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letter to shareholders

  1. This is an excellent company that was clearly overvalued during all the hype of the biotech boom. In my view, the company is now undervalued. Potential investors should keep an eye on this one. Clearly, there are risks as the companies health, in general, will be a function of the health of the US economy. I don't see US recovery on the horizon any time soon however, bottom pickers and others would do well to watch this company for a suitable entry point.

    I have used this companies products for many years when I was a research scientist. Their quality and product support was better than any.

    AnnaP

    AXN : Letter to Shareholders re Update
    ASX Report
    10:20:026 16/12/2002 Issuer: AXN
    AXON INSTRUMENTS INC 2002-12-13 ASX-SIGNAL-G

    HOMEX - Melbourne

    +++++++++++++++++++++++++
    This update expands on the announcement detailing the restructuring
    and expense reduction plan made to the Australian Stock Exchange on
    November 12, 2002.

    BACKDROP

    In May 2002, we advised of a decline in the genomics market and the
    resultant impact on the company's business. We also advised of the
    high level of research and development expenditure associated with
    several important new products that either have been released or will
    be released early in 2003. In response to these factors we advised
    of a number of initiatives undertaken to reduce costs, together with
    our continued commitment to build the company's revenues through the
    release of new products.

    In an additional response to these challenges, and to our financial
    performance in the first half of the year, Axon's management and
    board undertook a complete strategic review of the company's research
    and development activities, with the goal of achieving an enhanced
    focus on projects with the greatest near-term market potential. As a
    result of this review, in November 2002 we:

    1. took action to further decrease expenses, most notably in research
    and development, and

    2. adopted a strategy to substantially reduce the time to market for
    our products.

    2002 FINANCIAL PERFORMANCE

    We expect a loss for the year ended December 31, 2002, of up to US$10
    million, compared to a profit of US$750,000 for the previous year.
    The expected loss in 2002 includes anticipated R&D expenditure of
    approximately US$13.5 million, versus US$12.3 million for 2001, and
    one-off expenses totaling US$1.8 million. These are: acquisition of a
    technology license, the November restructuring (see below), the
    estimated loss over the lifetime of a sublease resulting from our
    relocation to new premises, realised stock readjustments on the sale
    of a product line, and inventory to cost of goods sold adjustments.

    We believe that the combination of increased revenues from new
    products and expense reductions will return Axon to profitability in
    2003, consistent with its eighteen years of profitable operations up
    to 2002. In addition, we are in a strong cash position, holding US$27
    million in cash and marketable securities as of November 30, 2002.

    RESTRUCTURING & EXPENSE REDUCTION PLAN

    On November 12 we implemented the first of the action items arising
    from the strategic review and reduced our workforce by approximately
    15%. Combined with attrition, this brings the total workforce
    reduction this year to approximately 20%. We are confident that by
    concentrating our efforts on key near-term product opportunities we
    will be able to launch new products at a faster rate.

    In total, the current reorganisation is estimated to deliver savings
    of more than US$4 million in 2003, and the initiatives will
    positively impact profitability on an ongoing basis in future years.

    RATIONALE FOR THE PLAN

    The restructuring and expense reduction plan, together with the new
    strategic direction, were prompted by a combination of
    less-than-anticipated revenue from a depressed world genomics
    market, and significant increases to research and development
    expenses as we undertook to develop a larger than usual number of new
    products at one time. In addition to significantly increasing
    expenses, the increase in the number of R&D projects contributed to a
    slowing of the rate of new product releases. The key change to our
    strategy is to now conduct research and development on a smaller
    number of projects, with the aim of bringing products to market at a
    faster pace. This will result in our being in a stronger competitive
    position in rapidly changing technology markets, positioning us to
    begin to achieve more profitable performance as in the previous
    eighteen years of operations.

    The basis from which we will implement our new strategies remains
    strong. There are two major reasons for this:

    * in spite of the genomics market downturn, microarray scanning and
    analysis is a powerful technology with a long term future. Our range
    of new scanners and software (recently released, or to be released in
    the next few months) places Axon in a strong position to compete
    effectively, to take advantage of upturns in the market, and to
    increase our share of the market;

    * other new products we have developed, especially our integrated
    high-throughput drug discovery systems, have launched the company
    into new, growing markets with strong demand for high quality
    instrumentation of the type Axon is widely recognised for developing.
    With certain of the first-generation systems now released, and others
    due to be released in early 2003, we are in a strong position to take
    advantage of new opportunities and bring products to market at a
    faster pace.

    The new strategic approach will allow us to respond to market
    opportunities faster, demand less outlay, and build on the
    investments made over the past few years.

    NEW PRODUCTS

    Under our new operating plan we have prioritised our development
    projects and will concentrate on developing the key products that
    have maximum potential to build near-term and medium-term
    profitability. Top priority will go to the ion-channel recording and
    fluorescence imaging screening products.

    ION-CHANNEL SCREENING: PATCHXPRESS & OPUSXPRESS

    We will devote the largest portion of our immediate research and
    development effort to the PatchXpress(TM) pharmaceutical screening
    system. The PatchXpress is intended to satisfy the widely recognised
    pent-up demand for the screening of compounds for ion-channel
    therapeutic targets.

    We believe this product represents a major market opportunity for
    Axon. It builds on our long history as the world's leading
    manufacturer of instrumentation for studying ion-channel mechanisms.
    The PatchXpress product development is well advanced, with final
    testing underway and first commercial shipments expected early in
    2003. Through collaborations and early marketing efforts we have
    secured advance orders for the initial shipments.

