugs.

To achieve long-term clinical benefit, physicians
must select drugs that maximally suppress viral replication and
avoid drugs to which a patients virus is resistant. We
believe that long term solutions will rely on drug resistance
tests and information systems that can guide physicians in
selecting the most effective drugs against the patients
virus and avoiding drugs to which the patients virus is
resistant. The need for resistance testing has been affirmed in
guidelines from panels led by the U.S. Department of Health
and Human Services, the International AIDS Society-USA and the
EuroGuidelines Group, all of which have recommended that
resistance tests be routinely used when treating HIV patients.

Resistance tests can also assist pharmaceutical
companies in the development of drugs to target resistant
viruses. In fact, a November 1999 FDA advisory committee
emphatically recommended that resistance testing be used in the
development of all new anti-viral drugs for HIV.

Phenotypic tests determine phenotype,
which refers to an organisms outward appearance or
functional characteristics. For example, eye color is a
phenotype. One viral phenotype is the ability to replicate in
the presence of anti-viral drugs, also referred to as drug
resistance. Phenotypic drug resistance tests directly
measure the sensitivity of a patients virus to anti-viral
drugs by adding a drug to a virus sample and determining whether
the virus is able to replicate in the presence of the drug.
These tests eliminate much of the guesswork in making treatment
decisions by providing the physician with direct information
about drug resistance of a patients virus.

Early phenotypic tests required culturing, or
growing viruses in the laboratory. These tests were slow, labor
intensive and not easily automated. Since viruses mutate while
growing in culture, the process could produce inaccurate results
because the virus in culture might be different from the virus
in the patient. As a result, early phenotypic testing was
impractical for patient management. In the absence of practical
phenotypic drug resistance tests, clinicians began to use
genotypic tests in an attempt to predict drug

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resistance indirectly. Genotypic tests detect
mutations in the underlying gene sequence, or genotype of the
virus, and attempt to correlate these mutations with drug
resistance.


Vaccine Development

The World Health Organization estimates that
40 million individuals are currently infected with HIV/
AIDS, which is emerging as the most important healthcare
challenge in many developing countries. A preventive vaccine
remains the best long-term solution to bring this epidemic under
control. Over 30 candidate vaccines have been tested and dozens
more are planned. Recently, many of the worlds top AIDS
researchers called for the formation of a worldwide vaccine
development coalition. The current strategy for vaccine design
focuses on the induction of an immune response to the virus,
including the generation of neutralizing antibodies. However,
conventional HIV neutralization testing technologies have cost,
capacity and technical constraints that often limit the extent
of their application in vaccine testing protocols. We have
applied our proprietary PhenoSense technology and developed an
antibody neutralization assay which we believe is more rapid,
reproducible and accurate.

Our Solution

We believe our PhenoSense technology has
significantly improved viral drug resistance testing. Our
technology, which we believe to be the only currently available
method that eliminates all prolonged virus culture steps, uses a
genetically engineered virus that replicates only once. As a
result, we avoid the need to culture viruses during testing,
which makes the tests more consistent and accurate than
competing phenotypic tests currently available and dramatically
shortens the time required to complete them. Also, our tests can
be automated and performed in large numbers, making them
practical for routine use in clinical management of patients. We
believe that our tests and the information that we collect from
these tests have the potential to significantly change the way
physicians treat viral diseases.

We believe our PhenoSense technology meets the
needs of physicians and patients because it is:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | Direct:detects drug
    resistance of viruses without need for complex interpretation of
    mutations                
|
| |  | Quantitative:measures the degree of drug resistance and susceptibility,
    providing more than a yes or no answer
|
| |  | Reliable:results
    are accurate and reproducible                                                                    
|
| |  | Comprehensive:can
    evaluate drug resistance to all currently available anti-viral
    drugs                        
|
| |  | Versatile:can be
    modified to evaluate new classes of anti-viral drugs                                             
|
| |  | User-Friendly:results are easy to read and understand                                                                 
|
| |  | Rapid:can be
    performed in eight to ten days, much faster than other
    phenotypic resistance tests               

The cornerstone of our PhenoSense technology is a
proprietary vector, which we call the resistance test
vector. This vector is a strand of viral genes that
replicates when introduced into a living cell. Our vector
includes two key elements. The first is a gene that produces a
protein that can be easily detected, which we call an
indicator. An example of an indicator we use is
luciferase, which is responsible for the glow of fireflies. The
second key element is one or more specific genes derived from
the patients virus. These genes correspond to the targets
of the anti-viral drugs being tested. For example, many HIV
drugs target an enzyme called protease that is needed for HIV to
replicate. We incorporate the gene that makes protease into the
vector for our HIV drug resistance test.

To perform our PhenoSense tests, we:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | Obtain a blood sample from the patient;                                                                 
|
| |  | Isolate and inactivate the virus;                                                                       
|
| |  | Copy the viral genes corresponding to the drug
    targets;                                             
|
| |  | Insert these genes into the vector;                                                                     
|
| |  | Introduce the assembled vector into living cells
    to produce a new virus containing the copied genes;

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| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Use the new virus to infect cells in the presence
    of anti-viral drugs; and 
|
| |  | Determine the ability of the virus to complete a
    single round of infection.

The amount of indicator we detect is used to
measure drug resistance. For example, we measure the amount of
light produced by luciferase in our PhenoSense HIV test. If the
virus is sensitive to the drug being tested, less light is
detected. If the virus is resistant to the drug, more light is
detected.

We report our resistance test results using
illustrative curve diagrams. We plot the amount of luciferase,
which corresponds to the amount of virus replication, on the
vertical axis against the amount of drug administered on the
horizontal axis. We generate curves for both a patients
virus and a drug-sensitive control virus, and compare the two
curves to quantitatively measure drug resistance. Viruses with
increased resistance require more drugs to inhibit replication.
We produce curves for each commercially available drug as well
as for novel drugs we test for pharmaceutical development.

Our Strategy

Our objective is to be the world leader in
developing and commercializing products and information systems
to guide the treatment of serious diseases. Our current products
are in the fields of HIV/ AIDS and hepatitis; future target
therapeutic areas may include oncology. Key elements of our
strategy are to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establish ViroLogic As The World Leader In
    Drug Resistance.We believe we have
    firmly established ourselves as a prominent force in the medical
    and scientific community in the field of HIV drug resistance. We
    present important new scientific discoveries at major meetings
    each year and publish those findings in prominent peer-reviewed
    journals. A number of major pharmaceutical companies have
    partnered with ViroLogic in training their organizations on the
    topic of HIV drug resistance and in educating the physician
    community.                                                                                                                                                                                                              
|
| |  | Successfully Commercialize our Product
    Portfolio.We are currently marketing
    PhenoSense HIV, GeneSeq HIV, and PhenoSense GT to physicians
    directly and through scientific publications, clinical trials
    and scientific meetings. We market our products directly to
    physicians in the United States through our own sales force,
    primarily focusing on the 1,800 leading HIV physicians who treat
    approximately 80% of the total U.S. HIV/ AIDS patient
    population. We also conduct educational symposia and programs on
    HIV drug resistance and resistance testing for physicians,
    patients and treatment educators throughout the country. We work
    collaboratively with pharmaceutical companies to educate
    physicians about resistance testing.
|
| |  | Provide Broad, Easy Access to our
    Products.We have created broad access
    to our current commercial products from both reimbursement and
    distribution standpoints. We have advocated and achieved
    established insurance coverage policies for our marketed
    products throughout the country with over an estimated 75% of
    HIV/ AIDS patients now having access to coverage. Our products
    are available either directly from us or through major national
    and regional reference labs.                                                                                                                                                                                                                                                                               
|
| |  | Apply Our Technology to Drug Discovery and
    Development.We are applying our
    technology to create tools for pharmaceutical companies to help
    them determine how patients will respond to particular drugs, to
    assist them in screening drug candidates and to use in other
    drug discovery efforts. We are also assembling a library of
    resistance test vectors for testing of drug compounds and
    candidates. We currently have testing agreements with numerous
    pharmaceutical companies to conduct clinical trial and drug
    characterization work. In the future we may enter into
    additional partnerships to jointly discover and develop drug
    candidates for the treatment of HIV and other viral diseases.                                          
|
| |  | Expand Our PhenoSense Technology to Other
    Serious Diseases.Using our
    proprietary PhenoSense technology, we intend to develop
    phenotypic drug resistance testing products for other diseases.
    We are currently developing phenotypic and genotypic resistance
    tests for hepatitis viruses. We also believe that as the next
    generation of cancer drugs gain wide acceptance and use, they
    may provide a promising application for our platform therapy
    guidance technologies.                                                                                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain a Strong Intellectual Property
    Portfolio.We have patent coverage for
    our PhenoSense HIV product and patent applications directed to
    our other products. As we expand into new areas and diversify
    our business, we intend to build strong intellectual property
    positions.

Products

PhenoSense HIV

PhenoSense HIV, launched commercially in 1999, is
a phenotypic drug resistance test that measures the resistance
of HIV to all commercially available anti-viral drugs. When a
physician orders a PhenoSense HIV test, a blood sample is drawn
from the patient. This sample is sent to us to perform the test
in our clinical laboratory located in South San Francisco,
California. We then send a report detailing the results of the
test to the physician, typically within two weeks.

HIV now affects nearly one million people in the
United States and over 40 million people worldwide.
Nineteen anti-viral drugs are FDA-approved for treatment of
HIV infection and more than an estimated 50 additional
drugs are currently in development. Despite the availability of
anti-viral drugs, HIV is difficult to treat because it
replicates rapidly and becomes resistant to anti-viral drugs.
Selecting the right combination of drugs for optimal treatment
of HIV patients is often difficult when physicians have limited
information about the susceptibility to specific anti-viral
drugs of the HIV infecting an individual patient.

Physicians are now routinely using resistance
testing because drug resistance in HIV/AIDS treatment has become
a serious crisis. Guidelines for the management of patients with
HIV, issued by separate panels led by the U.S. Department
of Health and Human Services and the International
AIDS Society-USA (IAS-USA) each recommend that
resistance tests be routinely used for HIV patients. The
IAS-USA guidelines updated in 2003 also recommend resistance
testing to new patient populations, including chronically
infected, untreated patients prior to initiation of therapy. In
addition, the FDA Antiviral Drugs Advisory Committee in
November 1999 emphatically recommended that resistance tests
should be utilized in the development of new anti-viral drugs
for HIV.

All currently FDA-approved HIV drugs target
an important step in the replication cycle of HIV. One group of
drugs, called reverse transcriptase inhibitors,
blocks the virus from copying its genetic material. Another
group, called protease inhibitors, blocks the
formation of viral proteins that are necessary for the virus to
infect other cells. The vectors used in our PhenoSense HIV
test incorporate the protease and reverse transcriptase gene
segments from the virus of the patient being tested. A new group
of HIV drugs, called virus entry inhibitors,
blocks HIV from entering new cells, thereby preventing the
spread of the virus in the body. PhenoSense HIV has been
expanded to incorporate the HIV envelope gene in order to
test this new group of drugs for pharmaceutical customers. Based
on our knowledge of the mechanism of action of all of the
HIV drugs currently in development, we believe we will be
able to incorporate appropriate gene segments corresponding to
the targets of new drugs, such as HIV integrase inhibitors
or assembly inhibitors, into our proprietary PhenoSense HIV
technology, thereby allowing us to create resistance tests for
each of these targets.

GeneSeq HIV

We have commercialized a genotypic test we call
GeneSeq HIV. Genotypic tests identify gene sequence
mutations that may be associated with resistance to commercially
available drugs. We have developed GeneSeq HIV as a tool to
examine and evaluate the genetic sequences of HIV in patients.
We also frequently update the rules correlating genotypic and
phenotypic results to improve genotypic interpretation and our
understanding of drug resistance and have incorporated many of
those rules into our genotypic algorithm. We sell
GeneSeq HIV to physicians who request genotypic testing and
pharmaceutical companies that are developing new drugs. We may
use the genetic sequence information and the rules as a
component of the database described below.

PhenoSense GT

PhenoSense GT is the only commercially
available drug resistance test using phenotypic test results
supplemented by genotypic information to provide physicians with
comprehensive resistance information on

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one integrated, easy-to-interpret report.
Launched in November 2001, it helps physicians and patients
individualize treatment regimens to fight HIV.
PhenoSense GT was designed in response to an increasing
number of physicians ordering both phenotypic and genotypic
tests for their patients.


Replication Capacity HIV

We have applied our PhenoSense technology to
measure replication capacity of a patients virus, which is
a critical component of a broader concept known as viral
fitness. Replication capacity is a measure of a virus
ability to replicate and infect new cells. It is different from
resistance in that it is a measure of the virus ability to
replicate in the absence of anti-viral drugs, rather than a
measure of drug activity against the virus. Our researchers and
collaborators have published 14 studies using the
PhenoSense Replication Capacity assay. The current IAS-USA
guidelines also highlight replication capacity measurement,
which in recent studies has been shown to be a reliable
predictor of HIV disease progression, similar to viral load and
CD4 T-cell counts. Several studies have demonstrated the
important relationship between replication capacity and
immunological outcome. We are currently conducting multiple
studies to further define the clinical utility of our
Replication Capacity assay. We currently offer this product free
of charge when a physician or pharmaceutical customer orders one
of our PhenoSense products. In the future, we may offer this
product on a stand-alone basis.

PhenoScreen

This phenotypic product is intended as a
secondary screening assay that can be used to determine relative
potency of a larger number of compounds. This assay was designed
to help drug companies screen clinical drug candidates for HIV
by providing an initial drug susceptibility assessment at a very
high testing capacity and throughput in order to identify
lead compounds that will require subsequently more
intensive characterization.

PhenoSense HIV Entry and GeneSeq HIV
Entry

We have developed tests to measure phenotypic and
genotypic susceptibility of HIV to a new class of anti-viral
drugs called viral entry inhibitors. One entry inhibitor drug
has been approved for the treatment of HIV infection and an
estimated 20 drugs designed to block virus attachment or
entry are being evaluated in preclinical and clinical studies.
Several pharmaceutical companies have already used our tests to
determine the anti-viral activity of their drugs in early or
late stages of preclinical and clinical development.

PhenoSense HIV Co-Receptor Tropism

HIV enters and infects cells by attaching to a
cellular receptor (CD4) and one of two co-receptors, either
CCR5 or CXCR4. Several pharmaceutical companies are developing
drugs to block co-receptor attachment. We have applied our
PhenoSense HIV Entry technology to develop a test to assess
which co-receptor the patients virus uses to enter cells
(tropism). The test may play an important role in defining
patient eligibility for treatment with these new
HIV co-receptor inhibitors and monitoring their response to
therapy. In addition, data exist which suggest that co-receptor
tropism may be a prognostic factor in the pace of
HIV disease progression.

PhenoSense HIV Antibody Neutralization for
Vaccine Development

We are currently applying our PhenoSense HIV
Entry technology to test patient blood samples for the presence
of antibodies that neutralize the HIV virus
(i.e., prevent the virus from infecting cells). This test
is especially important for the development of an effective
prophylactic or therapeutic HIV vaccine. Currently,
numerous companies, academic and government organizations have
HIV vaccine candidates in various stages of development and
require a rapid high-throughput assay for accurate assessment of
neutralizing antibodies. We are currently providing neutralizing
antibody testing for several pharmaceutical companies, as well
as government sponsored and private research groups.

GeneSeq HCV

We have applied our GeneSeq technologies to
develop a test to analyze drug resistance of hepatitis C
virus, or HCV. HCV infection causes liver disease and liver
cancer. The Center for Disease Control and Prevention
(CDC) estimates that four million people in the
United States and more than 170 million

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people worldwide are infected with HCV. Based on
studies that show that 60% to 85% of persons infected with HCV
develop chronic infection, and assuming that all such persons
would benefit from anti-viral drug therapy, we estimate that 60%
to 85% of patients infected with HCV may benefit from anti-viral
drug therapy.


HCV replicates and mutates at extremely high
rates inside an infected patient, similar to HIV. Therefore,
complex combinations of drugs may then be required to increase
the success of treatment. As a result, a number of major
pharmaceutical companies are discovering and developing new
drugs for HCV. HCV drugs are in development that target
many different aspects of the virus life cycle. Similar to
HIV drugs, there are efforts to develop HCV protease
inhibitors as well as drugs that block the replication of the
genetic material of HCV or the production of HCV proteins.

Our HCV genotypic test is currently being used by
pharmaceutical customers in the discovery and development of new
HCV drugs. As the number and use of HCV drugs
increase, we expect the demand for our HCV resistance tests
by physicians making treatment decisions to grow. Prior to that
time, we expect our HCV resistance tests will continue to
be used by pharmaceutical customers in the discovery and
development of new HCV drugs.

GeneSeq HBV

We have applied our GeneSeq technology to develop
a test to analyze drug resistance of hepatitis B virus, or
HBV. HBV infection is a leading cause of liver disease and
liver cancer and leads to more than one million deaths worldwide
each year. The CDC estimates that there are over
one million people in the United States chronically
infected with HBV, and over 350 million people chronically
infected worldwide, mostly in Asia. Based on research that shows
that half of patients with chronic HBV have evidence of active
disease, and assuming that anti-viral drug treatment is
indicated for patients with active disease, we estimate that
approximately half of those chronically infected would benefit
from anti-viral drug therapy.

As in the case of HIV, drug resistance is a
problem when treating HBV. Similar to the treatment of
HIV infection, effective therapy of chronic
HBV infection will likely require complex combinations of
anti-viral drugs. As more drugs become available, physicians
will face increasing difficulty selecting the most appropriate
drug combinations for HBV patients. Therefore, we believe
drug resistance testing will play a significant role in guiding
HBV treatment.

The FDA has approved three drugs (alpha
interferon, lamivudine, and adefovir) for the treatment of HBV
infection and more than an estimated 15 drugs are in
preclinical or clinical stages of development. Many of these
drugs target HBV reverse transcriptase, which acts in a
manner similar to HIV reverse transcriptase, to prevent the
virus from copying its genes. Research efforts are ongoing to
discover drugs that target other aspects of HBVs life
cycle, such as the assembly of HBV viruses, or the entry of
HBV into liver cells.

As the number and use of HBV drugs
increases, we expect the demand for GeneSeq HBV by
physicians making treatment decisions to grow. Prior to that
time, we expect our HBV resistance tests will continue to
be used by pharmaceutical customers in the discovery and
development of new HBV drugs.

Products in Development

PhenoSense and GeneSeq HIV Integrase

We are currently applying our PhenoSense and
GeneSeq HIV technologies to develop tests to evaluate
resistance to a new class of HIV drugs called integrase
inhibitors. Several integrase inhibitors, which are designed to
block the reproduction of HIV once it is inside a cell, are now
in development.

PhenoSense HBV and HCV

We plan to apply our PhenoSense technology to
develop tests to analyze drug resistance of hepatitis B, or
HBV, and hepatitis C, or HCV. As discussed above, hepatitis
infection is a leading cause of liver disease and liver cancer,
and we believe drug resistance testing will play a significant
role in guiding treatment. Based on our knowledge of the
mechanism of action of these drugs in research, we believe that
we will be able to incorporate genes corresponding to the
targets of these drugs into our PhenoSense HBV and HCV
vector.

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As the number and use of HBV and HCV drugs
increases, we expect the demand for PhenoSense HBV and HCV
by physicians making treatment decisions to grow. Prior to that
time, we expect our HBV and HCV resistance tests will be
used by pharmaceutical customers in the discovery and
development of new HBV and HCV drugs.

Pharmaceutical Customers

We perform resistance testing for industry,
academia and government for clinical studies, drug
screening/characterization and basic research. Given the
FDAs endorsement of the important role of resistance
testing in drug development, and the large number of drugs in
development for HIV, hepatitis and other viral diseases, our
pharmaceutical product and service offerings have become a
significant aspect of our business.

Clinical Trials.Because clinical trials are the most expensive part of drug
development, pharmaceutical companies are trying to improve the
outcomes of clinical trials by using the methods of
pharmacogenomics, the scientific discipline focused
on how genetic differences among patients determine or predict
responsiveness or adverse reactions to particular drugs. In a
similar way, pharmaceutical companies are applying our
PhenoSense technology to help select patients for clinical
trials. This selection process may allow companies to guide
important drug development decisions before large resource
commitments are made. To date, we have signed testing agreements
with most pharmaceutical companies involved in HIV/AIDS drug
development, including: Abbott Laboratories, Boehringer
Ingelheim, Bristol-Myers Squibb, Chiron Corporation, Gilead
Sciences, GlaxoSmithKline, Hoffmann-La Roche Ltd., Merck
and Co., Pfizer Pharmaceuticals, Schering-Plough, Vertex
Pharmaceuticals and numerous others. We are involved in more
than 100 clinical research and drug characterization
studies with these pharmaceutical companies as well as other
government and academic organizations evaluating a number of
HIV drugs and drug regimens.

Database.We are
collecting resistance test results and related clinical data in
an interactive database to assist our pharmaceutical customers
in drug marketing and drug development. Two important components
of our database include viral resistance, replication, and
co-receptor tropism data and a specimen library comprised of
resistance test vectors, virus clones and site-directed mutants.
We have entered into contractual relationships with
pharmaceutical companies to provide defined data queries that
can enhance efforts to develop and market their drugs. We have
also entered into a contract with a database product company to
commercialize this asset. Our database may be made available to
physicians for use in therapy guidance in the future.

Drug and Vaccine
Discovery.Our database of viral
resistance information and our specimen library which is
comprised of resistance test vectors, virus clones and
site-directed mutants is the foundation of our pharmacogenomics
capability for use in screening potential drugs or vaccines. We
believe our drug resistance technology can provide more
extensive supplemental and enhanced information about the
activity of chemical compounds than conventional assays.

Sales and Marketing

We currently have 21 experienced sales
representatives promoting our resistance tests in the primary
U.S. markets for drugs targeted at HIV/AIDS. Within these
major markets, we are targeting the approximately
1,800 leading HIV physicians who treat 80% of the
HIV/AIDS patients in the U.S. We may enter into
relationships with other companies to serve markets outside the
U.S.

Our marketing strategies focus on physician,
patient and payor education in order to increase market
awareness of our resistance testing products. We routinely
sponsor and participate in conferences and scientific meetings,
sponsor educational forums for physicians, and advertise in
relevant journals and publications. Additionally we target
patients directly through educational programs.

We have an active reimbursement strategy, and
educate both private and public payors concerning drug
resistance testing in an effort to maximize reimbursement. Over
an estimated 75% of HIV/AIDS patients in the United States now
have access to coverage for resistance testing. At the end of
2003, 48 state Medicaid programs, including California,
Florida, New Jersey and New York, the states with the
largest HIV/AIDS patient populations, had favorable coverage
policies for drug resistance testing. Medicare and nearly all
private

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payors, including Aetna, the Blue Cross Blue
Shield Association, Humana and UnitedHealthCare, pay for
resistance testing.


In addition, we have made PhenoSense HIV
broadly available through numerous national and regional
reference laboratories and hospitals. We currently have
distribution arrangements with nearly all major national
reference laboratories including Quest Diagnostics, Laboratory
Corporation of America, Associated Regional and University
Pathologists, Inc. (ARUP), Mayo Clinic, as well as
multiple regional laboratories. Under these agreements, these
entities perform numerous services for us including collection
of samples, shipping the samples to us, billing and reporting
the results to doctors.

Patents and Proprietary Rights

We will be able to protect our technology from
unauthorized use by third parties only 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. Our commercial success will depend in part on
obtaining this patent protection. We currently have
19 issued patents and 107 pending applications for
additional patents, including international counterparts to our
U.S. patents. We have non-exclusively licensed seven
patents under the Roche Molecular Systems, Inc.
(Roche) license discussed below. These patents cover
a broad range of technology applicable across our entire current
and planned product line. We have also licensed technology from
other third parties, and expect that we may need to license
additional technology in order to continue the development and
commercialization of our products. We also seek protection
through confidentiality and proprietary information agreements.

Third parties may have patents or patent
applications relating to products or processes similar to,
competitive with or otherwise related to our products. These
products and processes may include technologies relating to HIV
and hepatitis B and C and other viruses. Third parties have
from time to time threatened to assert infringement or other
intellectual property rights against us based on their patents
or other intellectual property rights. We have had to, and
expect to continue to have to, enter into licenses covering the
rights at issue. Unless we are able to expand our existing
licenses and obtain additional licenses, patents covering these
technologies may adversely impact our ability to commercialize
one or more of our products.

License Agreements

We license polymerase chain reaction
(PCR) technology from Roche for performing a step in
our PhenoSense and GeneSeq tests. This license is non-exclusive
and lasts for the life of the patent term of the last to expire
licensed Roche patent. Currently, the last Roche patent expires
in 2005. If Roche develops or acquires additional patents
covering technology related to the licensed technology, we have
the option of licensing that additional technology under the
terms of this agreement, which may extend the term of the
license. In exchange for the license, we have agreed to pay
Roche a royalty based on the net service revenues we receive
from our products. At least sixty days prior to introducing a
new product utilizing the Roche technology, we must notify Roche
of that introduction. If we fail to notify Roche, we would have
to pay a higher royalty. We also agreed to participate in
proficiency testing in accordance with applicable quality
assurance standards and to comply with all relevant regulations
and standards. Further, we have agreed to give Roche a
reasonable opportunity to negotiate for a license to use any
technology we develop related to the reaction technology we
license from Roche, such as the automation of the method for
performing the reaction. Roche has the right to terminate this
license if we fail to pay royalties, make a semi-annual royalty
report or participate in proficiency testing. We believe we are
in compliance with these requirements. The license allows us to
use technology covered by the licensed Roche patents within a
broad field that includes all of our currently planned products.
If we were to expand our product line beyond the licensed field,
however, we would need to negotiate an expansion of the license.
In addition, we also license technology from other third
parties. We recorded royalty expense of $1.1 million,
$1.0 million and $0.7 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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Competition

We face, and will continue to face, competition
from organizations such as other biotechnology companies and
commercial laboratories, as well as academic and research
institutions.

Our major competitors include manufacturers and
distributors of phenotypic drug resistance technology, such as
Tibotec-Virco (division of Johnson & Johnson) and
Specialty Laboratory. We also compete with makers of genotypic
tests such as Applied Biosystems Group, Visible
Genetics Inc. (division of Bayer Diagnostics) and
laboratories performing genotypic testing as well as other
genotypic testing referred to as virtual phenotyping. Each of
these competitors is attempting to establish its test as the
standard of care among opinion leaders. However, we believe that
ViroLogic is well positioned in this market as the only company
focused on HIV drug resistance with:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Multiple testing platforms (phenotype, genotype
    and combination)                        
|
| |  | Rapid turnaround time (2 weeks or less)                                                     
|
| |  | Clinical cutoffs derived using our assay                                                    
|
| |  | Technologies developed to provide additional
    resistance information for new drug targets

Some of our competitors have substantially
greater financial resources and larger research and development
staffs than we do. In addition, they may have greater experience
in developing products, obtaining the necessary regulatory
approvals of products, and the processing and marketing of
products.

Our ability to compete successfully will depend,
in part, on our ability to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Demonstrate the degree of clinical benefit of our
    products relative to their costs
|
| |  | Develop proprietary products                                                          
|
| |  | Develop and maintain products that reach the
    market first                         
|
| |  | Develop products that are technologically
    superior to other products in the market
|
| |  | Obtain patent or other proprietary protection for
    our products and technologies   
|
| |  | Obtain and maintain adequate reimbursement
    coverage from payors                   
|
| |  | Attract and retain scientific and product
    development personnel                   

Regulation and Reimbursement

Regulation of Clinical Laboratory
Operations

The Clinical Laboratory Improvement Amendments of
1988 extends federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the
federal government, by a federally approved accreditation agency
or by a state that has been deemed exempt from the
regulations requirements. Pursuant to these Federal
clinical laboratory regulations, clinical laboratories must meet
quality assurance, quality control and personnel standards. Labs
also must undergo proficiency testing and inspections. Standards
are based on the complexity of the method of testing performed
by the laboratory.

These regulations categorize our laboratory as
high complexity, and we believe we are in compliance with the
more stringent standards applicable to high complexity testing
for personnel, quality control, quality assurance and patient
test management. Our clinical laboratory holds a Certificate of
Registration under these regulations. Our clinical laboratory
has been surveyed by the College of American Pathologists, a
federally approved accreditation agency, which has accredited
our clinical laboratory.

In addition to the Federal laboratory
regulations, states, including California, require laboratory
licensure and may adopt regulations that are more stringent than
federal law. We believe we are in material compliance with
California and other applicable state laws and regulations.

The sanctions for failure to comply with Federal
or state clinical laboratory regulations, or accreditation
requirements of federally approved agencies, may be suspension,
revocation or limitation of a laboratorys certificate or
accreditation. There also could be fines and criminal penalties.
The suspension or loss of a license, failure to achieve or loss
of accreditation, imposition of a fine, or future changes in
applicable federal

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or state laws or regulations or in the
interpretation of current laws and regulations, could have a
material adverse effect on our business.


Under our current labeling and marketing plans,
our phenotypic products have not been subject to FDA regulation,
although we are aware of increasing activity by the FDA in
regards to regulating homebrew HIV genotypic resistance
testing such as ours. We cannot predict the extent of future
FDA regulation, and we might be subject in the future to
greater regulation, or different regulations, that could have a
material effect on our finances and operations.

Medical Waste and Radioactive
Materials

We are subject to licensing and regulation under
federal, state and local laws relating to the handling and
disposal of medical specimens and hazardous waste and
radioactive materials as well as to the safety and health of
laboratory employees. Our clinical laboratory is operated in
material compliance with applicable federal and state laws and
regulations relating to disposal of all laboratory specimens. We
utilize outside vendors for disposal of specimens.

Occupational Safety

In addition to its comprehensive regulation of
safety in the workplace, the Federal Occupational Safety and
Health Administration has established extensive requirements
relating to workplace safety for healthcare employers, including
clinical laboratories, whose workers may be exposed to
blood-borne pathogens such as HIV and the hepatitis virus. These
regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up,
vaccinations and other measures designed to minimize exposure to
chemicals and transmission of the blood-borne and airborne
pathogens. Although we believe that we are currently in
compliance in all material respects with such federal, state and
local laws, failure to comply could subject us to denial of the
right to conduct business, fines, criminal penalties and other
enforcement actions.

Specimen Transportation

Regulations of the Department of Transportation,
the International Air Transportation Agency, the Public Health
Service and the Postal Service apply to the surface and air
transportation of clinical laboratory specimens.

