10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

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

Commission File Number 000-21873

BIOSITE INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	33-0288606 (I.R.S. Employer Identification No.)
11030 Roselle Street San Diego, California (Address of principal executive offices)	92121 (Zip Code)

Registrant's telephone number, including area code: (858) 455-4808

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Stock Purchase Rights
(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 ý    No o

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

        The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 15, 2002 as reported on the Nasdaq National Market, was approximately $258,000,000. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of March 15, 2002, there were 14,688,588 shares of the Registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Registrant's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant's 2002 Annual Meeting of Stockholders to be held on June 14, 2002 is incorporated by reference in Part III, Item 10 (as to directors), 11, 12 and 13 of this Form 10-K.

BIOSITE INCORPORATED

FORM 10-K

INDEX

			Page
PART I			1
	ITEM 1.	BUSINESS	1
	ITEM 2.	PROPERTIES	35
	ITEM 3.	LEGAL PROCEEDINGS	35
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	36
PART II			36
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	36
	ITEM 6.	SELECTED FINANCIAL DATA	37
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	47
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	47
PART III			48
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	48
	ITEM 11.	EXECUTIVE COMPENSATION	50
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	50
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	53
PART IV			54
	ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	54
SIGNATURES			57

        Biosite®, Triage®, Omniclonal® and Immediate Response Diagnostics® are registered trademarks of the Company and the Company's logo is a trademark or service mark of the Company. Trans-Phage Technology^SM and HuMAb-Mouse® are service marks and registered trademarks of Medarex Inc.

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PART I

Item 1. Business

Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, manufacturing efficiency issues, dependence on others, the impact of competitive products, third-party reimbursement issues, changing market conditions and the other risks detailed throughout this Form 10-K. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Form 10-K. We disclaim, however, any intent or obligation to update these forward-looking statements.

Background

        Biosite® Incorporated was established in 1988. We are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician's ability to diagnose disease. We combine separate, yet integrated, discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis. We believe our products, which are aimed primarily at the diagnosis of catastrophic diseases, positively impact medical decisions, improve the quality of patient care and contribute to cost-effective medical treatment.

        Our diagnostics business is a leading provider of rapid immunoassays, or antibody-based diagnostic tests, that aid in the diagnosis of a variety of critical diseases. These tests are sold worldwide primarily for use in hospitals, although we believe that in the future certain tests may have applications in other clinical sites. Our two product platforms are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously. They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool. Among the products expected to contribute most significantly to product revenue in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac Panel and the Triage BNP Test.

        In 1992, we launched our first product, the Triage Drugs of Abuse Panel, a small, self-contained, qualitative test capable of detecting within urine a broad spectrum of commonly overdosed prescription and illicit drugs within approximately 10 minutes. Results from the Triage Drugs of Abuse Panel enable physicians to differentiate drug overdose from other conditions with similar symptoms. Currently, the Triage Drugs of Abuse Panel is used in approximately 50% of U.S. acute care hospitals. Net sales of the Triage Drugs of Abuse Panel were approximately $36.6 million in 2001. In January 2002 the U.S. Food and Drug Administration, FDA, cleared the Triage TOX Drug Screen, a second-generation drug test capable of simultaneously screening up to eight classes of commonly abused drugs. The Triage TOX Drug Screen is based on our meter platform and is intended to provide a one-step testing process and a definitive yes/no response. The Triage TOX Drug Screen is positioned as an alternative to the Triage Drugs of Abuse Panel and is currently aimed primarily at new customers that are interested in performing this testing at the point-of-care.

        In 1999, we completed the U.S. launch of the Triage Cardiac System, which aids in the detection of acute myocardial infarction, otherwise known as heart attack. The Triage Cardiac System, comprised of the Triage Cardiac Panel and the Triage Meter, is designed to measure three cardiac proteins, CK-MB, myoglobin and troponin I, within 20 minutes using a whole-blood sample. The Triage Cardiac System aids in the diagnosis of heart attack, by enabling physicians to easily and frequently monitor changes in the levels of the three cardiac proteins, which rise as heart damage occurs. Early access to this information enables physicians to use accelerated care protocols, which are intended to drive earlier and better treatment decisions. The Triage Cardiac System is in the early stages of market

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penetration, with approximately 510 customers using the system at year-end 2001. Worldwide net sales of the Triage Cardiac System were $17.8 million in 2001.

        In November 2000, we received FDA approval to market the Triage BNP Test, the first and only blood test currently approved in the United States as an aid in the diagnosis of congestive heart failure, CHF. The Triage BNP Test measures levels of B-type natriuretic peptide, or BNP, a hormone that is elevated in patients suffering from heart failure. Physicians can use measurements of BNP to distinguish heart failure from other diseases with similar symptoms. We believe that BNP may also be useful in evaluating treatment of patients undergoing therapy and we intend to conduct clinical studies to further explore this application. We commenced marketing of the Triage BNP Test in December 2000. Sales in 2001 totaled approximately $3.4 million. While we believe that the long-term growth prospects for this product are significant, we do expect competitors to enter the market in the near future.

        The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We focus our direct efforts on larger centers with more than 200 beds. In selling our products, we work with employees from a variety of areas within the hospital. These include laboratory administrators, who are generally the primary purchasers, emergency room physicians, specialists and administrative personnel. In marketing our products we utilize a direct sales team that includes account executives, who have extensive experience selling cardiovascular devices or drugs. The Fisher HealthCare division, Fisher, of the Fisher Scientific Company distributes our products in U.S. hospitals and supports our direct sales force, particularly in smaller hospitals. In international markets we utilize a network of country-specific and regional distributors. In 2001 we invested in the expansion of a clinical support network to complement our sales force. This network includes clinical nurse consultants, clinically experienced individuals who provide pre- and post- sale education, and implementation specialists, who work with customers to ensure a successful product implementation within the hospitals. We also offer certain customers premium consulting services, such as outcomes tracking, economic analysis and regulatory compliance consultation. We believe that a robust customer support infrastructure can build customer satisfaction and mitigate the risk of an unsuccessful installation.

        In addition to focusing our attention on commercial activities associated with our existing products, we are investing in discovery efforts aimed at identifying proteins with high diagnostic utility. We believe such proteins can be patented or licensed with some level of exclusivity and commercialized using our testing platforms. We are targeting our efforts toward acute conditions that currently lack good diagnostic methods. We believe there is a lack of good diagnostic tests for several critical diseases, including stroke and acute coronary syndromes. We believe that the discovery of new protein markers could lead to the development of novel tests that would play an important role in improving patient care by aiding in the rapid diagnosis of acute diseases or conditions where initiation of the most effective treatment is time-sensitive.

        In March 1999, we launched Biosite Discovery, which is dedicated to the identification of new protein markers of acute diseases that lack good diagnostic tests. Through Biosite Discovery we access potential diagnostic targets via internal research or collaborations with partners. We access protein targets, select promising candidates, develop immunoassays for these targets and run the assays against patient samples provided by clinical collaborators in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers added to our product development pipeline. We conduct marker mining on known proteins identified through our internal research and on protein targets accessed from biotechnology and pharmaceutical partners. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use. In return, we seek licenses to their protein targets for the diagnostic rights in addition to fees. We

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believe this collaborative model is attractive to potential partners, that might otherwise have forego antibody development for certain targets or incur significant cost to access antibodies for their targets. Under Biosite Discovery, we have executed collaborative agreements with different partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. In 2001, our collaborations with pharmaceutical and biotechnology partners generated revenues of $3.5 million.

        In 2000, we entered into an agreement with Medarex, Inc., or Medarex, pursuant to which we are combining our proprietary phage display technology with Medarex's proprietary transgenic mouse technology to offer a process for high throughput development of high affinity, fully human antibodies. This process is being provided as a service to biotechnology and pharmaceutical companies, which require high affinity, fully human antibodies for use in conducting target validation and, or, characterization experiments. Under the terms of the eight-year agreement, Medarex provides us with research funding of $3 million per year.

        When Biosite and Medarex enter into agreements to provide high affinity, fully human antibodies to third-party biotechnology and pharmaceutical customers, we will generally receive a variety of payments and we will also seek exclusive or semi-exclusive diagnostic rights to the protein targets provided to us by biotechnology and pharmaceutical customers. Medarex receives a portion of certain of the payments we receive. Among the payments we might receive are: up-front technology access fees, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development, milestone fees on targets that reach clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

        In January 2001, we initiated a technology alliance with Large Scale Biology Corporation through its wholly-owned proteomics subsidiary. Through this alliance we planned to generate the antibody and protein target components required to produce the first generation of commercial protein chips. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considers itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution.

        In March 2002, we entered into a multi-year collaborative agreement under which we will utilize Omniclonal®phage display technology, and potentially Trans-Phage Technology^SM to generate high-affinity antibodies to targets provided by Amgen Inc. Trans-Phage Technology combines Biosite's Omniclonal® phage display technology with Medarex's HuMAb-Mouse®. Amgen Inc. will use the antibodies in its discovery research. Under the terms of the agreement, Amgen Inc. will provide us with targets for a period of up to three years. We will receive development fees and may receive annual maintenance fees. If products are successfully developed and commercialized by Amgen Inc., we will also receive milestone fees and royalties from products resulting from the joint research efforts. We will also retain certain diagnostic rights to targets in the collaboration.

Industry Overview

Diagnostics

        We believe that diagnosis is a crucial, but often overlooked, element of the patient care process. We believe that improved diagnosis could contribute to positive clinical and economic outcomes by providing earlier treatment decisions, more accurate diagnosis, higher emergency room efficiencies and

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by reducing costs associated with misdiagnosis or delayed treatment. We contribute to improved diagnosis by providing novel tests for diseases that lack good diagnostic methods, rapid testing technologies to speed the delivery of diagnostic information to physicians and education to keep laboratory and medical clinicians abreast of guidelines and protocols aimed at improving diagnosis.

        According to industry reports, the 1998 worldwide market for immunoassays was approximately $3.8 billion, consisting primarily of testing related to infectious disease, endocrinology, therapeutic drug monitoring, drugs of abuse testing, and cancer markers. Currently, our business is primarily focused on the hospital market, which accounts for approximately 58% of all in vitro diagnostic tests. However, the discovery of new disease markers and the extension of applications for existing products could lead us to expand into other market segments in the future.

        Within hospitals, diagnosis is typically accomplished through a battery of testing methods including immunoassays. Historically, the majority of immunoassay testing has been accomplished through a centralized process using large automated analyzers housed in the central lab. These immunoassay analyzers utilize automated liquid handling mechanisms and pipetting systems for reagent addition. Modern immunoassay analyzers are capable of storing and selecting multiple reagents for a variety of analytes, including drugs, hormones and cancer antigens. They also provide accurate and highly sensitive test results and help to simplify the performance of immunoassays. However, centralized testing using immunoassay analyzers may lead to lengthy turnaround times to accommodate transport of the sample to the testing lab, time consuming sample preparation to obtain serum or plasma and delivery of results to the physician. Additionally, immunoassay analyzers require high volumes of sample throughput to justify the investment in equipment, training, staffing and other costs required to operate and support the systems.

        In recent years, there has been a movement from the use of such conventional analyzer systems to more technologically advanced rapid testing methods that can be performed in minutes by less skilled personnel. Simple, rapid immunoassays are capable of detecting a single analyte target with a color change that can be visually interpreted. Formats such as dipsticks, test tubes and membrane test cartridges have been used to provide fast, non-instrument read results for conditions where a single analyte target is present in high concentrations and where a simple yes/no non-numeric answer is clinically relevant. Rapid color change test formats are widely available for drugs of abuse, pregnancy, strep throat and ovulation prediction. Until recently, simple test formats have remained incapable of precise, multi-analyte detection or highly sensitive, quantitative measurements. As a result, medical conditions where the detection of one or more analytes is required or where the precise measurement of the target analyte is required have remained the domain of immunoassay analyzers.

        We believe that significant market potential exists for novel rapid diagnostic products that are capable of precise quantitative measurement of single or multiple analytes. Rapid testing, including point-of-care testing, may help to reduce overall health care delivery costs and can improve patient outcomes by providing diagnosis in a reduced period of time, thereby minimizing the time to medical intervention. Patients undergoing emergency procedures can benefit from more timely and accurate testing results, both of which ensure correct decision-making, which could limit unnecessary use of costly inpatient care. Quicker diagnosis of infectious agents can also permit earlier prescription of appropriate medications, potentially shortening the duration of illness. Furthermore, the development of new tests for diseases that lack accurate diagnostics could improve treatment and provide better outcomes.

Discovery

        Biosite Discovery is a program intended to enhance our product pipeline. Through Biosite Discovery we access potential diagnostic targets via internal research or collaborations with partners. Under our collaborative model we leverage our antibody development capabilities, providing antibodies

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to pharmaceutical and biotechnology companies for research on potential targets in return for the diagnostic rights to targets and fees.

