Annual Report

Exhibit 13

Management’s Discussion and Analysis

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

INTRODUCTION

Sigma-Aldrich Corporation (“the Company”) develops, manufactures and distributes the broadest range of high quality biochemicals and organic chemicals available in the world. These chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development, disease diagnosis and chemical manufacturing. The Company operates in 34 countries, manufacturing 40,000 of the 85,000 products it sells. The Company sells into over 150 countries, servicing over 60,000 accounts representing over one million individual customers.

The Company consists of three business units, Scientific Research, Biotechnology and Fine Chemicals, which define the Company’s approach to serving customers. Scientific Research, which represented 59% of sales in 2003, provides our customers with high quality research chemicals and products for use in Life Science and High Technology applications. Biotechnology, which represented 23% sales in 2003, provides our customers with biochemicals and kits for Biotechnology and genome Life Science research. Fine Chemicals, which represented 18% of sales in 2003, provides our customers with larger-scale organic chemicals and biochemicals for the Pharmaceutical, Biotechnology and High Technology industries. These units, while organized to best serve our customers, are closely interrelated in their activities and share services such as order entry, billing, tech services, internet, purchasing, inventory control and share production and distribution facilities. Additionally, these units are supported by centralized functional areas such as finance, human resources and information technology.

The Company has a broad customer base of pharmaceutical companies, diagnostics companies, biotechnology companies, universities, governmental institutions, non-profit organizations, chemical and allied companies, hospitals and commercial laboratories, located in the United States, Europe and Internationally, and would not be significantly impacted by the loss of any one customer. However, sluggish economies in the United States, Europe and Internationally do impact demand from our customers. In 2003, the Company believes softness in both the United States and European pharmaceutical sectors and deterioration in some international markets negatively affected sales growth.

The Company expects short-term growth should benefit from sales force additions and marketing efforts. Growth over the longer term will be dependent on communicating our capabilities through new marketing efforts and expanding our capabilities by adding new products from internal research and development efforts, exploiting our vast sourcing knowledge and acquisitions.

With over 50% of sales denominated in currencies other than the U.S. dollar, any significant changes in currency exchange rates will likely have a significant impact on the Company’s sales growth and diluted earnings per share.

COMPARABILITY

The net income summaries below present the results of our operations before and after goodwill amortization and unusual items affecting our business. These summaries show the impact goodwill amortization and unusual items had on our net income and basic and diluted net income per share. Due to the discontinuance of the Diagnostics business in 2002, we present results separately for our continuing and discontinued operations.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

HIGHLIGHTS

Reported net income from continuing operations in 2003 increased 2.0% to $190.4 from $186.7 in 2002. Net income in 2002 from continuing operations included a gain on the sale of a major production facility in Milwaukee of $18.1 (net of taxes) and an international tax benefit of $1.6, offset by a charge incurred in a settlement with the Department of Commerce of $1.8. Net income from continuing operations increased 12.8% to $190.4 in 2003, compared to $168.8 in 2002 before these unusual items. This increase in net income resulted from currency, process improvement benefits, favorable product mix and lower interest costs partially offset by increased costs of new sales and marketing initiatives, insurance and employee benefits. Reported net income from continuing operations in 2002 increased 22.2% to $186.7 from $152.8 in 2001. Net income from continuing operations before unusual items for 2002 was $168.8 compared to $158.6 in 2001, which excludes goodwill amortization and a charge for purchased in-process research and development.

Diluted earnings per share from continuing operations for 2003 was $2.68 compared to $2.54 in 2002. Diluted earnings per share in 2002 benefited from a $.24 gain on the sale of a Milwaukee facility and an international tax benefit of $.02, which was offset by a $.02 Department of Commerce settlement. Diluted earnings per share increased 16.5% to $2.68 in 2003 from $2.30 in 2002 before these 2002 unusual items. Diluted earnings per share from continuing operations in 2002 was $2.30 compared to $2.11 for 2001 before these unusual items in 2002 and goodwill amortization and a charge for purchased in-process research and development in 2001.

All activities relating to the discontinuance of the Diagnostics business were completed in the second quarter of 2003. The discontinuance of the Diagnostics business increased diluted earnings per share by $.03 in 2003 and reduced 2002 diluted earnings per share by $.76, which includes an after-tax charge of $52.3, as a result of discontinuing this business.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

ITEMS AFFECTING COMPARABILITY OF RESULTS

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years presented. Actual results could differ from those estimates under different assumptions or conditions.