Regulation of Coverage and
Reimbursement

Revenues for clinical laboratory testing services
come from a variety of sources, including Medicare and Medicaid
programs; other third-party payors, including commercial
insurers, Blue Cross Blue Shield plans, health maintenance and
other managed care organizations; and patients, physicians,
hospitals and other laboratories. We are a Medicare laboratory
services provider. Medicare has issued coverage policies and
payment guidelines for resistance testing, including phenotypic
and genotypic testing. Currently, nearly all public and a
majority of private payors have approved the reimbursement of
our existing products. However, the majority of our payors are
currently reimbursing our products at varying levels from 70% to
100% of our list prices. While recently issued guidelines of the
Department of Health and Human Services recommend drug
resistance testing for HIV patients, this does not assure
coverage or level of coverage, by state, Medicare or any other
payors.

Since 1984, Congress has periodically lowered the
ceilings on Medicare reimbursement for clinical laboratory
services from previously authorized levels. In addition, state
Medicaid programs are prohibited from paying more than Medicare
for clinical laboratory tests. In some instances, they pay
significantly less. Similarly, other payors, including managed
care organizations, have sought on an ongoing basis to reduce
the costs of healthcare by limiting utilization and payment
rates. Actions by Medicare or other payors to reduce
reimbursement rates or limit coverage or utilization of
resistance testing would have a direct adverse impact on our
revenues and cash flows. We cannot predict whether reductions or
limitations will occur, though we feel some reductions are
likely.

Our agreements with third-party payors, including
Medicare and Medicaid, require that we identify the services we
perform using industry standard codes known as the Current
Procedural Terminology (CPT)

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codes, which are developed by the American
Medical Association (AMA). Most payors maintain a
list of standard reimbursement rates for each such code, and our
ability to be reimbursed for our services is therefore
effectively limited by our ability to describe the services
accurately using the CPT codes. From time to time, the AMA
changes its instructions about how our services should be coded
using the CPT codes. If these changes leave us unable to
accurately describe our services or are not coordinated with
payors such that corresponding changes are made to the
payors reimbursement schedules, we may have to renegotiate
our pricing and reimbursement rates, the changes may interrupt
our ability to be reimbursed, and/or the overall reimbursement
rates for our services may decrease dramatically.


Significant uncertainty exists as to the
reimbursement status of new medical products like the products
we are currently developing, particularly if these products fail
to show demonstrable value in clinical studies. If government
and other third-party payors do not provide adequate coverage
and reimbursement for our planned products, our revenues will be
reduced.

Fraud and Abuse Regulation

Existing federal laws governing Medicare and
Medicaid and other federal healthcare programs, as well as
similar state laws, impose a variety of broadly described fraud
and abuse prohibitions on healthcare providers, including
clinical laboratories. Multiple government agencies enforce
these laws. The Health Insurance Portability and Accountability
Act of 1996 provides for the establishment of a program to
coordinate federal, state and local law enforcement programs.
Over the last several years, the clinical laboratory industry
has also been the focus of major government enforcement actions.

One set of fraud and abuse laws, the federal
anti-kickback laws, prohibits clinical laboratories from, among
other things, making payments or furnishing other benefits
intended to induce the referral of patients for tests billed to
Medicare, Medicaid, or certain other federally funded programs.
California also has its own Medicaid anti-kickback law, as well
as an anti-kickback law that prohibits payments made to
physicians to influence the referral of any patients. California
laws also limit the ability to use a non-employee sales force.

Under another federal provision, known as the
Stark law or self-referral prohibition,
physicians who have an investment or compensation relationship
with a clinical laboratory may not, unless a statutory exception
applies, refer Medicare or Medicaid patients for testing to the
laboratory. In addition, a laboratory may not bill Medicare,
Medicaid or any other party for testing furnished pursuant to a
prohibited referral. There is a California self-referral law, as
well, which applies to all patient referrals.

Currently, we have a financial relationship with
one referring physician, who serves as part-time medical
director at our clinical laboratory. Very few of this
physicians patients, if any, are federal healthcare
program patients. In addition, we do not bill for services
furnished to any patients referred by this physician. The
California anti-kickback law may have exceptions applicable to
our relationship with this physician. We have requested a
written opinion from California officials to determine whether
this relationship is appropriate, but have not received any
response to our request.

There are a variety of other types of federal and
state anti-fraud and abuse laws, including laws prohibiting
submission of false or otherwise improper claims to federal
healthcare programs, and laws limiting the extent of any
differences between charges to Medicare and Medicaid and charges
to other parties. We seek to structure our business to comply
with the federal and state anti-fraud and abuse laws. We cannot
predict, however, how these laws will be applied in the future,
and we cannot be sure arrangements will not be found in
violation of them. Sanctions for violations of these laws may
include exclusion from participation in Medicare, Medicaid and
other federal healthcare programs, criminal and civil fines and
penalties, and loss of license. Any of these could have a
material adverse effect on our business.

Patient Privacy

The Department of Human Health and Services, or
HHS, has issued final regulations under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA),
designed to improve the efficiency and effectiveness of the
health care system by facilitating the electronic exchange of
information in certain

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financial and administrative transactions, while
protecting the privacy and security of the information
exchanged. Three principal regulations have been issued:




| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | privacy regulations;                                                
|
| |  | security regulations; and                                           
|
| |  | standards for electronic transactions, or
    transaction standards.

The privacy regulations prohibit the use or
disclosure of protected health information except
for certain purposes or unless specific conditions are met.
Protected health information is information transmitted or
maintained in any form  by electronic means, on
paper, or through oral communications that: (1) relates to
the past, present, or future physical or mental health or
condition of an individual, the provision of health care to an
individual, or the past, present, or future payment for the
provision of health care to an individual; and
(2) identifies the individual or with respect to which
there is a reasonable basis to believe the information can be
used to identify the individual. Data that have been
de-identified in accordance with the Privacy regulations
stringent de-identification standard are not considered
protected health information and are not subject to the
regulation. We have implemented privacy and security changes
that we believe comply with these standards. In addition, we
implemented measures we believe will reasonably and
appropriately meet the specifications of the security
regulations and the transaction standards.

The HIPAA regulations on transaction standards
establish uniform standards for electronic transactions and code
sets, including the electronic transactions and code sets used
for claims, remittance advices, enrollment and eligibility.
These standards are complex, and subject to differences in
interpretation. We cannot guarantee that our compliance measures
will meet the specifications for any of these regulations. In
addition, certain types of information, including demographic
information not usually provided to us by physicians, could be
required by certain payers. As a result of inconsistent
application of requirements by payers, or our inability to
obtain billing information, we could face increased costs and
complexity, a temporary disruption in receipts and ongoing
reductions in reimbursements and net revenues.

HHS issued additional guidance on July 24,
2003 stating that it will not penalize a covered entity for
post-implementation date transactions that are not fully
compliant with the transactions standards, if the covered entity
can demonstrate its good faith efforts to comply with the
standards. HHS stated purpose for this flexible
enforcement position was to permit health plans to
mitigate unintended adverse effects on covered entities
cash flow and business operations during the transition to the
standards, as well as on the availability and quality of patient
care.

On September 23, 2003, the Centers for
Medicare and Medicaid Services (CMS) announced that
it will implement a contingency plan for the Medicare program to
accept electronic transactions that are not fully compliant with
the transaction standards after the October 16, 2003
compliance deadline. CMS contingency plan allows Medicare
carriers to continue to accept and process Medicare claims in
the traditional electronic formats now in use in order to give
its healthcare providers additional time to complete the testing
process, provided they are making a good faith effort to comply
with the new standards. As part of its plan, CMS is expected to
regularly reassess the readiness of its healthcare providers to
determine how long the contingency plan will remain in effect.

In its announcement, CMS encouraged other payors
to assess the readiness of their trading partners and to
implement contingency plans, if appropriate. A number of
other major payors have announced they intend to follow
CMS lead, but we cannot assure you that all payors will
develop similar contingency plans. At this time, we cannot
estimate the potential impact of payors implementing (or failing
to implement) the HIPAA transaction standards on our cash flows
and results of operations.

In addition to the HIPAA provisions described
above, there are a number of state laws regarding the
confidentiality of medical information, some of which apply to
clinical laboratories. These laws vary widely, and new laws in
this area are pending, but they most commonly restrict the use
and disclosure of medical information without patient consent.
Penalties for violation of these laws include sanctions against
a laboratorys state licensure, as well as civil and/ or
criminal penalties. Compliance with such rules could require us
to spend substantial sums, which could negatively impact our
profitability.

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Employees

As of March 25, 2004, we had 187 employees,
of whom 15 hold PhD or MD degrees and 22 hold other advanced
degrees. Approximately 86 employees are engaged in clinical
laboratory operations, including 33 licensed healthcare
professionals. There are 22 employees in research and
development, and 79 in sales, marketing, information systems,
finance and other administrative functions.

Executive Officers

In 2003, we adopted a code of ethics that applies
to our principal executive officer, principal financial and
accounting officer, persons performing similar functions as well
as all employees. We have posted the text of our code of ethics
on our website at www.virologic.com. In addition, we intend to
promptly disclose (i) the nature of any amendment to our
code of ethics that applies to our principal executive officer,
principal financial and accounting officer, or persons
performing similar functions and (ii) the nature of any
waiver, including an implicit waiver, from a provision of our
code of ethics that is granted to one of these specified
individuals, the name of such person who is granted the waiver
and the date of the waiver on our website in the future.

The following table sets forth, as of
February 27, 2004, certain information concerning our
executive officers:

|                             |  |     |    |          |  |                                               
|---------------------------- |  | --- | -- | -------- |  | ----------------------------------------------
|Name                         |  | Age |    | Position
|                             |  |     |    |         
|William D. Young             |  |     | 59 |          |  | Chairman, Chief Executive Officer and Director
|Karen J. Wilson              |  |     | 40 |          |  | Vice President, Chief Financial Officer       
|Tien T. Bui                  |  |     | 39 |          |  | Vice President, Sales and Marketing           
|Kathy L. Hibbs               |  |     | 40 |          |  | Vice President, General Counsel               
|Kenneth N. Hitchner          |  |     | 49 |          |  | Vice President, Pharmaceutical Collaborations 
|Christos J. Petropoulos, PhD |  |     | 50 |          |  | Vice President, Research and Development      
|Jeannette M. Whitcomb, PhD   |  |     | 43 |          |  | Vice President, Operations                    

WILLIAM D. YOUNG has served as our Chief
Executive Officer since November 1999 and has served as the
Chairman of the Board since May 1999. From March 1997 to October
1999, Mr. Young was Chief Operating Officer at
Genentech, Inc., a biotechnology company. As COO at
Genentech, Mr. Young was responsible for all of the
companys development, operations and commercial functions.
Mr. Young joined Genentech in 1980 as Director of
Manufacturing and Process Sciences and held various executive
positions prior to becoming COO. Prior to joining Genentech,
Mr. Young was employed by Eli Lilly and Company for
14 years. Mr. Young is a member of the board of
directors of Biogen IDEC, Inc., Human Genome
Sciences, Inc. and VaxGen, Inc. He received his
bachelors degree in chemical engineering from Purdue
University and his MBA from Indiana University.

KAREN J. WILSON has served as our Chief Financial
Officer since January 2001. From November 1999 to January 2001,
Ms. Wilson held the position of Chief Financial Officer and
Vice President of Operations for Novare Surgical
Systems, Inc., a medical device manufacturer. Prior to
that, from 1987 to 1993 and from 1996 to November 1999, she
worked for Deloitte & Touche LLP, a professional
services firm, most recently as Senior Manager serving a diverse
list of global clients in both the medical and technology
fields. From 1993 to 1996, she was Controller for Lightwave
Electronics Corporation, a laser manufacturer. Ms. Wilson
is a certified public accountant and received her
bachelors degree in business from the University of
California at Berkeley.

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TIEN T. BUI joined ViroLogic as National Sales
Director in November 2000 and was named Vice President of Sales
in September 2001. Before joining ViroLogic, Ms. Bui was
the Virology Field Director for DuPont Pharmaceuticals
Western Business Unit, where she was responsible for
$60 million in product sales. In addition to her most
recent sales management position at DuPont, she served that
company for over 10 years, from 1990 to 2000, in various
sales and marketing roles, including: physician and hospital
sales; clinical development and education; healthcare policy and
government affairs; and strategic market development.
Ms. Bui received her bachelors degree in
international business from San Francisco State University
and also studied abroad at The University of Liege, Belgium.

KATHY L. HIBBS joined ViroLogic as Vice
President, General Counsel in April 2001. Prior to joining
ViroLogic, Ms. Hibbs was Vice President and General Counsel
for Multitude, Inc., an Internet telecommunications
company. Prior to that, from 1996 to 2000, she served as Senior
Corporate Counsel at Varian Medical Systems, Inc., a
leading manufacturer of integrated cancer therapy systems. At
Varian, she was responsible for numerous legal matters including
regulatory compliance, employment law, litigation and SEC
reporting. Before her employment with Varian, Ms. Hibbs
worked as a litigator for two California law firms and dealt
with various legal issues, including civil rights and securities
law. She received her JD degree from the University of
California, Hastings College of Law, and her bachelors
degree in political science from the University of California,
Riverside.

KENNETH N. HITCHNER joined ViroLogic as Director
of Project Management in May 1999 and was named Vice President
of Pharmaceutical Collaborations in October 2003. Prior to
joining ViroLogic, Mr. Hitchner was the Director of Project
Management at Gilead Sciences. Prior to Gilead, he was with
Genentech for fifteen years where he held a number of positions
including the Director of Product Development and Global Project
Leader. Mr. Hitchner received his bachelors degree in
Zoology from DePauw University and a Masters Degree in Biology
from San Francisco State University.

CHRISTOS J. PETROPOULOS, PhD has served as our
Director of Research and Development since August 1996, became
Senior Director of Research and Development in September 1997
and was named our Vice President, Research and Development in
November 1999. From 1992 to 1996, Dr. Petropoulos was a
scientist at Genentech where he headed the Molecular Virology
Laboratory and the Research Virology and Molecular Detection
Laboratories from 1994 to 1996. Dr. Petropoulos received
his PhD in molecular and cell biology from Brown University.

JEANNETTE M. WHITCOMB, PhD joined ViroLogic as
one of the first scientists in the Research and Development
department in 1996, transitioned to the Operations group in 2002
and was named Vice President of Operations in June 2003. Prior
to joining ViroLogic she was a Postdoctoral Fellow in
Dr. Stephen H. Hughes lab at the National Cancer
Institute  Frederick Cancer Research and Development
Center. Prior to that, she was a Fogerty Fellow in
Dr. Peter A. Ceruttis lab at the Swiss Institute for
Experimental Cancer Research in Lausanne, Switzerland.
Dr. Whitcomb received her bachelors degree in Biology
from Widener University in Chester, Pennsylvania and her PhD in
Microbiology and Immunology from Temple University School of
Medicine in Philadelphia.

Scientific Advisory Board

We have established an internationally renowned
Scientific Advisory Board to provide specific expertise in areas
of research and development relevant to our business. Our
Scientific Advisory Board meets periodically with our scientific
and development personnel and management to discuss our present
and long-term research and development activities. Scientific
Advisory Board members include the following leaders in
scientific and clinical research:

STEPHEN P. GOFF, PhD Higgens Professor of Biochemistry and
Molecular Biophysics at the College of Physicians and Surgeons
of Columbia University, and an Investigator of the Howard Hughes
Medical Institute.

DAVID D. HO, MD Scientific Director and Chief
Executive Officer of the Aaron Diamond AIDS Research Center, and
a Professor of The Rockefeller University.

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STEPHEN H. HUGHES, PhD Chief of the Retroviral Replication
Laboratory, HIV Drug Resistance Program at the National Cancer
Institute  Frederick in Maryland.

DOUGLAS D. RICHMAN, MD Professor of Pathology and Medicine at
the University of California, San Diego School of Medicine
and Director of the Research Center for AIDS and HIV Infection
at the San Diego VA Medical Center.

ROBERT T. SCHOOLEY, MD Tim Gill Professor of Medicine and
Head of the Infectious Disease Division at the University of
Colorado Health Sciences Center.

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RISK FACTORS RELATED TO OUR BUSINESS

Except for the historical information
contained or incorporated by reference, this annual report on
Form 10-K and the information incorporated by reference
contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from
those discussed here. Factors that could cause or contribute to
differences in our actual results include those discussed in the
following section, as well as those discussed in
Part II, Item 7 entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere throughout this annual report and
in any other documents incorporated by reference into this
annual report. You should consider carefully the following risk
factors, together with all of the other information included in
this annual report on Form 10-K. Each of these risk factors
could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an
investment in our common stock.

We may incur future losses and may not achieve
profitability as soon as expected, which may cause our stock
price to fall.

We have experienced significant losses each year
since our inception and may incur additional losses. We
experienced losses applicable to common stockholders of
approximately $9.3 million in the year ended
December 31, 2003, $33.3 million in 2002 and
$28.8 million in 2001. As of December 31, 2003, we had
an accumulated deficit of approximately $106.3 million. We
may continue to incur losses primarily as a result of spending
related to:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | Expanding patient and pharmaceutical company
    sample processing capabilities     
|
| |  | Research and product development costs                                              
|
| |  | Sales and marketing activities                                                      
|
| |  | Additional clinical laboratory and research space
    and other necessary facilities
|
| |  | General and administrative costs                                                    

If our history of losses continues, our stock
price may fall and you may lose part or all of your investment.

Our stockholders will experience substantial
additional dilution if our shares of preferred stock or their
related warrants are converted into or exercised for shares of
common stock. As of December 31, 2003, our outstanding
shares of preferred stock and related warrants were convertible
into or exercisable for up to an aggregate of
15,390,497 shares of common stock, or approximately 29% of
the number of shares of outstanding common stock.

As of December 31, 2003, we had
52,608,382 shares of common stock outstanding. However, as
of December 31, 2003, we also had outstanding the following
shares of preferred stock and related warrants:



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 274 shares of Series A Redeemable
    Convertible Preferred Stock (Series A Preferred
    Stock), convertible into 2,468,468 shares of common
    stock (not including the conversion of accrued but unpaid
    premiums)
|
| |  | warrants issued to the purchasers of our
    preferred stock in connection with our preferred stock
    financings to purchase 12,922,029 shares of common stock                                                           

Together, the common shares reserved for issuance
upon conversion of the Series A Preferred Stock and upon
exercise of the warrants referenced above, represent
approximately 15,390,497 shares of common stock, or 29% of
the outstanding shares of our common stock at December 31,
2003, all of which are issuable for an approximate
weighted-average effective price of $1.15 per share.

The number of shares of common stock that we may
be required to issue upon conversion of the Series A
Preferred Stock, and exercise of the warrants granted to
purchasers of our Series A Preferred Stock in connection
with the issuance thereof, can increase substantially upon the
occurrence of several events, including if:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We issue shares of stock (with certain
    exceptions) for an effective price less than the conversion
    price of the Series A Preferred Stock or the related
    warrants (each $1.11 as of December 31, 2003)

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| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We fail to have sufficient shares of common stock
    reserved to satisfy conversions, exercises and other issuances                                    
|
| |  | We fail to honor requests for conversion, or
    notify any holder of Series A Preferred Stock of our
    intention not to honor requests for conversion
|
| |  | We fail to issue shares upon exercise of the
    warrants                                                                                               
|
| |  | We fail to redeem any shares of Series A
    Preferred Stock when required                                                                              

We are also obligated to issue additional shares
of common stock every six months to the holders of the
Series A Preferred Stock as premium payments.
As of December 31, 2003, these issuances equaled about
133 shares of common stock for every share of Series A
Preferred Stock outstanding at the time the issuance is made.
This number of shares will increase every six months, by about
27 shares of common stock for each share of Series A
Preferred Stock, up to a maximum of about 186 shares of
common stock for every share of Series A Preferred Stock.
All of the previous share totals are based upon an assumed stock
price of $3.76, which was the closing price of our stock on the
Nasdaq National Market on December 31, 2003, but the actual
number of shares will be based upon our stock price from time to
time as of the payment dates. If the 274 shares of the
Series A Preferred Stock outstanding as of
December 31, 2003 remain outstanding for five years
following such date, we will be required to issue as premium
payments an additional 493,989 shares of common stock
(again based on an assumed stock price of $3.76) to holders of
the Series A Preferred Stock, which is 0.9% of the shares
of common stock outstanding as of December 31, 2003. We do
not receive payment or other consideration for these issuances.

All of the foregoing issuances of common stock
would be substantially dilutive to the outstanding shares of
common stock, especially where, as described above, the shares
of common stock are issued without additional consideration. We
cannot predict whether or how many additional shares of our
common stock will become issuable due to these provisions.

Any dilution or potential dilution may cause our
stockholders to sell their shares, which would contribute to a
downward movement in the stock price of our common stock. Any
downward pressure on the trading price of our common stock could
encourage investors to engage in short sales, which could
further contribute to a downward trend in the price of our
common stock.

We may be obligated to redeem our
Series A Preferred Stock.

Holders of our Series A Preferred Stock have
the right, under certain circumstances, to require us to redeem
for cash all of the preferred stock that they own. The
redemption price for the Series A Preferred Stock is the
greater of (i) 115% of the original purchase price plus
115% of any accrued premium payment thereon and (ii) the
aggregate fair market value of the shares of common stock into
which such shares of Series A Preferred Stock are then
convertible. As of December 31, 2003, there were
274 shares of Series A Preferred Stock outstanding,
with an aggregate redemption price equal to approximately
$3.3 million.

Shares of Series A Preferred Stock are
redeemable by the holders of the respective series in any of the
following situations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If we fail to remove a restrictive legend on any
    certificate representing any common stock that was issued to any
    holder of such series upon conversion of their preferred stock
    or exercise of their warrants and that may be sold pursuant to
    an effective registration statement or an exemption from the
    registration requirements of the federal securities laws
|
| |  | If we fail to have sufficient shares of common
    stock reserved to satisfy conversions of the series                                                                                                                                                                                                                                                                                   
|
| |  | If we fail to honor requests for conversion, or
    if we notify any holder of such series of our intention not to
    honor future requests for conversion                                                                                                                                                                                                                              
|
| |  | If we institute voluntary bankruptcy or similar
    proceedings                                                                                                                                                                                                                                                                                                                          
|
| |  | If we make an assignment for the benefit of
    creditors, or apply for or consent to the appointment of a
    receiver or trustee for us or for a substantial part of our
    property or business, or such a receiver or trustee shall
    otherwise be appointed                                                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If we sell all or substantially all of our assets                                                                                                                                                                                                                                                      
|
| |  | If we merge, consolidate or engage in any other
    business combination (with some exceptions), provided that such
    transaction is required to be reported pursuant to Item 1
    of Form 8-K                                                                                                      
|
| |  | If we commit a material breach under, or
    otherwise materially violate the terms of, the transaction
    documents entered into in connection with the issuance of such
    series                                                                                                                  
|
| |  | If the registration statements covering shares of
    common stock underlying the Series A Preferred Stock and
    related warrants cannot be used by the respective selling
    security holders for the resale of all the underlying shares of
    common stock for an aggregate of more than 30 days
|
| |  | If our common stock is not tradable on the NYSE,
    the AMEX, the Nasdaq National Market or the Nasdaq SmallCap
    market for an aggregate of twenty trading days in any nine month
    period                                                                                                       
|
| |  | If 35% or more of our voting power is held by any
    one person, entity or group                                                                                                                                                                                                                      
|
| |  | If we fail to pay any indebtedness in excess of
    $350,000 when due, or if there is any event of default under any
    agreement that is likely to have a material adverse effect on us                                                                                                              
|
| |  | Upon the institution of involuntary bankruptcy
    proceedings                                                                                                                                                                                                                                         

Upon the occurrence of any of the events
described above, individual holders of the Series A
Preferred Stock would have the option, while such event
continues, to require us to purchase some or all of the then
outstanding shares of Series A Preferred Stock held by such
holder. If we receive any notice of redemption, we are required
to immediately (no later than one business day following such
receipt) deliver a written notice to all holders of the same
series of preferred stock stating the date when we received the
redemption notice and the amount of preferred stock covered by
the notice. Redemption of the Series A Preferred Stock in
any event described above would require us to expend a
significant amount of cash that could exceed our total available
cash and cash equivalents and could negatively impact our
ability to operate our business or raise additional capital. See
the notes to the financial statement for further details.

In the event that we need to raise additional
capital, our stockholders could experience substantial
additional dilution. If such financing is not available on
commercially reasonable terms, we may have to significantly
curtail our operations or sell significant assets and may be
unable to continue as a going concern.

As of December 31, 2003, we had available
cash and cash equivalents, short-term investments and short-term
restricted cash of $9.9 million. We anticipate that our
existing capital resources together with funds from the sale of
our products, contract revenue and borrowing under equipment
financing arrangements will enable us to maintain currently
planned operations through at least December 31, 2004.
However, we may need additional funding sooner than that. To the
extent operating and capital resources are insufficient to meet
our obligations, including lease payments and future
requirements, we will have to raise additional funds to continue
the development, commercialization and expansion of our
technologies. Our inability to raise capital would seriously
harm our business and product development efforts. In addition,
we may choose to raise additional capital due to market
conditions or strategic considerations even if we believe we
have sufficient funds for our current or future operating plans.
However, we cannot guarantee that additional financing, in any
form, will be available at all, or on terms acceptable to us. If
we sell equity or convertible debt securities to raise
additional funds, our existing stockholders may incur
substantial dilution and any shares so issued will likely have
rights, preferences and privileges superior to the rights,
preferences and privileges of our outstanding common and
preferred stock. In the event financing is not available in the
time frame required, we will be forced to reduce our operating
expenses, curtail sales and marketing activities, reschedule
research and development projects or delay, scale back or
eliminate some or all of our activities. Further, we might be
required to sell certain of our assets or obtain funds through
arrangements with third parties that require us to relinquish
rights to certain of our technologies or products that we would
seek to develop or commercialize ourselves. These actions, while
necessary for the continuance of operations during a time of
cash constraints and a shortage of working capital, could make
it difficult or impossible to implement our long-term business
plans or could affect our ability to continue as a going concern.

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Our testing products may not achieve market
acceptance, which could limit our future revenue.

Our ability to establish phenotypic resistance
testing as the standard of care to guide and improve the
treatment of viral diseases will depend on physicians and
clinicians acceptance and use of phenotypic resistance
testing. Phenotypic resistance testing is still relatively new.
We cannot predict the extent to which physicians and clinicians
will accept and use phenotypic resistance testing. They may
prefer competing technologies and products. The commercial
success of phenotypic resistance testing will require
demonstrations of its advantages and potential economic value in
relation to the current standard of care, as well as to
competing products. We have introduced two products using our
proprietary PhenoSense technology, PhenoSense HIV and PhenoSense
GT, which we began actively marketing in November 1999 and
November 2001, respectively. We are still in the early stages of
development of new products applying our PhenoSense technology
to other viral diseases. If PhenoSense HIV or PhenoSense GT is
not accepted in the marketplace, our ability to sell other
PhenoSense products would be undermined. Market acceptance will
depend on:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our marketing efforts and continued ability to
    demonstrate the utility of PhenoSense in guiding anti-viral drug
    therapy, for example, through the results of retrospective and
    prospective clinical studies
|
| |  | Our ability to demonstrate the advantages and
    potential economic value of our PhenoSense testing products over
    current treatment methods and other resistance tests                                            

If the market does not accept phenotypic
resistance testing, or our PhenoSense products in particular,
our ability to generate revenue will be limited.

Our revenues will be diminished if changes are
made to the way that our products are reimbursed, or if
government or third-party payors limit the amounts that they
will reimburse for our current products, or do not authorize
reimbursement for our planned products.

Government and third-party payors, including
Medicare and Medicaid require that we identify the services we
perform using industry standard codes known as the Current
Procedural Terminology (CPT) codes, which are
developed by the American Medical Association (AMA).
Most payors maintain a list of standard reimbursement rates for
each such code, and our ability to be reimbursed for our
services is therefore effectively limited by our ability to
describe the services accurately using the CPT codes. From time
to time, the AMA changes its instructions about how our services
should be coded using the CPT codes. If these changes leave us
unable to accurately describe our services or are not
coordinated with payors such that corresponding changes are made
to the payors reimbursement schedules, we may have to
renegotiate our pricing and reimbursement rates, the changes may
interrupt our ability to be reimbursed, and/or the overall
reimbursement rates for our services may decrease dramatically.
In addition, we may spend significant time and resources to
minimize the impact of these changes on reimbursement.

Government and third-party payors are attempting
to contain or reduce the costs of healthcare and are challenging
the prices charged for medical products and services. In
addition, increasing emphasis on managed care in the United
States will continue to put pressure on the pricing of
healthcare products. This could in the future limit the price
that we can charge for our products. This could also hurt our
ability to generate revenues. Significant uncertainty exists as
to the reimbursement status of new medical products like the
products we are currently developing, particularly if these
products fail to show demonstrable value in clinical studies.
Currently, nearly all public and a majority of private payors
have approved the reimbursement of our existing products.
However, the majority of our payors are currently reimbursing
our products at varying levels from 70% to 100% of our list
prices. If government and other third-party payors do not
continue to provide adequate coverage and reimbursement for our
testing products or do not authorize reimbursement for our
planned products, our revenues will be reduced.

Billing complexities associated with health
care payors may result in increased bad debt expense, which
could impair our cash flow and limit our ability to reach
profitability.

Billing for laboratory services is complex.
Laboratories must bill various payors, such as Medicare,
Medicaid, insurance companies, doctors, employer groups and
patients, all of whom have different requirements. Billing
difficulties often result in a delay in collecting, or
ultimately an inability to collect, the related receivable. This
impairs cash flow and ultimately reduces profitability if we are
required to record bad debt

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expense for these receivables. Most of the bad
debt expense is the result of noncredit related issues,
primarily missing or incorrect billing information on
requisitions. We perform the requested tests and report test
results regardless of incorrect or missing billing information.
We subsequently attempt to obtain any missing information and
rectify incorrect billing information received from the
healthcare provider. Missing or incorrect information on
requisitions slows the billing process, creates backlogs of
unbilled requisitions and generally increases the aging of
accounts receivable. Among many other factors complicating
billing are:




| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Pricing differences between our fee schedules and
    those of the payors                                  
|
| |  | Changes in or questions about how products are to
    be identified in the requisitions                    
|
| |  | Disputes between payors as to which party is
    responsible for payment                                   
|
| |  | Disparity in coverage among various payors                                                                 
|
| |  | Difficulties of adherence to specific compliance
    requirements and procedures mandated by various payors

Ultimately, if all issues are not resolved in a
timely manner, the related receivables are charged to the
allowance for doubtful accounts.