        Traditionally, antibodies have been a valuable tool in the characterization of protein targets because the antibodies may be used to localize the protein in tissues, to quantify the protein in body fluids, and to modulate the biological activity of the protein by, for example, binding to the protein and blocking its natural function. Antibodies have been traditionally derived from immunization of animals and either the harvest of antiserum containing antibodies or the development of monoclonal antibodies using hybridoma technology. Antisera were generally of limited utility and monoclonal antibody technology is labor intensive and not cost-effective for the validation of large numbers of protein targets. In 1990, the phage display of antibodies was invented and over the past decade it has enabled the development of antibodies with much greater efficiency than the previous methods.

        Several companies, including Cambridge Antibody Technology, Morphosys, and Dyax, have invested significantly in the technology and each employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Biosite Discovery differs in its application of phage display technology by using either immunized mice to produce murine antibodies or immunized transgenic mice to produce fully human antibodies. The immunized mice produce high affinity antibodies that can be selected using phage display. Many of our competitors do not use immunized mice, and antibodies that are initially selected from their naïve human antibody libraries are generally of lower affinity.

        We believe that our model is significantly different from that of our competitors, and we believe that our technology and collaborative model is attractive to biotechnology and therapeutic companies.

Technology

        Historically, we have made significant investments in research and development, exceeding traditional industry standards. This investment has yielded several proprietary advances in the biological and physical sciences that make practical the development and manufacture of rapid, accurate and cost-effective diagnostics that form the basis of our Immediate Response Diagnostics® technology. Our products integrate our expertise in several core scientific and engineering disciplines, including antibody development and engineering, analyte cloning and synthesis, signaling chemistry and micro-capillary fluidics, each of which is described below. Our research and development program is supported by 89 employees, including 19 Ph.D.s with expertise in our core technologies. By combining research capabilities in each of these areas, we create novel single and multi-analyte diagnostics that overcome the limitations of traditional rapid diagnostic technologies and seek to address the significant unmet need for effective, real-time diagnostic information.

Antibody Development

        We believe that our internal antibody development capabilities allow rapid identification and development of antibodies with optimal specificity, affinity and stability characteristics. We initially utilized hybridoma technology for the selection and production of our novel antibodies. However, hybridoma technology has distinct disadvantages that include the length of time required to develop antibody candidates, the higher costs associated with the use of this technology and the need to restart the antibody development process when unwanted characteristics such as cross reactivities are discovered.

        We developed a proprietary process utilizing phage display of antibodies that enables the selection and production of antibodies more rapidly and efficiently than is possible using hybridoma technology. The technology enables the high throughput generation of custom Omniclonal® antibody libraries containing genes encoding antibodies specific to the target analyte. Omniclonal antibodies produced from such libraries can contain thousands of different antibodies that bind to a target analyte with high

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affinity. High affinity refers to an antibody's ability to bind tightly to targets, and is a highly desired attribute. Monoclonal antibody candidates can be rapidly selected from an Omniclonal antibody library and produced in quantities sufficient for product development. During the course of product development, unexpected antibody cross reactivities often require additional selection of antibodies to improve the assay specificity. Unlike hybridoma technology, Omniclonal antibody libraries can rapidly provide additional antibody candidates in these circumstances.

Analyte Cloning and Synthesis

        Our molecular biology capabilities include the cloning and identification of specific proteins useful in the development of immunoassays. We developed proprietary expression vectors that enable the production and purification of these proteins for the development of antibodies and for use as calibrators and controls in our immunoassay products. In addition, our considerable expertise in synthetic organic chemistry allows the synthesis of targets and useful derivatives. We develop products where the targeted analyte is small (i.e., haptens, such as drugs) or large (i.e., proteins, such as cardiac enzymes). We believe that the ability to develop, stabilize and manufacture the target analyte or its analogues is key to the development of highly accurate immunoassays.

Highly Sensitive Fluorescence Energy Transfer Dyes

        Immunoassays require the attachment of a detectable label to an antibody or target analyte. We developed a variety of labels for use in our products. For our qualitative tests, a visual label that produces color is attached to antibodies or analytes through either non-covalent or covalent chemical methods to provide yes/no results. For our quantitative products, we developed novel fluorescent dyes that are attached to antibodies or analytes using both noncovalent and covalent chemical means. Although fluorescence is a potentially powerful label for use in immunoassays, its potential has been limited by the lack of available dyes that are stable and have no sample interference, and by the requirement of a complex instrument for detection. We have invented our own proprietary dyes which satisfy three criteria: (1) they are usable with complex biological samples such as serum, plasma, and whole blood; (2) they are stable for the dating period of the product; (3) they utilize fluorescence energy transfer, which results in a substantial phase shift away from background fluorescence in samples; and (4) they are excited at near infra red wavelengths chosen to be compatible with inexpensive solid state components.

Micro-capillary/Protein Array Technology

        We developed proprietary technology to design, develop and manufacture protein arrays containing micro capillaries to control the flow of fluids in immunoassay processes. The qualitative device format uses micro capillaries to draw fluids through a membrane that contains immobilized antibody zones for the detection of specific substances. The quantitative protein array format uses several different micro-capillary designs to control the contact of sample with reagents and to control the flow of fluid throughout the protein array. When a sample is added to the quantitative protein array, a filter contained within the array separates blood cells from plasma, which capillary forces then direct into a chamber that contains dried immunoassay reagents. After an incubation time that is determined by another micro-capillary element of the array, the volume of sample that contacted the reagents flows down a capillary path that brings it into contact with an antibody array. The binding of fluorescent reagents at the protein array is detected by an instrument and is related to the concentration of the substance being tested for in the sample. We also developed the engineering capability to design unique micro-capillary structures in plastic parts and to fabricate them in commercial scale quantities using injection molding processes.

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Sample Handling

        We developed proprietary technology relating to sample handling and preparation, including technology that allows whole-blood to be passively separated into its plasma component or to be passively lysed to release the target analyte. We developed technologies for the handling of stool samples that concentrate and purify the target analytes or organisms from solid stool materials. In addition, we developed technologies that can be used to assay urine samples.

Product Platforms

        We have used our core technologies to develop two product platforms: the Triage Panel and the Triage Meter System. Both of our product platforms utilize our expertise in antibody development, analyte cloning, signaling chemistry, micro-capillary fluidics and sample handling technologies.

Triage Qualitative Platform

        We designed the Triage qualitative platform for rapid, qualitative screening of multiple analytes in a small, hand-held single-use device. The Triage Panel has a visual yes/no display containing simultaneous tests for any combination of analytes and control standards. It can be performed in a simple multi-step process and is capable of performing tests on both urine and stool. The Triage Drugs of Abuse Panel, the first product developed on this platform, tests for analytes of up to eight abused drugs in approximately 10 minutes. The Triage C. difficile Panel and the Triage Parasite Panel, the other products developed on this platform, test for microorganisms that cause severe gastrointestinal disease.

Triage Meter System Platform

        Our Triage Meter System platform, which includes the second-generation Triage MeterPlus, is designed to provide rapid quantitative or qualitative results for immunoassays using urine, whole-blood, serum or plasma. The Triage Meter System consists of two parts: a small, single-use disposable test panel and a proprietary, compact, fluorescent meter that can be used in laboratories or at the point-of-care. After a sample is applied to the panel, the panel is inserted into the meter, which is designed to automatically and simultaneously detect multiple analytes and display the numerical results on an electronic read-out. The meter incorporates proprietary software in erasable, programmable, read-only memory (EPROM) chips, which are plugged into the meter. This software allows a single meter to be used for performing different tests. The software may also provide important information about the analyte being measured, such as normal or abnormal levels of a marker, which could then be used to diagnose disease or manage patient therapy. Studies have validated that the analyte sensitivity of the Triage Meter System products is clinically comparable to the clinical sensitivity levels of the conventional immunoassay analyzers. The Triage Cardiac System, the Triage BNP System and the Triage TOX Drug Screen are commercialized products developed under this platform. We are developing other applications for this platform.

Product Attributes

        Our commercial products and products under development share common attributes which we believe make them superior diagnostic tools:

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Rapid Results:  We design our products to offer complete results in a rapid timeframe providing physicians with real-time access to important diagnostic information.



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Ease of Use:  We design our products to be simple to use. A high level of training is not needed to perform the tests and achieve accurate results.



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High Analytical Accuracy:  We utilize our omniclonal antibody technology to develop reagents which yield highly specific, accurate and reproducible analytical results.

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Capability of Performing Multiple Analyses:  We design our products to simultaneously measure one or more target analytes, including reagent controls, without sacrificing the quality of the individual analysis. This simultaneous detection capability can provide significant time and cost savings compared to current technologies.



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Reliability:  We use internal thresholds, built-in controls, software lockouts and other control mechanisms that are intended to make our current and future products reliable in any hospital or clinical laboratory setting.



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Cost-Effectiveness:  We design our products to simplify the performance of highly complex testing procedures and potentially reduce the cost of patient care and equipment acquisition and maintenance, making our products cost-effective alternatives to conventional immunoassay analyzers.



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Proprietary Technology:  We focus on developing products for which we can obtain patent coverage of the reagent/instrument systems and/or of the diagnostic markers being measured.

Commercialized Products

        We introduced the Triage Drugs of Abuse Panel in 1992. Hospital laboratories and emergency departments use it to screen for up to eight commonly abused prescription and illicit drugs or drug classes. During 1998, we began selling three new products, the Triage C. difficile Panel, the Triage Parasite Panel and the Triage Cardiac System. The Triage BNP System was launched on a limited basis in Europe in December 1999 and on a full-scale basis in the United States in December 2000. In January 2002 we launched the Triage TOX Drug Screen, a second-generation drug test. We distribute our products in the U.S. hospital market segment through Fisher and internationally through country-specific and regional distributors.

        We rely upon a key distributor alliance with Fisher to distribute our products in the United States and may rely upon distributors to distribute products under development. All of our products are currently marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 85% of product sales in the 2001 and 84% in 2000) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors could have a material adverse effect on our sales.

        We have additional products under development that apply our core technologies to a variety of other medical testing needs and we continue to pursue research of new proteins that can be directed toward the expansion of menu options, and additional uses of our current products. We continue to evaluate other rapid diagnostic product opportunities that can utilize our technologies.

        We intend, where appropriate, to enter into licensing and/or collaborative arrangements to develop and commercialize additional future products. We may not be able to negotiate license or collaborative arrangements on favorable terms, if at all, in the future. Our current or future licensing or collaborative arrangements may not be successful.

The Triage Drug Screening Product Line

        According to a survey conducted by the Substance Abuse and Mental Health Services Administration, SAMHSA, in 2000, the number of drug-related emergency department, ED, visits in the U.S. exceeded 600,000, the highest level since the mid-1980s. Our Triage drug screen product line, which includes the Triage Drugs of Abuse Panel and Triage TOX Drug Screen, is marketed primarily in the hospital segment. Within hospitals, medical testing typically occurs in laboratories, although testing may also occur at the point-of-care. Test results are generally reported to emergency physicians and psychiatrists.

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        Drug abuse plays a significant role in emergency medicine cases occurring annually in the United States, either as a primary cause such as an overdose, or as a contributing factor such as in the case of an accident. A diagnostic dilemma confronts physicians when patients present with symptoms that could be either drug related or non-drug related. A patient brought to a hospital emergency department in a coma may be under the influence of narcotics or sedatives, which may require one type of treatment or intervention. Conversely, the same patient may have had a stroke or suffered some form of trauma requiring a completely different type of care. The ability to obtain a differential diagnosis in a timely manner greatly aids the course of treatment.

        Prior to the introduction of the Triage Drugs of Abuse Panel, drug or toxicology screening was primarily accomplished using automated immunoassays and Gas Chromatography/Mass Spectroscopy or GC/MS. Although GC/MS is the most specific identification method commercially available, it is time consuming, requiring an average of approximately three hours per test, complex and expensive, and is generally reserved for final confirmation of specimens that have been screened positive by an immunoassay. Automated immunoassays, although less expensive than those performed by GC/MS, also require significant amounts of time, approximately one to two hours, to route and prepare samples, perform the tests and deliver results. Turnaround time may be longer if the equipment required to perform an immunoassay is not accessible on an immediate or rapid basis.

        The Triage Drugs of Abuse Panel and Triage TOX Drug Screen are rapid, qualitative urine screens that analyze a single test sample for up to eight different illicit and prescription drugs or drug classes, and provide results in approximately 10 to 15 minutes. The Triage Drugs of Abuse Panel and Triage TOX Drug Screen contain built-in controls for accuracy and are capable of a high degree of specificity.

        Illicit drugs detected by the Triage Drugs of Abuse Panel and Triage TOX Drug Screen include:

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Amphetamines/Methamphetamines (ecstasy, speed, crystal)



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Cocaine (crack)



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Opiates (heroin)



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Phencyclidine (angel dust)



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Tetrahydrocannabinol (pot, marijuana)

        Prescription drugs tested by the Triage Drugs of Abuse Panel include:

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Barbiturates (Phenobarbital)



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Benzodiazepines (Valium, Librium, Halcion)



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Tricyclic Antidepressants (Elavil, Tofranil)



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Methadone.