The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.

Inventories

Inventories are valued at the lower of cost or market. The Company regularly reviews inventories on hand and records a provision for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The provision for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management initiatives. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories.

Long-Lived Assets

Long-lived assets, including intangibles with definite lives, are amortized over their expected useful lives. Goodwill and other intangibles with indefinite lives are no longer systematically amortized against earnings. Goodwill and other intangibles are assessed annually for impairment and whenever events or changes in business conditions indicate that the carrying amount of an asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair market value.

Pension and Other Post-Retirement Benefits

The determination of the obligation and expense for pension and other post-retirement benefits is dependent on the Company’s selection of certain assumptions used by actuaries to calculate such amounts. Those assumptions are described in Note 14 to the consolidated financial statements and include, among others, the discount rate, expected return on plan assets and rates of increase in compensation and health care costs. In accordance with generally accepted accounting principles, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in the assumptions may materially affect the Company’s pension and other post-retirement obligations and the Company’s future expense. A 1% change in the expected return on plan assets for the U.S. pension plan would have less than a $1.0 impact on the Company’s pension expense.

Taxes

The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In management’s opinion, adequate provisions for income taxes have been made for all years presented.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when it believes that such assets may not be recovered, taking into consideration historical operating results, expectations of future earnings, changes in its operations and the expected timing of the reversals of existing temporary differences.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OPERATING RESULTS FROM CONTINUING OPERATIONS

Sales

Sales increased 7.6%, 8.3% and 7.7% in 2003, 2002 and 2001, respectively. The sales growth in 2003 is primarily attributed to currency benefits, price increases and favorable product mix, partially offset by declines in unit volume. Price increases averaged 3.0%, 3.2% and 3.7% in 2003, 2002 and 2001, respectively. Price gains in 2004 may show modest declines from current levels as the Company plans to continue to both match competitive levels and take business in selected strategic instances to achieve long-term growth targets. New product sales, while not material in the year introduced, do contribute to sales growth in subsequent years. The effect of translating foreign currency sales into U.S. dollars increased the 2003 and 2002 sales growth by 7.3% and 1.4%, respectively, while it reduced 2001 sales growth by 3.0%.

Currency adjusted sales growth (decline) in Scientific Research, Biotechnology and Fine Chemicals for 2003 was 0.2%, 2.0% and (1.7)%, respectively. Scientific Research achieved sales gains in international markets primarily on the strength of price increases while unit volumes declined due to softness in sales to European pharmaceutical customers. Scientific Research sales in the U.S. market declined due to reduced demand from pharmaceutical companies, partially offset by benefits from price increases. Biotechnology also achieved sales gains in international markets from both increased unit volumes and pricing. Biotechnology sales in the U.S. declined due to reduced demand for synthetic DNA. The decline in Fine Chemicals sales reflects weak demand from U.S. pharmaceutical customers that was only partially offset by modest gains in international markets.

The sales growth in 2002 is primarily attributable to price increases, the annual addition of new products and volume gains driven by improved service, enhanced web site capabilities and sales and marketing activities. After achieving targeted, internal currency adjusted sales growth goals of 8.0% in Scientific Research and 12.0% for both Biotechnology and Fine Chemicals in 2001 and continuing at above market growth rates early in 2002, economic uncertainties and lower demand from pharmaceutical and other commercial customers slowed growth late in 2002. Scientific Research sales growth in 2002 continued to benefit from pricing gains and sales strength in the Company’s international markets. Biotechnology experienced price increases of 3.0% and maintained strong sales to Europe and other international customers throughout 2002. Fine Chemicals achieved double-digit growth in the Company’s international markets, which was offset by weaker demand for custom orders from U.S. pharmaceutical customers in 2002.

A summary of reported sales growth, currency benefits and currency adjusted sales changes is as follows:

Excluding currency impacts, international direct sales increased 4.1%, 9.7% and 10.6% in 2003, 2002 and 2001, respectively.