We may encounter problems or delays in
processing tests, or in expanding our automated testing systems,
which could impair our ability to grow our business, generate
revenue and achieve and sustain profitability.

In order to meet future projected demand for our
products and fully utilize our current clinical laboratory
facilities, we estimate that we will have to continue to expand
the volume of patient samples that we are able to process. We
are also continuing to develop our quality-control procedures
and to establish more consistency with respect to test
turnaround so that results are delivered in a timely manner.
Thus, we need to continue to develop and implement additional
automated systems to perform our tests. We have installed
several information systems over the past few years, including
enterprise resource and laboratory information systems, to
support the automated tests, analyze the data generated by our
tests and report the results. If these systems do not work
effectively as we scale up our processing of patient samples, we
may experience processing or quality-control problems and we may
experience delays or failures in our operations. These problems,
delays or failures could adversely impact the promptness and
accuracy of our transaction processing, which could impair our
ability to grow our business, generate revenue and achieve and
sustain profitability. We have experienced periods during which
processing of our test results was delayed, resulting in a
temporary backlog of tests to be performed, as was the case in
the fourth quarter of 2003. While we take steps to minimize the
likelihood of any delays, future delays and backlog may
nevertheless occur.

We face intense competition, and if our
competitors existing products or new products are more
effective than our products, the commercial opportunity for our
products will be reduced or eliminated.

The commercial opportunity for our products will
be reduced or eliminated if our competitors develop and market
new testing products that are superior to, or are less expensive
than, our phenotypic and/or genotypic resistance testing
products we develop using our proprietary technology. The
biotechnology industry evolves at a rapid pace and is highly
competitive. Our major competitors include manufacturers and
distributors of phenotypic drug resistance technology, such as
Tibotec-Virco (division of Johnson & Johnson) and
Specialty Laboratory. We also compete with makers of genotypic
tests such as Applied Biosystems Group, Visible Genetics Inc.
(division of Bayer Diagnostics) and laboratories performing
genotypic testing as well as other genotypic testing referred to
as virtual phenotyping. Each of these competitors is attempting
to establish its test as the standard of care.
Tibotec-Vircos phenotypic and genotypic tests have been
commercially available for a longer time than has PhenoSense HIV
or GeneSeq HIV. Genotypic tests are cheaper and generally faster
than phenotypic resistance tests. Our competitors may
successfully develop and market other testing products that are
either superior to those that we may develop or that are
marketed prior to marketing of our testing products. Some of our
competitors have substantially greater financial resources and
research and development staffs than we do. In addition, some of
our competitors have significantly greater experience in
developing products, and in obtaining the necessary regulatory
approvals of products and processing and marketing products.

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We derive a significant portion of our
revenues from a small number of customers and our revenues may
decline significantly if any major customer cancels or delays a
purchase of our products.

Our revenues to date and for the foreseeable
future consist largely of sales of our PhenoSense products. It
is likely that we will continue to have significant customer
concentration. Our customers are not typically required to
purchase tests from us under long-term contracts, and may stop
ordering tests from us at any time. The loss of any major
customer, a slowdown in the pace of increasing physician and
physician group sales as a percentage of sales, or the delay of
significant orders from any significant customer, even if only
temporary, could have a significant negative impact on our
revenues and our ability to fund operations from revenues,
generate cash from operations or achieve profitability.

Various testing materials that we use are
purchased from single qualified suppliers, which could result in
our inability to secure sufficient materials to conduct our
business.

We purchase some of the testing materials used in
our laboratory operations from single qualified suppliers.
Although these materials could be purchased from other
suppliers, we would need to qualify the suppliers prior to using
their materials in our commercial operations. Although we
believe we have ample inventory stock to allow validation of
another source, in the event of a material interruption of these
supplies, the quantity of our stock may not be adequate. Any
extended interruption, delay or decreased availability of the
supply of these materials could prevent us from running our
business as contemplated and result in failure to meet our
customers demands. If significant customer relationships
were harmed by our failure to meet customer demands, our
revenues may decrease. We might also face significant additional
expenses if we are forced to find alternate sources of supplies,
or change materials we use. Such expenses could make it more
difficult for us to attain profitability, offer our tests at
competitive prices and continue our business as currently
conducted or at all.

We are dependent on licenses for technology we
use in our resistance testing, and our business would suffer if
these licenses were terminated.

We license technology that we use in our
PhenoSense and GeneSeq tests from Roche. We hold a non-exclusive
license for the life of the patent term of the last licensed
Roche patent. Currently, the last Roche patent expires in 2005.
However, if additional patents are identified that would be
necessary or useful for our operations, such patents could be
added to the license at our option, which may extend the term of
the license. We believe that many of our competitors, including
Tibotec-Virco (division of Johnson & Johnson) and other
resistance testing companies, also license this technology on
non-exclusive terms. Roche has the right to terminate this
license if we fail to pay royalties, make a semi-annual royalty
report or participate in proficiency testing. We believe we are
in compliance with these requirements. The license allows us to
use technology covered by the licensed Roche patents within a
broad field that includes all of our currently planned products.
If we were to expand our product line beyond the licensed field,
however, we would need to negotiate an expansion of the license.
In addition, we also license technology from other third
parties. If these licenses were to be terminated, we would
likely have to change a portion of our testing methodology,
which would halt our testing, at least temporarily, and cause us
to incur substantial additional expenses.

The intellectual property protection for our
technology and trade secrets may not be adequate, allowing third
parties to use our technology or similar technologies, and thus
reducing our ability to compete in the market.

The strength of our intellectual property
protection is uncertain. In particular, we cannot be sure that:



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We were the first to invent the technologies
    covered by our patent or pending patent applications                                                                               
|
| |  | We were the first to file patent applications for
    these inventions                                                                                                              
|
| |  | Others will not independently develop similar or
    alternative technologies or duplicate any of our technologies                                                                  
|
| |  | Any of our pending patent applications will
    result in issued patents                                                                                                            
|
| |  | Any patents issued to us will provide a basis for
    commercially viable products or will provide us with any
    competitive advantages or will not be challenged by third parties

25



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We currently have 19 issued patents and 107
pending applications for additional patents, including
international counterparts to our U.S. patents. We have
licensed seven patents under the Roche license discussed above.
These patents cover a broad range of technology applicable
across our entire current and planned product line. Other
companies may have patents or patent applications relating to
products or processes similar to, competitive with or otherwise
related to our products. Patent law relating to the scope of
claims in the technology fields in which we operate, including
biotechnology and information technology, is still evolving and,
consequently, patent positions in our industry are generally
uncertain. We cannot assure you that we will prevail in any
lawsuits regarding the enforcement of patent rights or that, if
successful, we will be awarded commercially valuable remedies.
In addition, it is possible that we will not have the required
resources to pursue offensive litigation or to otherwise protect
our patent rights. We also rely on unpatented trade secrets to
protect our proprietary technology. Other companies may
independently develop or otherwise acquire equivalent technology
or gain access to our proprietary technology.

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
defending any such litigation or we cannot obtain necessary
licenses, could cause us to pay substantial damages and prohibit
us from selling our products.

Our commercial success depends upon our ability
to develop, manufacture, market and sell our products and use
our proprietary technologies without infringing the proprietary
rights of others. Companies in our industry typically receive a
higher than average number of claims and threatened claims of
infringement of intellectual property rights, and numerous U.S.
and foreign issued patents and pending patent applications owned
by others exist in HIV, HCV, HBV and the other fields in which
we are selling and/or developing products. We may be exposed to
future litigation by third parties based on claims that our
products, technologies or activities infringe the intellectual
property rights of others. Because patent applications can take
many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our products or technologies may infringe. There
also may be existing patents, of which we are not aware, that
our products or technologies may inadvertently infringe.
Further, there may be issued patents and pending patent
applications in fields relevant to our business, of which we may
become aware from time to time, that we believe we do not
infringe or that we believe are invalid or relate to immaterial
portions of our overall business. We cannot assure you that
third parties holding any of these patents or patent
applications will not assert infringement claims against us for
damages or seeking to enjoin our activities. We also cannot
assure you that, in the event of litigation, we will be able to
successfully assert any belief we may have as to
non-infringement, invalidity or immateriality, or that any
infringement claims will be resolved in our favor. Third parties
have from time to time threatened to assert infringement or
other intellectual property claims against us based on their
patents or other intellectual property rights or inform us that
they believe we required one or more licenses in order to
perform certain of our tests. For instance, we recently entered
into a license agreement with the NIH covering certain
intellectual property rights. To date, we have not had to incur
and do not expect to incur significant costs to defend against
or settle threatened claims. However, in the future we may have
to pay substantial damages, possibly including treble damages,
for infringement if it is ultimately determined that our
products infringe a third partys patents. Further, we may
be prohibited from selling our products before we obtain a
license, which, if available at all, may require us to pay
substantial royalties. Even if infringement claims against us
are without merit, defending a lawsuit will take significant
time, and may be expensive and divert management attention from
other business concerns.

If we do not successfully introduce new
products using our technology, we may not sustain long-term
revenue growth.

We may not be able to develop and market new
resistance testing products for HIV and other serious diseases,
including hepatitis. Demand for these products will depend in
part on the development by others of additional anti-viral drugs
to fight these diseases. Physicians will likely use our
resistance tests to determine which drug is best for a
particular patient only if there are multiple drug treatment
options. Several anti-viral drugs currently are in development
but we cannot assure you that they will be approved for
marketing, or if these drugs are approved that there will be a
need for our resistance tests. If we are unable to develop and
market resistance test products for other viral diseases, or if
an insufficient number of anti-viral drugs are approved for
marketing, we may not sustain long-term revenue growth.

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Our business operations and the operation of
our clinical laboratory facility are subject to stringent
regulations and if we are unable to comply with them, we may be
prohibited from accepting patient samples or may incur
additional expense to attain and maintain compliance.

The operation of our clinical laboratory facility
is subject to a stringent level of regulation under the Clinical
Laboratory Improvement Amendments of 1988. Laboratories must
meet various requirements, including requirements relating to
quality assurance, quality control and personnel standards. Our
laboratory is also subject to regulation by the state of
California and various other states. We have received
accreditation by the College of American Pathologists and
therefore are subject to their requirements and evaluation. Our
failure to comply with applicable requirements could result in
various penalties, including loss of certification or
accreditation, and we may be prevented from conducting our
business as we do now or as we may wish to in the future.

The FDA may impose medical device regulatory
requirements on our tests, including possibly premarket approval
requirements, which could be expensive and time-consuming and
could prevent us from marketing these tests.

In the past, the FDA has not required that
genotypic or phenotypic testing conducted at a clinical
laboratory be subject to premarketing clearance or approval,
although the FDA has stated that it believes its jurisdiction
extends to tests generated in a clinical laboratory. We received
a letter from the FDA in September 2001 that asserted such
jurisdiction over in-house tests like ours, but which also
stated the FDA is not currently requiring premarket approval for
HIV monitoring tests such as ours provided that the promotional
claims for such tests are limited to its analytical capabilities
and do not mention the benefit of making treatment decisions on
the basis of test results. The FDA letter also asserted that our
GeneSeq test had been misbranded due to the use of purchased
analyte specific reagents (ASRs), if test reports do not include
a statement disclosing that the test has not been cleared or
approved by the FDA. We now utilize in-house prepared ASRs in
our products. The FDA has indicated in discussions that the
focus of the letter was our genotypic tests and not our
phenotypic tests, but there is no certainty its focus will
remain narrow.

We have had several discussions with the FDA
related to its positions set forth in the letter. We do not at
this point believe the FDA will require us to take steps that
materially affect our business or financial performance, but we
cannot guarantee this will remain the case.

We cannot be sure that the FDA will accept the
steps we take, or that the FDA will not require us to alter our
promotional claims or undertake the expensive and time-consuming
process of seeking premarket approval with clinical data
demonstrating the sensitivity and specificity of our tests. If
premarket approval is required, we cannot be sure that we will
be able to obtain it in a timely fashion or at all; and in such
event the FDA would have authority to require us to cease
marketing tests until such approval is granted.

In general, we cannot predict the extent of
future FDA regulation of our business. We might be subject in
the future to greater regulation, or different regulations, that
could have a material effect on our finances and operations. If
we fail to comply with existing or additional FDA regulations,
it could cause us to incur civil or criminal fines and
penalties, increase our expenses, prevent us from increasing
revenues, or hinder our ability to conduct our business.

If we do not comply with laws and regulations
governing the confidentiality of medical information, we may
lose the state licensure we need to operate our business, and
may be subject to civil, criminal or other penalties. Compliance
with such laws and regulations could be expensive.

The Department of Human Health and Services, or
HHS, has issued final regulations under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA),
designed to improve the efficiency and effectiveness of the
health care system by facilitating the electronic exchange of
information in certain financial and administrative
transactions, while protecting the privacy and security of the
information exchanged. Three principal regulations have been
issued:



| |   |                          
| | - | -------------------------
| |  | privacy regulations;     
|
| |  | security regulations; and

27



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| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | standards for electronic transactions, or
    transaction standards.

We have implemented the HIPAA privacy
regulations. In addition, we implemented measures we believe
will reasonably and appropriately meet the specifications of the
security regulations and the transaction standards.

These standards are complex, and subject to
differences in interpretation. We cannot guarantee that our
compliance measures will meet the specifications for any of
these regulations. In addition, certain types of information,
including demographic information not usually provided to us by
physicians, could be required by certain payors. As a result of
inconsistent application of requirements by payors, or our
inability to obtain billing information, we could face increased
costs and complexity, a temporary disruption in receipts and
ongoing reductions in reimbursements and net revenues. At this
time, we cannot estimate the potential impact of payors
implementing (or failing to implement) the HIPAA transaction
standards on our cash flows and results of operations.

In addition to the HIPAA provisions described
above, there are a number of state laws regarding the
confidentiality of medical information, some of which apply to
clinical laboratories. These laws vary widely, and new laws in
this area are pending, but they most commonly restrict the use
and disclosure of medical information without patient consent.
Penalties for violation of these laws include sanctions against
a laboratorys state licensure, as well as civil and/or
criminal penalties. Compliance with such rules could require us
to spend substantial sums, which could negatively impact our
profitability.

We may be unable to build brand loyalty
because our trademarks and trade names may not be
protected.

Our registered or unregistered trademarks or
trade names such as the name PhenoSense, PhenoSense GT,
PhenoScreen and GeneSeq may be challenged, canceled, infringed,
circumvented or declared generic or determined to be infringing
on other marks. We may not be able to protect our rights to
these trademarks and trade names, which we need to build brand
loyalty. Brand recognition is critical to our short-term and
long-term marketing strategies especially as we commercialize
future enhancements to our products.

Clinicians or patients using our products or
services may sue us and our insurance may not sufficiently cover
all claims brought against us, which will increase our
expenses.

Clinicians, patients and others may at times seek
damages from us if drugs are incorrectly prescribed for a
patient based on testing errors or similar claims. Although we
have obtained liability insurance coverage, we cannot guarantee
that liability insurance will continue to be available to us on
acceptable terms or that our coverage will be sufficient to
protect us against all claims that may be brought against us. We
may incur significant legal defense expenses in connection with
a liability claim, even one without merit or for which we have
coverage.

We may have difficulty managing our growth and
attracting and retaining skilled personnel, which could hinder
our commercial efforts and impair our ability to
compete.

If our management is unable to manage our growth
effectively, it is possible that our systems and our facilities
may become inadequate. Our success also depends on our continued
ability to attract and retain highly qualified management and
scientific personnel. If we cannot successfully attract and
retain qualified personnel, our research and development efforts
could be hindered and our ability to run our business
effectively and compete with others in our industry will be
harmed. With the exception of Bill Young, our CEO, we do not
have employment agreements with any of our employees, and we do
not maintain key man insurance for any employee. If
any of our key employees were to leave, we may incur significant
costs searching for a replacement. In addition, we have entered
into severance agreements with our officers that would, in some
instances, require us to pay severance to such officers upon the
termination of their employment. We are not aware that any key
employee has plans to retire or leave in the near future.

Decreased effectiveness of equity compensation
could adversely affect our ability to attract and retain
employees, and proposed changes in accounting for equity
compensation could adversely affect earnings.

We have historically used stock options and other
forms of equity-related incentives as a key component of our
employee compensation packages. We believe that stock options
and other long-term equity incentives

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directly motivate our employees to maximize
long-term stockholder value and, through the use of long-term
vesting, encourage employees to remain with us. The Financial
Accounting Standards Board and other agencies have proposed, and
are currently considering, changes to accounting principles
generally accepted in the U.S. that would require us to
record a charge to earnings for employee stock option grants and
other equity incentives. Moreover, applicable stock exchange
listing standards related to obtaining stockholder approval of
equity compensation plans could make it more difficult or
expensive for us to grant options to employees in the future,
which may result in changes in our equity compensation strategy.
These and other developments in the provision of equity
compensation to employees could make it more difficult to
attract, retain and motivate employees, and such a change in
accounting rules may adversely impact our future financial
condition and operating results.


We may be subject to litigation, which would
be time consuming and divert our resources and the attention of
our management.

In November 2002, we implemented a business
restructuring plan. With the exception of one, all of the
employees terminated in connection with the business
restructuring signed a release of claims. We have received
correspondence from the former employee that did not sign a
release threatening to bring claims against us that stem from
termination. We do not have employee practices liability
insurance to cover any potential claims by employees terminated
in the reduction of force. Even if we are eventually successful
in our defense of this or any other similar claims, the time and
money spent may prevent us from operating our business
effectively or profitably or may distract our management.

Compliance with changing regulation of
corporate governance, public disclosure and accounting matters
may result in additional expenses.

Changing laws, regulations and standards relating
to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and new rules subsequently
implemented by the SEC and The Nasdaq Stock Market, as well as
new accounting pronouncements, are creating uncertainty and
additional complexities for companies such as ours. To maintain
high standards of corporate governance and public disclosure, we
intend to invest all reasonable necessary resources to comply
with evolving standards. This investment may result in increased
general and administrative expenses and a diversion of
management time and attention from strategic revenue-generating
and cost management activities.

Our operating results may fluctuate from
quarter to quarter, making it likely that, in some future
quarter or quarters, we will fail to meet estimates of operating
results or financial performance, causing our stock price to
fall.

If revenue declines in a quarter, our losses will
likely increase or our earnings will likely decline because many
of our expenses are relatively fixed. Though our revenues may
fluctuate significantly as we continue to build the market for
our products, expenses such as research and development, sales
and marketing and general and administrative are not affected
directly by variations in revenue. In addition, our cost of
product revenue could also fluctuate significantly due to
variations in the demand for our product and the relatively
fixed costs to produce it. We are contractually obligated for
rental payments under a building lease assignment through 2011
in the event of default by the assignee. We cannot accurately
predict how volatile our future operating results will be
because our past and present operating results, which reflect
moderate sales activity, are not indicative of what we might
expect in the future. As a result it is very difficult for us to
forecast our revenues accurately and it is likely that in some
future quarter or quarters, our operating results will be below
the expectations of securities analysts or investors. In this
event, the market price of our common stock may fall abruptly
and significantly. Because our revenue and operating results are
difficult to predict, period-to-period comparisons of our
results of operations may not be a good indication of our future
performance.

If a natural disaster strikes our clinical
laboratory facility and we are unable to receive and or process
our customers samples for a substantial amount of time, we
would lose revenue.

We rely on a single clinical laboratory facility
to process patient samples for our tests, which are received via
delivery service or mail, and have no alternative facilities. We
will also use this facility for conducting other tests we
develop, and even if we move into different or additional
facilities they will likely be in close proximity

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##### Table of Contents



to our current clinical laboratory. Our clinical
laboratory and some pieces of processing equipment are difficult
to replace and could require substantial replacement lead-time.
Our processing facility may be affected by natural disasters
such as earthquakes and floods. Earthquakes are of particular
significance since our clinical laboratory is located in South
San Francisco, California, an earthquake-prone area. Our
laboratory and equipment are insured up to $15.3 million
against loss or damage in the event of a fire but not in the
event of a flood or an earthquake. We also have business
interruption insurance that provides coverage up to
$25 million for business losses related to fire. Our
insurance coverage may not be adequate to cover total losses
incurred in a fire. However, even if covered by insurance, in
the event our existing clinical laboratory facility or equipment
is affected by natural disasters, we would be unable to process
patient samples and meet customer demands or sales projections.
If our patient sample processing operations were curtailed or
ceased, we would not be able to perform our tests, which would
reduce our revenues, and may cause us to lose the trust of our
customers or market share.


Terrorist acts and acts of war may seriously
harm our business and financial condition.

Terrorists acts or acts of war (wherever located
around the world) may cause damage or disruption to our company,
employees, facilities, partners, suppliers, distributors and
resellers, and customers, which could significantly impact our
revenues, costs and expenses and financial condition. In
addition, as our headquarters and our significant patient
populations are located in major metropolitan areas of the
United States, we may be impacted by actions against the United
States. Depending on severity and location, such acts could
impact our ability to receive shipments of patient samples or
result in a substantial reduction in the number of ordered tests
due to the inability of patients to get to their physicians. We
will be predominantly uninsured for losses and interruptions
caused by terrorist acts and acts of war.

Concentration of ownership among some of our
stockholders may prevent other stockholders from influencing
significant corporate decisions.

At December 31, 2003, approximately 33% of
our common stock was beneficially held by a small number of
stockholders including an affiliate of Pfizer, our directors,
entities affiliated with our directors and former directors, and
our executive officers. In addition, our Series A Preferred
Stock is held by a small number of stockholders, some of who
also own shares of our common stock and could acquire
significant additional shares of common stock by converting
shares of preferred stock. Consequently, a small number of our
stockholders may be able to substantially influence our
management and affairs. If acting together, they would be able
to influence most matters requiring the approval by our
stockholders, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets
and any other significant corporate transaction. The
concentration of ownership may also delay or prevent a change in
our control at a premium price if these stockholders oppose it.
There are also certain approval rights of the Series A
Preferred Stock, and the few holders of those shares could
prevent certain important corporate actions by not approving
those actions.

Our stock price may be volatile, and our stock
could decline in value.

The market prices for securities of biotechnology
companies in general have been highly volatile and may continue
to be highly volatile in the future. Our stock price has
fluctuated widely during the last two years from a low of
$0.72 per share in September 2002 to a high of
$4.40 per share in January 2004. The following factors, in
addition to other risk factors described in this section, may
have a significant negative impact on the market price of our
common stock:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Period-to-period fluctuations in financial results                                          
|
| |  | Financing activities                                                                        
|
| |  | Litigation                                                                                  
|
| |  | Delays in product introduction, launches or
    enhancements                                
|
| |  | Announcements of technological innovations or new
    commercial products by our competitors
|
| |  | Results from clinical studies                                                               

30



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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Developments concerning proprietary rights,
    including patents                                                                                                          
|
| |  | Publicity regarding actual or potential medical
    results relating to products under development by our
    competitors or our own products or products under development
|
| |  | Regulatory developments in the United States and
    foreign countries                                                                                                     
|
| |  | Changes in payor reimbursement policies                                                                                                                                    
|
| |  | Economic and other external factors or other
    disaster or crisis                                                                                                        

A low or volatile stock price may negatively
impact our ability to raise capital and to attract and maintain
key employees.

We may be required to obtain the consent of
the holders of our preferred stock before taking corporate
actions, which could harm our business.

Our charter documents require us to obtain the
consent of the holders of the Series A Preferred Stock
before we may issue securities that have senior or equal rights
to the respective series, incur unsecured indebtedness for
borrowed money, or take other actions with respect to the
respective series or other securities. We are also required to
obtain the consent of the holders of the Series A Preferred
Stock before we amend or modify our certificate of incorporation
or bylaws to change any of the rights of such series. To obtain
these consents, we would need to get consent from holders of a
majority of the outstanding shares of the Series A
Preferred Stock.

These obligations, and our complicated
capitalization structure in general, might frustrate attempts to
remove our board or management by making it difficult to find
suitable replacements willing to spend substantial amounts of
time and efforts on company matters. Moreover, these obligations
may deter a potential acquirer from completing a transaction
with us. They may also prevent us from taking corporate actions
that would be beneficial to our stockholders and us, such as
raising capital. Even if we are not prevented from taking such
actions, they might be more expensive to us. This was the case
when we issued our Series B Preferred Stock in March 2002,
because we had to grant additional warrants to holders of
Series A Preferred Stock as consideration in order to
secure their consent and waiver concerning the financing and the
resulting impact on the Series A Preferred Stock. This was
also the case when we issued our Series C Convertible
Preferred Stock in November 2002, because we had to agree to
exchange the shares of Series B Preferred Stock for notes
that were convertible into our Series C Convertible
Preferred Stock, and to exchange the warrants associated with
shares of Series B Preferred Stock for new warrants as
consideration to secure the consent and waiver of the
Series B Preferred Stock holders concerning the financing
and the resulting impact on their respective preferred stock.

If our stockholders sell substantial amounts
of our common stock, the market price of our common stock may
fall.

If our stockholders sell substantial amounts of
our common stock, including shares issued upon the exercise of
outstanding options and warrants and upon the conversion of the
Series A Preferred Stock, the market price of our common
stock may fall. These sales also might make it more difficult
for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate. Sales of a
substantial number of shares could occur at any time. This may
decrease the price of our common stock and may impair our
ability to raise capital in the future.

Provisions of our charter documents and
Delaware law may make it difficult for our stockholders to
replace our management and may inhibit a takeover, either of
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 make it difficult for our stockholders to replace
or remove our current management, and may delay or prevent an
acquisition or merger in which we are not the surviving company.
In particular:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our Board of Directors is classified into three
    classes, with only one of the three classes elected each year,
    so that it would take at least two years to replace a majority
    of our directors

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| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our bylaws contain advance notice provisions that
    limit the business that may be brought at an annual meeting and
    place procedural restrictions on the ability to nominate
    directors
|
| |  | Our stockholders are not permitted to call
    special meetings or act by written consent                                                                                                       

The holders of Series A Preferred Stock also
have voting rights relating to many types of transactions, such
as the creation or issuance of senior or pari passu equity or
debt securities and the payment of dividends or distributions,
and are subject to redemption at the option of the holder upon
certain mergers, consolidations or other business combinations.
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 could discourage
changes of our management and acquisitions or other changes in
our control and otherwise limit the price that investors might
be willing to pay in the future for our common stock.






|        |           
|------- | ----------
|Item 2. | Properties

As of March 25, 2004, we leased one building
of laboratory and office space of approximately
41,000 square feet in South San Francisco, California.
The lease expires in April 2010 and provides an option to extend
the term for an additional ten years. We also subleased office
space of approximately 14,000 square feet in another
building in South San Francisco, California. This sublease
expires on December 31, 2004.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not a party to any material legal
proceedings.






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

None.

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PART II





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

(a) Market Data; Dividends

Since May 2, 2000, our common stock has been
traded on the Nasdaq National Market under the symbol
VLGC. The following table sets forth, for the
periods indicated, the high and low sales prices per share of
common stock on the Nasdaq National Market:

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|               |  | High |      | Low
|               |  |      |      |    
|2003           |  |      |      |     |  |   |      | 
|Fourth Quarter |  | $    | 3.87 |     |  | $ | 1.34 | 
|Third Quarter  |  | $    | 1.74 |     |  | $ | 1.05 | 
|Second Quarter |  | $    | 2.25 |     |  | $ | 0.86 | 
|First Quarter  |  | $    | 1.30 |     |  | $ | 0.85 | 
|2002           |  |      |      |     |  |   |      | 
|Fourth Quarter |  | $    | 1.70 |     |  | $ | 0.75 | 
|Third Quarter  |  | $    | 2.90 |     |  | $ | 0.72 | 
|Second Quarter |  | $    | 3.40 |     |  | $ | 1.95 | 
|First Quarter  |  | $    | 2.96 |     |  | $ | 1.78 | 

The last reported sale price of our common stock
on the Nasdaq National Market on March 25, 2004 was $2.92.
As of March 25, 2004, there were approximately 10,000
stockholders of record of our common stock.

We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future
earnings for funding growth and, therefore, do not anticipate
paying any cash dividends on our common stock in the foreseeable
future. Any future determination to pay cash dividends on our
common stock will be at the discretion of the board of directors
and will be dependent upon our financial condition, results of
operations, capital requirements and other such factors as the
board of directors deems relevant. In addition, as long as any
Series A Preferred Stock is outstanding, we may not,
without first obtaining the written approval of the holders of
such stock, declare or pay any cash dividends to common
stockholders.

In addition, we are obligated to pay dividends to
the Series A preferred stockholders. See Capital
Stock note to the financial statements for further
discussion.

Recent Sales of Unregistered
Securities.

The following sets forth the number of shares of
our common and preferred stock issued in the fourth quarter of
2003. For these issuances, we relied on the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended
(the Securities Act):

In October 2003, we issued 3,479,849 shares
of our common stock to four holders of our Series C
Preferred Stock upon such holders conversion of certain
shares of Series C Preferred Stock held by such holders.
Additionally, we issued 420 shares of our common stock to
one holder of our warrants upon such holders exercise of
warrants for an aggregate cash exercise price of $0.02.

In November 2003, we issued 2,419,889 and
1,863,437 shares of our common stock to one holder of our
Series A Preferred Stock and four holders of our
Series C Preferred Stock, respectively, upon such
holders conversion of certain shares of Series A and
Series C Preferred Stock held by such holders.
Additionally, we issued 420 and 250,000 shares of our
common stock to three holders of our warrants upon such
holders exercise of warrants for an aggregate cash
exercise price of $0.02 and $1.11 per share, respectively.

In December 2003, we issued 4,203,089 shares
of our common stock to twelve holders of our Series C
Preferred Stock upon conversion of certain shares of
Series C Preferred Stock held by such holders.
Additionally, we issued 946,079 shares of our common stock
to two holders of our warrants upon such holders exercise
of warrants for an aggregate cash exercise price of $1.11. We
also issued 124,493 shares of

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our common stock to six holders of our warrants
upon such holders net exercise of warrants held by such
holders.


In December 2003, we issued 53,820 shares of
common stock with a market value of $0.2 million as of the
date of such issuance, to the ViroLogic, Inc. 401(k) Profit
Sharing Plan as a matching contribution under the terms of the
plan.

Information about our equity compensation plans
is included in Item 12 of Part III of this Annual
Report.