        The Triage Drugs of Abuse Panel is configured to test various combinations of the above drugs. The Triage TOX Drug Screen can screen for all eight classes using a single test panel. Approximately one-half of U.S. acute care hospitals in the United States use one of our drug-screening products.

The Triage Cardiac System

        Chest pain complaints represent the second leading reason for visits to U.S. emergency rooms. Information from the National Hospital Ambulatory Medical Care Survey suggests that in 1998, there were over 5 million emergency department, ED, visits made by adults suffering from chest pain. That number is believed to have since increased to at least 6 million visits. Among chest pain patients, the highest acuity is associated with those suffering a heart attack. For these patients, time is a significant factor in the race to save their heart muscle and their lives. Of the patients presenting to EDs with

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chest pain, approximately 40 percent will be admitted to hospitals. Ultimately, only a minor number of these individuals will be diagnosed with a heart attack. We believe that frequent, quantitative, serial measurements of multiple cardiac protein markers may improve a physician's ability to manage, diagnose and treat patients suffering from chest pain.

        In 1998, nearly $11 billion was paid to Medicare beneficiaries for coronary heart disease. It is estimated that in the United States, hospitalization of over 3 million chest pain patients costs between $3-4 billion yearly for those found to be disease free or suffering from lower acuity conditions. The incidence of chest pain visits to hospital EDs may also contribute to overcrowding which, in the most dire situations, can result in hospitals diverting patients to other hospitals. This results in additional healthcare costs.

        The blocking or "occlusion" of an artery that provides oxygen-enriched blood to the heart generally causes a heart attack. Without oxygen, the heart muscle is destroyed, with prolonged occlusion resulting in additional muscle damage. The destruction of cells in the heart muscle results in the release of several proteins into the bloodstream, including CK-MB, troponin I and myoglobin. Studies have shown that concentrations of myoglobin are elevated most quickly post-heart attack, therefore, myoglobin is recognized as a good early marker of an event. However, since myoglobin is not cardiac specific, the use of CK-MB and troponin I are necessary to accurately diagnosis a heart attack. In patients with a heart attack, CK-MB and troponin I are detectable several hours after myoglobin elevation. Since troponin I is cardiac specific, an elevated level of this marker is a strong indication of a heart attack.

        In diagnosing heart attacks, clinicians generally rely on patient history, physical exam, electrocardiograms and the measurement of cardiac protein markers. CK-MB and troponin I are the most widely used cardiac markers, while studies suggest that myoglobin is also a useful adjunct in the early detection of heart attacks. Given the temporal patterns of cardiac protein markers, we believe that frequent measurements of multiple cardiac markers provide the best information from which to diagnose a heart attack.

        The adoption of new protocols for evaluating chest pain patients in the emergency department is not yet widespread and we believe that education of the medical community will be a key factor in penetrating the market. Associations such as the American Heart Association and American College of Cardiology, AHA/ACC, have issued guidelines recommending greater use of cardiac markers in evaluating chest pain in the emergency department. The AHA/ACC has recommended the use of at least two markers (an early marker and a specific marker) and has stated that if results cannot be obtained from a laboratory within 60 minutes then testing should be performed at the point-of-care. Guidelines such as these have caused more hospitals to explore new protocols incorporating rapid, serial testing of all three markers. We have invested in clinical studies and in a significant physician education effort in order to help the medical community better understand the need for and benefits associated with frequent, serial testing of cardiac markers.

        Several diagnostic tests have been developed to quantitatively measure the blood levels of such markers. Unfortunately, the quantitative measurement of multiple markers generally requires large, centralized immunoassay systems that cannot directly analyze whole-blood and are not always available on a rapid basis. Since turnaround time is critical to enabling frequent, serial testing of cardiac markers, current immunoassay systems may not satisfy physician needs. Smaller automated systems have recently been developed, however these are not portable, have low throughput and often cannot provide results for all three markers in less than 20 minutes.

        We believe that frequent, serial, quantitative measurement of multiple cardiac markers can have a positive impact on an emergency physician's ability to make medical decisions relative to chest pain patients. Accordingly, our Triage Cardiac System is designed to quantitatively measure the levels of CK-MB, troponin I and myoglobin within 20 minutes using a single test panel and whole-blood sample.

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We designed the Triage Cardiac System to provide results of these measurements in the central lab or optimally at the point-of-care to aid in the detection of heart attack. Providing easy access to measurements of cardiac markers enables physicians to make timely treatment decisions. We utilize distributor alliances and a direct sales force in marketing the Triage Cardiac System.

The Triage BNP System

        Congestive Heart Failure, CHF, is a chronic inability of the heart to maintain an adequate output of blood from one or both ventricles of the heart, resulting in congestion or swelling of certain veins or organs, and an inadequate blood supply to the body. It is estimated that nearly 5 million Americans live with CHF and over 15 million people suffer from CHF worldwide. With approximately 550,000 new cases diagnosed annually, CHF imposes a growing toll on Americans, in terms of disability and mortality, contributing to 287,000 deaths each year. CHF is an important public health problem, in part because survival following diagnosis is poor, with only 50% of the patients surviving longer than 5 years. Survival can be improved with the use of effective therapy such as enzyme inhibitors and receptor blockers. The estimated direct and indirect costs of CHF for 2002 in the US are $23.2 billion.

        We obtained a semi-exclusive license (worldwide, except Japan) to technology and patents developed by Scios, Inc. for use in developing a test that would provide measurements of B-type Natriuretic Peptide, or BNP, a hormone made primarily in the ventricles of the heart. Studies suggest that levels of BNP become elevated in circulating blood plasma in response to ventricular volume expansion and pressure overload associated with CHF in both symptomatic and asymptomatic patients.

        We developed the Triage BNP Test to provide physicians with a cost-effective tool to easily, rapidly and accurately measure BNP levels to aid in the diagnosis of CHF using the Triage Meter. We commenced shipments of the test in the United States in December 2000. Currently, the Triage BNP Test is most applicable for differentiating CHF from other diseases that cause similar symptoms, especially shortness of breath and fatigue. Each year approximately 3 million individuals present to emergency departments with complaints of shortness of breath. Because many of these patients are among the elderly, a patient population subject to multiple overlapping diseases, physician must consider several possible causes.

        Per the standard clinical guidelines, patient history and symptoms will be evaluated and typically an x-ray will also be administered along with an exam. These subjective methods may detect CHF in patients at the most advanced stages, but are not always effective in patients who are not severely ill. Patients who are suspected of having CHF might receive an echocardiogram, which is used to detect left ventricular dysfunction. Although echocardiogram is the "gold standard" for diagnosis of CHF, the accuracy of the procedure is highly dependent on the expertise of the person administering the test. Additionally, echocardiograms typically cost between $400-800 per procedure and are not always readily available in all hospitals. We believe traditional clinical diagnostic techniques for CHF can result in delayed treatment, misdiagnosis and emergency department inefficiency.

        For those patients suffering from CHF, timely diagnosis is critical to relieving stress on the heart, which can occur as a result of severe congestion, and to initiating treatment that would halt the progression of the disease. Misdiagnosis, or failure to diagnose, could result in improper treatment and or recurring visits to the emergency department. This, in turn, could contribute to emergency department traffic and to the costs of patient treatment, as treatment alternatives become more expensive as CHF progresses. We believe that the Triage BNP Test can accurately aid in the diagnosis of CHF and, if used at the point-of-care, reduce time to treatment and enhance emergency department efficiency.

        Prior to the introduction of our Triage BNP Test, there was no blood test available to aid in the diagnosis of CHF. Clinical studies have demonstrated that BNP is a highly reliable indicator of CHF and that the protein marker is found in increasingly higher levels as disease progression occurs. The

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test provides physicians with an objective tool for differentiating CHF from the host of other possible diseases that mimic the condition. We believe that the Triage BNP Test may also be applicable for the management of acutely ill patients and could possibly be used in a physician's office setting. We intend to explore these possible applications. A decision to pursue these or other new applications would most likely require that we seek additional clearances for our test from the FDA.

        We believe that the medical community will require a significant degree of validation in order to achieve widespread acceptance of a new marker for CHF and to accept use of the marker at the point-of-care. While significant interest is already apparent, we have and intend to continue to sponsor multiple clinical studies of varying sizes in order to demonstrate the diagnostic utility of our Triage BNP Test. Additionally, we are investing in other educational programs and resources.

        The Triage BNP Test is currently the only FDA approved test used as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogyi & Co. Ltd have certain diagnostic rights to the protein and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test. These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully with these and other competitors in the future.

The Triage C. difficile Panel

Clostridium difficile, or C. difficile, is an opportunistic pathogen of the intestinal tract that may thrive as a result of broad spectrum antibiotic treatment. The bacteria may be found in asymptomatic carriers or may spread among immunocompromised hospital patients. Toxins produced by the bacteria mediate C. difficile-associated disease, which may include antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous colitis. It has been estimated that over 3 million rapid tests for C. difficile are performed annually in the United States. We expect this number to continue to rise due to the expected increase in the number of patients who are immunocompromised.

        We designed the Triage C. difficile Panel to simplify the laboratory procedure and improve the turnaround time for a physician to receive a result by enabling laboratories to complete direct testing for the bacteria, as well as testing for the toxin in less than 20 minutes. We believe the Triage C. difficile Panel provides a negative predictive value that is superior to that of existing immunoassays by coupling the results of direct organism detection with toxin detection. The built-in controls and standards of the Triage C. difficile Panel allow it to perform individually or in batches, by any laboratory technician, without compromising the quality of the result. By improving the turnaround time to result, the clinician may initiate therapy earlier and thus minimize a patient's time in isolation. Rapid, accurate diagnosis of the bacteria and toxin should enable earlier treatment, which may reduce length of stay in the hospital and may reduce costs. We utilize distributor alliances in marketing the Triage C. Difficile Panel.

The Triage Parasite Panel

        Parasitic infection is a common cause of gastrointestinal disease and diarrhea. Some of the more common parasites responsible for such infection are:

•

Giardia lamblia ("Giardia")

•

Cryptosporidium parvum ("C. parvum")

•

Entamoeba histolytica

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        According to the U.S. Center for Disease Control and Prevention, the CDC, intestinal parasitic infection is a problem in the United States and the prevalence of Giardia may be increasing.

        It is estimated that in 1998, approximately one million ova and parasite, O&P, microscopic examinations were performed in the United States. Recently, several manufacturers have developed and marketed ELISA tests for the more rapid identification of two of the more common parasites, Giardia and C. parvum. Because of the cumbersome procedures and limited test menu of the current ELISA test formats, these tests have had limited success in hospitals that perform larger volumes of tests in batches.

        The Triage Parasite Panel is designed to replace the standard O&P microscopic detection method for three of the most commonly encountered parasites: Giardia, C. parvum and Entamoeba histolytica/dispar in a single test device. The Triage Parasite Panel delivers results in less than 20 minutes and is available to hospitals of any size, including facilities that previously sent such testing to a reference lab. The sensitivity of the Triage Parasite Panel is comparable to that of the current O&P microscopic examination, using only a single-patient specimen. This should greatly reduce the collection burden for the patient, and reduce the amount of labor for the laboratory technician. Additionally, the length of time physicians spend waiting for results may be reduced. We utilize distributor alliances in marketing the Triage Parasite Panel. Sales of the Triage Parasite Panel are expected to be seasonal in nature as parasitic infections are less prevalent during the colder seasons of the year.

Products Under Development

        Our strategy for potential future products, including our current products under development, is to focus our attention not only on products aimed primarily at the diagnosis of catastrophic diseases, but also to select from among the many potential products or applications of our proprietary technologies those that would provide us a proprietary patent position related to novel diagnostic markers. We would also consider following the more costly and lengthy regulatory pathway in order to gain a stronger proprietary position or a competitive advantage. Among the novel diagnostic assays we are attempting to develop are assays for diagnosing stroke and acute coronary syndromes.

Stroke

        Among the nation's costliest diseases, stroke is a cardiovascular disease that affects the vessels supplying blood to the brain, which requires a constant flow of blood in order to function properly. A stroke occurs when the blood supply to the brain is disrupted. This disruption can result from a blood clot blocking a blood vessel (ischemic stroke), or when a blood vessel breaks, interrupting blood flow to an area of the brain (hemorrhagic stroke). Approximately 80% of stroke patients have ischemic stroke and 20% hemorrhagic.

        The direct and indirect costs associated with stroke are estimated to total $45.4 billion in 2001. Approximately 4.5 million stroke survivors are currently living in the United States and about 750,000 people suffer a new or recurrent stroke. In 1998, stroke killed nearly 160,000 Americans, and is the nation's third leading cause of death.