Cost of Products Sold

Cost of products sold was 48.3%, 49.1% and 47.8% of net sales in 2003, 2002 and 2001, respectively. The increase in the gross profit rate in 2003 reflects currency benefits, cost savings from process improvements and increased growth in higher margin products, partially offset by increased employee costs and insurance. The reduction in the gross profit rate in 2002 is due to higher growth in lower margin products, increased inventory write-offs of approximately $4.0 related to inventory shrinkage, increases in insurance rates (experienced by many companies due to market conditions) and increased employee benefit costs.

Overall, the cost of products sold increased 5.9% and 11.3% compared to sales increases of 7.6% and 8.3% in 2003 and 2002, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were 26.6%, 26.3% and 27.6% of sales in 2003, 2002, and 2001, respectively. Excluding the Department of Commerce settlement in 2002 and goodwill amortization in 2001, selling, general and administrative expenses were 26.2% of sales in 2002 and 27.0% of sales in 2001. In 2003, selling, general and administrative expenses as a percent of sales increased 0.4% compared to 2002, excluding unusual items, as savings from process improvements only partially offset the addition of 50 new sales representatives and new marketing programs in 2003. The Company currently has plans to add approximately 30 new sales representatives in 2004. In 2002, selling, general and administrative expenses as a percent of sales decreased 0.8% compared to 2001 (excluding unusual items and goodwill amortization) as the impact of process improvement savings and the leverage of fixed costs against a higher sales base more than offset increases in insurance and employee benefit costs.

Research and Development Expenses

Research and development expenses were 3.3% of sales in 2003 and 3.4% of sales in 2002 and 2001. The research and development expenses relate primarily to efforts to add new manufactured products. All manufactured products currently account for approximately 55% of total sales.

Interest Expense, Net

Net interest expense reduced pretax earnings by $10.1, $13.8 and $16.5 in 2003, 2002 and 2001, respectively. The decrease in net interest expense in 2003 is due to lower net interest costs resulting from increased cash balances, reduced interest rates on borrowings and a decline in

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

OPERATING RESULTS FROM CONTINUING OPERATIONS (continued)

short-term debt. The decrease in net interest expense in 2002 resulted from interest rate reductions and lower short-term borrowing levels due to reduced tax payments, significantly lower capital expenditures and benefits from working capital management initiatives in 2002.

Income Taxes

Income taxes, which include federal, state and international taxes were 30.2%, 31.4% and 30.3% of pretax income from continuing operations in 2003, 2002 and 2001, respectively. The effective income tax rate in 2003 of 30.2% reflects the favorable impact of a higher benefit on U.S. export sales, while the effective rate in 2002 was negatively affected by the non-deductibility of the settlement with the Commerce Department and a higher incremental tax rate on the Milwaukee property sale. These negative impacts on the 2002 effective income tax rate were partially offset by an international tax benefit. For 2004, a tax benefit from international operations is expected to reduce the effective income tax rate to approximately 26% from an otherwise reportable effective tax rate of about 31%.

Accounting Changes

Enacted accounting standards resulted in the elimination of goodwill amortization for all companies in 2002. The Company’s goodwill amortization from continuing operations was $6.3 ($.07 per diluted share, after tax) for 2001.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). The Company adopted the provisions of SFAS 144 for the year ended December 31, 2002. The implementation of this Statement is reflected in the Company’s consolidated financial statements and discussed further in Note 5 to the consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash flows from operating, investing and financing activities for continuing operations, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

Operating Activities

The decrease in net cash provided by operating activities in 2003 compared to 2002 was primarily the result of higher tax payments. In 2002, tax payments were lower because of the tax benefit of the charge related to discontinuing the Diagnostics business. In addition to the tax benefit, the increase in net cash provided by operating activities in 2002 resulted primarily from increased net income from continuing operations and declines in inventory levels and accounts receivable. In 2003, working capital management initiatives improved accounts receivable days sales outstanding by three days from year-end 2002, providing $13.2 in cash in 2003. Active inventory management programs reduced inventory levels by approximately one half month from year-end 2002, providing $24.6 in cash in 2003. In 2002, working capital management initiatives improved accounts receivable days sales outstanding by three days from year-end 2001, providing $19.4 in cash in 2002, while active inventory management programs reduced inventory levels by one month from year-end 2001, providing $29.8 in cash in 2002.

Investing Activities

In 2003, cash used for investing activities related primarily to capital expenditures of $57.7 million, which included the expansion of the Company’s distribution center in Germany, the beginning of construction for replacement facilities to relocate the Company’s major production/R&D/administration facility in Milwaukee, a new production line in St. Louis, a pilot plant upgrade in Germany, continued investment in the SAP computer software system and other upgrades to production and R&D facilities.