34



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##### Table of Contents







|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial information has
been derived from our audited financial statements. The
information below is not necessarily indicative of results of
future operations, and should be read in conjunction with
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and related notes thereto included in
Item 8 of this Form 10-K in order to fully understand
factors that may affect the comparability of the information
presented below.

|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       |        | 
|-------------------------------------------------------------------- | -------------------------- | ---------------------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ----- | ------ | 
|                                                                     |                            |                                         
|                                                                     |                            | Year Ended December 31,                 
|                                                                     |                            |                                         
|                                                                     |                            | 2003                                     |        | 2002   |        | 2001 |         | 2000   |        | 1999
|                                                                     |                            |                                          |        |        |        |      |         |        |        |     
|                                                                     |                            |                                         
|                                                                     |                            | (In thousands, except per share amounts)
|Statement of Operations Data:                                        |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Revenue:                                                             |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                                     | Product revenue            |                                          | $      | 31,911 |        |      | $       | 24,530 |        |      | $       | 17,815 |        |   | $       | 7,466  |        |   | $       | 1,069 |       
|                                                                     | Contract revenue           |                                          |        | 1,468  |        |      |         | 731    |        |      |         | 458    |        |   |         |       |        |   |         |      |       
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                                     |                            | Total revenue                            |        |        | 33,379 |      |         |        | 25,261 |      |         |        | 18,273 |   |         |        | 7,466  |   |         |       | 1,069  | 
|Operating costs and expenses:                                        |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                                     | Cost of product revenue    |                                          |        | 16,713 |        |      |         | 14,589 |        |      |         | 11,845 |        |   |         | 5,457  |        |   |         | 627   |       
|                                                                     | Research and development   |                                          |        | 4,733  |        |      |         | 10,406 |        |      |         | 11,693 |        |   |         | 10,080 |        |   |         | 9,588 |       
|                                                                     | General and administrative |                                          |        | 9,256  |        |      |         | 10,550 |        |      |         | 11,376 |        |   |         | 10,841 |        |   |         | 6,804 |       
|                                                                     | Sales and marketing        |                                          |        | 8,306  |        |      |         | 11,716 |        |      |         | 10,336 |        |   |         | 5,890  |        |   |         | 1,196 |       
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                                     |                            | Total operating costs and expenses       |        |        | 39,008 |      |         |        | 47,261 |      |         |        | 45,250 |   |         |        | 32,268 |   |         |       | 18,215 | 
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Operating loss                                                       |                            |                                          | (5,629 | )      |        |      | (22,000 | )      |        |      | (26,977 | )      |        |   | (24,802 | )      |        |   | (17,146 | )    
|Interest income                                                      |                            |                                          | 106    |        |        |      | 307     |        |        |      | 1,143   |        |        |   | 1,868   |        |        |   | 249     |      
|Interest expense                                                     |                            |                                          | (141   | )      |        |      | (423    | )      |        |      | (466    | )      |        |   | (262    | )      |        |   | (243    | )    
|Other income                                                         |                            |                                          | 156    |        |        |      | 347     |        |        |      | 106     |        |        |   |        |        |        |   |        |      
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Net loss                                                             |                            |                                          | (5,508 | )      |        |      | (21,769 | )      |        |      | (26,194 | )      |        |   | (23,196 | )      |        |   | (17,140 | )    
|Deemed dividend to preferred stockholders                            |                            |                                          | (2,155 | )      |        |      | (10,551 | )      |        |      | (2,269  | )      |        |   | (15,700 | )      |        |   | (3,100  | )    
|Preferred stock dividend                                             |                            |                                          | (1,610 | )      |        |      | (977    | )      |        |      | (334    | )      |        |   |        |        |        |   |        |      
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Loss applicable to common stockholders                               |                            | $                                        | (9,273 | )      |        | $    | (33,297 | )      |        | $    | (28,797 | )      |        | $ | (38,896 | )      |        | $ | (20,240 | )    
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Basic and diluted loss per common share                              |                            | $                                        | (0.27  | )      |        | $    | (1.38   | )      |        | $    | (1.43   | )      |        | $ | (2.62   | )      |        | $ | (4.24   | )    
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Shares used in computing basic and diluted loss
    per common share |                            |                                          | 34,445 |        |        |      | 24,157  |        |        |      | 20,072  |        |        |   | 14,852  |        |        |   | 4,772   |      
|                                                                     |                            |                                          |        |        |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      

See notes to the financial statements for a
description of the number of shares used in the computation of
the basic and diluted loss per common share.

|                                                   |  |                |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  |               
|                                                   |  | December 31,  
|                                                   |  |               
|                                                   |  | 2003           |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                   |  |                |          |      |  |      |          |      |  |     
|                                                   |  |               
|                                                   |  | (In thousands)
|Balance Sheet Data:                                |  |                |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents, and short-term investments |  | $              | 9,430    |      |  | $    | 11,145   |      |  | $    | 8,962   |   |  | $ | 23,794  |   |  | $ | 2,208   |  
|Accounts receivable, net                           |  |                | 6,165    |      |  |      | 4,924    |      |  |      | 4,562   |   |  |   | 2,404   |   |  |   | 550     |  
|Working capital(a)                                 |  |                | 13,038   |      |  |      | (239     | )    |  |      | 7,508   |   |  |   | 21,097  |   |  |   | 522     |  
|Restricted cash                                    |  |                | 776      |      |  |      | 707      |      |  |      | 1,000   |   |  |   | 2,029   |   |  |   | 950     |  
|Total assets                                       |  |                | 28,378   |      |  |      | 30,486   |      |  |      | 37,851  |   |  |   | 43,647  |   |  |   | 9,777   |  
|Long-term portion of capital lease obligations     |  |                | 87       |      |  |      | 419      |      |  |      | 1,341   |   |  |   | 945     |   |  |   |        |  
|Long-term portion of loans payable                 |  |                |         |      |  |      |         |      |  |      | 174     |   |  |   | 1,019   |   |  |   | 1,051   |  
|Long-term advance from subtenant                   |  |                |         |      |  |      |         |      |  |      | 975     |   |  |   |        |   |  |   |        |  
|Redeemable convertible preferred stock             |  |                | 1,994    |      |  |      | 4,249    |      |  |      | 11,228  |   |  |   |        |   |  |   |        |  
|Accumulated deficit                                |  |                | (106,272 | )    |  |      | (100,764 | )    |  |      | (78,995 | ) |  |   | (52,801 | ) |  |   | (29,605 | )
|Total stockholders equity(a)                      |  |                | 20,587   |      |  |      | 7,014    |      |  |      | 13,471  |   |  |   | 33,643  |   |  |   | 4,698   |  



---



|    |                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | At December 31, 2002, short-term liabilities
    include $12.05 million of Series C Convertible Secured
    Promissory Notes (Notes). On February 4, 2003,
    our stockholders ratified the Series C Private Placement
    resulting in the conversion of the Notes into stockholders
    equity. See notes to financial statements for further details.

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

The following discussion of the financial
condition and results of operations should be read in
conjunction with the financial statements and the notes thereto
included in this Form 10-K. The estimates and certain other
statements below are forward-looking statements that involve
risks and uncertainties. Our actual future capital requirements
and the adequacies of our available funds will depend on many
factors, including those under Risk Factors Related to Our
Business.

OVERVIEW

We are a biotechnology company developing,
marketing and selling innovative products to guide and improve
treatment of viral diseases. We incorporated in the state of
Delaware on November 14, 1995 and commenced commercial
operations in 1999. We developed a practical way of directly
measuring the impact of genetic mutations on drug resistance and
using this information to guide therapy. We have proprietary
technology, called PhenoSense, for testing drug resistance in
viruses that cause serious viral diseases such as HIV/ AIDS and
hepatitis. Our products are used by physicians in selecting
optimal treatments for their HIV patients and by industry,
academia and government for clinical studies, drug screening and
characterization, and basic research.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND
ESTIMATES

Our financial statements 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 assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses. Note 1 to the financial statements describes the
significant accounting policies used in the preparation of the
financial statements. Certain of these significant accounting
policies are considered to be critical accounting policies, as
defined below.

A critical accounting policy is defined as one
that is both material to the presentation of our financial
statements and requires management to make difficult, subjective
or complex judgments that could have a material effect on our
financial condition and results of operations. Specifically,
critical accounting estimates have the following attributes:
1) we are required to make assumptions about matters that
are highly uncertain at the time of the estimate; and
2) different estimates we could reasonably have used, or
changes in the estimate that are reasonably likely to occur,
would have a material effect on our financial condition or
results of operations.

Estimates and assumptions about future events and
their effects cannot be determined with certainty. We base our
estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur,
as additional information is obtained and as our operating
environment changes. These changes have historically been minor
and have been included in the financial statements as soon as
they became known. Based on a critical assessment of our
accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, we
believe that our financial statements are fairly stated in
accordance with accounting principles generally accepted in the
United States, and present a meaningful presentation of our
financial condition and results of operations.

We believe the following critical accounting
policies reflect our more significant estimates and assumptions
used in the preparation of our financial statements:

Revenue Recognition

Product revenue is recognized upon completion of
tests made on samples provided by customers and the shipment of
test results to those customers. Services are provided to
certain patients covered by various third-party payor programs,
such as Medicare and Medicaid. Billings for services under
third-party payor programs are included in revenue net of
allowances for differences between the amounts billed and
estimated receipts under such programs. We estimate these
allowances based on historical payment information and current
sales

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data. If the government and other third-party
payors significantly change their reimbursement policies, an
adjustment to the allowance may be necessary. Revenue generated
from our database of resistance test results is recognized when
earned under the terms of the related agreements, generally upon
shipment of the requested reports. Contract revenue consists of
revenue generated from National Institutes of Health
(NIH) grants and commercial assay development, and
other non-product revenue. NIH grant revenue is recorded on a
reimbursement basis as grant costs are incurred. The costs
associated with contract revenue are included in research and
development expenses. Deferred revenue relates to cash received
in advance of meeting the revenue recognition criteria described
above.


Accounts Receivable

The process for estimating the ultimate
collection of receivables involves significant assumptions and
judgments. Billings for services under third-party payor
programs are recorded as revenue net of allowances for
differences between amounts billed and the estimated receipts
under such programs. Adjustments to the estimated receipts,
based on final settlement with the third-party payors, are
recorded upon settlement as an adjustment to net revenue.

In addition, we review and estimate the
collectibility of our receivables based on the period of time
they have been outstanding. Historical collection and payor
reimbursement experience is an integral part of the estimation
process related to reserves for doubtful accounts. In addition,
we assess the current state of our billing functions in order to
identify any known collection or reimbursement issues in order
to assess the impact, if any, on our reserve estimates, which
involves judgment. We believe that the collectibility of our
receivables is directly linked to the quality of our billing
processes, most notably those related to obtaining the correct
information in order to bill effectively for the services we
provide. As such, we have implemented procedures to reduce the
number of requisitions that we receive from healthcare providers
with missing or incorrect billing information. Revisions in
reserve for doubtful accounts estimates are recorded as an
adjustment to bad debt expense within general and administrative
expenses. We believe that our collection and reserves processes,
along with our close monitoring of our billing processes, helps
to reduce the risk associated with material revisions to reserve
estimates resulting from adverse changes in collection and
reimbursement experience and billing operations.

Deferred Tax Assets

We record a valuation allowance to reduce our
deferred tax assets to the amount that we believe is more likely
than not to be realized. Due to our lack of earnings history,
the net deferred tax assets at December 31, 2003 have been
fully offset by a valuation allowance.

Deemed Dividends

We estimate a beneficial conversion feature for
our convertible preferred stock in accordance with Emerging
Issues Task Force Consensus No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features
and No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments based on the difference
between the estimated conversion price and common stock fair
market value at the date of issuance. We use the Black-Scholes
option valuation model to estimate the conversion price at the
date of issuance, which considers a number of factors requiring
judgment including the weighted-average expected life of stock
options from grant date and the volatility factor of the
expected market price of the Companys common stock. We
record the beneficial conversion feature as a deemed dividend on
the Statement of Operations, resulting in an increase to the
loss applicable to common stockholders in the calculation of
basic and diluted loss per common share.

Stock Based Compensation

We have elected to continue to follow Accounting
Principles Board Opinion No. 25 Accounting for
Stock-Based Compensation (APB 25) to
account for employee stock options. Under APB 25, no
compensation expense is recognized because the exercise price of
our employee stock options equals the

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market price of the underlying stock on the date
of grant. Deferred compensation, if recorded, is amortized using
the graded vesting method. Statement of Financial Accounting
Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123) as
amended by Statement of Financial Accounting Standards Board
Statement No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123
(SFAS 148) requires the disclosure of pro forma
information regarding net loss and net loss per share as if we
had accounted for stock options under the fair value method. See
Summary of Significant Accounting Policies note to
the financial statements for further discussion.


We account for stock option grants to
non-employees in accordance with the Emerging Issues Task Force
Consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, which requires the options subject to vesting to
be periodically re-valued and expensed over their vesting
periods. We estimate the fair value of these stock options and
stock purchase rights at the date of grant using the
Black-Scholes option valuation model, which considers a number
of factors requiring judgment.

RESULTS OF OPERATIONS

Year Ended December 31, 2003 Compared to
Years Ended December 31, 2002 and 2001.

|                               |                 |                |        |        |  |      |        |        |  |   |        |        | 
|------------------------------ | --------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                               |                 | 2003           |        | 2002   |  | 2001
|                               |                 |                |        |        |  |     
|                               |                 |               
|                               |                 | (In thousands)
|Patient testing                |                 | $              | 22,834 |        |  | $    | 17,845 |        |  | $ | 12,041 |       
|Pharmaceutical company testing |                 |                | 9,077  |        |  |      | 6,685  |        |  |   | 5,774  |       
|                               |                 |                |        |        |  |      |        |        |  |   |        |       
|                               | Product revenue |                |        | 31,911 |  |      |        | 24,530 |  |   |        | 17,815 | 
|Contract revenue               |                 |                | 1,468  |        |  |      | 731    |        |  |   | 458    |       
|                               |                 |                |        |        |  |      |        |        |  |   |        |       
|Total revenue                  |                 | $              | 33,379 |        |  | $    | 25,261 |        |  | $ | 18,273 |       
|                               |                 |                |        |        |  |      |        |        |  |   |        |       

Revenue.Revenue was
$33.4 million, $25.3 million and $18.3 million in
2003, 2002 and 2001, respectively. The increase of
$8.1 million in 2003 as compared to 2002 and
$7.0 million in 2002 as compared to 2001 was primarily
attributable to growth in the HIV resistance testing market and
increased demand for our PhenoSense HIV, PhenoSense GT and
GeneSeq HIV products for patient and pharmaceutical testing. In
addition, contract revenue, which primarily consists of revenue
from NIH research grants and commercial assay development
contributed to increases year over year due to new projects
being approved and initiated. In 2003, we were awarded four
Small Business Innovation Research (SBIR) grants
from the National Institute of Allergy and Infectious Diseases
(NIAID), a division of the U.S. National
Institutes of Health, totaling more than $4 million over
three years. These grants will help support the development of
analytical and database tools to facilitate the identification
and characterization of drug resistant strains of HIV, and
assays that will aid in the pre-clinical and clinical evaluation
of the next generation of anti-viral therapeutics. In 2001, we
were awarded NIH research grants to develop new technologies to
measure HIV resistance to entry inhibitors and viral replication
capacity.

We believe increased demand for existing products
and new product launches will be the primary factors
contributing to a projected increase in the level of sales in
2004 as compared to 2003. The Company anticipates quarterly
differences in the revenue growth rate relating to the timing of
various clinical studies and seasonal effects observed in
patient testing, which in keeping with the historical trend we
expect to be most noticeable in the first quarter.

Cost of product
revenue.Cost of product revenue was
$16.7 million, $14.6 million and $11.8 million in
2003, 2002 and 2001, respectively. The increase of
$2.1 million in 2003 as compared to 2002 and
$2.7 million in 2002 as compared to 2001 was due to the
higher volume of testing. Included in these costs are materials,
supplies, labor and overhead related to product revenue. Gross
margins increased to 48% in 2003 from 41% in 2002 and 34% in
2001. The increase was primarily due to improved operational
efficiency and economies of scale and implementation of the 2002
business restructuring plan as discussed below. We anticipate
that gross

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margin on our product revenue will continue to
improve as revenue increases and further operational
efficiencies and economies of scale are achieved.


Research and
development.Research and development
costs were $4.7 million, $10.4 million and
$11.7 million in 2003, 2002 and 2001, respectively. The
decrease of $5.7 million in 2003 as compared to 2002 and
$1.3 million in 2002 as compared to 2001 was primarily the
result of reallocating certain research and development
personnel and resources to revenue generating activities, and
implementation of the 2002 business restructuring plan as
discussed below. Total research and development expenses
included costs associated with contract revenue as follows:

|                                                |              |                |       |      |  |   |     |     | 
|----------------------------------------------- | ------------ | -------------- | ----- | ---- |  | - | --- | --- | 
|                                                |              |               
|                                                |              | Year Ended    
|                                                |              | December 31,  
|                                                |              |               
|                                                |              | 2003           |       | 2002
|                                                |              |                |       |     
|                                                |              |               
|                                                |              | (In thousands)
|NIH Grants:                                     |              |                |       |      |  |   |     |    
|                                                | HIV assays   |                | $     | 509  |  |   | $   | 731 | 
|                                                | HIV Database |                |       | 102  |  |   |     |    | 
|                                                | HCV assay    |                |       | 107  |  |   |     |    | 
|Commercial assay development and other projects |              |                | 442   |      |  |   |    |    
|                                                |              |                |       |      |  |   |     |    
|Total                                           |              | $              | 1,160 |      |  | $ | 731 |    
|                                                |              |                |       |      |  |   |     |    

Because our resistance tests target viral
diseases and our product lines overlap, most of our core
research and development activities are advancing multiple
potential product lines. Due to this substantial overlap, we do
not track costs on a project by project basis, except for the
costs reimbursed by the NIH as discussed above. We expect
research and development spending in the future to trend with
the level of NIH grants and/or other research and development
cost reimbursement arrangements under contract.

Below is a summary of products and products in
development. The information in the column labeled
Estimated Completion contains forward-looking
statements regarding completion of products in development and
is dependent on securing NIH grants and/or other research and
development funding as well as demand for the products. The
actual timing of completion of those products could differ
materially from the estimates provided in the table.

The following summarizes our products and
products in development:

|                                                                          |                                    |            |  |           | 
|------------------------------------------------------------------------- | ---------------------------------- | ---------- |  | --------- | 
|                                                                          |                                    | Estimated 
|                                                                          |                                    | Completion
|                                                                          |                                    |           
|PhenoSense HIV, a phenotypic HIV
    test                                 |                                    |            |  |          
|                                                                          | Pharmaceutical and patient testing |            |  | Completed | 
|GeneSeq HIV, a genotypic HIV test                                         |                                    |            |  |          
|                                                                          | Pharmaceutical and patient testing |            |  | Completed | 
|PhenoSense GT, a combination
    phenotype/genotype HIV test              |                                    |            |  |          
|                                                                          | Pharmaceutical and patient testing |            |  | Completed | 
|Replication Capacity HIV, a measurement of
    fitness(1)                 |                                    |            |  |          
|                                                                          | Pharmaceutical and patient testing |            |  | Completed | 
|PhenoScreen, a high-throughput screening
    assay                        |                                    |            |  |          
|                                                                          | Pharmaceutical testing             |            |  | Completed | 
|PhenoSense HIV Antibody Neutralization for
    Vaccine Development        |                                    |            |  |          
|                                                                          | Pharmaceutical testing             |            |  | Completed | 
|PhenoSense HIV Entry and GeneSeq HIV Entry,
    entry inhibitor assays(2) |                                    |            |  |          
|                                                                          | Pharmaceutical testing             |            |  | Completed | 
|                                                                          | Patient testing(6)                 |            |  | 2004      | 

39



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|                                                       |                        |            |  |           | 
|------------------------------------------------------ | ---------------------- | ---------- |  | --------- | 
|                                                       |                        | Estimated 
|                                                       |                        | Completion
|                                                       |                        |           
|PhenoSense HIV Co-Receptor Tropism, an entry
    assay |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | Completed | 
|                                                       | Patient testing(4)     |            |  | 2004      | 
|PhenoSense and GeneSeq HIV Integrase
    assays        |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | 2004      | 
|                                                       | Patient testing(3)     |            |  | 2006      | 
|GeneSeq HCV, a genotypic hepatitis C
    test          |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | Completed | 
|                                                       | Patient testing(3)     |            |  | 2005      | 
|PhenoSense HCV, a phenotypic hepatitis C
    test      |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | 2005      | 
|                                                       | Patient testing(3)     |            |  | 2006      | 
|GeneSeq HBV, a genotypic hepatitis B
    test          |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | Completed | 
|                                                       | Patient testing        |            |  | (5)       | 
|PhenoSense HBV, a phenotypic hepatitis B
    test      |                        |            |  |          
|                                                       | Pharmaceutical testing |            |  | (5)       | 
|                                                       | Patient testing        |            |  | (5)       | 



---

|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Currently offered free of charge on phenotypic
    reports, in the future may be offered as a stand-alone product.                                                                         
|   
|(2) | This test may be incorporated into one of our
    existing products or possibly offered as a stand-alone product.                                                                          
|   
|(3) | This test is expected to be offered after more
    pharmaceutical drugs are available for patient use and based on
    demand for the product.                                             
|   
|(4) | This test is expected to be validated in 2004 for
    use in clinical trials, and subsequently offered to patients
    based on demand for the product.                                    
|   
|(5) | The timing of estimated completion is under
    evaluation and is dependant on securing NIH grants and/or other
    research and development funding as well as demand for the
    product.
|   
|(6) | The phenotypic test for the FDA approved fusion
    inhibitor drug, Fuzeon, is expected to be validated in 2004 and
    available for patient use dependent on demand for the product.     

40



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General and
administrative.General and
administrative expenses were $9.3 million,
$10.6 million and $11.4 million in 2003, 2002 and
2001, respectively. The decrease of $1.3 million in 2003 as
compared to 2002 and $0.8 million in 2002 as compared to
2001 was primarily due to the implementation of the 2002
business restructuring plan as discussed below and a reduction
in non-cash compensation expenses related to granting stock and
options prior to our initial public offering, and was partially
offset by an increase in professional services fees and costs
associated with facilities marketed for sublease. We expect
general and administrative expenses in 2004 to increase from
2003 levels but at a substantially lower growth rate than the
projected revenue growth rate primarily due to continued
leveraging of existing infrastructure.

Stock Based
Compensation.Deferred compensation
for options granted to employees is the difference between the
exercise price and the deemed fair value for financial reporting
purposes of our common stock on the date certain options were
granted and is a component of stockholders equity. In
2003, 2002 and 2001, all options were granted at fair value and
no deferred compensation was recorded. Stock based compensation,
recorded in connection with the grant of stock options to
employees prior to our initial public offering, was amortized
over the vesting period for the individual options. We recorded
related amortization of $0.2 million, $0.7 million and
$1.5 million in 2003, 2002 and 2001, respectively.

We determined compensation for options granted to
non-employees in accordance with the Emerging Issues Task Force
Consensus No. 96-18 as the fair value of the equity
instruments issued. We record compensation for options granted
to non-employees as the related services are rendered, and the
value of the compensation may be periodically remeasured and the
expense adjusted accordingly as the underlying options vest. We
recorded $0.3 million, $0.2 million and
$0.2 million of stock based compensation for non-employees
in 2003, 2002 and 2001, respectively. At December 31, 2003,
the aggregate value of the unvested options subject to
remeasurement was $0.1 million, calculated based on the
deemed fair value of our common stock. The related amortization
will be recorded over the remaining service, which is generally
one to four years.

Sales and marketing.Sales and marketing expenses were $8.3 million,
$11.7 million and $10.3 million in 2003, 2002 and
2001, respectively. The decrease of $3.4 million in 2003 as
compared to 2002 was primarily due to continued effective
utilization of our sales and marketing capabilities and
implementation of the 2002 business restructuring plan as
discussed below. The increase of $1.4 million in 2002 as
compared to 2001 was primarily attributable to increased sales
and marketing programs related to the commercialization of our
existing and new products, including PhenoSense GT. We expect
sales and marketing expenses in 2004 to increase from 2003
levels but at a lower growth rate than the projected revenue
growth rate primarily due to continued effective utilization of
our sales and marketing capabilities.

Interest income.Interest income was $0.1 million, $0.3 million and
$1.1 million in 2003, 2002 and 2001, respectively. The
decrease of $0.2 million in 2003 as compared to 2002 and
$0.8 million in 2002 as compared to 2001 was primarily due
to lower average cash balances and lower interest rates.

Interest expense.Interest expense was $0.1 million, $0.4 million and
$0.5 million in 2003, 2002 and 2001, respectively. The
decrease of $0.3 million in 2003 as compared to 2002 and
$43,000 in 2002 as compared to 2001 was primarily due to the
payoff of several equipment loans which expired.

Other income.Other
income was $0.2 million, $0.3 million and
$0.1 million in 2003, 2002 and 2001, respectively, which
represents residual income from one of our subleases. For
further discussion, see Liquidity and Capital Resources below.

Deemed dividend.In
2001, we sold 1,625 shares of Series A Preferred Stock
with warrants to purchase an aggregate of 3.2 million
shares of common stock, for an aggregate purchase price of
$16.25 million. We determined that the issuance of the
Series A Preferred Stock resulted in a beneficial
conversion feature with a value of $2.3 million that was
recorded in 2001.

In the first quarter of 2002, we sold
1,005 shares of Series B Preferred Stock with warrants
to purchase an aggregate of 2.2 million shares of common
stock, for an aggregate purchase price of $10.05 million.
In connection with this financing, we also granted warrants to
purchase an aggregate of 637,261 shares of common stock to
holders of Series A Preferred Stock as a payment in order
to secure their consent and waiver concerning the financing and
the resulting impact on the Series A Preferred Stock. In
the fourth quarter of

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2002, we sold 706 shares of Series C
Preferred Stock with warrants to purchase an aggregate of
4.4 million shares of common stock, for an aggregate
purchase price of $7.06 million. We determined that the
issuance of the Series B and Series C Preferred Stock
resulted in a beneficial conversion feature of $2.9 million
and $7.7 million, respectively, for a total of
$10.6 million in 2002.


On February 4, 2003, our stockholders
approved the conversion of certain convertible secured
promissory notes (Notes) issued to prior
Series B preferred stockholders into Series C
Preferred Stock and the issuance of warrants to purchase shares
of our common stock in exchange for warrants originally issued
in connection with Series B Preferred Stock. The warrant
exchange resulted in a beneficial conversion feature of
$2.2 million that was recorded at the time of the exchange
in the first quarter of 2003.

The beneficial conversion features were
calculated in accordance with Emerging Issues Task Force
Consensus No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features and
Emerging Issues Task Force Consensus No. 00-27
Application of Issue No. 98-5 to Certain Convertible
Instruments. The beneficial conversion features were
reflected as deemed dividends in the Statement of Operations of
$2.2 million, $10.6 million and $2.3 million in
2003, 2002 and 2001, respectively, and are included in
stockholders equity as offsetting charges and credits to
additional paid-in capital.

Preferred stock
dividend.We recorded a preferred
stock dividend of $1.6 million, $1.0 million and
$0.3 million in 2003, 2002 and 2001, respectively. The
Series A Preferred Stock issued in 2001 bore an initial 6%
annual dividend rate, payable twice a year in shares of common
stock, which increased to an 8% annual rate on the fourth such
payment, and then increases by 2 percentage points every
six months thereafter up to a maximum annual rate of 14%. The
Series B Preferred Stock issued in 2002 received cash
dividends based on a 6% annual dividend rate until November 2002
when the Series B Preferred Stock was exchanged for secured
convertible promissory notes and converted to Series C
Preferred Stock. The Series C Preferred Stock bore an
initial 8% annual dividend rate, payable quarterly, which
increases to a 9% annual dividend rate on June 30, 2004,
then increases by one percentage point every quarter thereafter
up to a maximum annual rate of 14%. The Series C Preferred
Stock dividend was paid in cash in 2002 and was paid in shares
of common stock in 2003. In December 2003, we elected to convert
all Series C Convertible Preferred Stock then outstanding
into common stock.

Business
restructuring.In the fourth quarter
of 2002, we implemented a business restructuring plan to
reallocate certain personnel and resources to revenue maximizing
activities and reduce cash consumption. The plan included a
reduction in force of approximately 17% or 35 employees: 8
employees in laboratory operations; 6 employees in research and
development; 8 employees in sales and marketing; and 13
employees in administration. In the fourth quarter of 2002, we
recorded a charge for salaries, severance and other personnel
related costs to the respective departments totaling $286,000:
cost of product revenue of $61,000; research and development
expense of $54,000; general and administrative expense of
$96,000 and sales and marketing expense of $75,000. All amounts
related to this restructuring were paid in 2002.

LIQUIDITY AND CAPITAL RESOURCES

We expect our available cash and cash
equivalents, short-term investments and short-term restricted
cash of $9.9 million at December 31, 2003, funds
provided by the sale of our products, contract revenue, and
borrowing under equipment financing arrangements will be
adequate to fund our operations through at least December 2004,
assuming revenue reaches projected levels and cost containment
measures continue to be effective. In addition, we plan to
continue to evaluate various strategic opportunities, including
among others, research and development collaborations,
international alliances and marketing partnerships.

We have funded our operations since inception
primarily through public and private sales of common and
preferred stock, equipment financing arrangements, product
revenue and contract revenue. In particular, we have completed
three private financings since our initial public offering in
May 2000. Although we expect our operating and capital resources
will be sufficient to meet future requirements through at least
December 2004, we may have to raise additional funds to continue
the development and commercialization of future technologies and
our business operations in general. These funds may not be
available on favorable terms, or at all. If adequate funds are
not available on commercially reasonable terms, we may be
required to curtail

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operations significantly or sell significant
assets and may not be able to continue as a going concern. In
addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
that we have sufficient funds for current or future operating
plans.


Net cash used in operating activities was
$3.6 million, $19.3 million and $24.1 million in
2003, 2002 and 2001, respectively. Cash used in operating
activities decreased primarily due to a reduction of operating
losses as discussed above. Cash flows from operating activities
can vary significantly due to various factors including changes
in accounts receivable and deferred revenue related to new
arrangements with customers. The average collection period of
our accounts receivable as measured in days sales outstanding
(DSO) can vary and is dependent on various factors, including
the type of revenue (i.e. patient testing, pharmaceutical
company testing or contract revenue) and the payment terms
related to those revenues and whether the related revenue was
recorded at the beginning or ending of a period.