        Typically, stroke is diagnosed through clinical evaluation and through use of a CT scan, a diagnostic imaging technique. However, CT scans are typically not highly sensitive in the early hours after onset of an ischemic stroke. Given the narrow window of opportunity for aggressive therapeutic intervention following a stroke, we believe that the availability of better and faster methods of detection could substantially impact clinical outcomes.

        Through independent research we identified 35 markers that appeared to be related to stroke. Using patient samples provided by Duke University in our marker mining process, we found six markers that are highly correlated with stroke and initiated product development in the second half of

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2001. We intend to initiate clinical studies in the second half of 2002 and, if successful, we will file a pre-market approval application, a PMA, with the FDA. Preliminary data from a retrospective study of over 600 samples suggest that our panel of six markers is more accurate than a CT scan in detecting stroke in the early hours after onset.

Acute Coronary Syndromes

        Acute coronary syndromes, or ACS, encompasses many permutations of ischemic heart disease. However, ACS can be difficult to detect. Although over 5 million people present to emergency departments, EDs, with chest pain, studies report that up to 50% do not receive a definitive diagnosis. Many of these could potentially suffer heart attacks. We believe there is a need for a diagnostic test that can detect acute coronary syndromes ensuring that patients receive appropriate therapies in a timely manner.

        We are developing a high sensitivity troponin I assay as an enhancement to our existing Triage Cardiac Panel. Studies suggest that low concentrations of troponin I are associated with ischemic chest pain. We intend to conduct clinical studies in late 2002. Through Biosite Discovery, we are also analyzing markers that we believe are associated with ACS. Using our marker mining process we hope to identify a panel of markers that can proceed to product development. In conducting our analysis, we are working with the TIMI Group, an organization that has been at the forefront of clinical research in acute coronary syndromes over the past two decades.

Biosite Discovery

        Within the scientific world, much attention is being focused on the mapping of the human genome and human proteome. We believe that this massive research effort will result in the discovery of a number of novel proteins that may have therapeutic and/or diagnostic applications. The majority of the companies conducting such research today have expressed an interest in the development of therapeutics, however we believe there is opportunity in the development of novel diagnostics and intend to pursue that course through Biosite Discovery.

        Biosite Discovery was launched in 1999 as a research program dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we access potential diagnostic targets via internal research or collaborations with partners. We conduct analyses on both known proteins that may be markers of disease and potential markers accessed from partners in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it will then be assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use. In exchange, we seek, licenses to their protein targets for diagnostic rights, in addition to fees. Under Biosite Discovery, we have executed agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex, Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. In 2001, our collaborations with pharmaceutical and biotechnology partners generated revenues of $3.5 million.

        Phage display antibody development is the basis of Biosite Discovery's activities. Phage display refers to the method by which we generate antibodies. It is a high throughput process that allows the selection and production of large numbers of antibodies in a period of weeks. Our proprietary phage display techniques, which utilize immunized mice, enable us to deliver highly diverse antibodies with high affinity, which means they bind tightly to protein targets. We refer to these antibodies as

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Omniclonal antibodies. High affinity and high diversity are two qualities of high importance to pharmaceutical and biotechnology companies using antibodies for research experiments. We believe that biotechnology and pharmaceutical companies will provide substantial demand for our research antibodies. Furthermore, we believe that Biosite Discovery's capabilities in the area of antibody development are unique within the diagnostics industry.

        In 2000 we entered into an agreement with Medarex in which we combine our proprietary phage display technology with Medarex's proprietary transgenic mouse technology to offer Trans-Phage Technology^SM, a process for high throughput development of high affinity, fully human antibodies. This process is being provided as a service to biotechnology and pharmaceutical companies, which require high affinity fully human antibodies for research use in conducting target validation and, or, characterization experiments. Under the terms of the eight-year agreement, Medarex provides us with research funding of $3 million per year.

        When Biosite and Medarex enter into agreements to provide high affinity, fully human antibodies to third-party biotechnology and pharmaceutical customers, we will generally receive a variety of payments and we will also seek exclusive or semi-exclusive diagnostic rights to the protein targets provided to us by biotechnology and pharmaceutical customers. Among the payments we might receive are: up-front technology access fees, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development, milestone fees on drug targets that reach clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

        We announced our first Trans-Phage Technology customers, Eli Lilly and Eos Biotechnology, in January 2001 and February 2001, respectively. Lilly will provide us with 30-300 targets over three years, and Amgen Inc. and Eos Biotechnology are expected to provide tens of targets over three years. We will receive technology access fees, development fees upon delivery of antibodies for a target, annual target maintenance fees, milestone fees upon the achievement of certain preclinical and clinical milestones, and royalties from products resulting from these joint research efforts.

        Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considers itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution. See "Legal Proceedings."

Competition

Diagnostics

        The market in which we compete is intensely competitive. Our competitors include:

•

manufacturers of laboratory-based tests and analyzers, and



•

clinical reference laboratories



•

other rapid diagnostic test manufacturers.

        Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference

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laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. Our products may not be able to compete with the testing services provided by traditional laboratory services.

        In addition, companies with a significant presence in the diagnostic market, such as:

•

Abbott Laboratories



•

Roche Diagnostics



•

Dade Behring



•

Bayer Diagnostics and



•

Beckman Coulter

have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than we, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with our products. The Triage BNP Test is currently the only FDA approved test used as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogyi & Co. Ltd have certain diagnostic rights to the protein and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test.

        Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing technologies, may be more effective than us or may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. See "—Technology" and "—Commercialized Products".

Biosite Discovery

        Several companies, including Cambridge Antibody Technology, Morphosys, and Dyax have invested significantly in phage display technology and each generally employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Our competitors entered the marketplace before Biosite Discovery and have established a significant presence in the marketplace. Our competitors may succeed in establishing agreements and providing antibodies to biotechnology and pharmaceutical companies and prevent Biosite Discovery from penetrating the marketplace.

Employees

        As of December 31, 2001, we employed 351 individuals. Of these, 26 hold Ph.D.s and 26 hold other advanced degrees. None of our employees are covered by the collective bargaining agreement. We believe that we maintain good relations with our employees.

Research and Development

        Our research and development expenses were $13.9 million, $13.3 million and $13.3 million for the years ended December 31, 2001, 2000, 1999, respectively. As of December 31, 2001, we employed 89 employees in research and development, 19 that have Ph.D.s. Our research and development

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organization is dedicated to the discovery and development of new markers and technologies that can be applied to future products and to the development of new products with our existing platform technologies.

        We have a research staff dedicated to the development and production of antibodies through a variety of techniques. Recombinant techniques are used to express proteins for use as diagnostic targets. Our staff of chemists and biochemists synthesize drug targets and compounds for diagnostic use and seek to perfect techniques for coupling these compounds to biological reagents such as antibodies or labels. We developed a proprietary process utilizing phage display antibodies that enables the selection and production of antibodies more rapidly and efficiently than is possible using hybridoma technology. Our development engineering staff is involved in the design and development of new diagnostic device technologies as well as the processes for their fabrication and interaction with biological and chemical reagents. Our product development group completes final optimization of assays and our regulatory affairs group controls all in-house and external clinical studies of our products and prepares applications to the FDA for pre-market clearance or approval.

Manufacturing

        As of December 31, 2001, we had 126 employees in manufacturing involved in reagent production, device assembly, engineering, quality assurance/quality control and materials management.

        We maintain worldwide manufacturing rights to all current and future products, except for the Triage Meter for which LRE maintains the manufacturing rights. We seek to provide high quality analytical results in an efficient manner. To this end, we invest in the design and development of manufacturing systems and technologies that can produce a high quality product using controlled, cost-effective manufacturing processes and equipment. The Triage C. difficile and Triage Parasite Panels utilize the same or similar processes and equipment as the Triage DOA Panel. We believe that the experience we acquired in manufacturing the Triage DOA Panel provided benefits in product quality and cost in manufacturing these new products. We have developed and continue to improve our novel and sophisticated processes and equipment for the manufacturing of our meter platform products, the Triage Cardiac Panel and Triage BNP Test. We evaluate potential automation projects, capital expenditures and facility expansion to address potential growth in the manufacturing requirements for current and potential new products.

        Except for the Triage Meter, all of our products are manufactured at our facility in San Diego, California. The Triage Meter is purchased from LRE Relais + Elektronik GmbH, or LRE, which is located in Germany. Most of the antibodies used in the manufacture of our products were developed by us and the cell lines are owned or licensed by us. In addition, we maintain our own in-house antibody production capability. All other raw materials required to manufacture our products are obtained from outside suppliers. We may not continue to use LRE to manufacture the Triage Meter. See "Risk Factors."

        Our San Diego facility received its registration as a diagnostic product manufacturer from the FDA and from the California State Department of Health & Services in 1991. We have also been licensed and certified to manufacture products using controlled substances by the U.S. Drug Enforcement Agency. We may not continue to comply with all government requirements and regulations that may lead to the suspension or revocation of our right to manufacture. See "Government Regulation".

Sales and Marketing

        As of December 31, 2001, we had 73 employees in various sales and marketing functions. We distribute our products to hospital facilities in the United States primarily through Fisher, and internationally through country-specific and regional distributors.

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        We anticipate that we may, if appropriate, enter into additional distribution agreements with respect to our current products, products currently under development and products that we develop in the future. We may not be able to enter into these or other distribution agreements on acceptable terms, if at all. If we elect to distribute products directly, our direct sales, marketing and distribution efforts may not be successful. A failure to enter into acceptable distribution agreements or a failure by us to successfully market our products would have a material and adverse effect on us.

Strategic and Distribution Arrangements

        Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with corporate partners, licensors, licensees and others, and is dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected or that any revenue will be derived from any of the arrangements. Under our existing arrangements, we are not obligated to make any material capital expenditures. If products are successfully developed under some of our existing arrangements, royalties will be payable by us on sales of products which incorporate licensed technology.

Fisher HealthCare Division of Fisher Scientific Company

        In January 2001, we entered into a new distribution agreement, the Fisher Agreement, with Fisher which extended Fisher's role in the distribution of certain of our new products and some potential new products currently under development. Under the agreement, we granted to Fisher a right to distribute certain of our products to hospitals within the United States. Under some circumstances, in the event that we elect to terminate the Fisher Agreement without cause, we will be obligated to make a one-time payment to Fisher. Fisher purchases our products on a monthly basis through firm purchase orders. Fisher accounted for 85%, 84% and 83% of our product sales in 2001, 2000 and 1999, respectively.

LRE Relais + Elektronik GmbH

        In September 1994, we entered into an agreement with LRE, the LRE Agreement, for the development, manufacturing and supply of a hand-held meter to be used in all Triage Meter System products commercially available or under development, including the Triage Cardiac System, the Triage BNP System, and the Triage TOX System. Under the terms of the LRE Agreement, LRE developed and produced the fluorescent meter according to specifications provided by us. LRE is our exclusive supplier of the Triage Meter during the term of the LRE Agreement. We purchase the Triage Meters from LRE in Euros through firm purchase orders on a per meter price basis which varies according to sales volume.

        We are currently renegotiating the terms of the LRE Agreement with LRE. We are attempting to update various terms of the agreement including a possible increase in cost of approximately Euro 500, or approximately $440 based the exchange rate on March 18, 2002. If we are unable to renegotiate the LRE Agreement, we have agreed to terminate the contract by March 31, 2003, and assume the responsibility for the manufacture of the meter. If this were to occur, LRE has agreed to assist in the transfer of the technology and we would evaluate the manufacture of the meter by us or a third party. If we are unable to renegotiate the LRE Agreement and are unable to manufacture or have manufactured sufficient quantity or quality of meters, this may adversely affect

•

our profit margins



•

our ability to develop and manufacture products on a timely and competitive basis, or



•

the timing of market introductions and subsequent sales of products incorporating the meter.

        See "Risk Factors."

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Biosite Discovery

        In March 1999, we launched Biosite Discovery, a collaborative research business dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known proteins that may be markers of disease and potential markers accessed from partners in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it will then be assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology.

Proprietary Technology and Patents

        Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing on the proprietary rights of others or to obtain licenses to such proprietary rights. We have U.S. and foreign issued patents and are currently prosecuting patent applications in the United States and with certain foreign patent offices. Certain of our issued patents covering significant aspects of our core technologies have legal lives expiring between July 2007 and January 2018. There can be no assurance that any of our pending patent applications will result in the issuance of any patents, that our patent applications will have priority over others' applications, or that, if issued, any of our patents will offer protection against competitors with similar technology. There can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented in the future or that the rights created thereunder will provide a competitive advantage.

        Our current products and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. We obtained licenses for some technologies and are negotiating to obtain licenses for technologies patented by others. We may not be able to obtain licenses for technology patented by others on commercially reasonable terms, if at all. We may not be able to develop alternative approaches if we are unable to obtain licenses or that our current and future licenses will be adequate for the operation of our business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent us from commercializing certain of our products under development and would have a material adverse effect on our business, financial condition and results of operations.