In 2002, cash used for investing activities related primarily to capital expenditures of $60.7 offset by cash proceeds of $32.5 from the sale of the Company’s major Milwaukee production facility.

In 2001, cash used for investing activities related primarily to capital expenditures of $108.1 and the acquisition of Isotec, Inc. for $37.2.

During 2004, we anticipate capital spending to be approximately $88.0, with the increase over the 2003 level explained completely by the continuing construction of replacement facilities in Milwaukee.

Financing Activities

In 2003, the Company used cash of $183.7 in financing activities for stock repurchases, payment of dividends and repayment of short-term debt. These cash outflows were partially offset by cash from the exercise of stock options. Cash outflows totaled $35.2 and $142.8 for dividend payments and stock repurchases, respectively, in 2003 compared to dividends paid of $25.2 and $24.5 for 2002 and 2001, respectively, and stock repurchases of $125.1 and $173.9 for 2002 and 2001, respectively. The dividend payout in 2003 reflects a 78% increase in the quarterly cash dividend during 2003.

At December 31, 2003, the Company had short-term credit facilities totaling $300. These facilities provide back-up liquidity for a commercial paper program launched in January 2002, at which time loans outstanding from the facilities were repaid with the commercial paper proceeds. In 2003 and 2002, $23.3 and $180.5, respectively, of short-term debt was repaid. During 2001, the Company borrowed $91.4 of short-term debt to fund acquisitions, share repurchases and for general corporate purposes.

Long-term debt at December 31, 2003 was $176.3 compared to $176.8 in 2002. In 2001, the Company issued $75.0 of senior notes, payable in 2006 and other long-term debt of $1.9. Total debt as a percentage of total capitalization was 19.6% and 23.2% at December 31, 2003 and 2002, respectively.

For a description of the Company’s debt covenants, see Notes 6 and 7 to the consolidated financial statements.

Share Repurchases

At December 31, 2003 and December 31, 2002, the Company had repurchased a total of 35.0 million shares and 32.2 million shares, respectively, of an authorized repurchase of 40 million shares. During 2003, the Company was authorized to increase its share repurchase program from 35 million to 40 million shares. There were 69.1 million shares outstanding as of December 31, 2003. The Company expects to acquire the remaining 5.0 million authorized shares, however, the timing of the repurchases and number of shares repurchased, if any, will depend upon market conditions and other factors.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

LIQUIDITY AND CAPITAL RESOURCES (continued)

Liquidity and Risk Management

Liquidity risk refers to the risk that the Company might be unable to meet potential cash outflows promptly and cost effectively. Factors that could cause such risk to arise might be disruption to the securities market, downgrades in the Company’s credit rating or the unavailability of funds. The primary funding source is the Company’s commercial paper and long-term debt programs. The Company maintains committed bank lines of credit to support its commercial paper borrowings and local bank lines of credit to support international operations. Downgrades in the Company’s credit rating or other limitations on the ability to access short-term financing, including the ability to refinance short-term debt as it becomes due, would increase interest costs and adversely affect profitability.

Management believes that the Company’s financial condition is such that internal and external resources are sufficient and available to satisfy the Company’s requirements for debt service, capital expenditures, acquisitions, dividends, share repurchases and working capital presently and for the next 12 months.

ENVIRONMENTAL AND OTHER MATTERS

Environmental Matters

The operations of the Company, like those of other companies engaged in similar lines of business, are subject to various federal, state, foreign and local laws and regulations intended to protect the public health and the environment. These regulations primarily relate to worker safety, air and water quality and waste handling. The Company is in discussions with the United States Department of Justice on behalf of the Environmental Protection Agency (EPA) for a civil penalty based on alleged violations of Title VI of the Clean Air Act (40 C.F.R. Part 82). Various violations have been claimed by the EPA relating to the release of certain refrigerants from industrial appliances and record keeping violations associated with such releases. No suit has been filed while the Company and the United States Attorney and EPA are negotiating any civil penalties and/or future compliance plans. The Company currently expects any settlement (or penalties if no settlement is reached) to exceed $0.1 and has established a reserve, which it believes is appropriate under the circumstances. The Company believes that the ultimate resolution of this matter would not have a material adverse effect on its consolidated financial condition or on its results of operations in any given quarter or year.