Net cash used in investing activities of
$1.0 million in 2003 resulted primarily from capital
expenditures of $0.5 million and costs associated with
acquiring other assets of $0.4 million. Net cash provided
by investing activities of $10.7 million in 2002 resulted
primarily from the net proceeds from maturities and sales of
short-term investments, a lease assignment of $3.8 million
and a tenant improvement reimbursement of $1.3 million,
partially offset by capital expenditures of $1.4 million.
Net cash used in investing activities of $2.2 million in
2001 resulted primarily from capital expenditures of
$7.8 million offset by the receipt of an advance from
subtenant of $2.6 million and net proceeds from maturities
and sales of short-term investments.

Net cash provided by financing activities was
$2.9 million, $17.8 million and $15.1 million in
2003, 2002 and 2001, respectively. The net cash provided by
financing activities in 2003 resulted primarily from warrant
exercises for proceeds of $4.3 million, partially offset by
payments on loans and capital lease obligations. Net cash
provided by financing activities in 2002 resulted primarily from
our issuance of Series B and Series C Preferred Stock
and an equity investment from Pfizer Ireland Pharmaceuticals for
net proceeds of approximately $19.0 million. Net cash
provided by financing activities in 2001 resulted primarily from
our issuance of Series A Preferred Stock for net proceeds
of approximately $14.7 million and equipment financing of
approximately $1.3 million.

At December 31, 2003, the Company leased two
buildings totaling approximately 66,000 square feet in
South San Francisco, California. The lease for the
Companys primary facility, which covers 41,000 square
feet, expires in April 2010 and provides an option to extend the
term for an additional ten years. The lease for the
Companys original facilities, which covers approximately
25,000 square feet, was scheduled to expire in November
2004. On March 22, 2004, Company and the lessor agreed to
terminate this lease. The lease termination enabled the Company
to decrease the present value of its remaining lease obligations
for this facility by approximately 50%. Under the terms of this
agreement, the Company will make cash payments to the lessor
totaling $0.4 million as follows: $0.2 million in
March 2004 and $0.2 million in April 2004. As a result, the
Company will record a charge in the first quarter of 2004 of
approximately $0.4 million primarily related to the
termination payment and the write-off of the net carrying value
of the related leasehold improvements.

In addition, at December 31, 2003, the
Company subleased approximately 14,000 square feet in South
San Francisco, California. This sublease expires on
December 31, 2004.

In June 2002, we assigned a lease of excess
laboratory and office space and transferred ownership through
the sale of related leasehold improvements and equipment to a
third party. We received net proceeds from the lease assignment
of $3.8 million, resulting in a net gain of
$0.3 million, which was recognized as other income over the
initial sublease term. In the event of default by the assignee,
we would be contractually obligated for payments under the lease
of: $1.0 million in 2004; $1.4 million in 2005;
$1.5 million in 2006; $1.5 million in 2007;
$1.5 million in 2008; and $3.9 million from 2009
through 2011.

In July 2001, we sublet approximately
12,000 square feet of one of our existing facilities to a
third party for a term of 18 months, which ended in January
2003. The rental income generated from this sublease was
$0.1 million, $0.6 million and $0.3 million in
2003, 2002 and 2001, respectively, and is recorded as a partial
offset to rental expense.

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At December 31, 2003, our contractual
obligations for the next five years and thereafter are as
follows:

|                                |       |                        |       |           |  |           |       |            |  |       |       |       |  |  |       |       |  |   |       |       | 
|------------------------------- | ----- | ---------------------- | ----- | --------- |  | --------- | ----- | ---------- |  | ----- | ----- | ----- |  |  | ----- | ----- |  | - | ----- | ----- | 
|                                |       |                       
|                                |       | Payments Due By Period
|                                |       |                       
|                                |       | Less Than              |       |          
|                                |       | 1 Year                 |       | 2-3 Years |  | 4-5 Years |       | Thereafter |  | Total
|                                |       |                        |       |           |  |           |       |            |  |      
|                                |       |                       
|                                |       | (In thousands)        
|Operating leases                |       | $                      | 1,860 |           |  | $         | 1,936 |            |  | $     | 2,051 |       |  |  | 1,419 |       |  | $ | 7,266 |      
|Capital leases                  |       |                        | 427   |           |  |           | 71    |            |  |       | 24    |       |  |  |      |       |  |   | 522   |      
|Equipment loans                 |       |                        | 135   |           |  |           |      |            |  |       |      |       |  |  |      |       |  |   | 135   |      
|Materials and service contracts |       |                        | 257   |           |  |           |      |            |  |       |      |       |  |  |      |       |  |   | 257   |      
|                                |       |                        |       |           |  |           |       |            |  |       |       |       |  |  |       |       |  |   |       |      
|                                | Total |                        | $     | 2,679     |  |           | $     | 2,007      |  |       | $     | 2,075 |  |  | $     | 1,419 |  |   | $     | 8,180 | 
|                                |       |                        |       |           |  |           |       |            |  |       |       |       |  |  |       |       |  |   |       |      

In addition, the Company is obligated to pay
dividends to the Series A preferred stockholders. See
Capital Stock note to the financial statements for
further discussion.

The contractual obligations discussed above are
fixed costs. If we are unable to generate sufficient cash from
operations to meet these contractual obligations, we may have to
raise additional funds. These funds may not be available on
favorable terms or at all.

Income taxes.We
have incurred net operating losses since inception. At
December 31, 2003, we had federal and state net operating
loss carryforwards of approximately $96.9 million and
$39.5 million, respectively. The federal net operating loss
and credit carryforwards will expire at various dates between
the years 2010 and 2023, if not utilized. The state of
California net operating losses will expire at various dates
between the years 2005 and 2014, if not utilized. Utilization of
the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation
due to the change in ownership provisions of the
Internal Revenue Code of 1986. The annual limitation may result
in the expiration of net operating losses and credits before
utilization.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150).
SFAS 150 established standards for classifying and
measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of
both liabilities and equity. The provisions of SFAS 150
were effective for instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 did not have a
material effect on the Companys results of operations or
financial position.

In November 2002, the FASB issued Emerging Issues
Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
company for arrangements under which it will perform multiple
revenue-generating activities. EITF 00-21 addresses when
and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF 00-21
provides guidance with respect to the effect of certain customer
rights due to company nonperformance on the recognition of
revenue allocated to delivered units of accounting.
EITF 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer
cancellation provisions and consideration that varies as a
result of future actions of the customer or the company.
Finally, EITF 00-21 provides guidance with respect to the
recognition of the cost of certain deliverables that are
excluded from the revenue accounting arrangement. The provisions
of EITF 00-21 apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption
of EITF 00-21 did not have a material effect on the
Companys results of operations or financial position.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

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. Some of the

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securities that we invest in may have market
risk. This means that a change in prevailing interest rates may
cause the fair value of the investment to fluctuate and result
in an unrealized loss on the instrument equal to the difference
between the fair value and our carrying value of the instrument.
To minimize this risk in the future, we intend to continue to
maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial
paper, money market funds, government and non-government debt
securities. Due to the short-term nature of our investments,
which have an effective maturity of approximately 180 days
as of December 31, 2003, we believe we do not have a
material exposure to interest rate risk arising from our
investments. Therefore we have not included quantitative tabular
disclosure in this Form 10-K.


We do not enter into financial investments for
speculation or trading purposes and are not a party to financial
or commodity derivatives.

We have operated primarily in the United States
and all sales to date have been made in U.S. Dollars.
Accordingly, we have not had any material exposure to foreign
currency rate fluctuations.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO FINANCIAL STATEMENTS

|                                                                                            |  |      |     | 
|------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                            |  | Page
|                                                                                            |  |     
|Report of Ernst & Young
    LLP, Independent Auditors                                       |  |      | F-2 | 
|Balance Sheets as of December 31, 2003 and
    2002                                         |  |      | F-3 | 
|Statements of Operations for the years ended
    December 31, 2003, 2002 and 2001           |  |      | F-4 | 
|Statements of Stockholders Equity for the
    years ended December 31, 2003, 2002 and 2001 |  |      | F-5 | 
|Statements of Cash Flows for the years ended
    December 31, 2003, 2002 and 2001           |  |      | F-6 | 
|Notes to Financial Statements                                                               |  |      | F-7 | 

F-1



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##### Table of Contents



REPORT OF ERNST & YOUNG
LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

ViroLogic, Inc.


We have audited the accompanying balance sheets
of ViroLogic, Inc. as of December 31, 2003 and 2002,
and the related 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)(2). 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 financial
position of ViroLogic, Inc. at December 31, 2003 and
2002, and the results of its operations and its 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 financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California

February 6, 2004, except for Notes 7
and 11,


as to which the date is March 22, 2004


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VIROLOGIC, INC.

BALANCE SHEETS

(In thousands, except share data)


|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |          |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ------ | -------- | ------ | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                           
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | December 31,                              
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                           
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | 2003                                       |       | 2002    
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |         
|ASSETS                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|Current assets:                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       | Cash and cash equivalents                                                                                                                                                                       |                                            | $     | 8,893    |        |  | $      | 10,559   |       
|                                                                                                                                                                                                                                                                                                       | Short-term investments                                                                                                                                                                          |                                            |       | 537      |        |  |        | 586      |       
|                                                                                                                                                                                                                                                                                                       | Accounts receivable, net of allowance for
    doubtful accounts of $643 and $989 in 2003 and 2002, respectively                                                                                 |                                            |       | 6,165    |        |  |        | 4,924    |       
|                                                                                                                                                                                                                                                                                                       | Prepaid expenses                                                                                                                                                                                |                                            |       | 700      |        |  |        | 811      |       
|                                                                                                                                                                                                                                                                                                       | Inventory                                                                                                                                                                                       |                                            |       | 1,378    |        |  |        | 958      |       
|                                                                                                                                                                                                                                                                                                       | Restricted cash                                                                                                                                                                                 |                                            |       | 426      |        |  |        | 257      |       
|                                                                                                                                                                                                                                                                                                       | Other current assets                                                                                                                                                                            |                                            |       | 267      |        |  |        | 125      |       
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | Total current assets                       |       |          | 18,366 |  |        |          | 18,220 | 
|Property and equipment, net                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                 |                                            | 8,445 |          |        |  | 10,961 |         
|Restricted cash                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                 |                                            | 350   |          |        |  | 450    |         
|Other assets                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                 |                                            | 1,217 |          |        |  | 855    |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | Total assets                               |       | $        | 28,378 |  |        | $        | 30,486 | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|Current liabilities:                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       | Accounts payable                                                                                                                                                                                |                                            | $     | 1,556    |        |  | $      | 831      |       
|                                                                                                                                                                                                                                                                                                       | Accrued compensation                                                                                                                                                                            |                                            |       | 862      |        |  |        | 863      |       
|                                                                                                                                                                                                                                                                                                       | Accrued liabilities                                                                                                                                                                             |                                            |       | 2,108    |        |  |        | 2,456    |       
|                                                                                                                                                                                                                                                                                                       | Deferred revenue                                                                                                                                                                                |                                            |       | 268      |        |  |        | 674      |       
|                                                                                                                                                                                                                                                                                                       | Convertible promissory notes                                                                                                                                                                    |                                            |       |         |        |  |        | 12,046   |       
|                                                                                                                                                                                                                                                                                                       | Current portion of capital lease obligations                                                                                                                                                    |                                            |       | 401      |        |  |        | 1,173    |       
|                                                                                                                                                                                                                                                                                                       | Current portion of loans payable                                                                                                                                                                |                                            |       | 133      |        |  |        | 416      |       
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | Total current liabilities                  |       |          | 5,328  |  |        |          | 18,459 | 
|Long-term portion of capital lease obligations                                                                                                                                                                                                                                                         |                                                                                                                                                                                                 |                                            | 87    |          |        |  | 419    |         
|Other long-term liabilities                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                 |                                            | 382   |          |        |  | 345    |         
|Redeemable convertible preferred stock,
    $0.001 par value, 274 and 606 shares authorized,
    designated by series, 274 and 589 shares issued and
    outstanding at December 31, 2003 and December 31,
    2002, respectively; aggregate liquidation preference of $2,838
    at December 31, 2003 |                                                                                                                                                                                                 |                                            | 1,994 |          |        |  | 4,249  |         
|Commitments                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|Stockholders equity:                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       | Preferred stock, $0.001 par value, 4,999,726
    and 4,999,394 shares authorized, designated by series, none
    and 706 issued and outstanding at December 31, 2003 and
    2002, respectively |                                            |       |         |        |  |        |         |       
|                                                                                                                                                                                                                                                                                                       | Common stock, $0.001 par value,
    100,000,000 shares authorized; 52,608,382 and
    28,263,255 shares issued and outstanding at
    December 31, 2003 and 2002, respectively                  |                                            |       | 53       |        |  |        | 28       |       
|                                                                                                                                                                                                                                                                                                       | Additional paid-in capital                                                                                                                                                                      |                                            |       | 126,805  |        |  |        | 107,925  |       
|                                                                                                                                                                                                                                                                                                       | Accumulated other comprehensive income                                                                                                                                                          |                                            |       | 1        |        |  |        | 7        |       
|                                                                                                                                                                                                                                                                                                       | Deferred compensation                                                                                                                                                                           |                                            |       |         |        |  |        | (182     | )     
|                                                                                                                                                                                                                                                                                                       | Accumulated deficit                                                                                                                                                                             |                                            |       | (106,272 | )      |  |        | (100,764 | )     
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | Total stockholders equity                 |       |          | 20,587 |  |        |          | 7,014  | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 | Total liabilities and stockholders equity |       | $        | 28,378 |  |        | $        | 30,486 | 
|                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                 |                                            |       |          |        |  |        |         

See accompanying notes.

F-3



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##### Table of Contents



VIROLOGIC, INC.

STATEMENTS OF OPERATIONS

(In thousands, except per share
amounts)


|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |        |        | 
|------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                      |                            |                                   
|                                                                                      |                            | Year Ended December 31,           
|                                                                                      |                            |                                   
|                                                                                      |                            | 2003                               |        | 2002   |        | 2001
|                                                                                      |                            |                                    |        |        |        |     
|Revenue:                                                                              |                            |                                    |        |        |        |      |         |        |        |   |         |       
|                                                                                      | Product revenue            |                                    | $      | 31,911 |        |      | $       | 24,530 |        |   | $       | 17,815 |       
|                                                                                      | Contract revenue           |                                    |        | 1,468  |        |      |         | 731    |        |   |         | 458    |       
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|                                                                                      |                            | Total revenue                      |        |        | 33,379 |      |         |        | 25,261 |   |         |        | 18,273 | 
|Operating costs and expenses:                                                         |                            |                                    |        |        |        |      |         |        |        |   |         |       
|                                                                                      | Cost of product revenue    |                                    |        | 16,713 |        |      |         | 14,589 |        |   |         | 11,845 |       
|                                                                                      | Research and development   |                                    |        | 4,733  |        |      |         | 10,406 |        |   |         | 11,693 |       
|                                                                                      | General and administrative |                                    |        | 9,256  |        |      |         | 10,550 |        |   |         | 11,376 |       
|                                                                                      | Sales and marketing        |                                    |        | 8,306  |        |      |         | 11,716 |        |   |         | 10,336 |       
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|                                                                                      |                            | Total operating costs and expenses |        |        | 39,008 |      |         |        | 47,261 |   |         |        | 45,250 | 
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|Operating loss                                                                        |                            |                                    | (5,629 | )      |        |      | (22,000 | )      |        |   | (26,977 | )     
|Interest income                                                                       |                            |                                    | 106    |        |        |      | 307     |        |        |   | 1,143   |       
|Interest expense                                                                      |                            |                                    | (141   | )      |        |      | (423    | )      |        |   | (466    | )     
|Other income                                                                          |                            |                                    | 156    |        |        |      | 347     |        |        |   | 106     |       
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|Net loss                                                                              |                            |                                    | (5,508 | )      |        |      | (21,769 | )      |        |   | (26,194 | )     
|Deemed dividend to preferred stockholders                                             |                            |                                    | (2,155 | )      |        |      | (10,551 | )      |        |   | (2,269  | )     
|Preferred stock dividend                                                              |                            |                                    | (1,610 | )      |        |      | (977    | )      |        |   | (334    | )     
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|Loss applicable to common stockholders                                                |                            | $                                  | (9,273 | )      |        | $    | (33,297 | )      |        | $ | (28,797 | )     
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|Basic and diluted loss per common share                                               |                            | $                                  | (0.27  | )      |        | $    | (1.38   | )      |        | $ | (1.43   | )     
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       
|Weighted average shares used in computing basic
    and diluted loss per common share |                            |                                    | 34,445 |        |        |      | 24,157  |        |        |   | 20,072  |       
|                                                                                      |                            |                                    |        |        |        |      |         |        |        |   |         |       

See accompanying notes.

F-4



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##### Table of Contents



VIROLOGIC, INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands)


|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |         |  
|------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------- | -- | ------ |  | ---------- | - | ------------- |  | ------------- | ------ | ----------- |  | ----------- | -- | ------------- |  | ------- | ------- | ------ |  | - | --- | - |  | - | --- | --- | - | - | ------ | - |  | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |        
|                                                                                            |                                                          |                 |    | Common |  |            |   | Notes         |  | Accumulated   |        |             |  |             |    |              
|                                                                                            |                                                          | Preferred Stock |    | Stock  |  | Additional |   | Receivable    |  | Other         |        |             |  |             |    | Total        
|                                                                                            |                                                          |                 |    |        |  | Paid-in    |   | from Officers |  | Comprehensive |        | Deferred    |  | Accumulated |    | Stockholders
|                                                                                            |                                                          | Shares          |    | Amount |  | Shares     |   | Amount        |  | Capital       |        | & Employees |  | Income      |    | Compensation  |  | Deficit |         | Equity
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |       
|Balance as of December 31, 2000                                                             |                                                          |                 |   |        |  | $          |  |               |  |               | 19,870 |             |  | $           | 20 |               |  | $       | 88,772  |        |  | $ | (31 | ) |  | $ | 178 |     |   | $ | (2,495 | ) |  | $ | (52,801  | )       |   | $ | 33,643  |        
|Comprehensive loss:                                                                         |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Net loss                                                 |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     |    |   |   |        |  |  |   |          | (26,194 | ) |   |         | (26,194 | )
|                                                                                            | Net unrealized loss on securities
    available-for-sale |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     | (84 | ) |   |        |  |  |   |          |        |   |   |         | (84     | )
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Comprehensive loss                                       |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         | (26,278 | )
|Issuance of warrants under Series A
    Preferred Stock, net of issuance costs              |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 2,775   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,775   |        
|Conversion of Series A Preferred Stock to
    common stock                                  |                                                          |                 |   |        |  |            |  |               |  |               | 402    |             |  |             | 1  |               |  |         | 744     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 745     |        
|Exercise of warrants                                                                        |                                                          |                 |   |        |  |            |  |               |  |               | 10     |             |  |             |   |               |  |         |        |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   |        |        
|Forgiveness of note receivable                                                              |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         |        |        |  |   | 31  |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 31      |        
|Reversal of deferred compensation for terminated
    employees                              |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (121    | )      |  |   |    |   |  |   |    |     |   |   | 121    |   |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                       |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         |        |        |  |   |    |   |  |   |    |     |   |   | 1,499  |   |  |   |         |         |   |   | 1,499   |        
|Issuance of common stock under 401K plan                                                    |                                                          |                 |   |        |  |            |  |               |  |               | 79     |             |  |             |   |               |  |         | 228     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 228     |        
|Exercise of employee and nonemployee stock options                                          |                                                          |                 |   |        |  |            |  |               |  |               | 33     |             |  |             |   |               |  |         | 78      |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 78      |        
|Stock-based compensation related to consultant
    options                                  |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 384     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 384     |        
|Issuance of common stock under employee stock
    purchase plan                             |                                                          |                 |   |        |  |            |  |               |  |               | 256    |             |  |             |   |               |  |         | 700     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 700     |        
|Preferred stock dividends                                                                   |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (334    | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (334    | )      
|Deemed dividend to preferred stockholders                                                   |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 2,269   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,269   |        
|                                                                                            |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (2,269  | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (2,269  | )      
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2001                                                             |                                                          |                 |   |        |  |            |  |               |  |               | 20,650 |             |  |             | 21 |               |  |         | 93,226  |        |  |   |    |   |  |   | 94  |     |   |   | (875   | ) |  |   | (78,995  | )       |   |   | 13,471  |        
|Comprehensive loss:                                                                         |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Net loss                                                 |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     |    |   |   |        |  |  |   |          | (21,769 | ) |   |         | (21,769 | )
|                                                                                            | Net unrealized loss on securities
    available-for-sale |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     | (87 | ) |   |        |  |  |   |          |        |   |   |         | (87     | )
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Comprehensive loss                                       |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         | (21,856 | )
|Issuance of Series C Preferred Stock, net of
    issuance costs                             |                                                          |                 | 1  |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 6,224   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 6,224   |        
|Issuance of warrants in connection with
    Series B Preferred Stock, net of issuance costs |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 2,596   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,596   |        
|Conversion of Series A and B Preferred Stock
    to common stock                            |                                                          |                 |   |        |  |            |  |               |  |               | 4,289  |             |  |             | 4  |               |  |         | 6,817   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 6,821   |        
|Exchange of Series B Preferred Stock for
    convertible promissory notes                   |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (4,556  | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (4,556  | )      
|Reversal of deferred compensation for terminated
    employees                              |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (31     | )      |  |   |    |   |  |   |    |     |   |   | 31     |   |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                       |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         |        |        |  |   |    |   |  |   |    |     |   |   | 662    |   |  |   |         |         |   |   | 662     |        
|Issuance of common stock to Pfizer Inc, net of
    issuance costs                           |                                                          |                 |   |        |  |            |  |               |  |               | 2,609  |             |  |             | 3  |               |  |         | 2,924   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,927   |        
|Issuance of common stock under 401K plan                                                    |                                                          |                 |   |        |  |            |  |               |  |               | 179    |             |  |             |   |               |  |         | 239     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 239     |        
|Exercise of employee and nonemployee stock options                                          |                                                          |                 |   |        |  |            |  |               |  |               | 7      |             |  |             |   |               |  |         | 5       |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 5       |        
|Stock-based compensation related to consultant
    options                                  |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 292     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 292     |        
|Issuance of common stock under employee stock
    purchase plan                             |                                                          |                 |   |        |  |            |  |               |  |               | 220    |             |  |             |   |               |  |         | 433     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 433     |        
|Preferred stock dividends                                                                   |                                                          |                 |   |        |  |            |  |               |  |               | 309    |             |  |             |   |               |  |         | (244    | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (244    | )      
|Deemed dividend to preferred stockholders                                                   |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 10,551  |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 10,551  |        
|                                                                                            |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (10,551 | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (10,551 | )      
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2002                                                             |                                                          |                 | 1  |        |  |            |  |               |  |               | 28,263 |             |  |             | 28 |               |  |         | 107,925 |        |  |   |    |   |  |   | 7   |     |   |   | (182   | ) |  |   | (100,764 | )       |   |   | 7,014   |        
|Comprehensive loss:                                                                         |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Net loss                                                 |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     |    |   |   |        |  |  |   |          | (5,508  | ) |   |         | (5,508  | )
|                                                                                            | Net unrealized loss on securities
    available-for-sale |                 |    |       |  |            |   |              |  |               |        |            |  |             |    |              |  |         |         |       |  |   |     |  |  |   |     | (6  | ) |   |        |  |  |   |          |        |   |   |         | (6      | )
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                            | Comprehensive loss                                       |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         | (5,514  | )
|Exercise of warrants                                                                        |                                                          |                 |   |        |  |            |  |               |  |               | 4,188  |             |  |             | 5  |               |  |         | 4,344   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 4,349   |        
|Exchange of Series C convertible promissory
    notes for Series C Preferred Stock          |                                                          |                 | 1  |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 12,046  |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 12,046  |        
|Costs relating to issuance of Series C
    Preferred Stock                                  |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (423    | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (423    | )      
|Conversion of Series A and C Preferred Stock
    to common stock                            |                                                          |                 | (2 | )      |  |            |  |               |  |               | 18,793 |             |  |             | 19 |               |  |         | 2,236   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,255   |        
|Reversal of deferred compensation for terminated
    employees                              |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (10     | )      |  |   |    |   |  |   |    |     |   |   | 10     |   |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                       |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         |        |        |  |   |    |   |  |   |    |     |   |   | 172    |   |  |   |         |         |   |   | 172     |        
|Issuance of common stock under 401K plan                                                    |                                                          |                 |   |        |  |            |  |               |  |               | 54     |             |  |             |   |               |  |         | 202     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 202     |        
|Issuance of common stock under employee stock
    purchase plan                             |                                                          |                 |   |        |  |            |  |               |  |               | 247    |             |  |             |   |               |  |         | 252     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 252     |        
|Exercise of employee and nonemployee stock options                                          |                                                          |                 |   |        |  |            |  |               |  |               | 40     |             |  |             |   |               |  |         | 7       |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 7       |        
|Stock-based compensation related to consultant
    options                                  |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 205     |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 205     |        
|Preferred stock dividends                                                                   |                                                          |                 |   |        |  |            |  |               |  |               | 1,023  |             |  |             | 1  |               |  |         | 21      |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 22      |        
|Deemed dividend to preferred stockholders                                                   |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | 2,155   |        |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,155   |        
|                                                                                            |                                                          |                 |   |        |  |            |  |               |  |               |       |             |  |             |   |               |  |         | (2,155  | )      |  |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (2,155  | )      
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2003                                                             |                                                          |                 |   |        |  | $          |  |               |  |               | 52,608 |             |  | $           | 53 |               |  | $       | 126,805 |        |  | $ |    |   |  | $ | 1   |     |   | $ |       |   |  | $ | (106,272 | )       |   | $ | 20,587  |        
|                                                                                            |                                                          |                 |    |        |  |            |   |               |  |               |        |             |  |             |    |               |  |         |         |        |  |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        

See accompanying notes.

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##### Table of Contents



VIROLOGIC, INC.

STATEMENTS OF CASH FLOWS

(In thousands)


|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |       |        |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                                |                                                   |                        
|                                                                                |                                                   | Year Ended December 31,
|                                                                                |                                                   |                        
|                                                                                |                                                   | 2003                    |                                                         | 2002  |        | 2001  
|                                                                                |                                                   |                         |                                                         |       |        |       
|OPERATING ACTIVITIES                                                            |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Net loss                                                                        |                                                   | $                       | (5,508                                                  | )     |        | $      | (21,769 | )     |        | $       | (26,194 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|                                                                                | Depreciation and amortization                     |                         |                                                         | 3,329 |        |        |         | 3,811 |        |         |         | 3,276 |       
|                                                                                | Non-cash stock-based compensation                 |                         |                                                         | 377   |        |        |         | 955   |        |         |         | 1,914 |       
|                                                                                | Provision for doubtful accounts                   |                         |                                                         | 101   |        |        |         | 593   |        |         |         | 606   |       
|                                                                                | Amortization of subtenant advance                 |                         |                                                         |      |        |        |         | (327  | )      |         |         | (325  | )     
|                                                                                | Amortization of deferred gain on lease assignment |                         |                                                         | (156  | )      |        |         | (121  | )      |         |         |      |       
|                                                                                | Changes in assets and liabilities:                |                         |                                                         |       |        |        |         |       |        |         |         |       |       
|                                                                                |                                                   | Accounts receivable     |                                                         |       | (1,342 | )      |         |       | (955   | )       |         |       | (2,764 | )      
|                                                                                |                                                   | Prepaid expenses        |                                                         |       | 111    |        |         |       | 653    |         |         |       | (801   | )      
|                                                                                |                                                   | Inventory               |                                                         |       | (420   | )      |         |       | (2     | )       |         |       | (507   | )      
|                                                                                |                                                   | Other current assets    |                                                         |       | (142   | )      |         |       | 171    |         |         |       | 104    |        
|                                                                                |                                                   | Accounts payable        |                                                         |       | 725    |        |         |       | (1,473 | )       |         |       | 439    |        
|                                                                                |                                                   | Accrued compensation    |                                                         |       | (1     | )      |         |       | (1,173 | )       |         |       | 731    |        
|                                                                                |                                                   | Accrued liabilities     |                                                         |       | (171   | )      |         |       | (191   | )       |         |       | (981   | )      
|                                                                                |                                                   | Deferred revenue        |                                                         |       | (450   | )      |         |       | 360    |         |         |       | 198    |        
|                                                                                |                                                   | Long-term deferred rent |                                                         |       | (45    | )      |         |       | 146    |         |         |       | 167    |        
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|                                                                                |                                                   |                         | Net cash used in operating activities                   |       |        | (3,592 | )       |       |        | (19,322 | )       |       |        | (24,137 | )
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|INVESTING ACTIVITIES                                                            |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Purchases of short-term investments                                             |                                                   |                         | (4,570                                                  | )     |        |        | (13,415 | )     |        |         | (7,324  | )    
|Maturities and sales of short-term investments                                  |                                                   |                         | 4,613                                                   |       |        |        | 20,305  |       |        |         | 10,848  |      
|Restricted cash                                                                 |                                                   |                         | (69                                                     | )     |        |        | 350     |       |        |         | 1,029   |      
|Capital expenditures                                                            |                                                   |                         | (544                                                    | )     |        |        | (1,437  | )     |        |         | (7,777  | )    
|Advance from subtenant                                                          |                                                   |                         |                                                        |       |        |        |        |       |        |         | 2,600   |      
|Lease assignment                                                                |                                                   |                         |                                                        |       |        |        | 3,793   |       |        |         |        |      
|Reimbursable tenant improvements                                                |                                                   |                         |                                                        |       |        |        | 1,286   |       |        |         | (1,286  | )    
|Other assets                                                                    |                                                   |                         | (440                                                    | )     |        |        | (187    | )     |        |         | (270    | )    
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|                                                                                |                                                   |                         | Net cash provided by (used in) investing
    activities |       |        | (1,010 | )       |       |        | 10,695  |         |       |        | (2,180  | )
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|FINANCING ACTIVITIES                                                            |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Proceeds from loans payable                                                     |                                                   |                         | 238                                                     |       |        |        | 295     |       |        |         |        |      
|Principal payments on loans payable                                             |                                                   |                         | (521                                                    | )     |        |        | (1,166  | )     |        |         | (1,345  | )    
|Proceeds in connection with sale leaseback
    transactions                     |                                                   |                         |                                                        |       |        |        |        |       |        |         | 1,303   |      
|Principal payments on capital lease obligations                                 |                                                   |                         | (1,169                                                  | )     |        |        | (958    | )     |        |         | (619    | )    
|Dividends paid on preferred stock                                               |                                                   |                         |                                                        |       |        |        | (367    | )     |        |         |        |      
|Proceeds from issuance of common stock, net of
    common stock repurchases     |                                                   |                         | 4,811                                                   |       |        |        | 3,603   |       |        |         | 1,006   |      
|Net proceeds from (costs relating to) issuance of
    preferred stock           |                                                   |                         | (423                                                    | )     |        |        | 16,380  |       |        |         | 14,748  |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|                                                                                |                                                   |                         | Net cash provided by financing activities               |       |        | 2,936  |         |       |        | 17,787  |         |       |        | 15,093  |  
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Net increase (decrease) in cash and cash
    equivalents                        |                                                   |                         | (1,666                                                  | )     |        |        | 9,160   |       |        |         | (11,224 | )    
|Cash and cash equivalents at beginning of year                                  |                                                   |                         | 10,559                                                  |       |        |        | 1,399   |       |        |         | 12,623  |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Cash and cash equivalents at end of year                                        |                                                   | $                       | 8,893                                                   |       |        | $      | 10,559  |       |        | $       | 1,399   |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Cash paid for interest                                                          |                                                   | $                       | 141                                                     |       |        | $      | 423     |       |        | $       | 466     |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|SCHEDULE OF NONCASH FINANCING AND INVESTING
    ACTIVITIES                      |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Warrants issued to preferred stockholders                                       |                                                   | $                       | 2,776                                                   |       |        | $      | 5,151   |       |        | $       | 2,775   |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Preferred stock converted to convertible
    promissory notes                   |                                                   | $                       |                                                        |       |        | $      | 12,046  |       |        | $       |        |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Convertible promissory notes converted to
    preferred stock                   |                                                   | $                       | 12,046                                                  |       |        | $      |        |       |        | $       |        |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Deemed dividend to preferred stockholders                                       |                                                   | $                       | 2,155                                                   |       |        | $      | 10,551  |       |        | $       | 2,269   |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Preferred stock converted into common shares                                    |                                                   | $                       | 2,255                                                   |       |        | $      | 6,821   |       |        | $       | 745     |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Assets acquired under capital leases                                            |                                                   | $                       | 65                                                      |       |        | $      | 455     |       |        | $       | 291     |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Accrued financing costs                                                         |                                                   | $                       |                                                        |       |        | $      | 316     |       |        | $       |        |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Stock dividend to preferred stockholders                                        |                                                   | $                       | 1,585                                                   |       |        | $      | 123     |       |        | $       | 334     |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      
|Accrued capital expenditures                                                    |                                                   | $                       |                                                        |       |        | $      |        |       |        | $       | 355     |      
|                                                                                |                                                   |                         |                                                         |       |        |        |         |       |        |         |         |      

See accompanying notes.