        Litigation may be necessary to enforce any patents issued to us to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. We have settled three patent infringement claims by obtaining licenses to the contested patent in return for up-front payments and/or royalty obligations. On May 10, 2001, we received notice from XOMA Ltd. and its affiliates ("XOMA"), alleging that we have breached our obligations under three license agreements with XOMA. See "Risk Factors" and "Legal Proceedings."

        Litigation that could be brought forth by other parties have in the past and may in the future result in material expenses to us and significant diversion of effort by our technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that we had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license

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could subject us to significant liability and could prevent us from selling any or all of our products, which could have a material adverse effect on our business, financial condition and results of operations.

        We rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets, or that we will be capable of protecting our rights to our trade secrets.

        Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to us. No assurance can be given that any patent application of others will not have priority over patent applications filed by us.

        Our commercial success also depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. There can be no assurance that we do not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that we or our collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in such litigation, it could consume a substantial portion of our managerial and financial resources, which could have a material adverse effect on our business, financial condition and results of operations.

Government Regulation

        The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. We will not be able to commence marketing or commercial sales in the United States of new products under development until we receive clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by us.

        We may not be able to obtain necessary regulatory approvals or clearances for our products on a timely basis, if at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of

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such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on us.

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RISK FACTORS

We Have Only a Limited History of Profitability and We May Not Maintain Profitability. In Addition Our Quarterly Results Will Fluctuate.

        We have reported quarterly operating profits since the third quarter of 1999 after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future. We may not be able to maintain profitability in the future. We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•

market acceptance of current or new products



•

whether and when new products are successfully developed and introduced by us



•

changes in the mix of products sold



•

the timing and variability of significant orders



•

seasonal customer demand



•

research and development efforts, including clinical trials and new product scale-up activities



•

enforcement, defense and resolution of license and patent disputes



•

ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues



•

attainment of milestones under collaborative agreements necessary to earn contract revenues



•

competitive pressures on average selling prices



•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

potential changes in our relationship with LRE which could impact the manufacture of the Triage meter



•

changes in reimbursement policies



•

regulatory uncertainties or delays



•

product recalls



•

shipment problems, and



•

costs and timing associated with business development activities, including potential licensing of technologies.

        Operating results would also be adversely affected by a downturn in the market for our products. Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our product development efforts are unsuccessful or subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis and our growth or operating results may not be consistent with predictions made by securities analysts.

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We Are Dependent on the Development and Introduction of New Products for Revenue Growth and Profitability.

        Except for our commercialized products, all of our products are still under development and may not be successfully developed or commercialized on a timely basis, or at all. If we are unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing for any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, we will be harmed.

        We believe that our revenue growth and profitability will substantially depend upon our ability to complete development of and successfully introduce these new products as well as continue to achieve a growing level of market acceptance of new products such as the Triage Cardiac Panel and the Triage BNP Test. In addition, the successful development of some of these new products will depend on the development of new technologies. We will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the U.S. Food and Drug Administration, the FDA, or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized.

        If we fail to establish and maintain:

•

reliable, cost-efficient, high volume manufacturing capacity



•

a cost-effective sales force and administrative infrastructure, or



•

an effective product distribution system for our products

we may not be able to successfully commercialize our current or new products.

We Are Dependent in the Near Term on Sales of the Triage Drugs of Abuse Panel. A Significant Reduction in Sales of the Triage Drugs of Abuse Panel Would Harm Us.

        Sales of the Triage Drugs of Abuse Panel products accounted for approximately 59% of our product sales in 2001 and 68% of our product sales in 2000. We expect our revenue and profitability to substantially depend on the sale of the Triage Drugs of Abuse Panel products for the foreseeable future. A significant reduction in demand for the Triage Drugs of Abuse Panel products would have a material adverse effect on us. We believe that domestic net sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated. Competitive pressures could also erode our profit margins for the Triage Drugs of Abuse Panel products. Our continued growth will depend on our ability to

•

successfully commercialize our newer products, including the Triage TOX Panel



•

develop and commercialize other products, and



•

gain additional acceptance of the Triage Drugs of Abuse Panel products in new market segments, such as international markets.

        We may not be able to successfully commercialize new products, including the Triage Cardiac Panel and Triage BNP Test, which represented 27% and 6%, respectively, of our product sales in 2001. We may not be able to maintain or expand our share of the drug-testing and cardiovascular markets. Technological change, competition or the development of new or improved diagnostic technologies could result in our products becoming obsolete or noncompetitive.

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The Triage BNP Test May Encounter Significant Competition From Products To Be Developed and Commecialized By Companies with Greater Financial Capital and Resources

        The Triage BNP Test is currently the only FDA approved test to be used as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogyi & Co. Ltd have certain diagnostic rights to the protein and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test. These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future.

We Are Dependent on Key Distributors and Have Limited Direct Sales Experience. If Our Distributors Terminate Their Relationship With Us or Fail to Adequately Perform, Our Product Sales Will Suffer.

        We rely upon a key distributor alliance with Fisher to distribute our products in the United States and may rely upon distributors to distribute products under development. All of our products are currently marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 85% of product sales in the 2001 and 84% in 2000) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors could have a material adverse effect on our sales.

        If any of our distribution or marketing agreements are terminated and we are unable to enter into alternative agreements or if we elect to distribute new products directly, we would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. We have limited experience in direct sales, marketing and distribution of our products. Our direct sales, marketing and distribution efforts may not be successful. Further, we may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all. A failure to enter into acceptable distribution agreements or our failure to successfully market our products would have a material and adverse effect on us.

Competition and Technological Change May Make Our Products Less Attractive or Obsolete.

Diagnostics

        The market in which we compete is intensely competitive. Our competitors include:

•

companies making laboratory-based tests and analyzers



•

clinical reference laboratories, and



•

other rapid diagnostic test manufacturers.

        Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. Our products may not be able to compete with the testing services provided by traditional laboratory services.

        In addition, companies with a significant presence in the diagnostic market, such as:

•

Abbott Laboratories

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•

Dade Behring



•

Roche Diagnostics



•

Bayer Diagnostics, and



•

Beckman Coulter

have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than us, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with our products. The Triage BNP Test is currently the only FDA approved test used as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogyi & Co. Ltd have certain diagnostic rights to the protein and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test.

        Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing technologies, may be more effective than us or may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

Discovery

        Several companies, including Cambridge Antibody Technology, Morphosys, and Dyax have invested significantly in phage display technology and each generally employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Our competitors entered the marketplace before Biosite Discovery and have established a significant presence in the marketplace. Our competitors may succeed in entering into agreements and providing antibodies to biotechnology and pharmaceutical companies and thereby prevent Biosite Discovery from penetrating the marketplace.

Our Limited Manufacturing Experience and Our Potential Inability to Scale-Up Manufacturing May Adversely Affect Our Ability to Produce Products.

        We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Significant additional work will be required for the scaling-up of each new product prior to commercialization, and this work may not be completed successfully.

        In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise. These products may not be able to be manufactured by us or any other party at a cost or in quantities to make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, our ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on us.

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        Manufacturing and quality control problems have arisen and may arise as we attempt to scale-up our manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all. Our manufacturing facilities and those of our contract manufacturers are, or will be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and these facilities are subject to Quality System Regulations requirements of the FDA. We or our contractors may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on us.

We Are Dependent on Sole-Source Suppliers For Our Products. A Supply Interruption Would Harm Us.

        Key components and raw materials used in the manufacture of our products are provided by single-source vendors. Any supply interruption in a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified and, as a result, would have a material adverse effect on us. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to us or incompatible with our manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products. We have under development products that, if developed, may require us to enter into additional supplier arrangements. We may not be able to enter into additional supplier arrangements on commercially reasonable terms, or at all. Failure to obtain a supplier for the manufacture of our future products, if any, would have a material adverse effect on us.

        We rely upon LRE for production of the fluorescent meter used in connection with our Triage Meter System platform products, including the Triage Cardiac System, Triage BNP System and Triage TOX Drug Screen and others currently under development. We are currently renegotiating the terms of the LRE Agreement with LRE. We are attempting to update various terms of the agreement including a possible increase in cost of approximately Euro 500, or $440 based on the exchange rate at March 18,2002. If we are unable to renegotiate the LRE Agreement, we have agreed to terminate the contract by March 31, 2003, and assume the responsibility for the manufacture of the meter. If this were to occur, LRE has agreed to assist in the transfer of the technology and we would evaluate the manufacture of the meter by us or a third party. If we are unable to renegotiate the LRE Agreement and unable to manufacture or have manufactured sufficient quantity or quality of meters, this may adversely affect

•

our profit margins



•

our ability to develop and manufacture products on a timely and competitive basis, or



•

the timing of market introductions and subsequent sales of products incorporating the LRE meter.

Health Care Reform and Restrictions on Reimbursement May Adversely Affect Our Results.

        In the United States, health care providers that purchase our products and other diagnostic products generally rely on third-party payors to reimburse all or part of the cost of the procedure. Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services. In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement. Further, some health care providers are moving towards a managed care system in which providers contract to provide comprehensive health care for a fixed cost per patient. We are unable to predict what changes will be made in the reimbursement methods utilized by third-party payors. We could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which our products are used.

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        Third-party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our products on a profitable basis. Failure by physicians and other users to obtain reimbursement from third-party payors, or changes in government and private third-party payors' policies toward reimbursement of tests utilizing our products could have a material adverse effect on us. Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for our existing products or products under development.

        In addition, market acceptance of our products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance.

        We believe that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by us. Third-party reimbursement and coverage may not be available or adequate in either U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our products or our ability to sell our products on a profitable basis.

Our Patent and Proprietary Technology May Not Provide Us With Any Benefit and the Patents of Others May Prevent Us From Commercializing Our Products.

        Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Our patent applications may not result in the issuance of any patents. Additionally, our patent applications may not have priority over others' applications, or, if issued, our patents may not offer protection against competitors with similar technology. Any patents issued to us may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage.

        Our products and activities may be covered by technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses for some technologies. We may negotiate to obtain other licenses for technologies patented by others. Some of our current licenses are subject to rights of termination and may be terminated. Our licensors may not abide by their contractual obligations and, as a result, may limit the benefits we currently derive from their licenses. We may not be able to renegotiate or obtain licenses for technology patented by others on commercially reasonable terms, or at all. We may not be able to develop alternative approaches if we are unable to obtain licenses and our current and future licenses may not be adequate for the operation of our business. The failure to obtain, maintain or enforce necessary licenses or to identify and implement alternative approaches would prevent us from operating some or all of our business and would have a material adverse effect on us.

        Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. We have already settled a number of patent infringement claims in the past.

Long-lived and Intangible Assets May Become Impaired and Result in An Impairment Charge

        At December 31, 2001, we had approximately $28.9 million of long-lived assets, including $13.8 million of property, plant and equipment and $9.2 million of capitalized patents and license

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rights. The carrying amounts of long-lived and intangibles assets are affected whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation such as our dispute with XOMA or other items. Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from long-lived and intangible assets. In the event impairment exists, an impairment charge would be determined by comparing the carrying amount of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. An impairment charge may result in a material adverse effect on our operating results. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.

The Legal Proceedings to Obtain Patents and Litigation of Third-Party Claims of Intellectual Property Infringement Could Require Us to Spend Substantial Amounts of Money and Could Impair Our Operations.

        We may become subject to additional patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office, or USPTO, to determine the priority of inventions. We also may receive correspondence from other parties calling to our attention the existence of patents that they believe cover technology that is or may be incorporated in our products and products under development. Some of this correspondence may include offers to negotiate the licensing of the patented technologies. There can be no assurance that these matters would not result in litigation to determine the enforceability, scope, and validity of the patents. Litigation, if initiated, could seek to recover damages as a result of any sales of the products and to enjoin further sales of such products.

        Litigation that could be brought forth by other parties may result in material expenses to us and significant diversion of effort by our technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that we had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling our products, which would have a material adverse effect on us.

        On May 10, 2001, we received notice from XOMA Ltd. and its affiliates ("XOMA"), alleging that we have breached our obligations under three license agreements with XOMA. The license agreements relate to the bacterial expression of antibodies. On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA's threat to terminate the agreements. We believe that XOMA's conduct threatens to cause damages to Biosite that are not easily calculable or easily compensable by money damages. On July 5, 2001, XOMA filed a complaint in the same court (the "XOMA action"). In September, 2001, the Court denied Biosite's request for a preliminary injunction, dismissed XOMA's action in part with leave to amend, and dismissed Biosite's action without prejudice to Biosite's right to plead its claims in defense and counterclaims in the XOMA action. XOMA's complaint, which has now been amended, alleges fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite. XOMA seeks injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages. On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference. Biosite intends to contest XOMA's claims vigorously. We believe that there has been no misrepresentation or breach of the agreements, that our rights under the agreements have not been terminated and, accordingly, no misappropriation or unfair business practice has occurred, and that our activities do not infringe XOMA's patents. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us

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or settlements that might or might not have a material adverse impact on our business. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction of our contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. During the fourth quarter of 2001, we established a $267,000 reserve for doubtful accounts related to our collaboration with Large Scale Biology as a result of the impact of the XOMA dispute on our collaboration with them. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting find a mutually acceptable solution.