Other Matters

The Company is involved in legal and regulatory proceedings generally incidental to its business, as described below:

Insurance and Other Contingent Liabilities and Commitments

As previously disclosed, the Company is a defendant in several lawsuits and claims related to the normal conduct of its business, including lawsuits and claims related to product liability and personal injury matters. The Company has self-insured retention limits and has obtained insurance to provide coverage above the self-insured limits for pending product liability and personal injury claims, subject to certain limits and exclusions. Reserves have been provided to cover expected payments for these self-insured amounts at December 31, 2003.

In one group of lawsuits and claims, the Company, as well as others engaged in manufacturing and distributing similar products, is a defendant in multiple claims alleging injuries from exposure to various chemicals by a limited number of employees of one electronics manufacturer.

In the other group of lawsuits and claims, the Company provided a product for use in research activities in developing various vaccines at pharmaceutical companies. The Company, together with other manufacturers and distributors offering the same product and several pharmaceutical companies, has been named as a defendant and served in 262 lawsuits, of which 23 lawsuits have been dismissed to date. Several of the outstanding suits have been stayed by various state and federal courts pending a decision on coverage available under a Federal government relief program, which is not expected before July 2004.

In all cases, the Company believes its products in question were restricted to research use and that proper information for safe use of the products was provided to the customer.

The Company believes its reserves and insurance are sufficient to provide for claims received through December 31, 2003. While the outcome of the current claims cannot be predicted with certainty, the possible outcome of the claims is reviewed at least quarterly and reserves adjusted as deemed appropriate based on these reviews. Based on current information available, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its consolidated financial condition but could have a material adverse effect on the Company’s results of operations in any given quarter or year. Future claims related to the use of these categories of products may not be covered in full by the Company’s insurance program.

As previously disclosed, the Company and its subsidiary, Sigma Chemical Company, Inc., are two of numerous defendants named in a lawsuit filed by Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (“Enzo”) on October 23, 2002 in the United States District Court for the Southern District of New York. Subsequently, on or about January 15, 2003, Enzo filed its First Amended Complaint and, among other things, added Sigma-Aldrich Company and Sigma-Aldrich, Inc. as additional defendants to the lawsuit. On or about May 28, 2003, based upon an Order entered by the District Court, Enzo filed separate complaints against the various defendants, including a separate Complaint naming Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., Sigma-Aldrich Company, Sigma-Aldrich, Inc. and Yale University as defendants. In the lawsuit, Enzo alleges, among other things, that the various Sigma defendants breached two distributorship agreements, violated Section 43(a) of the Lanham Act, and are infringing upon various patents. Enzo alleges that the Sigma entities manufacture, use, offer for sale, sell, and market certain products that infringe upon the claims of nine U.S. Patents owned by and/or licensed to Enzo. The complaint seeks actual and enhanced damages but does not specify the amount sought. Limited discovery has occurred to date. A trial date has not been set. The Company believes there are substantial legal defenses to the allegations contained in the complaint, but cannot predict the likely outcome of the lawsuit. On or about July 16, 2003, Sigma filed a motion to dismiss the allegations of patent infringement pleaded in count 2 of the complaint in so far as they allege infringement of the four Ward Patents identified in the complaint on the grounds that the plaintiffs allegedly lack standing to prosecute such claims, and to dismiss all patent infringement claims that plaintiff Enzo Life Sciences, Inc. pleaded in count 2 of the complaint on the grounds that Enzo Life Sciences, Inc. lacks standing to prosecute such claims. The Court heard oral arguments on the motions on October 16, 2003, and took the motions under advisement. Although the Company intends to vigorously defend against the

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

ENVIRONMENTAL AND OTHER MATTERS (continued)

allegations asserted in the lawsuit, given the inherent uncertainty of litigation and the very early stage of the proceedings, it is unable to predict the ultimate resolution of this matter. Based on current information available, the Company believes that the ultimate resolution of this matter would not have a material adverse effect on its consolidated financial condition but could have a material adverse effect on the Company’s results of operations in any given quarter or year.