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##### Table of Contents



VIROLOGIC, INC.



NOTES TO FINANCIAL STATEMENTS

December 31, 2003




|   |                                               
|-- | ----------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES

Organization and Basis of
Presentation

ViroLogic, Inc. (ViroLogic or
the Company) is a biotechnology company developing,
marketing and selling innovative products to guide and improve
treatment of viral diseases. The Company incorporated in the
state of Delaware on November 14, 1995 and commenced
commercial operations in 1999. The Company developed a practical
way of directly measuring the impact of genetic mutations on
drug resistance and using this information to guide therapy. The
Company has proprietary technology, called PhenoSense, for
testing drug resistance in viruses that cause serious viral
diseases such as HIV/ AIDS and hepatitis. The Companys
products are used by physicians in selecting optimal treatments
for their HIV patients and by industry, academia and government
for clinical studies, drug screening and characterization, and
basic research.

Managements Plans

The Company expects available cash and cash
equivalents, short-term investments and short-term restricted
cash of $9.9 million at December 31, 2003, funds
provided by the sale of products, contract revenue and borrowing
under equipment financing arrangements will be adequate to fund
operations through at least December 2004, assuming revenue
reaches projected levels and cost containment measures continue
to be effective. In addition, management plans to continue to
evaluate various strategic opportunities, including among
others, research and development collaborations, international
alliances and marketing partnerships.

The Company has funded operations since inception
primarily through public and private sales of common and
preferred stock, equipment financing arrangements, product
revenue and contract revenue. In particular, the Company
completed three private financings since its initial public
offering in May 2000. Although management expects operating and
capital resources will be sufficient to meet future requirements
through at least December 2004, the Company may have to raise
additional funds to continue the development and
commercialization of future technologies and business operations
in general. These funds may not be available on favorable terms,
or at all. If adequate funds are not available on commercially
reasonable terms, the Company may be required to curtail
operations significantly or sell significant assets and may not
be able to continue as a going concern. In addition, management
may choose to raise additional capital due to market conditions
or strategic considerations even if management believes that the
Company has sufficient funds for current or future operating
plans.

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
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.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable,
other accrued expenses and short-term obligations approximates
fair value based on the highly liquid, short-term nature of
these instruments.

Cash Equivalents

ViroLogic considers all highly liquid investments
with original maturities of three months or less from the date
of purchase to be cash equivalents. Management determines the
appropriate classification of its cash

F-7



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


equivalents and investment securities at the time
of purchase and reevaluates such determination as of each
balance sheet date.

Short-Term Investments

Management has classified ViroLogics
marketable securities as available-for-sale securities in the
accompanying financial statements. Available-for-sale securities
are carried at market value with unrealized gains and losses
included in accumulated other comprehensive income within
stockholders equity. Realized gains and losses are
included in interest income. The cost of securities sold is
based on the specific identification method.

ViroLogic invests its excess cash in United
States government and agency securities, debt instruments of
financial institutions and corporations, and money market funds
with strong credit ratings. ViroLogic has established guidelines
regarding diversification of its investments and their
maturities, which should maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates while
maintaining adequate safety and liquidity.

Inventory

Inventory is stated at the lower of standard
cost, which approximates actual cost on a first-in, first-out
basis, or market. If inventory costs exceed expected market
value due to obsolescence or lack of demand, reserves are
recorded for the difference between the cost and the market
value. These reserves are based on estimates. Inventory consists
of the following:

|                |  |                |       |      |  |   |     | 
|--------------- |  | -------------- | ----- | ---- |  | - | --- | 
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2003           |       | 2002
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 832   |      |  | $ | 712 | 
|Work in process |  |                | 546   |      |  |   | 246 | 
|                |  |                |       |      |  |   |     | 
|Total           |  | $              | 1,378 |      |  | $ | 958 | 
|                |  |                |       |      |  |   |     | 

Property and Equipment

Property and equipment are recorded at cost and
are depreciated using the straight-line method over the
estimated useful lives of the assets, generally five years.
Capitalized software includes software and external consulting
costs incurred to implement new information systems. Computer
hardware and capitalized software are depreciated over three to
five years. Leasehold improvements are amortized over the
shorter of the estimated useful life of the assets or the lease
term.

Intangible Assets

Intangible assets with definite lives are
amortized over their estimated useful lives. Included in
intangible assets are costs of patents and patent applications
related to products and products in development, which are
capitalized and amortized on a straight-line basis over their
estimated useful lives of approximately 15 years. Other
intangible assets are generally amortized on a straight-line
basis over their estimated useful lives.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including
property, equipment and intangibles, for impairment whenever
events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated undiscounted
future cash flows

F-8



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


expected to result from the use of the asset and
its eventual disposition is less than its carrying amount.
Impairment, if any, is determined using discounted cash flows.

Revenue Recognition

Product revenue is recognized upon completion of
tests made on samples provided by customers and the shipment of
test results to those customers. Services are provided to
certain patients covered by various third-party payor programs,
such as Medicare and Medicaid. Billings for services under
third-party payor programs are included in revenue net of
allowances for differences between the amounts billed and
estimated receipts under such programs. The Company estimates
these allowances based on historical payment information and
current sales data. If the government and other third-party
payors significantly change their reimbursement policies, an
adjustment to the allowance may be necessary. Revenue generated
from the Companys database of resistance test results is
recognized when earned under the terms of the related
agreements, generally upon shipment of the requested reports.
Contract revenue consists of revenue generated from National
Institutes of Health (NIH) grants and commercial
assay development, and other non-product revenue. NIH grant
revenue is recorded on a reimbursement basis as grant costs are
incurred. The costs associated with contract revenue are
included in research and development expenses. Deferred revenue
relates to cash received in advance of meeting the revenue
recognition criteria described above.

Accounts Receivable

The process for estimating the ultimate
collection of receivables involves significant assumptions and
judgments. Billings for services under third-party payor
programs are recorded as revenue net of allowances for
differences between amounts billed and the estimated receipts
under such programs. Adjustments to the estimated receipts,
based on final settlement with the third-party payors, are
recorded upon settlement as an adjustment to net revenue. In
addition, the Company reviews and estimates the collectibility
of receivables based on the period of time they have been
outstanding. Historical collection and payor reimbursement
experience is an integral part of the estimation process related
to the allowance for doubtful accounts. Revisions to the
allowance for doubtful accounts estimate are included in general
and administrative expenses.

Research and Development

The Company expenses research and development
costs as incurred. Research and development expenses consist
primarily of salaries and related personnel costs, materials,
supply costs for prototypes, and include costs associated with
contract revenue. In addition, research and development expenses
include costs related to clinical trials and validation of the
Companys testing processes and procedures and related
overhead expenses.

Royalty Expense

The Company pays royalties under licensing
agreements. These royalties are directly related to revenue and
are expensed to cost of product revenue at the time revenue is
recognized. For further discussion, see Equipment
Financing and Commitments note below.

Advertising Expenses

The Company expenses the costs of advertising,
which include promotional expenses, as incurred. Advertising
expenses were $2.2 million, $4.2 million and
$4.5 million and for the years ended December 31,
2003, 2002 and 2001, respectively, and were recorded as sales
and marketing expenses.

F-9



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


Deemed Dividends

The Company estimates a beneficial conversion
feature for its convertible preferred stock in accordance with
Emerging Issues Task Force Consensus No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features and No. 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments
based on the difference between the estimated conversion price
and underlying common stock fair market value at the date of
issuance. The Company records the beneficial conversion feature
as a deemed dividend on the Statement of Operations, resulting
in an increase to the loss applicable to common stockholders in
the calculation of basic and diluted loss per common share.

Loss Per Share

Basic loss per share is calculated based on the
weighted-average number of common shares outstanding during the
periods presented, less the weighted-average shares outstanding
which are subject to the Companys right of repurchase.
Diluted earnings per common share would give effect to the
dilutive impact of potential common shares which consists of
convertible preferred stock (using the as-if converted method),
and stock options and warrants (using the treasury stock
method). Potentially dilutive securities have been excluded from
the diluted loss per common share computations in all years
presented as such securities have an anti-dilutive effect on
loss per common share due to the Companys net loss.

A reconciliation of shares used in the
calculations is as follows:

|                                                                            |  |                                       |        |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  |                                      
|                                                                            |  | Year Ended December 31,              
|                                                                            |  |                                      
|                                                                            |  | 2003                                  |        | 2002 |  | 2001
|                                                                            |  |                                       |        |      |  |     
|                                                                            |  |                                      
|                                                                            |  | (In thousands, except per share data)
|Loss applicable to common stockholders                                      |  | $                                     | (9,273 | )    |  | $    | (33,297 | ) |  | $ | (28,797 | )
|                                                                            |  |                                       |        |      |  |      |         |   |  |   |         |  
|Weighted-average shares of common stock
    outstanding                     |  |                                       | 34,445 |      |  |      | 24,157  |   |  |   | 20,078  |  
|Less: weighted-average shares subject to
    repurchase                     |  |                                       |       |      |  |      |        |   |  |   | (6      | )
|                                                                            |  |                                       |        |      |  |      |         |   |  |   |         |  
|Weighted-average shares used in basic and diluted
    loss per common share |  |                                       | 34,445 |      |  |      | 24,157  |   |  |   | 20,072  |  
|                                                                            |  |                                       |        |      |  |      |         |   |  |   |         |  
|Basic and diluted loss per common share                                     |  | $                                     | (0.27  | )    |  | $    | (1.38   | ) |  | $ | (1.43   | )
|                                                                            |  |                                       |        |      |  |      |         |   |  |   |         |  

The following outstanding options and warrants,
prior to the application of the treasury stock method, and
convertible preferred stock, on an as-converted basis, were
excluded from the computation of diluted loss per common share
as these potentially dilutive securities had an anti-dilutive
effect:

|                                                                            |  |                |        |      |  |      |        |  |  |  |       | 
|--------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                                                            |  |               
|                                                                            |  | December 31,  
|                                                                            |  |               
|                                                                            |  | 2003           |        | 2002 |  | 2001
|                                                                            |  |                |        |      |  |     
|                                                                            |  |               
|                                                                            |  | (In thousands)
|Series A redeemable convertible preferred
    stock (as-if converted basis) |  |                | 2,468  |      |  |      | 5,306  |  |  |  | 5,973 | 
|Series C convertible preferred stock (as-if
    converted basis)            |  |                |       |      |  |      | 5,835  |  |  |  |      | 
|Stock options                                                               |  |                | 4,664  |      |  |      | 3,965  |  |  |  | 3,079 | 
|Warrants to purchase common stock                                           |  |                | 13,572 |      |  |      | 16,056 |  |  |  | 3,575 | 

In addition to the securities listed above, at
December 31, 2002 the Company had convertible promissory
notes (Notes) outstanding with an aggregate
principal amount of $12.05 million. On February 4,
2003, the Companys stockholders ratified and approved the
conversion of the Notes into an aggregate of 1,204.6 shares
of Series C Convertible Preferred Stock, which on an as-if
converted basis, is equivalent to 10.0 million shares

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


of common stock. The Notes also included warrants
which are included in the table above. See the Convertible
Promissory Notes note below for further discussion.

Stock-Based Compensation

The Company has elected to continue to follow
Accounting Principles Board Opinion No. 25 Accounting
for Stock-Based Compensation (APB 25) to
account for employee stock options. Under APB 25, no
compensation expense is recognized when the exercise price of
the Companys employee stock options equals the market
price of the underlying stock on the date of grant. Deferred
compensation, if recorded, is amortized using the graded vesting
method. Statement of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123) as amended by
Statement of Financial Accounting Standards Board Statement
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123
(SFAS 148) requires the disclosure of pro forma
information regarding net loss and net loss per share as if the
Company had accounted for its stock options under the fair value
method.

The information regarding net loss applicable to
common stockholders and net loss per share prepared in
accordance with SFAS 123 has been determined as if the
Company had accounted for its employee stock option and employee
stock purchase plans using the fair value method prescribed by
SFAS 123. The resulting effect on loss applicable to common
stockholders and loss per share pursuant to SFAS 123 as
amended by SFAS 148 is not likely to be representative of
the effects in future years, due to subsequent years including
additional grants and years of vesting.

At December 31, 2003, the Company had two
stock-based employee compensation plans: the 2000 Equity
Incentive Plan and the 2000 Employee Stock Purchase Plan. The
Company estimates the fair value of these stock options and
stock purchase rights at the date of grant using the
Black-Scholes option valuation model with the following
weighted-average assumptions in 2003, 2002 and 2001: risk-free
interest rate of 3.3%, 2.9% and 4.0% in 2003, 2002 and 2001,
respectively; a weighted-average expected life of stock options
from grant date of four years; a weighted-average expected stock
purchase right of six months; volatility factor of the expected
market price of ViroLogics common stock of 100% for each
of 2003 and 2002, and 65% for 2001; and a dividend yield of
zero. The weighted-average fair value of stock options granted
in 2003, 2002 and 2001 was $1.39, $1.83 and $2.89, respectively.

F-11



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


For purposes of disclosures pursuant to
SFAS 123 as amended by SFAS 148, the estimated fair
value of the stock options and stock purchase rights are
amortized to expense over the vesting period. The Companys
pro forma information is as follows:

|                                                 |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |         |       |  
|------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ----- | ---- | ------- | ------- | ----- | - | ------- | ------- | ----- | -
|                                                 |                                                                                    |                                      
|                                                 |                                                                                    | Year Ended December 31,              
|                                                 |                                                                                    |                                      
|                                                 |                                                                                    | 2003                                  |         | 2002   |       | 2001
|                                                 |                                                                                    |                                       |         |        |       |     
|                                                 |                                                                                    |                                      
|                                                 |                                                                                    | (In thousands, except per share data)
|Loss applicable to common stockholders          |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|                                                 | as reported                                                                        |                                       | $       | (9,273 | )     |      | $       | (33,297 | )     |   | $       | (28,797 | )    
|Add back:                                        |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|                                                 | Amortization of deferred compensation                                              |                                       |         | 172    |       |      |         | 662     |       |   |         | 1,499   |      
|Deduct:                                          |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|                                                 | Stock-based compensation expense for employee
    awards determined under SFAS 123 |                                       |         | (2,257 | )     |      |         | (4,151  | )     |   |         | (4,582  | )    
|                                                 |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|Pro forma loss applicable to common stockholders |                                                                                    | $                                     | (11,358 | )      |       | $    | (36,786 | )       |       | $ | (31,880 | )      
|                                                 |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|Loss per common share:                           |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|                                                 | Loss applicable to common stockholders                                            |                                       |         |        |       |      |         |         |       |   |         |         |      
|                                                 |                                                                                    | as reported                           |         | $      | (0.27 | )    |         | $       | (1.38 | ) |         | $       | (1.43 | )
|                                                 |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        
|                                                 | Loss applicable to common stockholders                                            |                                       |         |        |       |      |         |         |       |   |         |         |      
|                                                 |                                                                                    | pro forma                             |         | $      | (0.33 | )    |         | $       | (1.52 | ) |         | $       | (1.59 | )
|                                                 |                                                                                    |                                       |         |        |       |      |         |         |       |   |         |        

The Company accounts for stock option grants to
non-employees in accordance with the Emerging Issues Task Force
Consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, which requires the options subject to vesting to
be periodically re-valued and expensed over their vesting
periods, which approximates the period over which services are
rendered or goods are received.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net
loss and other comprehensive income (loss). Other comprehensive
income (loss) includes certain changes in equity that are
excluded from net income (loss). Specifically, unrealized gains
and losses on our available-for-sale securities, which are
reported separately in stockholders equity, are included
in accumulated other comprehensive income. Comprehensive income
(loss) and its components are as follows:

|                                                                                   |  |                         |        |      |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                   |  |                        
|                                                                                   |  | Year Ended December 31,
|                                                                                   |  |                        
|                                                                                   |  | 2003                    |        | 2002 |  | 2001
|                                                                                   |  |                         |        |      |  |     
|                                                                                   |  |                        
|                                                                                   |  | (In thousands)         
|Net loss                                                                           |  | $                       | (5,508 | )    |  | $    | (21,769 | ) |  | $ | (26,194 | )
|Changes in unrealized gain (loss) on securities
    available-for-sale, net of tax |  |                         | (6     | )    |  |      | (87     | ) |  |   | (84     | )
|                                                                                   |  |                         |        |      |  |      |         |   |  |   |         |  
|Comprehensive loss                                                                 |  | $                       | (5,514 | )    |  | $    | (21,856 | ) |  | $ | (26,278 | )
|                                                                                   |  |                         |        |      |  |      |         |   |  |   |         |  

F-12



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


Significant Concentrations

Financial instruments that potentially subject
the Company to concentrations of credit risk primarily consist
of cash equivalents and marketable securities. For further
discussion, see Short-Term Investments note below.

In 2003, there were no customers representing
over 10% of total revenue. In 2002, one customer represented 10%
of total revenue. In 2001, two customers represented 15% and 14%
of total revenue, respectively.

The Company purchases various testing materials
from single qualified suppliers. Any extended interruption in
the supply of these materials could result in the Companys
inability to secure sufficient materials to conduct business and
meet customer demand.

Segment Reporting

The Company has determined that it operates in
only one segment under Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information
(SFAS 131). SFAS 131 establishes annual
and interim reporting standards for an enterprises
operating segments and related disclosures about its products,
services, geographic areas and major customers.

Recent Accounting Pronouncements

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150).
SFAS 150 established standards for classifying and
measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of
both liabilities and equity. The provisions of SFAS 150
were effective for instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 did not have a
material effect on the Companys results of operations or
financial position.

In November 2002, the FASB issued Emerging Issues
Task Force Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
company for arrangements under which it will perform multiple
revenue-generating activities. EITF 00-21 addresses when
and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF 00-21
provides guidance with respect to the effect of certain customer
rights due to company nonperformance on the recognition of
revenue allocated to delivered units of accounting.
EITF 00-21 also addresses the impact on the measurement
and/or allocation of arrangement consideration of customer
cancellation provisions and consideration that varies as a
result of future actions of the customer or the company.
Finally, EITF 00-21 provides guidance with respect to the
recognition of the cost of certain deliverables that are
excluded from the revenue accounting arrangement. The provisions
of EITF 00-21 apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption
of EITF 00-21 did not have a material effect on the
Companys results of operations or financial position.

F-13



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003




|   |                       
|-- | ----------------------
|2. | SHORT-TERM INVESTMENTS

The amortized cost, gross unrealized gains and
losses, and estimated fair value for available-for-sale
securities by major security type and class of security are as
follows:

|                                    |                           |                |   |            |  |            |   |           |  |            |   |            |  |  |   |     |  |  |   |   |  |  |   |     | 
|----------------------------------- | ------------------------- | -------------- | - | ---------- |  | ---------- | - | --------- |  | ---------- | - | ---------- |  |  | - | --- |  |  | - | - |  |  | - | --- | 
|                                    |                           |               
|                                    |                           | December 31,  
|                                    |                           |               
|                                    |                           |                |   |           
|                                    |                           | 2003           |   | 2002      
|                                    |                           |                |   |           
|                                    |                           |                |   | Gross      |  |            |   |           |  | Gross      |   |           
|                                    |                           |                |   | Unrealized |  |            |   |           |  | Unrealized |   |           
|                                    |                           | Amortized      |   | Holding    |  | Estimated  |   | Amortized |  | Holding    |   | Estimated 
|                                    |                           | Cost           |   | Gain       |  | Fair Value |   | Cost      |  | Gain       |   | Fair Value
|                                    |                           |                |   |            |  |            |   |           |  |            |   |           
|                                    |                           |               
|                                    |                           | (In thousands)
|Maturing between one and two years: |                           |                |   |            |  |            |   |           |  |            |   |            |  |  |   |     |  |  |   |   |  |  |   |    
|                                    | Corporate bonds and notes |                | $ | 537        |  |            | $ |          |  |            | $ | 537        |  |  | $ | 579 |  |  | $ | 7 |  |  | $ | 586 | 
|                                    |                           |                |   |            |  |            |   |           |  |            |   |            |  |  |   |     |  |  |   |   |  |  |   |    



|   |                       
|-- | ----------------------
|3. | PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2003           |         | 2002
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Machinery, equipment and furniture             |  | $              | 8,972   |      |  | $ | 5,867   |  
|Equipment under capital lease                  |  |                | 1,943   |      |  |   | 4,502   |  
|Leasehold improvements                         |  |                | 6,892   |      |  |   | 6,892   |  
|Capitalized software                           |  |                | 4,242   |      |  |   | 4,193   |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 22,049  |      |  |   | 21,454  |  
|Less accumulated depreciation and amortization |  |                | (13,604 | )    |  |   | (10,493 | )
|                                               |  |                |         |      |  |   |         |  
|Property and equipment, net                    |  | $              | 8,445   |      |  | $ | 10,961  |  
|                                               |  |                |         |      |  |   |         |  

Depreciation expense was $2.0 million,
$2.6 million and $2.1 million in 2003, 2002 and 2001,
respectively. Accumulated amortization related to leased assets
was $3.8 million and $2.6 million at December 31,
2003 and 2002, respectively.



|   |                  
|-- | -----------------
|4. | INTANGIBLE ASSETS

Intangible assets are summarized as follows:

|        |  |                |       |              |  |              |      |        |  |              |       |              |  |   |     |  |  |   |     |   |  |   |     | 
|------- |  | -------------- | ----- | ------------ |  | ------------ | ---- | ------ |  | ------------ | ----- | ------------ |  | - | --- |  |  | - | --- | - |  | - | --- | 
|        |  |               
|        |  | December 31,  
|        |  |               
|        |  |                |       |             
|        |  | 2003           |       | 2002        
|        |  |                |       |             
|        |  |                |       | Net of       |  |              |      | Net of
|        |  |                |       | Accumulated  |  | Accumulated  |      |        |  | Accumulated  |       | Accumulated 
|        |  | Cost           |       | Amortization |  | Amortization |      | Cost   |  | Amortization |       | Amortization
|        |  |                |       |              |  |              |      |        |  |              |       |             
|        |  |               
|        |  | (In thousands)
|Patents |  | $              | 1,206 |              |  | $            | (117 | )      |  | $            | 1,089 |              |  | $ | 695 |  |  | $ | (38 | ) |  | $ | 657 | 
|        |  |                |       |              |  |              |      |        |  |              |       |              |  |   |     |  |  |   |     |   |  |   |     | 

F-14



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003




|   |                    
|-- | -------------------
|5. | ACCRUED LIABILITIES

Accrued liabilities consists of the following:

|                                           |  |                |       |      |  |   |       | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                           |  |               
|                                           |  | December 31,  
|                                           |  |               
|                                           |  | 2003           |       | 2002
|                                           |  |                |       |     
|                                           |  |               
|                                           |  | (In thousands)
|Accrued royalty fee                        |  | $              | 797   |      |  | $ | 648   | 
|Accrued professional fees                  |  |                | 506   |      |  |   | 742   | 
|Property taxes payable                     |  |                | 143   |      |  |   | 149   | 
|Accrued marketing and promotional expenses |  |                | 103   |      |  |   | 55    | 
|Accrued interest payable                   |  |                |      |      |  |   | 113   | 
|Other                                      |  |                | 559   |      |  |   | 749   | 
|                                           |  |                |       |      |  |   |       | 
|Total accrued liabilities                  |  | $              | 2,108 |      |  | $ | 2,456 | 
|                                           |  |                |       |      |  |   |       | 



|   |                             
|-- | ----------------------------
|6. | CONVERTIBLE PROMISSORY NOTES

On November 14, 2002, the Company entered
into an exchange agreement with all of the holders of
Series B Redeemable Convertible Preferred Stock
(Series B Preferred Stock) in order to secure
their consent to the sale of Series C Convertible Preferred
Stock (the Financing) and the resulting impact on
the Series B Preferred Stock, and to increase the number of
shares of common stock available for issuance upon conversion of
the Series C Convertible Preferred Stock
(Series C Preferred Stock) and the exercise of
the warrants included in the Financing. Pursuant to the exchange
agreement, on November 19, 2002, the Company repurchased
all of the outstanding Series B Preferred Stock in exchange
for convertible secured promissory notes (Notes).
The aggregate principal amount of the Notes was
$12.05 million. In addition, the Notes bore an interest
rate of 8%, had a maturity date of March 19, 2003 and were
secured by substantially all of the Companys assets. On
February 4, 2003, the Companys stockholders
ratified and approved the conversion of the Notes into
Series C Preferred Stock and the issuance of warrants to
purchase shares of the Companys common stock. Promptly
following this approval, (i) the principal amount of the
Notes was automatically converted into an aggregate of
1,204.6 shares of Series C Preferred Stock,
(ii) an amount equal to the accrued interest on the Notes
from November 19, 2002 through December 31, 2002 was
paid to the holders of the Notes in cash, (iii) all other
accrued and unpaid interest was forgiven and, (iv) the
warrants attached to such preferred stock were issued. See the
Capital Stock note below for further details.



|   |                                    
|-- | -----------------------------------
|7. | EQUIPMENT FINANCING AND COMMITMENTS

At December 31, 2003, the Company leased two
buildings totaling approximately 66,000 square feet in
South San Francisco, California. The lease for the
Companys primary facility, which covers 41,000 square
feet, expires in April 2010 and provides an option to
extend the term for an additional ten years. The lease for the
Companys original facilities, which covers approximately
25,000 square feet, was scheduled to expire in November
2004. On March 22, 2004, Company and the lessor agreed to
terminate this lease. See Subsequent Event note
below for further details.

In addition, at December 31, 2003, the
Company subleased approximately 14,000 square feet in South
San Francisco, California. This sublease expires on
December 31, 2004.

In June 2002, the Company assigned a lease of
excess laboratory and office space and transferred ownership
through the sale of related leasehold improvements and equipment
to a third party. The Company received net proceeds from the
lease assignment of $3.8 million, resulting in a net gain
of $0.3 million which was recognized as other income over
the initial sublease term. In the event of default by the
assignee, the

F-15



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


Company would be contractually obligated for
payments under the lease of: $1.0 million in 2004;
$1.4 million in 2005; $1.5 million in 2006;
$1.5 million in 2007; $1.5 million in 2008; and
$3.9 million from 2009 to 2011.

In July 2001, the Company sublet approximately
12,000 square feet of one of its existing facilities to a
third party for a term of 18 months, which ended in January
2003. The rental income generated from this sublease was
$0.1 million, $0.6 million and $0.3 million in
2003, 2002 and 2001, respectively, and is recorded as a partial
offset to rental expense.

As of December 31, 2003 and 2002, the
Company had capitalized leases, which bear interest at
weighted-average fixed rates of approximately 10.7% and 11.6%
for 2003 and 2002, respectively, and are due in monthly
installments through June 2008. Some of these equipment
financing agreements require a balloon payment at the end of
their respective terms. The carrying amount of the equipment
approximates the corresponding loan balance.