        In February 2002, we announced that we have designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products will be produced using our new technology. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes.

        We also rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, and we may not be able to protect our trade secrets or our rights to our trade secrets.

        Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to us. Patent applications of others may have priority over patent applications filed by us.

        Our commercial success depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. We may infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. We or our collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may not be made available on commercially acceptable terms, or at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. Litigation, including the litigation with XOMA, concerning patent and other intellectual property rights could consume a substantial portion of our managerial and financial resources, which would have a material adverse effect on us.

We May Need Additional Capital. If Additional Capital is not Available, We May Have to Curtail or Cease Operations.

        If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain

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additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

        Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. Our future liquidity and capital funding requirements will depend on numerous factors, including:

•

the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive



•

the costs and timing of further expansion of sales, marketing and manufacturing activities, expansion of our Biosite Discovery capacity and facilities expansion needs



•

the enforcement, defense and resolution of license and patent disputes



•

the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues



•

the timing and results of research and development efforts including clinical studies and regulatory actions regarding our potential products



•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

potential changes in our relationship with LRE which could impact the manufacture of the Triage meter



•

changes in third-party reimbursement policies, and



•

the costs and timing associated with business development activities, including potential licensing of technologies patented by others.

        The failure by us to raise capital on acceptable terms when needed would cause us to have to scale back our operations, reduce our work force and license to others products we would otherwise seek to develop or commercialize ourselves. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Ownership of a New Corporate Headquarters May Negatively Impact Operating Results

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase are estimated to be $70.0 million. We expect that the first phase of construction to be completed in 2004. We expect our occupancy costs to increase. Should there be a downturn in our business or the markets in which we compete, we may not have a need to expand our facilities as we have planned. As a result, we may then seek an alternative use for all or a portion of the property, or seek to sell the property, which may have a negative impact on our operating results.

The Regulatory Approval Process is Expensive, Time Consuming and Uncertain. As a Result, We May Not Obtain Required Approvals or Previously Acquired Approvals for the Commercialization of Our Products May Be Rescinded.

        The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder,

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the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. We will not be able to commence marketing or commercial sales in the United States of new products under development until we receive clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by us.

        In the United States, medical devices are classified into one of three classes (Class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, pre-market notification and adherence to the Quality System Regulation, QSR), and Class II devices are subject to general and special controls (e.g., performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness, e.g., life-sustaining, life-supporting and implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices.

        Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance through clearance of a 510(k) notification or approval of a pre-market approval, PMA, application. A PMA application must be filed if a proposed device is a new device not substantially equivalent to a legally-marketed Class I or Class II device or if it is a pre-amendment Class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical investigations, bench tests, laboratory and animal studies. The PMA application must also contain a complete description of the device and its components and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and any training materials. The PMA approval process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.

        Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is complete, the FDA will accept the application for filing. Once the submission is accepted, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the application is accepted, but may take significantly longer. The review time is often significantly extended by FDA requests for additional information or clarification of information already provided in the submission. During the review period, it is likely that an advisory committee, typically a panel of clinicians, will be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. The FDA is not bound by the recommendation of the advisory panel. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable QSR requirements. If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a non-approvable letter. The FDA may determine that additional clinical investigations must be performed, in which case the PMA may be delayed for one or more years while additional clinical

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investigations are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to an approved PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.

        A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a pre-amendment Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring submission of clinical data and other performance data. It generally takes from four to twelve months from submission to obtain 510(k) pre-market clearance but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device or that additional information is needed before a substantial equivalence determination can be made. A "not substantially equivalent" determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions.

        We have made modifications to our products since receipt of initial 510(k) clearance. With respect to several of these modifications, we filed new 510(k) notices describing the modifications and have received FDA clearance of those 510(k) notices. We made other modifications to some of our products that we believe do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of our determinations not to submit a new 510(k) notice for any of these modifications, or would not require us to submit a new 510(k) notice for any of these modifications made to our products. If the FDA requires the Company to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified products until the 510(k) notice is cleared by the FDA.

        We are uncertain of the regulatory path to market that the FDA will ultimately apply to our products currently in development. Although the Triage Drugs of Abuse Panel, Triage C. difficile Panel, Triage Parasite Panel, Triage Cardiac Panel and Triage BNP Test received 510(k) clearance, a PMA was initially required for the Triage BNP Test and may be required for the other products now in development. There can be no assurance that the FDA will not determine that we must adhere to the more costly, lengthy and uncertain PMA approval process for any of our products in development.

        We may not be able to obtain necessary regulatory approvals or clearances for our products on a timely basis, if at all. Delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

        Before the manufacturer of a device can submit the device for FDA approval or clearance, it generally must conduct a clinical investigation of the device. Although clinical investigations of most devices are subject to the investigational device exemption, IDE, requirements, clinical investigations of in vitro diagnostic, IVD, tests, such as all of our products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA's prior approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition, the IVD must be labeled for research use only, RUO, or investigational use only, IUO, and distribution controls must be

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established to assure that IVDs distributed for research or clinical investigation are used only for those purposes.

        We intend to conduct clinical investigations of our products under development, which will entail distributing them in the United States on an IUO basis. There can be no assurance that the FDA would agree that our IUO distribution of our IVD products under development will meet the requirements for IDE exemption. Furthermore, failure by us or the recipients of our products under development to maintain compliance with the IDE exemption requirements could result in enforcement action by the FDA, including, among other things, the loss of the IDE exemption or the imposition of other restrictions on our distribution of our products under development, which would adversely affect our ability to conduct the clinical investigations necessary to support marketing clearance or approval.

        Any devices manufactured or distributed by us pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to QSR, which includes testing, control, documentation, and other quality assurance requirements. Manufacturers must also comply with Medical Device Reporting, MDR, requirements that a manufacturer report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.

        We are subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR requirements and other applicable regulations. The QSR requirements include the addition of design controls that will likely increase the cost of compliance. Changes in existing requirements or adoption of new requirements could have a material adverse effect on our business, financial condition and results of operation. There can be no assurance that we will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon our business, financial condition and results of operations.

        We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that we will not incur significant costs to comply with laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business, financial condition and results of operations.

        The use of our products is also affected by the Clinical Laboratory Improvement Amendments of 1988, CLIA, and related federal and state regulations which provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections. CLIA categorizes tests as "waived," "moderately complex" or "highly complex," on the basis of specific criteria. There can be no assurance that any future amendment of CLIA or the promulgation of additional regulations impacting laboratory testing will not have a material adverse effect on our ability to market our products or on our business, financial condition or results of operations.

        The Food and Drug Administration Modernization Act of 1997 makes changes to the device provisions of the FD&C Act or the Act and other provisions in the Act affecting the regulation of devices. Among other things, the changes will affect the Investigational Device Exemption, 510(k) and PMA processes, and also will affect device standards and data requirements, procedures relating to humanitarian and breakthrough devices, tracking and postmarket surveillance, accredited third-party review, and the dissemination of off-label information. We cannot predict how or when these changes will be implemented or what effect the changes will have on the regulation of our products. There can

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be no assurance that the new legislation will not impose additional costs or lengthen review times of our products.

We Are Dependent on Others for the Development of Products. The Failure of Our Collaborations to Successfully Develop Products Would Harm Our Business.

        Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with third parties. We are or will be dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected and no revenue may be derived from these arrangements. Under our Biosite Discovery collaborations, we rely and are dependent upon other parties to perform their responsibilities. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction in contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution.

        We entered into agreements with partners for the development and marketing of products. The agreements are subject to rights of termination and may be terminated. Our collaborators may not abide by their contractual obligations and may discontinue or sell their current lines of business. The research for which we receive or provide funding may not lead to the development of products. We intend to enter into additional development and marketing agreements. We may not be able to enter into agreements on acceptable terms, or at all.

We May Not Be Able to Manage Our Growth.

        We anticipate increased growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations as new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. Our ability to manage growth effectively will require us to continue to implement and improve our operational, financial and management information systems and to train, motivate and manage our employees. We may not be able to manage our expansion, and a failure to do so could have a material adverse effect on us.

If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional Personnel, We May Not Be Able to Pursue Collaborations or Develop Our Own Products.

        Our future success depends in part on the continued service of our key technical, sales, marketing and executive personnel, and our ability to identify, hire and retain qualified personnel. Competition for such personnel is intense and we may not be able to retain existing personnel or identify or hire additional personnel.

We May Have Significant Product Liability Exposure.

        The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability claims. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage, that claim could exceed our total assets.

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Item 2. Properties

        We lease approximately 118,000 square feet of space in seven buildings in the Sorrento Valley area in San Diego under leases that expire from December 2003 through December 2005. We believe these facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. Our current facilities are used for our administrative offices, research and development facilities and manufacturing operations.

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $27.5 million. As of March 27, 2002 we have deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including obtaining city permits, the grading of the land and construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of first quarter of 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase are estimated to be $70.0 million. We expect that the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in cash expenditures prior to occupancy for the purchase of land and construction costs, which would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

Item 3. Legal Proceedings

        On May 10, 2001, we received notice from XOMA Ltd. and its affiliates ("XOMA"), alleging that we have breached our obligations under three license agreements with XOMA. The license agreements relate to the bacterial expression of antibodies. On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA's threat to terminate the agreements. We believe that XOMA's conduct threatens to cause damages to Biosite which are not easily calculable or easily compensable by money damages. On July 5, 2001, XOMA filed a complaint in the same court (the "XOMA action"). In September, 2001, the Court denied Biosite's request for a preliminary injunction, dismissed XOMA's action in part with leave to amend, and dismissed Biosite's action without prejudice to Biosite's right to plead its claims in defense and counterclaims in the XOMA action. XOMA's complaint, which has now been amended, alleges fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite. XOMA seeks injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages. On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference. Biosite intends to contest XOMA's claims vigorously. We believe that there has been no misrepresentation or breach of the agreements, that our rights under the agreements have not been terminated and, accordingly, no misappropriation or unfair business practice has occurred, and that our activities do not infringe XOMA's patents. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction of our contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery

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of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution.

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

        Not applicable.

PART II

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

        Our common stock is traded in the over-the-counter market on the Nasdaq National Market, or the NNM, under the symbol BSTE. The following tables set forth the high and low sale prices, for our common stock as reported on the NNM for the periods indicated.

2001	High		Low
First Quarter	$	40.500	$	25.625
Second Quarter	$	58.480	$	31.688
Third Quarter	$	46.700	$	20.040
Fourth Quarter	$	27.440	$	12.430

2000	High		Low
First Quarter	$	40.938	$	13.125
Second Quarter	$	57.500	$	20.625
Third Quarter	$	84.625	$	35.000
Fourth Quarter	$	45.875	$	20.125

        There were approximately 76 holders of record of common stock as of March 15, 2002. We have not paid any cash dividends to date and do not anticipate any being paid in the foreseeable future.

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Item 6. Selected Financial Data

			Year ended December 31,
			2001			2000			1999			1998			1997
			(in thousands, except per share data)
Statement of Operations Data:
Revenues:
	Product sales		$	62,155		$	51,667		$	43,011		$	34,424		$	31,677
	Contract revenue			3,485			3,319			703			2,630			1,244
		Total revenues		65,640			54,986			43,714			37,054			32,921
Operating expenses:
	Cost of product sales			17,644			15,616			13,636			10,513			6,926
	Selling, general and administrative			22,864			18,471			17,581			15,470			14,913
	Research and development			13,946			13,303			13,347			11,167			11,662
	License and patent disputes			3,204			—			—			4,861			331
		Total operating expenses		57,658			47,390			44,564			42,011			33,832
Operating income (loss)				7,982			7,596			(850	)		(4,957	)		(911	)
Interest and other income, net				2,577			1,906			1,788			2,396			2,191
Income (loss) before benefit (provision) for income taxes				10,559			9,502			938			(2,561	)		1,280
Benefit (provision) for income taxes				(3,833	)		(3,339	)		166			1,448			(82	)
Net income (loss)			$	6,726		$	6,163		$	1,104		$	(1,113	)	$	1,198
Basic net income (loss) per share			$	0.47		$	0.45		$	0.08		$	(0.09	)	$	0.11
Diluted net income (loss) per share			$	0.44		$	0.41		$	0.08		$	(0.09	)	$	0.09
Common and common equivalent shares used in computing per share amounts(1)
	•    Basic			14,413			15,430			13,722			15,207			13,032
	•    Diluted			13,728			12,939			12,939			11,249			13,081

	December 31,
	2001		2000		1999		1998		1997
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	55,497	$	36,200	$	32,272	$	34,229	$	39,257
Working capital		65,515		53,667		39,978		41,214		46,611
Total assets		102,740		83,014		68,148		65,809		63,311
Long-term obligations, less current portion		3,542		3,708		4,069		4,038		3,797
Stockholders' equity		90,911		72,886		56,885		54,683		55,090

(1)

Computed on the basis described in Note 1 of Notes to Financial Statements.