Property Acquisition by Legal Authority

In December 2002, the State of Wisconsin’s Department of Transportation (“WISDOT”) acquired the Company’s major production facility in Milwaukee as part of the State’s overall project to reconstruct the Marquette Interchange section of that city’s freeway system. In separate agreements, WISDOT has agreed to permit the Company to lease and continue to operate that existing production facility through September 30, 2005, during which time the Company intends to design, construct and occupy replacement facilities adjacent to other local sites it currently owns.

The Company received $32.5 in cash and recorded a one-time pretax gain of $29.3 in 2002. Construction of the replacement facilities began in August 2003, which is being funded with proceeds from the sale of the Milwaukee facility, enterprise tax credits from the Wisconsin Department of Commerce, other government-provided funds or tax credits received in connection with the replacement facility and amounts from the Company’s ongoing capital budgets. Completion of the facility is targeted for mid-2005. Management expects productivity from the more modern and cost-effective design of its new facilities to fully offset all incremental costs related to the new facilities. The Company believes that it will be able to avoid potential business interruptions by constructing and occupying fully functional replacement facilities by mid-2005 and has been successful in extending the date by which it must vacate its existing facility to September 30, 2005 in order to provide extra protections against unknown contingencies. However, any such interruptions could have a material adverse effect on the Company’s business and results of operations.

Export Matter Settlement

On November 4, 2002, the Company, its wholly-owned subsidiary Research Biochemicals, Inc. (“RBI”) and an intermediate subsidiary reached a formal agreement with the U.S. Department of Commerce (the “Department”) to settle allegations that they had exported certain scientific research toxins without first obtaining requisite licenses from the Department. This matter was inherited through the Company’s acquisition of the assets of Research Biochemicals Limited Partnership in April 1997 and was discovered and corrected in April 1998. RBI has since applied for and received licenses for all subsequent shipments of such toxins. RBI paid $1.8 to the Department in 2002 to dispose of this matter.

Except as noted above, at December 31, 2003, there were no other known contingent liabilities that management believes could have a material adverse effect on the Company’s results of operations or financial condition, nor were there any material commitments outside of the normal course of business. Material commitments in the normal course of business include notes payable, long-term debt, lease commitments and pension and other post-retirement benefit obligations which are disclosed in Note 6, Note 7, Note 9 and Note 14, respectively, to the consolidated financial statements for the year ended December 31, 2003.

INFLATION

Management recognizes that inflationary pressures may have an adverse effect on the Company through higher asset replacement costs and higher material and other operating costs. The Company tries to minimize these effects through cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. It is management’s view, however, that inflation has not had a significant impact on operations in the three years ended December 31, 2003.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

The market risk inherent in the Company’s financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

Interest Rates

At December 31, 2003, the Company’s outstanding debt represents 19.6% of total capitalization. Approximately 73% of the Company’s outstanding debt at December 31, 2003 is at a fixed rate. Cash flows from operations and available credit facilities are sufficient to meet the working capital requirements of the Company. It is management’s view that market risk or variable interest rate risk will not significantly impact the Company’s results of operations.

Foreign Currency Exchange Rates

The functional currency of the Company’s international subsidiaries is generally the dominant currency in the respective country of residence of the subsidiary. The translation from the functional currencies to the U.S. dollar for revenues and expenses is based on the average exchange rate during the period. Large increases or decreases in the spread between currencies have affected and may continue to affect the Company’s revenues, revenue growth rates, gross margins and net income.

The Company transacts business in many parts of the world and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to minimize the impact of foreign currency exchange rate changes during the period of time between the original transaction date and its cash settlement. Accordingly, the Company uses forward exchange contracts to stabilize the value of certain receivables and payables denominated in foreign currencies. Most of the contracts are single currency. Gains and losses on these contracts, based on the difference in the contract rate and the spot rate at the end of each month for all contracts still in force, are typically offset either partially or completely by transaction gains and losses, with any net gains and losses included in selling, general and administrative expenses. The market risk of foreign currency rate changes represents the potential loss in fair value of net currency positions at year-end due to an adverse change in foreign currency exchange rates. The Company does not enter into foreign currency contracts for speculative trading purposes. The Company’s policy is to manage the risks associated with existing receivables, payables and commitments.

The market risk of the Company’s foreign currency positions at December 31, 2003, assuming a hypothetical 10% change in foreign currency exchange rates, would be less than $2.0 million.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

See Notes 7 and 9 to the consolidated financial statements for additional disclosures related to long-term debt and lease commitments, respectively.