As of December 31, 2003, future minimum
payments, excluding the lease assignment guarantee described
above, are as follows:

|                                    |            |                                            |   |         |       |         |      |     |     |   |      |     |     | 
|----------------------------------- | ---------- | ------------------------------------------ | - | ------- | ----- | ------- | ---- | --- | --- | - | ---- | --- | --- | 
|                                    |            | Operating                                  |   | Loans   |       | Capital
|                                    |            | Leases                                     |   | Payable |       | Leases 
|                                    |            |                                            |   |         |       |        
|                                    |            |                                           
|                                    |            | (In thousands)                            
|Year ending December 31:            |            |                                            |   |         |       |         |      |     |     |   |      |    
|                                    | 2004       |                                            | $ | 1,860   |       |         | $    | 135 |     |   | $    | 427 |    
|                                    | 2005       |                                            |   | 949     |       |         |      |    |     |   |      | 55  |    
|                                    | 2006       |                                            |   | 987     |       |         |      |    |     |   |      | 16  |    
|                                    | 2007       |                                            |   | 1,006   |       |         |      |    |     |   |      | 16  |    
|                                    | 2008       |                                            |   | 1,045   |       |         |      |    |     |   |      | 8   |    
|                                    | Thereafter |                                            |   | 1,419   |       |         |      |    |     |   |      |    |    
|                                    |            |                                            |   |         |       |         |      |     |     |   |      |    
|                                    |            | Total minimum lease and principal payments |   | $       | 7,266 |         |      |     | 135 |   |      |     | 522 | 
|                                    |            |                                            |   |         |       |         |      |     |     |   |      |    
|Amount representing interest        |            |                                            |   |         |       |         | (2   | )   |     |   | (34  | )  
|                                    |            |                                            |   |         |       |         |      |     |     |   |      |    
|Present value of future payments    |            |                                            |   |         |       |         | 133  |     |     |   | 488  |    
|Current portion of loans and leases |            |                                            |   |         |       |         | (133 | )   |     |   | (401 | )  
|                                    |            |                                            |   |         |       |         |      |     |     |   |      |    
|Noncurrent portion                  |            |                                            |   |         |       | $       |     |     |     | $ | 87   |    
|                                    |            |                                            |   |         |       |         |      |     |     |   |      |    

Rental expense, net of sublease rental income,
was approximately $2.5 million, $1.7 million and
$2.4 million in 2003, 2002 and 2001, respectively.

As of December 31, 2003, the Company had
purchase commitments for material and service contracts totaling
approximately $0.3 million. In addition, the Company is
obligated to pay dividends to the Series A preferred
stockholders as discussed in the Capital Stock note
below.

License Agreements

The Company licenses polymerase chain reaction
(PCR) technology from Roche Molecular
Systems, Inc. (Roche) for performing a step in
its PhenoSense and GeneSeq tests. This license is non-exclusive
and lasts for the life of the patent term of the last to expire
licensed Roche patent. Currently, the last Roche patent expires
in 2005. If Roche develops or acquires additional patents
covering technology related to the licensed technology, the
Company has the option of licensing that additional technology
under the terms of this agreement which may extend the term of
the license. In exchange for the license, the Company has agreed
to pay Roche a royalty based on the net service revenues the
Company receives from its products. Roche has the right to
terminate this license if the Company fails to pay royalties,
make a semi-annual royalty

F-16



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


report or participate in proficiency testing. The
Company believes it is currently in compliance with these
requirements. The license allows the Company to use technology
covered by the licensed Roche patents within a broad field that
includes all of the Companys currently planned products.
If the Company was to expand its product line beyond the
licensed field, however, the Company would need to negotiate an
expansion of the license. In addition, the Company also licenses
technology from other third parties. The Company recorded
royalty expense of $1.1 million, $1.0 million and
$0.7 million for the years ended December 31, 2003,
2002 and 2001, respectively.



|   |              
|-- | -------------
|8. | CAPITAL STOCK

Authorized Common Stock

In 2003, ViroLogics stockholders approved
an increase to the number of authorized shares of the
Companys common stock from 60,000,000 shares to
100,000,000 shares.

Equity Investment by Pfizer

In November 2002, the Company entered into a
Stock Purchase Agreement with Pfizer Ireland Pharmaceuticals (an
affiliate of Pfizer, Inc.) in which the Company agreed to
issue and sell an aggregate of 2.6 million shares of its
common stock for gross proceeds of $3.0 million.
Concurrently, the Company and Pfizer, Inc. entered into a
master services agreement and a non-exclusive license agreement
for the Companys HIV drug resistance tests and services.

Preferred Stock

Series A Redeemable Convertible Preferred
Stock

In 2001, the Company issued and sold, in a
private placement, an aggregate of 1,625 shares of the
Companys Series A Redeemable Convertible Preferred
Stock (Series A Preferred Stock) and warrants
to purchase an aggregate of 3.2 million shares of common
stock, for an aggregate purchase price of $16.25 million.

Of the 1,625 shares issued in the financing,
274 shares remain outstanding as of December 31, 2003,
and the remainder was converted into an aggregate of
approximately 7.4 million shares of the Companys
common stock. As a result of the Companys sale of
Series C Preferred Stock, which is described below, the
conversion price of the Series A Preferred Stock and the
exercise price of the warrants issued to the purchasers of the
Series A Preferred Stock has each been reduced to $1.11.
Accordingly, the 274 shares of Series A Preferred
Stock outstanding are convertible into approximately
2.5 million shares of common stock, and the outstanding
warrants are exercisable for approximately 4.0 million
shares of common stock.

The Series A Preferred Stock bears dividends
payable in common stock semi-annually. The dividends were
initially at an annual rate of 6% but increased to an 8% annual
rate on the fourth such payment, which was made in 2003, and
will increase by 2 percentage points every six months up to
a maximum annual rate of 14%. This dividend is paid as a stock
dividend semi-annually. Subject to the limitations described
below, the holders of Series A Preferred Stock may elect to
convert their shares into the Companys common stock at any
time, just as they may choose to exercise their warrants at any
time. Also subject to the limitations described below, the
Company may, at its option, convert the Series A Preferred
Stock into common stock at any time after June 21, 2002 for
Series A Preferred Stock issued at the first closing and
after July 9, 2002 for Series A Preferred Stock issued
at the second closing, but only if the Companys stock
price exceeds $5.10 for 20 consecutive trading days. The Company
may also, at its option, convert the Series A Preferred
Stock into common stock upon a sale of common stock in a firm
commitment underwritten offering to the public if the

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


public offering price exceeds $5.10, the
aggregate gross proceeds exceed $40 million and the
registration statements covering shares underlying the
Series A Preferred Stock are effective.

The holders are not subject to any limitations on
the number of conversions of Series A Preferred Stock or
subsequent sales of the corresponding common stock, that they
can effect, other than a prohibition on any holder acquiring
beneficial ownership of more than 4.99% of the outstanding
shares of the Companys common stock. This limitation also
applies to the Companys ability to convert Series A
Preferred Stock.

The holders of Series A Preferred Stock have
the right to require the Company to redeem all of the
Series A Preferred Stock for cash equal to the greater of
(i) 115% of their original purchase price plus 115% of any
accrued and unpaid dividend or (ii) the aggregate fair
market value of the shares of common stock into which such
shares of Series A Preferred Stock are then convertible.
Series A Preferred Stock is redeemable by the holders in
any of the following situations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the Company fails to remove a restrictive
    legend on any certificate representing any common stock that was
    issued to any holder of such series upon conversion of their
    preferred stock or exercise of their warrant and that may be
    sold pursuant to an effective registration statement or an
    exemption from the registration requirements of the federal
    securities laws
|
| |  | If the Company fails to have sufficient shares of
    common stock reserved to satisfy conversions of the series                                                                                                                                                                                                                                                                                      
|
| |  | If the Company fails to honor requests for
    conversion, or if the Company notifies any holder of such series
    of its intention not to honor future requests for conversion                                                                                                                                                                                                                      
|
| |  | If the Company institutes voluntary bankruptcy or
    similar proceedings                                                                                                                                                                                                                                                                                                                             
|
| |  | If the Company makes an assignment for the
    benefit of creditors, or applies for or consents to the
    appointment of a receiver or trustee for the Company or for a
    substantial part of the Companys property or business, or
    such a receiver or trustee shall otherwise be appointed                                                                                                   
|
| |  | If the Company sells all or substantially all of
    its assets                                                                                                                                                                                                                                                                                                                                       
|
| |  | If the Company merges, consolidates or engages in
    any other business combination (with some exceptions), provided
    that such transaction is required to be reported pursuant to
    Item 1 of Form 8-K                                                                                                                                                                                         
|
| |  | If the Company commits a material breach under,
    or otherwise materially violates the terms of, the transaction
    documents entered into in connection with the issuance of such
    series                                                                                                                                                                                                      
|
| |  | If the registration statements covering shares of
    common stock underlying the Series A Preferred Stock and
    related warrants cannot be used by the respective selling
    security holders for the resale of all the underlying shares of
    common stock for an aggregate of more than 30 days                                                                                               
|
| |  | If the Companys common stock is not
    tradable on the NYSE, the AMEX, the Nasdaq National Market or
    the Nasdaq SmallCap market for an aggregate of twenty trading
    days in any nine month period                                                                                                                                                                                            
|
| |  | If 35% or more of the Companys voting power
    is held by any one person, entity or group                                                                                                                                                                                                                                                                                                           
|
| |  | If the Company fails to pay any indebtedness in
    excess of $350,000 when due, or if there is any event of default
    under any agreement that is likely to have a material adverse
    effect on the Company                                                                                                                                                                                      
|
| |  | Upon the institution of involuntary bankruptcy
    proceedings                                                                                                                                                                                                                                                                                                                                        

Upon the occurrence of any of the redemption
events described above, individual holders of the Series A
Preferred Stock would have the option, while such event
continues, to require the Company to purchase some

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


or all of the then outstanding shares of
Series A Preferred Stock held by such holder. If the
Company receives any notice of redemption, the Company is
required to immediately (no later than one business day
following such receipt) deliver a written notice to all holders
of the same series of preferred stock stating the date when the
Company received the redemption notice and the amount of
preferred stock covered by the notice. If holders of the
Series A Preferred Stock were to exercise their rights to
redeem a material number of their shares as a result of any of
the events described above, such a redemption could have a
material adverse effect on the Company.

Subject to certain conditions, the Company may
redeem the Series A Preferred Stock at any time after
June 29, 2003, for Series A Preferred Stock issued at
the first closing and after September 27, 2003 for
Series A Preferred Stock issued at the second closing. Due
to the nature of the redemption features of the Series A
Preferred Stock, such stock has been excluded from permanent
equity in the Companys financial statements.

The Company initially recorded the Series A
Preferred Stock at its fair value on the date of issuance. In
accordance with EITF Topic D-98: Classification and Measurement
of Redeemable Securities (EITF Topic D-98), the
Company has elected not to adjust the carrying value of the
Series A Preferred Stock to the redemption value of such
shares, since it is uncertain whether or when the redemption
events described above will occur. Subsequent adjustments to
increase the carrying value to the redemption value will be made
when it becomes probable that such redemption will occur. As of
December 31, 2003, the redemption value of the
Series A Preferred Stock was $3.3 million.

Series B Redeemable Convertible Preferred
Stock

In 2002, the Company issued and sold, in a
private placement, an aggregate of 1,005 shares of
Series B Preferred Stock and warrants to purchase an
aggregate of 2.2 million shares of common stock, for an
aggregate purchase price of $10.05 million. In connection
with this financing, the Company also granted warrants to
purchase an aggregate of 637,261 shares of common stock to
holders of Series A Preferred Stock, as a payment in order
to secure their consent and waiver concerning the financing and
the resulting impact on the Series A Preferred Stock.

The Company recorded a deemed dividend of
$2.9 million in the first quarter of 2002 relating to the
beneficial conversion feature of the Series B Preferred
Stock and the additional warrants issued to the holders of the
Series A Preferred Stock in connection with the
Series B Preferred Stock financing. The net proceeds of
$2.6 million attributable to the fair value of warrants are
included in additional paid-in capital.

In connection with the sale of Series C
Preferred Stock, described below, on November 19, 2002, the
Company repurchased all of the outstanding Series B
Preferred Stock in exchange for Notes. The aggregate principal
amount of the Notes was $12.05 million. In addition, the
Notes bore an interest rate of 8%, had a maturity date of
March 19, 2003 and were secured by substantially all of the
Companys assets. On February 4, 2003, the
Companys stockholders approved the conversion of the Notes
into an aggregate of 1,204.6 shares of Series C
Preferred Stock. In addition, the Companys stockholders
approved the issuance of warrants to purchase approximately
5.0 million shares of the Companys common stock at an
exercise price of $1.11 per share in exchange for warrants
originally issued in connection with Series B Preferred
Stock.

Series C Convertible Preferred
Stock

On November 14, 2002, the Company entered
into a securities purchase agreement with several investors to
issue and sell, in a private placement, an aggregate of
706 shares of Series C Preferred Stock and warrants to
purchase an aggregate of 4.4 million shares of common
stock, for an aggregate purchase price of $7.06 million.
The transaction closed on November 19, 2002. On
February 4, 2003, the Company issued an

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


aggregate of 1,204.6 additional shares of
Series C Preferred Stock upon conversion of the Notes. The
rights, preferences and privileges of the Series C
Preferred Stock are set forth in the Certificate of
Designations, Preferences and Rights of Series C Preferred
Stock (Certificate), as amended on February 4,
2003 to (a) provide that any dividend payments due
thereunder may be paid in either cash or shares of common stock
at the option of the Company, and (b) include anti-dilution
provisions substantially identical to those applicable with
respect to Series A Preferred Stock. The Series C
Preferred Stock bore an initial 8% annual dividend rate. The
warrants are subject to the terms and conditions of the stock
purchase warrants issued by the Company and evidencing the
warrants. The warrants were exercisable beginning May 20,
2003 and expire November 19, 2007. The exercise price of
the warrants is $1.11 per share. In December 2003 the
Company elected to convert all 378 shares of the
Series C Convertible Preferred Stock then outstanding into
3,123,967 shares of the Companys common stock.

Liquidation Preference

The holders of the Series A Preferred Stock
are entitled to receive an amount equal to $10,000 per
share of Series A Preferred Stock plus all accrued and
unpaid premiums thereon. Any assets remaining for distribution
following the payment of the preferences to the holders of the
Series A Preferred Stock shall be distributed to the
holders of the common stock. As of December 31, 2003, the
liquidation preference of the Series A Preferred Stock was
$2.8 million.

Deemed Dividends

In 2001, ViroLogic sold 1,625 shares of
Series A Preferred Stock, or 6.4 million shares of
common stock as converted, for net proceeds of approximately
$14.7 million. In accordance with Emerging Issues Task
Force Consensus No. 98-5 and No. 00-27, ViroLogic
determined that the issuance of the Series A Preferred
Stock resulted in a beneficial conversion feature of
approximately $2.3 million recorded in 2001.

In the first quarter of 2002, ViroLogic sold
1,005 shares of Series B Preferred Stock, or
4.4 million shares of common stock as converted, for an
aggregate purchase price of $10.05 million. In connection
with this financing, ViroLogic also granted warrants to purchase
an aggregate of 637,261 shares of common stock to holders
of Series A Preferred Stock as a payment in order to secure
their consent and waiver concerning the financing and the
resulting impact on the Series A Preferred Stock. In the
fourth quarter of 2002, ViroLogic sold 706 shares of
Series C Preferred Stock, or 5.8 million shares of
common stock as converted, for an aggregate purchase price of
$7.06 million. In accordance with Emerging Issues Task
Force Consensus No. 98-5 and No. 00-27, ViroLogic
determined that the issuance of the Series B and
Series C Preferred Stock resulted in a beneficial
conversion feature of approximately $2.9 million and
$7.7 million, respectively, for a total of
$10.6 million recorded in 2002.

On February 4, 2003, the Companys
stockholders approved the conversion of certain convertible
secured promissory notes issued to prior Series B preferred
stockholders into Series C Preferred Stock and the issuance
of warrants to purchase shares of the Companys common
stock in exchange for warrants originally issued in connection
with Series B Preferred Stock. The warrant exchange
resulted in a beneficial conversion feature of $2.2 million
that was recorded at the time of the exchange.

Warrants

In connection with the loan agreement signed in
January 1998, ViroLogic issued the lender a warrant to purchase
an aggregate of 34,833 shares of common stock at a price of
$8.00 per share. The warrant expires in January 2008. The
value of the warrant was deemed to be insignificant and,
therefore, no value was recorded.

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VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


In connection with the Series B Preferred
Stock issuance in August 1998, ViroLogic issued to Series B
investors warrants to purchase up to 15,890 shares of
common stock at a price of $0.02 per share. The warrant
term is 10 years and was valued at $85,000. There are
12,596 warrants outstanding as of December 31, 2003.
ViroLogic issued warrants to purchase 365,000 shares of
Series B Preferred Stock, or as converted,
227,232 shares of common stock, at a price of
$3.68 per share, or $5.91 per converted common share.
The warrant term is 10 years and was valued at $383,000.
There are 225,256 warrants outstanding as of December 31,
2003. The fair values of these warrants were determined using
the Black-Scholes option valuation model.

In connection with loan agreements signed in
2000, ViroLogic issued the lender warrants to purchase an
aggregate of 26,792 shares of ViroLogics common stock
for $4.24 per share. The warrant terms are 10 years
and were valued at $318,000. The fair values of these warrants
were determined using the Black-Scholes option valuation model.
There are 26,792 warrants outstanding as of December 31,
2003.

In connection with the July 2001 sale of
Series A Preferred Stock, ViroLogic issued warrants to
purchase 11,800 and 1.3 million shares of common stock at a
price of $2.66 and $2.805, respectively, per share. As a result
of the sale of Series C Preferred Stock, the exercise price
of the warrants with an exercise price of $2.805 is now $1.11,
and such warrants are exercisable to purchase 3.3 million
shares of our common stock. The warrant term is four years
expiring July 2005 and was valued at $1.3 million using the
Black-Scholes option valuation model. The fair value of the
warrants is included in additional paid-in capital. There are
approximately 2.0 million warrants outstanding as of
December 31, 2003.

In connection with the September 2001 sale of
Series A Preferred Stock, ViroLogic issued warrants to
purchase 18,200 and 1.9 million shares of common stock at a
price of $2.178 and $2.805, respectively, per share. As a result
of the sale of Series C Preferred Stock, the exercise price
of the warrants with an exercise price of $2.805 is now $1.11,
and such warrants are exercisable to purchase 4.8 million
shares of our common stock. The warrant term is four years
expiring September 2005 and the warrants were valued at
$1.5 million using the Black-Scholes option valuation
model. The fair value of the warrants is included in additional
paid-in capital. There are approximately 2.0 million
warrants outstanding as of December 31, 2003.

In connection with the March 2002 sale of
Series B Preferred Stock, ViroLogic issued warrants to
purchase 0.7 million and 2.2 million shares of common
stock at a price of $2.28 and $2.508, respectively, per share.
The warrant term is 4.5 years expiring September 2006 and
the warrants were valued at $2.6 million using the
Black-Scholes option valuation model. The fair value of the
warrants is included in additional paid-in capital. On
February 4, 2003, ViroLogic stockholders approved the terms
of the Companys Series C Preferred Stock financing
including the issuance of warrants to purchase 5.0 million
shares of the Companys common stock (at an exercise price
of $1.11 per share) in exchange for the foregoing warrants
to purchase 2.2 million shares of common stock. See
Series B Redeemable Convertible Preferred Stock
discussion above for further discussion. There are approximately
4.9 million warrants outstanding as of December 31,
2003.

In connection with a service agreement signed in
2002, ViroLogic issued warrants to purchase an aggregate of
100,000 shares of ViroLogics common stock for
$2.03 per share. The warrant term is five years and was
valued at $117,000. The fair values of these warrants were
determined using the Black-Scholes option valuation model. There
are 100,000 warrants outstanding as of December 31, 2003.

In connection with the November 2002 sale of
Series C Preferred Stock, ViroLogic issued warrants to
purchase 4.8 million shares of common stock at a price of
$1.11 per share. The warrant term is five years expiring
November 2007 and was valued at $2.5 million using the
Black-Scholes option valuation model. The fair value of the
warrants is included in additional paid-in capital. There are
approximately 4.3 million warrants outstanding as of
December 31, 2003.

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


Stock Option Award to Chief Executive
Officer

In 1999, pursuant to an employment agreement, the
Chief Executive Officer was granted incentive and non-statutory
stock options to purchase 650,000 shares of common stock at
an exercise price of $3.14 per share. Deferred compensation
relating to these options of $4.7 million was recorded on
the date of grant and amortized over the vesting period of the
option using the graded vesting method. Compensation expense
relating to these options was $0.1 million,
$0.5 million and $1.1 million in 2003, 2002 and 2001,
respectively.

Stock Option Plan

In 1996, ViroLogics board of directors and
stockholders adopted the 1996 Stock Plan, which was amended and
renamed the 2000 Equity Incentive Plan in February 2000 (the
Plan). The Plan provides for the granting of options
to purchase common stock and other stock awards to employees,
officers, directors and consultants of ViroLogic. ViroLogic
generally grants shares of common stock for issuance under the
Plan at no less than the fair value of the stock on the grant
date; however, management is permitted to grant non-statutory
stock options at a price not lower than 85% of the fair value of
common stock on the date of grant. Options granted under the
Plan generally vest over four years at a rate of 25% one year
from the grant date and ratably monthly thereafter. The Plan was
amended in May 2002 to increase the total authorized shares
reserved for issuance to 6,200,000 shares.

A summary of activity under the Plan is as
follows:

|                              |                              |                                        |           |            |   |                  |           |           |   |  |      |      | 
|----------------------------- | ---------------------------- | -------------------------------------- | --------- | ---------- | - | ---------------- | --------- | --------- | - |  | ---- | ---- | 
|                              |                              |                                       
|                              |                              | Outstanding Stock Options/Stock Rights
|                              |                              |                                       
|                              |                              | Shares                                 |           | Number of  |   | Weighted Average
|                              |                              | Available                              |           | Shares     |   | Price Per Share 
|                              |                              |                                        |           |            |   |                 
|Balances at December 31, 2000 |                              |                                        | 2,599,923 |            |   |                  | 1,164,639 |           |   |  | 5.85 |     
|                              | Options/rights granted       |                                        |           | (1,707,644 | ) |                  |           | 1,707,644 |   |  |      | 4.44 | 
|                              | Options/rights exercised     |                                        |           |           |   |                  |           | (33,005   | ) |  |      | 2.38 | 
|                              | Options/rights forfeited     |                                        |           | 260,497    |   |                  |           | (260,497  | ) |  |      | 5.50 | 
|                              |                              |                                        |           |            |   |                  |           |           |   |  |      |     
|Balances at December 31, 2001 |                              |                                        | 1,152,776 |            |   |                  | 2,578,781 |           |   |  | 5.00 |     
|                              | Additional shares authorized |                                        |           | 2,000,000  |   |                  |           |          |   |  |      |     | 
|                              | Options/rights granted       |                                        |           | (1,288,924 | ) |                  |           | 1,288,924 |   |  |      | 2.32 | 
|                              | Options/rights exercised     |                                        |           |           |   |                  |           | (2,865    | ) |  |      | 1.66 | 
|                              | Options/rights forfeited     |                                        |           | 399,872    |   |                  |           | (399,872  | ) |  |      | 4.10 | 
|                              |                              |                                        |           |            |   |                  |           |           |   |  |      |     
|Balances at December 31, 2002 |                              |                                        | 2,263,724 |            |   |                  | 3,464,968 |           |   |  | 4.11 |     
|                              | Options/rights granted       |                                        |           | (1,408,382 | ) |                  |           | 1,408,382 |   |  |      | 1.39 | 
|                              | Options/rights exercised     |                                        |           |           |   |                  |           | (39,999   | ) |  |      | 0.98 | 
|                              | Options/rights forfeited     |                                        |           | 668,962    |   |                  |           | (668,962  | ) |  |      | 3.68 | 
|                              |                              |                                        |           |            |   |                  |           |           |   |  |      |     
|Balances at December 31, 2003 |                              |                                        | 1,524,304 |            |   |                  | 4,164,389 |           |   |  | 3.29 |     
|                              |                              |                                        |           |            |   |                  |           |           |   |  |      |     

In 2003, 2002 and 2001, all employee options were
granted at fair value on the date of grant, therefore no
deferred stock-based compensation was recorded. In connection
with options granted in 2000, ViroLogic recorded deferred
stock-based compensation of $1.6 million, representing the
difference between the exercise price and the deemed fair value
of the Companys common stock at the date of grant. The
amount was amortized over the vesting period using the graded
vesting method for the individual options. Amortization of
deferred stock-based compensation of $0.2 million,
$0.7 million and $1.5 million was recognized during
2003, 2002 and 2001, respectively. In addition, ViroLogic
recorded stock-based compensation for services rendered by
non-employees of $0.3 million, $0.2 million and
$0.2 million in 2003, 2002 and 2001, respectively.

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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


The following table summarizes information about
the stock options outstanding under the Plan at
December 31, 2003:

|               |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ----------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |                     |           |                    
|               |  | Options Outstanding |           | Options Exercisable
|               |  |                     |           |                    
|               |  |                     |           | Weighted Average    |  |                  |      |            
|Range of       |  | Number              |           | Remaining           |  | Weighted Average |      | Number      |  | Weighted Average
|Exercise Price |  | Outstanding         |           | Contractual Life    |  | Exercise Price   |      | Exercisable |  | Exercise Price  
|               |  |                     |           |                     |  |                  |      |             |  |                 
|$0.64    1.05 |  |                     | 145,000   |                     |  |                  | 8.18 |             |  | $                | 1.00  |  |  |  | 52,000    |  |  | $ | 0.91  | 
|1.06    1.27  |  |                     | 683,382   |                     |  |                  | 9.16 |             |  |                  | 1.26  |  |  |  | 61,227    |  |  |   | 1.24  | 
|1.29    1.51  |  |                     | 659,101   |                     |  |                  | 9.46 |             |  |                  | 1.50  |  |  |  | 4,834     |  |  |   | 1.49  | 
|1.58    2.40  |  |                     | 336,366   |                     |  |                  | 7.68 |             |  |                  | 2.13  |  |  |  | 234,914   |  |  |   | 2.19  | 
|2.47    2.57  |  |                     | 723,240   |                     |  |                  | 8.16 |             |  |                  | 2.57  |  |  |  | 434,106   |  |  |   | 2.56  | 
|2.59    3.10  |  |                     | 87,850    |                     |  |                  | 8.20 |             |  |                  | 2.77  |  |  |  | 47,052    |  |  |   | 2.75  | 
|3.14           |  |                     | 240,150   |                     |  |                  | 5.86 |             |  |                  | 3.14  |  |  |  | 240,077   |  |  |   | 3.14  | 
|3.15    5.40  |  |                     | 533,110   |                     |  |                  | 6.62 |             |  |                  | 3.72  |  |  |  | 428,461   |  |  |   | 3.83  | 
|5.75    8.00  |  |                     | 524,740   |                     |  |                  | 7.01 |             |  |                  | 6.55  |  |  |  | 408,404   |  |  |   | 6.58  | 
|8.56   22.13  |  |                     | 231,450   |                     |  |                  | 6.73 |             |  |                  | 11.69 |  |  |  | 208,989   |  |  |   | 11.69 | 
|               |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|               |  |                     | 4,164,389 |                     |  |                  |      |             |  |                  |       |  |  |  | 2,120,064 |  |  |   |       | 
|               |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 

Employee Stock Purchase Plan

In February 2000, the board of directors adopted
the 2000 Employee Stock Purchase Plan (the Stock
Plan). The Stock Plan permits eligible employees to
acquire shares of ViroLogics common stock through payroll
deductions of up to 15% of their eligible earnings. All
full-time employees of ViroLogic, except 5% stockholders, are
eligible to participate in the Stock Plan. The purchase price of
the shares is the lesser of 85% of the fair value of the shares
at the offering date or purchase date, as defined by the Stock
Plan. In 2002, the Companys shareholders ratified an
additional 500,000 shares to be reserved for issuance under
the Stock Plan. Of the 1,000,000 shares of common stock
reserved for issuance under the Stock Plan, 791,620 shares
were issued as of December 31, 2003.

401(k) Plan

ViroLogics 401(k) Plan covers substantially
all employees. Employees may contribute up to 15% of their
eligible compensation, subject to certain Internal Revenue
Service restrictions. ViroLogic matches employee contributions
in the form of ViroLogic common shares. In 2000, the 401(k) Plan
was amended to increase the matching percentage to 25% of the
employee contribution. The match is effective December 31
of each year and is fully vested when made. ViroLogic recorded
401(k) matching expense of $0.2 million in each of 2003,
2002 and 2001. As of December 31, 2003, ViroLogic had
issued approximately 337,000 shares under the 401(k) Plan.

F-23



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003


Reserved Shares

At December 31, 2003, ViroLogic had reserved
shares of common stock for future issuance as follows:

|                                                     |  |                |        | 
|---------------------------------------------------- |  | -------------- | ------ | 
|                                                     |  | Shares        
|                                                     |  | Reserved      
|                                                     |  |               
|                                                     |  | (In thousands)
|Series A Preferred Stock (as if converted
    basis) |  |                | 3,703  | 
|Stock options                                        |  |                | 4,664  | 
|Warrants                                             |  |                | 13,572 | 
|Employee Stock Purchase Plan                         |  |                | 208    | 
|                                                     |  |                |        | 
|                                                     |  |                | 22,147 | 
|                                                     |  |                |        | 

The reserved shares shown above do not include
additional indeterminate amounts reserved for issuance pursuant
to penalty, anti-dilution, dividend payments and other
provisions relating to the Companys Series A
Preferred Stock and the related warrants.



|   |             
|-- | ------------
|9. | INCOME TAXES

At December 31, 2003, ViroLogic had federal
and state net operating loss carryforwards of approximately
$96.9 million and $39.5 million, respectively. At
December 31, 2003, ViroLogic also had federal and state
research and development tax credits of approximately
$1.1 million and $1.0 million, respectively. The
federal net operating loss and credit carryforwards will expire
at various dates between the years 2010 and 2023, if not
utilized. The state of California net operating losses will
expire at various dates between the years 2005 and 2014, if not
utilized. The California research and development tax credits
can be carried forward indefinitely.

Utilization of the federal and state net
operating loss and credit carryforwards may be subject to a
substantial annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986.
The annual limitation may result in the expiration of net
operating losses and credits before utilization.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
for financial reporting purposes and the amount used for income
tax purposes. Significant components of ViroLogics
deferred tax assets for federal and state income taxes are as
follows:

|                                     |  |                |         |      |  |   |         |  
|------------------------------------ |  | -------------- | ------- | ---- |  | - | ------- | -
|                                     |  |               
|                                     |  | December 31,  
|                                     |  |               
|                                     |  | 2003           |         | 2002
|                                     |  |                |         |     
|                                     |  |               
|                                     |  | (In thousands)
|Deferred tax assets:                 |  |                |         |      |  |   |         |  
|Net operating loss carryforwards     |  | $              | 35,300  |      |  | $ | 33,400  |  
|Research and other credits           |  |                | 1,800   |      |  |   | 1,300   |  
|Capitalized research and development |  |                | 1,800   |      |  |   | 1,800   |  
|Other                                |  |                | 600     |      |  |   | 1,000   |  
|                                     |  |                |         |      |  |   |         |  
|Total deferred tax assets            |  |                | 39,500  |      |  |   | 37,500  |  
|Valuation allowance                  |  |                | (39,500 | )    |  |   | (37,500 | )
|                                     |  |                |         |      |  |   |         |  
|Net deferred taxes                   |  | $              |        |      |  | $ |        |  
|                                     |  |                |         |      |  |   |         |  

Due to ViroLogics lack of earnings history,
the net deferred tax assets have been fully offset by a
valuation allowance. The valuation allowance increased by
$2.0 million, $8.1 million and $9.8 million in
2003, 2002 and 2001, respectively.