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

The matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Business" and "Risk Factors," as well as those discussed elsewhere in this Annual Report on Form 10-K. We disclaim any intent or obligation to update these forward-looking statements.

Overview

        We were established in 1988. We are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician's ability to diagnose debilitating and life-threatening diseases and conditions. We combine integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes.

        Our diagnostics business is a leading provider of rapid tests that aid in the diagnosis of a variety of critical diseases and conditions. These tests are sold worldwide primarily for use in hospitals. Our two product platforms are designed to provide rapid results through either qualitative visual readings or meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously. They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool. Among the products expected to contribute most significantly to product sales in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac Panel and the Triage BNP Test.

        The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We aim to place our products in emergency departments and other point-of-care locations, as well as in laboratories. In marketing our products we utilize a direct sales team that includes general account executives and cardiovascular account executives, who have extensive experience selling cardiovascular devices or drugs. The Fisher HealthCare division of the Fisher Scientific Company, Fisher, distributes our products in U.S. hospitals and supports our direct sales force. In international markets we utilize a network of country-specific and regional distributors.

        In March 1999, we launched Biosite Discovery, a collaborative research program dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known disease markers and potential markers accessed from pharmaceutical and biotechnology companies in order to determine their diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology companies with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex, Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies

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for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain pre-clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

        Our product sales to date have primarily resulted from sales of the Triage Drugs of Abuse Panel product line. The Triage Drugs of Abuse Panel products are marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher, which accounted for 85% of our product sales in 2001 and 84% in 2000, and internationally by country-specific and regional distributors. Since its launch in 1992, the Triage Drugs of Abuse Panel product line has experienced continued annual revenue growth. We believe, however, that domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market.

        We have reported quarterly operating profits since the third quarter of 1999, after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts. We may not be able to maintain profitability in the future.

        We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•

market acceptance of current or new products



•

whether and when new products are successfully developed and introduced by us



•

changes in the mix of products sold



•

the timing and variability of significant orders



•

seasonal customer demand



•

research and development efforts, including clinical trials and new product scale-up activities



•

enforcement, defense and resolution of license and patent disputes



•

ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues



•

attainment of milestones under collaborative agreements necessary to earn contract revenues



•

competitive pressures on average selling prices



•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

manufacturing delays or inefficiencies



•

potential changes in our relationship with LRE which could impact the manufacture of the Triage meter



•

changes in reimbursement policies



•

regulatory uncertainties or delays



•

product recalls



•

shipment problems, and



•

costs and timing associated with business development activities, including potential licensing of technologies.

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        Operating results would also be adversely affected by a downturn in the market for our products. Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations, Biosite Discovery and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our Biosite Discovery or product development efforts are unsuccessful or subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis, and our growth or operating results may not be consistent with predictions made by securities analysts.

Recent developments

License and patent disputes

        Our dispute with XOMA pertains to patents that were licensed to us in 1998 and 1999. In May 2001, XOMA claimed that we were in breach of its license agreements and subsequently purported to terminate the license, which led to continuing litigation between the two companies. We maintain that we are in full compliance with the license agreements and have not breached our obligations, and therefore there is no basis for termination.

New Antibody Expression Technology

        In February 2002, we announced that we have designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products will be produced using our new technology. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes.

New Products—Triage TOX Drug Screen

        In January 2002, we received FDA clearance to market the Triage TOX Drug Screen within the U.S. The Triage TOX Drug Screen is a qualitative test that enables hospital physicians to quickly and conveniently perform toxicology screening of urine for eight classes of commonly abused drugs in approximately fifteen minutes. Based on the Triage MeterPlus platform, the test can be used at the point-of-care as an aid in identifying patients with drug overdose.

New Corporate Headquarters

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $27.5 million. As of March 27, 2002 we have deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including obtaining city permits, the grading of the land and construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of first quarter of 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase are estimated to be $70.0 million. We expect that the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility.. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding

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into a new facility would be expected to result in cash expenditures prior to occupancy for the purchase of land and construction costs that would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

Critical Accounting Policies Involving Management Estimates and Assumptions

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

        Revenue Recognition.    We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment. Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

        Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain pre-clinical milestones and royalties should products successfully be commercialized as a result of the collaboration. Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless the Company has no further continuing performance obligations related to the fees. Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance. Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement. Contract revenues that are based on the performance of and collection by our collaborative partners or their partners are deferred until such performance is complete and collection is probable. We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

        The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

        Inventories and Related Allowance for Obsolete and Excess Inventory.    Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

        Intangible and Other Long-Lived Assets.    At December 31, 2001, we have approximately $28.9 million of long-lived assets, including $13.8 million of property, plant and equipment and $9.2 million of capitalized patents and license rights. Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on

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management's estimates of the period that the assets will generate revenue directly or indirectly. License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Results of Operations

Years ended December 31, 2001 and 2000

        Product Sales.    Product sales increased 20% to $62.2 million in 2001 from $51.7 million in 2000. The increase in product sales was primarily attributable to the growth in net sales of our cardiovascular diagnostic products, the Triage Cardiac Panel and Triage BNP Test. Net sales of our meter platform products, consisting of the Triage Cardiac Panel, Triage BNP Test and Triage Meter, were approximately $21.2 million for 2001, as compared to $13.3 million for 2000. The Triage Cardiac Panel's net sales growth was primarily due to growth in our customer base and to a lesser extent due to changes in the average net sales price. The Triage BNP Test was launched in the U.S. in December 2000.

        Net sales of our qualitative platform products, consisting of the Triage Drugs of Abuse Panel and Triage Micro Panels (consisting of the Triage C. difficile Panel and Triage Parasite Panel), were approximately $41.0 million in 2001, as compared to $38.4 million in 2000. The net sales growth for our qualitative platform products was primarily related to an increase in the average net sales prices for our Triage Drugs of Abuse Panel. The impact of the increase in the average net sales price for our Triage Drugs of Abuse Panel was estimated to be $1.5 million. Net sales of the Triage Drugs of Abuse Panel for 2001 were approximately $36.7 million, as compared to $35.2 million in 2000. We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market.

        Contract Revenues.    Contract revenues consist of revenues associated with our research and development and licensing arrangements, including license fees, milestone revenues, royalties, research funding and antibody fees. Contract revenues for the year ended December 31, 2001 were $3.5 million as compared to $3.3 million for 2000. Contract revenues recognized during 2001 consisted primarily of research funding and antibody fees. In June 2000, we entered into an alliance with Medarex Inc. Under the terms of the agreement, we receives research funding of $3.0 million per year over eight years from Medarex, along with research fees and, if any products are generated through the collaboration, milestone payments and royalties. During 2001 and 2000, we recognized $3.0 million and $1.8 million, respectively, of research funding from the alliance with Medarex. Other contract revenues recognized during 2001 and 2000 included antibody fees, milestone payments and license fees. Biosite Discovery activities are performed and its costs are incurred by certain of our research and development teams. These Biosite Discovery research and development resources concurrently focus on programs for our partners, which generated our contract revenue, and on internal research and development programs. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $4.2 million and $3.5 million in 2001 and 2000, respectively, and are included in research and development expenses. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners with a resulting reduction of our contract revenues. During the fourth quarter of 2001, we established a $267,000 reserve for doubtful accounts related to one of our Biosite Discovery partners as a result of the impact of the XOMA dispute on our collaboration with them.

        Cost of Sales and Gross Profit From Product Sales.    Gross profit from product sales increased 23% to $44.5 million in 2001 from $36.1 million in 2000. The increase in gross profit was primarily

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attributable to the overall product sales growth. The overall gross margin from product sales increased to 72% for 2001 from 70% for 2000. The overall gross margin for 2001 increased primarily as a result of a greater manufacturing efficiency of our meter platform products, resulting primarily from larger production volumes, during 2001 as compared to 2000. Sales of our meter platform products represented 34% of our product sales in 2001, compared to 26% in 2000.

        Our newer products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel during the early stages of their commercialization as incremental manufacturing costs are spread over smaller sales volumes and efficiency issues are addressed. We also expect that although our gross profits may continue to grow, our overall gross margins may continue to decrease as a result of competitive pricing pressures related to the maturing Triage Drugs of Abuse product line and the changing mix of net sales of products with different gross margins.

        LRE manufactures the hand-held meter to be used in all of our Triage Meter System products. We are attempting to update various terms of the agreement including a possible increase in cost of approximately Euro 500, which is approximately $440 based on the exchange rate on March 18, 2002. If we are unable to renegotiate the LRE Agreement, we have agreed to terminate the contract by March 31, 2003, and assume the responsibility for the manufacture of the meter. Assuming the responsibility for the manufacture of the meter may affect our gross margins for the Triage Meters.

        Selling, General and Administrative Expenses (SG&A expenses).    Selling, general and administrative expenses increased 24% to $22.9 million in 2001 from $18.5 million in 2000. Increases in SG&A expenses were primarily associated with the expansion of our sales, clinical education and technical service resources, the expanded sales activities related to our broader product lines, additional marketing activities relating to new products and the increased administrative costs to support our expanded operations and business development activities.

        We expect selling, general and administrative costs in 2002 to be higher than in 2001, as we continue to expand our overall operations, including sales and marketing activities for our new products. We expect greater utilization of expanded sales, clinical education and technical service resources, and continued business development activities and administrative support functions. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our new products and the progress of business development activities.

        Research and Development Expenses.    Research and development expenses increased 5% to $13.9 million in 2001 from $13.3 million in 2000. During 2001, our research and development resources were focused primarily on new product development, the development of potential improvements to our existing products, and research activities associated with Biosite Discovery. Expenses related to the performance of our obligations associated with earning our contract revenues were incurred by our research and development group, primarily Biosite Discovery. We expect that our research and development expenses for 2002 to be higher than 2001. The increased expenditures will relate primarily to product development efforts, clinical studies, Biosite Discovery, and new product scale-up activities associated with potential new products. The timing of the expenditures and their magnitude are primarily dependent on the progress and success of the research and development and the timing of potential product launches.

        License and patent disputes.    Expenses associated with license and patent disputes incurred during 2001 totaled $3.2 million. The expenses consisted primarily of legal costs related to our litigation with XOMA. No expenses associated with the XOMA litigation were incurred prior to May 2001. We intend to vigorously defend ourselves in these disputes and expect that the total costs associated with executing our defense in the XOMA litigation may continue to be significant in 2002.

        Interest and Other Income net.    Interest and other income increased $671,000 to $2.6 million in 2001 from $1.9 million in 2000. The increases resulted primarily from the higher average balance of

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cash and marketable securities during 2001 as compared to 2000. Additionally, in December 2000, we decided to sell one of our marketable debt securities that had fallen below our investment guidelines. The security was sold in January 2001 and resulted in a $300,000 realized loss, which was accrued at December 31, 2000 as a permanent decline in value of the security.

        Benefit (Provision) for Income Taxes.    As a result of the pre-tax income and the estimated tax credits generated in each year, we recorded a provision for income taxes of $3.8 million for 2001 and $3.3 million for 2000. At December 31, 2001, we had net deferred tax assets of $5.5 million. The realization of the deferred tax assets is dependent upon the generation of future taxable income of approximately $14 million. We will continue to assess the likelihood of realization of our net deferred tax assets. If future events occur which do not make the realization of such assets more likely than not, a valuation allowance will be established against all or a portion of the net deferred tax assets.

Years ended December 31, 2000 and 1999

        Product Sales.    Product sales increased 20% to $51.7 million in 2000 from $43.0 million in 1999. The increase in product sales was primarily attributable to the growth in net sales of our Triage Cardiac System, one of our meter platform products. Net sales of our meter platform products, consisting of the Triage Cardiac System and Triage BNP System, were approximately $13.3 million for 2000, as compared to $6.6 million for 1999. The Triage Cardiac System's net sales growth was primarily due to growth in our customer base and greater average product utilization by our customers.

        Net sales of our qualitative platform products, consisting of the Triage Drugs of Abuse Panel and Triage Microbiology Panels, were approximately $38.4 million for 2000, compared to $36.5 million for 1999. The growth in our qualitative platform products was primarily related to sales growth in the Triage Drugs of Abuse Panel. Net sales of the Triage Drugs of Abuse Panel for 2000 increased $1.4 million, or 4%, as compared to 1999.