DISCONTINUED OPERATIONS

Results from discontinued operations represent the activities of the Diagnostics business.

On April 23, 2002, the Company announced its decision to sell substantially all the assets of its Diagnostics business and continue to supply customers under contract while seeking to transfer these commitments to other vendors as it sought to discontinue this business. Efforts to sell the assets of and discontinue the Diagnostics business resulted in the sale of the EIA product line to IVAX Diagnostics, Inc. in May 2002 and the sale of the coagulation product line to Trinity Biotech plc in August 2002. Efforts to sell other product lines and reduce inventories through sales to customers were concluded during the second quarter of 2003. Net income (loss) from discontinued operations of the Diagnostics business was $1.1, ($3.7) and ($12.1) for the years ended December 31, 2003, 2002 and 2001, respectively. The Company recorded an after-tax charge of $52.3 in 2002 as a result of discontinuing the Diagnostics business. Components of the Company’s charge for the year ended December 31, 2002 are as follows:

Operating results of the Diagnostics business through December 31, 2003 and the gain (loss) on the disposition of this business are included as discontinued operations in the Consolidated Statements of Income.

All activities related to discontinuing the Diagnostics business were completed in the second quarter of 2003. During 2003, the Company recorded an after-tax adjustment of $1.6 ($0.02 per share – diluted) reducing its original after-tax charge of $52.3 described above. This adjustment was due to reductions in inventory reserves and other costs to discontinue this business.

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Management’s Discussion and Analysis (CONTINUED)

($ In Millions, Except Per Share Data)

The following should be read in conjunction with the consolidated financial statements and related notes.

NON-GAAP FINANCIAL MEASURES

The Company uses certain non-GAAP financial measures to supplement its GAAP disclosures. The Company does not suggest investors should consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. These non-GAAP measures may not be consistent with the presentation by similar companies in the Company’s industry. Whenever the Company uses such non-GAAP measures, it provides a reconciliation of such measures to the most closely applicable GAAP measure.

With over 50% of sales denominated in currencies other than the U.S. dollar, the Company uses currency adjusted growth, and believes it is useful to investors, to judge the Company’s controllable local currency performance. While the Company is able to report currency impacts after the fact, it is unable to estimate the changes that may occur during 2004 to applicable rates of exchange. Any significant changes in currency exchange rates would likely have a significant impact on the Company’s reported growth rates due to the volume of the Company’s sales denominated in foreign currencies.

The Company also reports both GAAP and adjusted income amounts and comparisons to reflect what it believes are ongoing and/or comparable operating results excluding unusual and/or non-recurring items. The Company excludes these unusual and non-recurring items in judging its performance and believes this information is useful to investors as well.

FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis and other sections of this Annual Report to shareholders should be read in conjunction with the consolidated financial statements and notes thereto. Except for historical information, the statements in this discussion may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including financial, business environment and projections, as well as statements that are preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “should” or similar expressions, and other statements contained herein regarding matters that are not historical facts. Additionally, the Annual Report to shareholders contains forward-looking statements relating to future performance, goals, strategic actions and initiatives and similar intentions and beliefs, including without limitation, statements regarding the Company’s expectations, goals, beliefs, intentions and the like regarding future sales, earnings, return on equity, share repurchases, capital expenditures and other matters. These statements involve assumptions regarding Company operations, investments, acquisitions and conditions in the markets the Company serves. Although the Company believes its expectations are based on reasonable assumptions, such statements are subject to risks and uncertainties, including, among others, certain economic, political and technological factors. Actual results could differ materially from those stated or implied in this Annual Report to shareholders, due to, but not limited to, such factors as (1) changes in pricing and the competitive environment, (2) other changes in the business environment in which the Company operates, (3) changes in research funding, (4) uncertainties surrounding government health care reform, (5) government regulations applicable to the business, (6) the impact of fluctuations in interest rates and foreign currency exchange rates, (7) the effectiveness of the Company’s further implementation of its global software systems, (8) the ability to retain customers, suppliers, and employees, (9) changes in worldwide tax rates or tax benefits from international operations and (10) the outcome of the matters described in Note 11 — Contingent Liabilities and Commitments to the consolidated financial statements. The Company does not undertake any obligation to update these forward-looking statements.

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The accompanying notes are an integral part of these statements.

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