    The PatchXpress will be the first Axon product requiring high-value
    consumables, thus adding a new and profitable dimension to our
    business. The monthly revenue from these will build with time, as the
    number of installed PatchXpress systems increases.

    The OpusXpress(TM) 6000A parallel oocyte voltage clamp workstation
    was released to market in February 2002 and has begun selling. Focus
    for this product has now shifted to marketing.

    FLUORESCENCE IMAGING SCREENING: IMAGEXPRESS

    A second major market opportunity in pharmaceutical screening will be
    met with the ImageXpress(TM) fluorescence screening system. Like the
    PatchXpress and OpusXpress, the ImageXpress enables large numbers of
    compounds to be tested for their mode of action against the proteins
    implicated in disease. However, in ImageXpress this is achieved by
    imaging cells that have been labeled with molecular fluorescent
    markers, rather than by tracking the activity of ion channels. The
    use of fluorescent labeling is an established drug screening
    technique, and we have built on our expertise in imaging software and
    hardware to create a high quality, affordable system to enter this
    market. We expect to begin shipments in the next two months, as we
    already have a number of advance orders for ImageXpress systems.

    FIELD SERVICE

    Our new screening products are large, complex, integrated units that
    will experience heavy use. They will require regular maintenance in
    order to consistently generate the high quality data that Axon
    actively promotes as one of the major selling points for the systems.
    All the products will be offered with field-service maintenance
    contracts. As the number of units in the field grows it is
    anticipated that the provision of this service will become a
    significant new revenue source for the company.

    GENOMICS

    The GenePix(R) Personal 4100A microarray scanner was released to
    market in August 2002. Revenues for the new scanner (which won an
    instrument design award - see our web site for details) have been
    lower than anticipated due to the general downturn in genomics
    markets already noted, but are steadily increasing as the scanner
    gains market exposure. The four-colour high-end microarray scanner,
    GenePix Professional 4200A, continues in development and is expected
    to be released in early 2003.

    A new version of GenePix Pro software (4.1) was released concurrently
    with the GenePix Personal scanner. This microarray acquisition and
    analysis application continues to mature, with the addition of new
    features and streamlined usability, to the point that its file format
    is becoming a de facto standard amongst genomics researchers.

    Following its introduction to the market in February 2002, the gene
    expression informatics software, Acuity(R), has undergone rapid
    development, leading to a midyear version 2.0 release with
    significantly improved functionality. Work proceeds on Acuity 3.0,
    which is due for release in the first quarter of 2003. In addition,
    we are continuing our productive collaboration on Acuity with CSIRO
    for advanced microarray analysis methods.

    NEUROSCIENCES

    In general, our sales of neuroscience products continue to be strong.
    Axon dominates this market sector world-wide and will continue to
    support it, developing new and upgraded products to further increase
    market share and exploit new market opportunities.

    The latest version of Axon's market-standard electrophysiology
    acquisition and analysis software, pCLAMP 9, was released in
    September and is selling steadily.

    INCREASED MARKETING EFFORT

    An important aspect of the strategic review is the increased emphasis
    on effective, comprehensive marketing, with an accent on promoting
    total company image as well as individual products. In the coming
    year, we will complement the release of new and upgraded products
    with expanded marketing exposure directed at increasing market share.
    Our marketing campaigns will centre attention on Axon's excellent
    corporate image and reputation for reliable, high quality
    instrumentation and software in a range of fields, providing the
    capacity to supply complete solutions for customers.

    COLLABORATIONS

    We entered into an important and fruitful collaboration with Aviva
    Biosciences Corporation in June. Aviva has developed the disposable
    Patch-on-a-Chip(TM) planar electrodes exclusively licensed for use in
    the PatchXpress. In September, Axon signed agreements with Johnson &
    Johnson Pharmaceutical Research & Development, LLC and NeuroMed
    Technologies Inc for final stage in-the-field testing and development
    of the PatchXpress. These companies join a third, large
    pharmaceutical company (who, in cognizance of that company's policy,
    cannot be named) as collaborators on this project. These
    collaborations have helped keep the PatchXpress well on target for
    its projected release early next year.

    The collaboration with Zyomyx Inc to jointly develop laser scanners
    for protein biochips is complete, with scanners now in production at
    Axon, and Zyomyx in the final stages of beta-testing the integrated
    platform. Zyomyx's product launch is anticipated for the first
    quarter of 2003. The engineering collaboration will continue in 2003
    as we apply the GenePix 4200 design to the Zyomyx scanner, and
    customise GenePix Pro software for the instrument.

    FUTURE FOCUS

    The key goal of the strategic review and reorganisation mentioned
    above is to return Axon to profitability in 2003. To achieve this
    goal we will:

    1. focus on a smaller number of high-potential near-term product
    developments,

    2. reduce the time taken to bring products to market,

    3. implement new research and development procedures that will enable
    us to do more with less,

    4. significantly reduce operating expenses, primarily in research and
    development, and

    5. increase our marketing efforts across all product lines.

    In summary, we are confident that increased sales resulting from the
    introduction of innovative new products and an expanded marketing
    effort, combined with decreased expenses resulting from our
    reorganisation, will lead to a profitable and exciting future for the
    company.


    A Finkel G Powell
    CHIEF EXECUTIVE OFFICER PRESIDENT



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