F-24



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003




|    |              
|--- | -------------
|10. | RESTRUCTURING

In November 2002, the Company implemented a
business restructuring plan to reallocate certain personnel and
resources to revenue maximizing activities and reduce cash
consumption. The plan included a reduction in force of
approximately 17% or 35 employees: 8 employees in
laboratory operations; 6 employees in research and
development; 8 employees in sales and marketing; and
13 employees in administration. In the fourth quarter of
2002, the Company recorded a charge for salaries, severance and
other personnel related costs to the respective departments
totaling $0.3 million. All amounts related to this
restructuring were paid as of December 31, 2002.



|    |                 
|--- | ----------------
|11. | SUBSEQUENT EVENT

On March 22, 2004, the Company entered into
a lease termination agreement for its original laboratory and
office space of approximately 25,000 square feet in South
San Francisco, California. This lease was scheduled to
expire in November 2004. The lease termination enabled the
Company to decrease the present value of its remaining lease
obligations for this facility by approximately 50%. Under the
terms of this agreement, the Company will make cash payments to
the lessor totaling $0.4 million as follows:
$0.2 million in March 2004 and $0.2 million in April
2004. As a result, the Company will record a charge in the first
quarter of 2004 of approximately $0.4 million primarily
related to the termination payment and the write-off of the net
carrying value of the related leasehold improvements.

F-25



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##### Table of Contents



VIROLOGIC, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)

December 31, 2003




|    |                                                
|--- | -----------------------------------------------
|12. | QUARTERLY RESULTS OF OPERATIONS
    (UNAUDITED)

|     |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |         |       | 
|---- | --------------------------------------- | ---------------------------------------- | - | -------- | ----- | ------------- | - | ------------ | ----- |  | - | ------ | ----- |  | - | ------- | ----- | 
|     |                                         |                                         
|     |                                         | Quarter Ended                           
|     |                                         |                                         
|     |                                         | March 31,                                |   | June 30, |       | September 30, |   | December 31,
|     |                                         |                                          |   |          |       |               |   |             
|     |                                         |                                         
|     |                                         | (In thousands, except per share amounts)
|2003 |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     | Patient testing                         |                                          | $ | 5,294    |       |               | $ | 6,101        |       |  | $ | 6,179  |       |  | $ | 5,260   |      
|     | Pharmaceutical company testing          |                                          |   | 1,257    |       |               |   | 1,685        |       |  |   | 2,580  |       |  |   | 3,555   |      
|     |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     |                                         | Product revenue                          |   |          | 6,551 |               |   |              | 7,786 |  |   |        | 8,759 |  |   |         | 8,815 | 
|     | Contract revenue                        |                                          |   | 417      |       |               |   | 167          |       |  |   | 366    |       |  |   | 518     |      
|     |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     | Total revenue                           |                                          |   | 6,968    |       |               |   | 7,953        |       |  |   | 9,125  |       |  |   | 9,333   |      
|     | Cost of product revenue                 |                                          |   | 3,819    |       |               |   | 4,268        |       |  |   | 4,403  |       |  |   | 4,223   |      
|     | Net loss                                |                                          |   | (2,468   | )     |               |   | (2,206       | )     |  |   | (429   | )     |  |   | (405    | )    
|     | Loss applicable to common stockholders  |                                          |   | (5,090   | )     |               |   | (2,712       | )     |  |   | (842   | )     |  |   | (629    | )    
|     | Basic and diluted loss per common share |                                          | $ | (0.18    | )     |               | $ | (0.09        | )     |  | $ | (0.02  | )     |  | $ | (0.01   | )    
|2002 |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     | Patient testing                         |                                          | $ | 3,640    |       |               | $ | 4,666        |       |  | $ | 4,577  |       |  | $ | 4,962   |      
|     | Pharmaceutical company testing          |                                          |   | 1,853    |       |               |   | 1,764        |       |  |   | 1,095  |       |  |   | 1,973   |      
|     |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     |                                         | Product revenue                          |   |          | 5,493 |               |   |              | 6,430 |  |   |        | 5,672 |  |   |         | 6,935 | 
|     | Contract revenue                        |                                          |   | 215      |       |               |   | 227          |       |  |   | 255    |       |  |   | 34      |      
|     |                                         |                                          |   |          |       |               |   |              |       |  |   |        |       |  |   |        
|     | Total revenue                           |                                          |   | 5,708    |       |               |   | 6,657        |       |  |   | 5,927  |       |  |   | 6,969   |      
|     | Cost of product revenue                 |                                          |   | 3,425    |       |               |   | 3,761        |       |  |   | 3,463  |       |  |   | 3,940   |      
|     | Net loss                                |                                          |   | (6,138   | )     |               |   | (5,460       | )     |  |   | (5,586 | )     |  |   | (4,585  | )    
|     | Loss applicable to common stockholders  |                                          |   | (9,206   | )     |               |   | (5,718       | )     |  |   | (5,835 | )     |  |   | (12,538 | )    
|     | Basic and diluted loss per common share |                                          | $ | (0.43    | )     |               | $ | (0.24        | )     |  | $ | (0.24  | )     |  | $ | (0.48   | )    

F-26



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##### Table of Contents








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

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is
accumulated and communicated to management, including the Chief
Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.

Our Chief Executive Officer and Chief Financial
Officer, with the assistance of other members of our management,
have evaluated our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of the end of the period covered by
this report, and have concluded based on that evaluation that
those disclosure controls and procedures are effective. There
has been no change in our internal control over financial
reporting during the fiscal quarter ended December 31, 2003
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information with respect to executive
officers required by this item is set forth in Part I of
this report.

We have adopted a Code of Business Conduct and
Ethics Policy that applies to our directors and employees
(including our principal executive officer, principal financial
officer, principal accounting officer and controller), and have
posted the text of the policy on our website (www.virologic.com)
in connection with Investor materials. In addition,
we intend to promptly disclose (i) the nature of any
amendment to the policy that applies to our principal executive
officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions
and (ii) the nature of any waiver, including an implicit
waiver, from a provision of the policy that is granted to one of
these specified individuals, the name of such person who is
granted the waiver and the date of the waiver on our website in
the future.

The other information required by this item is
incorporated by reference to the proxy statement to be filed
with the SEC pursuant to Regulation 14A in connection with
ViroLogic Inc.s 2004 annual meeting.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference to the information under the caption
Executive Compensation contained in the proxy
statement.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this item is
incorporated by reference to the information under the caption
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters contained in
the proxy statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference to the information under the caption
Certain Transactions contained in the proxy
statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item is
incorporated by reference to the information under the captions
Independent Auditors Fees and
Pre-Approval Policies and Procedures contained in
the proxy statement.

46



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##### Table of Contents






Part IV






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

(a)(1) Index to Financial Statements

Reference is made to the Index to Financial
Statements under Item 8 in Part II hereof, where these
documents are listed.

(a)(2) Financial Statement
Schedules The following schedule is filed as
part of this Form 10-K:



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Schedule II  Valuation and
    Qualifying Accounts and Reserves for the years ended
    December 31, 2003, 2002 and 2001.

All other schedules have been omitted because
they are not applicable or required, or the information required
to be set forth therein is included in the Financial Statements
or notes thereto included in Item 8 (Financial
Statements and Supplementary Data).

(a)(3) Index to Exhibits 
See (c) below.

(b) Reports on Form 8-K

On November 4, 2003, we filed a report on
Form 8-K to furnish our earnings release for the quarter
ended September 30, 2003.

(c) Exhibits

|         |      |         |  |  |   |     |  |                                                                                                                                                
|-------- | ---- | ------- |  |  | - | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |      | Exhibit |  | 
|Footnote |      | Number  |  | 
|         |      |         |  | 
|         | (10) |         |  |  | 3 | .1  |  | Amended and Restated Certificate of
    Incorporation, as currently in effect.                                                                 
|         | (4)  |         |  |  | 3 | .2  |  | Bylaws, as currently in effect.                                                                                                                
|         | (3)  |         |  |  | 4 | .1  |  | Reference is made to Exhibits 3.1 and 3.2                                                                                                      
|         | (1)  |         |  |  | 4 | .2  |  | Specimen Stock Certificate.                                                                                                                    
|         | (1)  |         |  |  | 4 | .3  |  | Amended and Restated Investors Rights Agreement
    by and among the Company and certain stockholders of the Company
    dated August 23, 1999.
|         | (1)  |         |  |  | 4 | .4  |  | Form of Indemnity Agreement between the Company
    and its directors and officers.                                                            
|         | (1)  |         |  |  | 4 | .5  |  | Warrant Agreement by and between ViroLogic and
    Lease Management Services, Inc. dated as of
    October 16, 1996.                           
|         | (1)  |         |  |  | 4 | .6  |  | Warrant Agreement by and between ViroLogic and
    MMC/ GATX Partnership No. 1 dated as of January 30,
    1998.                               
|         | (1)  |         |  |  | 4 | .7  |  | Form of Warrant to purchase Common Stock.                                                                                                      
|         | (1)  |         |  |  | 4 | .8  |  | Form of Warrant to purchase Common Stock.                                                                                                      
|         | (1)  |         |  |  | 4 | .9  |  | Form of Warrant to purchase Series A
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |         |  |  | 4 | .10 |  | Form of Warrant to purchase Series A
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |         |  |  | 4 | .11 |  | Form of Warrant to purchase Series B
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |        |  |  | 4 | .13 |  | Form of Stock Option Agreement under the 2000
    Equity Incentive Plan for options granted prior to May 1,
    2000.                          
|         | (1)  |        |  |  | 4 | .14 |  | Form of Stock Option Agreement Pursuant to the
    2000 Equity Incentive Plan for options granted after May 1,
    2000.                       

47



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##### Table of Contents



|         |      |         |  |  |    |     |  |                                                                                                                                                          
|-------- | ---- | ------- |  |  | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |      | Exhibit |  | 
|Footnote |      | Number  |  | 
|         |      |         |  | 
|         | (1)  |         |  |  | 4  | .15 |  | Form of Warrant to Purchase Series C
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).                 
|         | (6)  |         |  |  | 4  | .16 |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series A Redeemable Convertible Preferred Stock.                                        
|         | (7)  |         |  |  | 4  | .17 |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series B Redeemable Convertible Preferred Stock.                                        
|         | (7)  |         |  |  | 4  | .18 |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series A Redeemable Convertible Preferred Stock.                                        
|         | (9)  |         |  |  | 4  | .19 |  | Form of Stock Purchase Warrant issued to
    purchasers of Series C Preferred Stock.                                                                     
|         | (9)  |         |  |  | 4  | .20 |  | Form of Stock Purchase Warrant issued to
    purchasers of Series B Preferred Stock.                                                                     
|         | (2)  | *       |  |  | 10 | .1  |  | Agreement with Roche Molecular Systems, Inc.
    dated July 29, 1997.                                                                                    
|         | (1)  |         |  |  | 10 | .2  |  | Office Lease by and between ViroLogic and Oyster
    Point Tech Center LLC dated as of May 25, 1999.                                                     
|         | (1)  |         |  |  | 10 | .3  |  | Office Lease by and between ViroLogic and
    Trammell Crow Northern California Development, Inc. dated
    as of November 23, 1999.                     
|         | (1)  |         |  |  | 10 | .4  |  | Loan and Security Agreement by and between
    ViroLogic and MMC/ GATX Partnership No. 1 dated as of
    January 30, 1998.                               
|         | (1)  |        |  |  | 10 | .5  |  | Employment Agreement by and between ViroLogic and
    William D. Young dated September 29, 1999.                                                         
|         | (1)  |        |  |  | 10 | .6  |  | 2000 Employee Stock Purchase Plan and related
    offering documents.                                                                                    
|         | (1)  |         |  |  | 10 | .7  |  | Equipment Financing Agreement dated
    March 28, 2000 with Pentech Financial Services, Inc.                                                             
|         | (2)  |        |  |  | 10 | .8  |  | ViroLogic, Inc. 2000 Equity Incentive Plan,
    as amended.                                                                                              
|         | (3)  |        |  |  | 10 | .9  |  | Form of Executive Severance Benefits Agreement.                                                                                                          
|         | (3)  |         |  |  | 10 | .10 |  | Master Lease Agreement dated September 14,
    2000 by and between ViroLogic, Inc. and General Electric
    Capital Corporation.                         
|         | (4)  |         |  |  | 10 | .11 |  | Equipment Financing Agreement by and between
    ViroLogic and De Lage Landen Financial Services, Inc. dated
    as of January 29, 2001.                 
|         | (5)  |         |  |  | 10 | .12 |  | Equipment Schedule No. 4 to Master
    Lease Agreement dated as of August 14, 2000 by and between
    ViroLogic and General Electric Capital Corporation.
|         | (5)  |         |  |  | 10 | .13 |  | Sublease by and between ViroLogic, Inc. and
    Raven Biotechnologies, Inc.                                                                              
|         | (6)  |         |  |  | 10 | .14 |  | First Registration Rights Agreement, dated as of
    June 29, 2001, by and between ViroLogic, Inc. and each
    of the Purchasers.                       
|         | (6)  |         |  |  | 10 | .15 |  | Second Registration Rights Agreement, dated as of
    June 29, 2001 by and between ViroLogic, Inc. and each
    of the Purchasers.                       
|         | (11) |         |  |  | 10 | .16 |  | Equipment Schedule No. 5 to Master
    Lease Agreement dated as of August 14, 2000 by and between
    ViroLogic and General Electric Capital Corporation.
|         | (8)  |         |  |  | 10 | .17 |  | Equipment Lease, dated as of April 21, 2002,
    by and between ViroLogic and Citicapital                                                                
|         | (8)  |         |  |  | 10 | .18 |  | Sublease, dated as of June 1, 2002, by and
    between ViroLogic, Inc. and diaDexus, Inc.                                                                
|         | (9)  |         |  |  | 10 | .19 |  | Securities Purchase Agreement, dated as of
    November 14, 2002, by and among ViroLogic, Inc. and
    each of the Purchasers.                           
|         | (9)  |         |  |  | 10 | .20 |  | Exchange Agreement, dated as of November 14,
    2002, by and among ViroLogic, Inc. and the Series B
    Holders.                                        

48



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##### Table of Contents



|         |      |         |  |  |    |     |  |                                                                                                                                                                                                                
|-------- | ---- | ------- |  |  | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |      | Exhibit |  | 
|Footnote |      | Number  |  | 
|         |      |         |  | 
|         | (9)  |         |  |  | 10 | .21 |  | Stock Purchase Agreement, dated as of
    November 19, 2002, by and among ViroLogic, Inc. and
    Pfizer Ireland Pharmaceuticals.                                                                              
|         | (9)  |         |  |  | 10 | .22 |  | Registration Rights Agreement, dated as of
    November 19, 2002, by and between ViroLogic, Inc. and
    each of the Purchasers.                                                                               
|         | (12) |         |  |  | 10 | .23 |  | First Amendment to Sublease, dated as of
    August 21, 2003, by and between diaDexus, Inc and
    ViroLogic, Inc.                                                                                             
|         |      |         |  |  | 23 | .1  |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                                        
|         |      |         |  |  | 24 | .1  |  | Power of Attorney is contained on the signature
    page.                                                                                                                                                      
|         |      |         |  |  | 31 | .1  |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(A) or Rule 15d-14(A) promulgated under
    the Securities Exchange Act of 1934.                                                           
|         |      |         |  |  | 31 | .2  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(A) or Rule 15d-14(A) promulgated under
    the Securities Exchange Act of 1934.                                                           
|         |      |         |  |  | 32 | .1  |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 and Rule 13a-14(B) or Rule 15d-14(B)
    promulgated under the Securities Exchange Act of 1934.




|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
| | Indicates management or compensatory plan or
    arrangement required to be identified pursuant to
    Item 14(c).



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*) | Certain confidential portions deleted pursuant to
    Order Granting Application Under the Securities Act of 1933 and
    Rule 406 Thereunder Respecting Confidential Treatment dated
    May 1, 2000.
|   
|(1) | Filed as an exhibit to our Registration Statement
    on Form S-1 (No. 333-30896) or amendments thereto and
    incorporated herein by reference.                                                     
|   
|(2) | Filed as an exhibit to our Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000 and incorporated herein by reference.                                          
|   
|(3) | Filed as an exhibit to our Annual Report on
    Form 10-K for the year ended December 31, 2000 filed
    with the Commission and incorporated herein by reference.                                    
|   
|(4) | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001 and
    incorporated herein by reference.                                                           
|   
|(5) | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2001 and
    incorporated herein by reference.                                                            
|   
|(6) | Filed as an exhibit to our Current Report on
    Form 8-K filed on July 6, 2001 and incorporated herein
    by reference.                                                                             
|   
|(7) | Filed as an exhibit to our Current Report on
    Form 8-K filed on March 26, 2002 and incorporated
    herein by reference.                                                                           
|   
|(8) | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2002 and
    incorporated herein by reference.                                                            
|   
|(9) | Filed as an exhibit to our Current Report on
    Form 8-K filed on November 25, 2002 and incorporated
    herein by reference.                                                                        



|     |                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Filed as an exhibit to our Registration Statement
    on Form S-3 (No. 333-102995) and incorporated herein by
    reference.                                      
|    
|(11) | Filed as an exhibit to our Annual Report on
    Form 10-K for the year ended December 31, 2001 filed
    with the Commission and incorporated herein by reference.
|    
|(12) | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the Quarter ended September 30, 2003 and
    incorporated herein by reference.                   

49



---



##### Table of Contents






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 to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                
| | ---------------
| | ViroLogic, Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ WILLIAM D. YOUNG

| |                        
| | -----------------------
| |                        
| | William D. Young       
| | Chief Executive Officer

Date: March 26, 2004

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
William D. Young, Kathy L. Hibbs and Karen J.
Wilson, and each of them, as his or her true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name,
place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his
substitute or substituted, may lawfully do or cause to be done
by virtue hereof.

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.

|                                                               |  |                                                                                             |  |               
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|Signatures                                                     |  | Title                                                                                       |  | Date          
|                                                               |  |                                                                                             |  |               
|/s/ WILLIAM D. YOUNGWilliam D. Young                           |  | Chairman, Chief Executive Officer and Director
    (Principal Executive Officer)            |  | March 26, 2004
|/s/ KAREN J. WILSONKaren J. Wilson                             |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 26, 2004
|/s/ EDMON JENNINGSEdmon Jennings                               |  | Director                                                                                    |  | March 26, 2004
|/s/ WILLIAM JENKINS, M.D.William Jenkins, M.D.                 |  | Director                                                                                    |  | March 26, 2004
|/s/ CRISTINA H. KEPNERCristina H. Kepner                       |  | Director                                                                                    |  | March 26, 2004
|/s/ DAVID H. PERSING, M.D., PH.D.David H. Persing, M.D., Ph.D. |  | Director                                                                                    |  | March 26, 2004

50



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##### Table of Contents



EXHIBIT INDEX

|         |      |         |  |  |      |  |  |                                                                                                                                                
|-------- | ---- | ------- |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |      | Exhibit |  | 
|Footnote |      | Number  |  | 
|         |      |         |  | 
|         | (10) |         |  |  | 3.1  |  |  | Amended and Restated Certificate of
    Incorporation, as currently in effect.                                                                 
|         | (4)  |         |  |  | 3.2  |  |  | Bylaws, as currently in effect.                                                                                                                
|         | (3)  |         |  |  | 4.1  |  |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                     
|         | (1)  |         |  |  | 4.2  |  |  | Specimen Stock Certificate.                                                                                                                    
|         | (1)  |         |  |  | 4.3  |  |  | Amended and Restated Investors Rights Agreement
    by and among the Company and certain stockholders of the Company
    dated August 23, 1999.
|         | (1)  |         |  |  | 4.4  |  |  | Form of Indemnity Agreement between the Company
    and its directors and officers.                                                            
|         | (1)  |         |  |  | 4.5  |  |  | Warrant Agreement by and between ViroLogic and
    Lease Management Services, Inc. dated as of
    October 16, 1996.                           
|         | (1)  |         |  |  | 4.6  |  |  | Warrant Agreement by and between ViroLogic and
    MMC/ GATX Partnership No. 1 dated as of January 30,
    1998.                               
|         | (1)  |         |  |  | 4.7  |  |  | Form of Warrant to purchase Common Stock.                                                                                                      
|         | (1)  |         |  |  | 4.8  |  |  | Form of Warrant to purchase Common Stock.                                                                                                      
|         | (1)  |         |  |  | 4.9  |  |  | Form of Warrant to purchase Series A
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |         |  |  | 4.10 |  |  | Form of Warrant to purchase Series A
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |         |  |  | 4.11 |  |  | Form of Warrant to purchase Series B
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (1)  |        |  |  | 4.13 |  |  | Form of Stock Option Agreement under the 2000
    Equity Incentive Plan for options granted prior to
    May 1, 2000.                          
|         | (1)  |        |  |  | 4.14 |  |  | Form of Stock Option Agreement Pursuant to the
    2000 Equity Incentive Plan for options granted after
    May 1, 2000.                       
|         | (1)  |         |  |  | 4.15 |  |  | Form of Warrant to Purchase Series C
    Preferred Stock (automatically converted to warrants to purchase
    Common Stock in May 2000).       
|         | (6)  |         |  |  | 4.16 |  |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series A Redeemable Convertible Preferred Stock.                              
|         | (7)  |         |  |  | 4.17 |  |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series B Redeemable Convertible Preferred Stock.                              
|         | (7)  |         |  |  | 4.18 |  |  | Form of (Common) Stock Purchase Warrant issued to
    holders of Series A Redeemable Convertible Preferred Stock.                              
|         | (9)  |         |  |  | 4.19 |  |  | Form of Stock Purchase Warrant issued to
    purchasers of Series C Preferred Stock.                                                           
|         | (9)  |         |  |  | 4.20 |  |  | Form of Stock Purchase Warrant issued to
    purchasers of Series B Preferred Stock.                                                           
|         | (2)  | *       |  |  | 10.1 |  |  | Agreement with Roche Molecular Systems, Inc.
    dated July 29, 1997.                                                                          
|         | (1)  |         |  |  | 10.2 |  |  | Office Lease by and between ViroLogic and Oyster
    Point Tech Center LLC dated as of May 25, 1999.                                           
|         | (1)  |         |  |  | 10.3 |  |  | Office Lease by and between ViroLogic and
    Trammell Crow Northern California Development, Inc. dated
    as of November 23, 1999.           
|         | (1)  |         |  |  | 10.4 |  |  | Loan and Security Agreement by and between
    ViroLogic and MMC/ GATX Partnership No. 1 dated as of
    January 30, 1998.                     
|         | (1)  |        |  |  | 10.5 |  |  | Employment Agreement by and between ViroLogic and
    William D. Young dated September 29, 1999.                                               
|         | (1)  |        |  |  | 10.6 |  |  | 2000 Employee Stock Purchase Plan and related
    offering documents.                                                                          
|         | (1)  |         |  |  | 10.7 |  |  | Equipment Financing Agreement dated
    March 28, 2000 with Pentech Financial Services, Inc.                                                   
|         | (2)  |        |  |  | 10.8 |  |  | ViroLogic, Inc. 2000 Equity Incentive Plan,
    as amended.                                                                                    



---



##### Table of Contents



|         |      |         |  |  |       |  |  |                                                                                                                                                                                                                
|-------- | ---- | ------- |  |  | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |      | Exhibit |  | 
|Footnote |      | Number  |  | 
|         |      |         |  | 
|         | (3)  |        |  |  | 10.9  |  |  | Form of Executive Severance Benefits Agreement.                                                                                                                                                                
|         | (3)  |         |  |  | 10.10 |  |  | Master Lease Agreement dated September 14,
    2000 by and between ViroLogic, Inc. and General Electric
    Capital Corporation.                                                                               
|         | (4)  |         |  |  | 10.11 |  |  | Equipment Financing Agreement by and between
    ViroLogic and De Lage Landen Financial Services, Inc. dated
    as of January 29, 2001.                                                                       
|         | (5)  |         |  |  | 10.12 |  |  | Equipment Schedule No. 4 to Master
    Lease Agreement dated as of August 14, 2000 by and between
    ViroLogic and General Electric Capital Corporation.                                                      
|         | (5)  |         |  |  | 10.13 |  |  | Sublease by and between ViroLogic, Inc. and
    Raven Biotechnologies, Inc.                                                                                                                                    
|         | (6)  |         |  |  | 10.14 |  |  | First Registration Rights Agreement, dated as of
    June 29, 2001, by and between ViroLogic, Inc. and each
    of the Purchasers.                                                                             
|         | (6)  |         |  |  | 10.15 |  |  | Second Registration Rights Agreement, dated as of
    June 29, 2001 by and between ViroLogic, Inc. and each
    of the Purchasers.                                                                             
|         | (11) |         |  |  | 10.16 |  |  | Equipment Schedule No. 5 to Master
    Lease Agreement dated as of August 14, 2000 by and between
    ViroLogic and General Electric Capital Corporation.                                                      
|         | (8)  |         |  |  | 10.17 |  |  | Equipment Lease, dated as of April 21, 2002,
    by and between ViroLogic and Citicapital                                                                                                                      
|         | (8)  |         |  |  | 10.18 |  |  | Sublease, dated as of June 1, 2002, by and
    between ViroLogic, Inc. and diaDexus, Inc.                                                                                                                      
|         | (9)  |         |  |  | 10.19 |  |  | Securities Purchase Agreement, dated as of
    November 14, 2002, by and among ViroLogic, Inc. and
    each of the Purchasers.                                                                                 
|         | (9)  |         |  |  | 10.20 |  |  | Exchange Agreement, dated as of November 14,
    2002, by and among ViroLogic, Inc. and the Series B
    Holders.                                                                                              
|         | (9)  |         |  |  | 10.21 |  |  | Stock Purchase Agreement, dated as of
    November 19, 2002, by and among ViroLogic, Inc. and
    Pfizer Ireland Pharmaceuticals.                                                                              
|         | (9)  |         |  |  | 10.22 |  |  | Registration Rights Agreement, dated as of
    November 19, 2002, by and between ViroLogic, Inc. and
    each of the Purchasers.                                                                               
|         | (12) |         |  |  | 10.23 |  |  | First Amendment to Sublease, dated as of
    August 21, 2003, by and between diaDexus, Inc and
    ViroLogic, Inc.                                                                                             
|         |      |         |  |  | 23.1  |  |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                                        
|         |      |         |  |  | 24.1  |  |  | Power of Attorney is contained on the signature
    page.                                                                                                                                                      
|         |      |         |  |  | 31.1  |  |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(A) or Rule 15d-14(A) promulgated under
    the Securities Exchange Act of 1934.                                                           
|         |      |         |  |  | 31.2  |  |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(A) or Rule 15d-14(A) promulgated under
    the Securities Exchange Act of 1934.                                                           
|         |      |         |  |  | 32.1  |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 and Rule 13a-14(B) or Rule 15d-14(B)
    promulgated under the Securities Exchange Act of 1934.




| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | Indicates management or compensatory plan or
    arrangement required to be identified pursuant to
    Item 14(c).



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Certain confidential portions deleted pursuant to
    Order Granting Application Under the Securities Act of 1933 and
    Rule 406 Thereunder Respecting Confidential Treatment dated
    May 1, 2000.



| |     |                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Filed as an exhibit to the Registrants
    Registration Statement on Form S-1 (No. 333-30896) or
    amendments thereto and incorporated herein by reference.    
|
| | (2) | Filed as an exhibit to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000 and incorporated herein by reference.      
|
| | (3) | Filed as an exhibit to our Annual Report on
    Form 10-K for the year ended December 31, 2000 filed
    with the Commission and incorporated herein by reference.
|
| | (4) | Filed as an exhibit to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2001 and incorporated herein by reference.          



---



##### Table of Contents





| |     |                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Filed as an exhibit to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001 and incorporated herein by reference.
|
| | (6) | Filed as an exhibit to our Current Report on
    Form 8-K filed on July 6, 2001 and incorporated herein
    by reference.                              
|
| | (7) | Filed as an exhibit to our Current Report on
    Form 8-K filed on March 26, 2002 and incorporated
    herein by reference.                            
|
| | (8) | Filed as an exhibit to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2002 and incorporated herein by reference.
|
| | (9) | Filed as an exhibit to our Current Report on
    Form 8-K filed on November 25, 2002 and incorporated
    herein by reference.                         



|     |                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Filed as an exhibit to our Registration Statement
    on Form S-3 (No. 333-102995) and incorporated herein by
    reference.                                      
|    
|(11) | Filed as an exhibit to our Annual Report on
    Form 10-K for the year ended December 31, 2001 filed
    with the Commission and incorporated herein by reference.
|    
|(12) | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the Quarter ended September 30, 2003 and
    incorporated herein by reference.                   



---



##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES

(IN THOUSANDS)

|                                 |                              |              |   |                    |  |            |   |            |  |  |   |      |   |  |   |     | 
|-------------------------------- | ---------------------------- | ------------ | - | ------------------ |  | ---------- | - | ---------- |  |  | - | ---- | - |  | - | --- | 
|                                 |                              | Balance at   |   | Additions Charged  |  |            |   | Balance at
|                                 |                              | Beginning of |   | to Operating Costs |  |            |   | End of    
|Classification                   |                              | Period       |   | and Expenses       |  | Deductions |   | Period    
|                                 |                              |              |   |                    |  |            |   |           
|Allowance for doubtful accounts: |                              |              |   |                    |  |            |   |            |  |  |   |      |   |  |   |    
|                                 | Year ended December 31, 2003 |              | $ | 989                |  |            | $ | 101        |  |  | $ | (447 | ) |  | $ | 643 | 
|                                 | Year ended December 31, 2002 |              | $ | 588                |  |            | $ | 593        |  |  | $ | (192 | ) |  | $ | 989 | 
|                                 | Year ended December 31, 2001 |              | $ | 175                |  |            | $ | 606        |  |  | $ | (193 | ) |  | $ | 588 | 

S-1