        Contract Revenues.    Contract revenues for the year ended December 31, 2000 were $3.3 million as compared to $703,000 for 1999. Contract revenues recognized during 2000 related primarily to the licensing of technology and performance of activities under Biosite Discovery collaborative research and development agreements. In June 2000, we entered into an alliance with Medarex, Inc. During 2000, we recognized $1.8 million in research funding directly from Medarex under the collaboration. The remainder of the contract revenue for 2000 related to research milestones achieved, license fees and antibody development fees. Contract revenue recognized during 1999 related to activities associated with a research and development feasibility study and Biosite Discovery research and development activities. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $3.5 million and $2.9 million in 2000 and 1999, respectively, and are included in research and development expenses.

        Cost of Sales and Gross Profit From Product Sales.    Gross profit from product sales increased 23% to $36.1 million in 2000 from $29.4 million in 1999. The increase in gross profit was primarily attributable to the overall product sales growth. The overall gross margin increased to 70% for 2000 from 68% for 1999. The overall gross margin for 2000 increased primarily as a result of a greater manufacturing efficiency of our meter platform products, primarily the Triage Cardiac System, during 2000 as compared to 1999. During the first quarter of 1999, we experienced significant inefficiencies related to the production of the Triage Cardiac Panel, which resulted in an overall gross margin of 60% during that quarter. Since the first quarter of 1999, our overall quarterly gross margins have ranged between 67% and 73%. During 1999, we were able to utilize some of our manufacturing resources for new product scale-up and validation activities related to products that were under development. The costs of new product scale-up and validation activities were charged to research and development expenses, contributing to the 1999 gross margins.

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        Selling, General and Administrative Expenses (SG&A expenses).    Selling, general and administrative expenses increased 5% to $18.5 million in 2000 from $17.6 million in 1999. Increases in SG&A expenses were primarily associated with additional marketing activities relating to new products, the expanded sales activities related to our broader product lines and the increased administrative costs to support our expanded operations and business development activities. SG&A expenses for 1999 included administrative costs totaling approximately $725,000 associated with the reorganization of our manufacturing operations and a business development opportunity that we decided to forego.

        Research and Development Expenses.    Research and development expenses were $13.3 million in 2000, consistent with 1999. During 2000, our research and development resources were focused primarily on: 1) the Biosite Discovery activities 2) activities related to the gathering of additional data needed for the approval of our Triage BNP test, which was approved in November 2000 3) clinical studies and 4) the development of potential improvements to our existing and new products. During 1999, our research and development resources were focused primarily on the development, clinical studies, manufacturing scale-up and validation of products under development, potential improvements to our existing products and research activities associated with the Biosite Discovery Program.

        Interest and Other Income net.    Interest and other income increased 7% to $1.9 million in 2000 from $1.8 million in 1999. The increase in interest income resulted primarily from the higher average balance of cash and marketable securities and higher overall interest rates on marketable debt securities during 2000 as compared to 1999. During the fourth quarter of 2000, we decided to sell one of our marketable debt securities that had fallen below our investment guidelines. The security was sold in January 2001 and resulted in a $300,000 realized loss, which was accrued at December 31, 2000 as a permanent decline in value of the security.

        Benefit (Provision) for Income Taxes.    As a result of the pre-tax income and the estimated tax credits generated in each year, we recorded a provision for income taxes of $3.3 million for 2000 and a benefit for income taxes of $166,000 for 1999. The benefit for income taxes recognized in the fourth quarter of 1999 included $112,000 of benefit resulting from the recognition of research and development credits generated during the first three quarters of 1999.

Liquidity and Capital Resources

        We have financed our operations through revenues from operations, private and public placements of equity securities, debt and capital lease financing, cash received under collaborative agreements and interest income. At December 31, 2001, the Company had cash, cash equivalents and marketable securities of approximately $55.5 million, an increase of $19.3 million from $36.2 million at December 31, 2000.

        The increase in cash, cash equivalents and marketable securities during 2001 was largely attributable to cash generated from the operating activities of $21.7 million, as compared to $4.6 million during 2000. The cash generated from operating activities included the reduction of accounts receivable of $3.5 million, tax benefit of disqualifying dispositions of $4.6 million and a refund of income taxes paid of $1.7 million. Other sources of cash included the receipt of $6.1 million in proceeds from the issuance of common stock under our stock plans, and the receipt of $2.0 million in proceeds from equipment financing. Significant uses of cash during 2001 included the purchase of leasehold improvement and capital equipment of approximately $6.6 million, principal payments under equipment financing obligations of $2.1 million, and investments in patents, license rights, deposits, and other assets of $2.6 million.

        Our primary short-term needs for capital, which are subject to change, are for the support of our commercialization efforts related to new products, facility expansion, improvements of our manufacturing capacity and efficiency, new product development, license and patent disputes, clinical

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trials, development and expansion of our Biosite Discovery antibody research capacity, and the continued advancement of research and development efforts. We executed agreements to license technologies patented by others that call for future royalties based on product sales utilizing the licensed technologies. We may enter into additional licensing agreements that may include up-front and annual cash payments and future royalties based on product sales utilizing the licensed technologies. We utilized and may continue to utilize credit arrangements with financial institutions to finance the purchase of capital equipment. Additionally, we may utilize cash generated from operating activities, if any, to meet our capital requirements.

        We are also addressing our future facilities expansion needs. We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $27.5 million. As of March 27, 2002 we have deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including obtaining city permits, the grading of the land and construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of first quarter of 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase are estimated to be $70.0 million. We expect that the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in cash expenditures prior to occupancy for the purchase of land and construction costs that would be reimbursed from loan proceeds if we're successfully in obtaining financing, and an increase in occupancy costs.

        We believe that our available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy our funding needs for at least the next 24 months, except for a portion of the cost of our facility expansion plan. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional credit facilities. We intend to pursue additional credit facilities to finance a portion of the land purchase price and the subsequent buildings construction costs. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. Our future liquidity and capital funding requirements will depend on numerous factors, including:

•

the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive



•

the costs and timing of further expansion of sales, marketing and manufacturing activities, expansion of our Biosite Discovery capacity and our facilities expansion needs



•

the enforcement, defense and resolution of license and patent disputes



•

the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues



•

the timing and results of research and development efforts including clinical studies and regulatory actions regarding our potential products



•

changes in third-party reimbursement policies, and

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•

the costs and timing associated with business development activities, including potential licensing of technologies patented by others.

        Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to changes in interest rates, primarily from our variable-rate long-term debt arrangements and, to a lesser extent, our investments in available-for-sale marketable securities. Under our current policies, we do not use interest rate derivatives instruments to manage this exposure to interest rate changes. We do have the option to convert our variable-rate long-term debt arrangements to fixed-rate debt arrangements for a nominal transaction fee. As of December 31, 2001, we had variable-rate debt totaling approximately $383,000. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

        Additionally, our purchases of Triage Meters from LRE Technology Partner GmbH, LRE, are denominated in Euros and sales of some products to some international customers are denominated in the local currency of customers. We have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes. As of December 31, 2001, we had no outstanding forward exchange contracts. Total receivables and payables denominated in foreign currencies as of December 31, 2001 were not material.

Item 8. Financial Statements and Supplementary Data

        Refer to the Index on Page F-l of the Financial Report included herein.

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

        Not applicable.

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PART III

        Some information required by Part III is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 1999 Annual Meeting of Stockholders (the "Proxy Statement").

Item 10. Directors and Executive Officers of the Registrant

        The information required by this section with respect to Directors is incorporated by reference from the information in the section entitled "Election of Directors" in the Proxy Statement. Our executive officers, their positions, and ages as of January 31, 2002 are as follows:

Name	Age	Position
Timothy J. Wollaeger	58	Director and Chairman of the Board
Anthony DeMaria, M.D	59	Director
Howard E. Greene, Jr.	59	Director
Lonnie M. Smith	57	Director
Kim D. Blickenstaff	49	Director, President, Chief Executive Officer, Treasurer, and Secretary
Gunars E. Valkirs, Ph.D.	50	Director, Vice President, Biosite Discovery, and Chief Technical Officer
Thomas M. Watlington	46	Senior Vice President, Commercial Operations
Kenneth F. Buechler, Ph.D.	48	Vice President, Research & Development
Christopher R. Hibberd	36	Vice President, Strategic Planning and Business Development
Nadine E. Padilla	41	Vice President, Corporate and Investor Relations
Christopher J. Twomey	42	Vice President, Finance and Chief Financial Officer
Peter Witerzens, Ph.D.	60	Vice President, Operations

Timothy J. Wollaeger has served as Chairman of the Board of Directors since the Company's inception. He is the general partner of Kingsbury Associates, L.P., a venture capital firm he founded in December 1993. From May 1990 until December 1993, he was Senior Vice President and a director of Columbia Hospital Corporation (now HCA Healthcare Corporation). From October 1986 until July 1993, he was a general partner of the general partner of Biovest Partners, a seed venture capital firm ("Biovest"). He is a director of several privately held medical products companies. Mr. Wollaeger received a B.A. in Economics from Yale University and an M.B.A. from Stanford University.

Anthony DeMaria joined the Board of Directors in June 1998. Dr. DeMaria is Professor of Medicine and Chief, division of cardiology at University of California, San Diego, School of Medicine. Prior to joining the University of California in 1992, Dr. DeMaria was Director of the Kentucky Heart Institute. Prior to joining the Kentucky Heart Institute, he held key management positions at the University of Kentucky College of Medicine and the University of California, Davis, School of Medicine. In 1988, Dr. DeMaria served as president of the American College of Cardiology and he is past president of the American Society of Echocardiography. Dr. DeMaria received a B.S. from College of the Holy Cross, and his M.D. from New Jersey College of Medicine.

        Howard E. Greene, Jr.    joined the Board of Directors in June 1989. Mr. Greene is an entrepreneur who founded, managed and financed a series of medical technology companies during the past 20 years. From September 1987 to July 1996, Mr. Greene was the founding Chief Executive Officer of Amylin Pharmaceuticals, Inc., a biotechnology company developing drug candidates for treating

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diabetes ("Amylin"). From October 1986 until July 1993, Mr. Greene was a founding general partner of Biovest. He was Chief Executive Officer of Hybritech Incorporated ("Hybritech") from March 1979 until its acquisition by Eli Lilly & Co. in March 1986, and was co-inventor of Hybritech's patented monoclonal antibody assay technology. Prior to joining Hybritech, he was an executive with the medical diagnostics division of Baxter Healthcare Corporation from 1974 to 1979, and a consultant with McKinsey & Company from 1967 to 1974. He is Chairman of the Board of Epimmune Inc. and a director of Amylin. Mr. Greene received an M.B.A. from Harvard University.

Lonnie M. Smith joined the Board of Directors in October 1997. Mr. Smith is Chief Executive Officer of Intuitive Surgical Inc., a surgical device company. From 1982 to February 1997, he served as Senior Executive Vice President in charge of healthcare for Hillenbrand Industries, Inc. ("Hillenbrand"), a diversified public holding company. Mr. Smith was a director of Hillenbrand from 1981 to February 1997. He had been employed by Hillenbrand or its subsidiaries in various offices since 1976. Mr. Smith received a B.S. in Electrical Engineering from Utah State University and an M.B.A. from Harvard Business School.

Kim D. Blickenstaff, a founder of the Company, has been President and Chief Executive Officer, Treasurer and Secretary since April 1988. Mr. Blickenstaff also is a director of Micro Therapeutics Incorporated and Medi Spectra Inc. Prior to joining Biosite, he held various positions in finance, operations, research management, sales management, strategic planning, and marketing with Baxter Travenol, National Health Laboratories, and Hybritech. Mr. Blickenstaff holds an M.B.A. from the Graduate School of Business, Loyola University, Chicago.

Gunars E. Valkirs, Ph.D., a founder of Biosite and a co-inventor of certain of our proprietary technology, has been a director, Vice President and Chief Technical Officer since 1988. Dr. Valkirs has been Vice President, Biosite Discovery since April 2001. Prior to April 2001, he was our Vice President, Research and Development. Before forming Biosite, he was a Scientific Investigator with the Diagnostics Research & Development Group at Hybritech, where he was the primary inventor of Hybritech's patented ICON technology. Dr. Valkirs holds a Ph.D. in Physics from the University of California at San Diego.

Thomas M. Watlington joined us as Senior Vice President of Commercial Operations in December 1996. He was formerly Vice President, Marketing for the Diabetes Care Division for Boehringer Mannheim. From 1982 to December 1996, Mr. Watlington held various positions in marketing, strategic analysis and product development with Boehringer Mannheim. Mr. Watlington holds a B.S. degree from the University of Maryland.

Kenneth F. Buechler, Ph.D., a founder of Biosite and a co-inventor of certain of our proprietary technology, has been Vice President, Research and Development since April 2001. From January 1994 to April 2001, he was Vice President, Research and was Director of Chemistry from April 1988 to January 1994. Before forming Biosite, he was a Senior Scientist in the Diagnostics Research and Development Group at Hybritech. Dr. Buechler holds a Ph.D. in Biochemistry from Indiana University.

Christopher R. Hibberd joined us in June 1997 to head our business development activities after spending five years with the Boston Consulting Group ("BCG"). At BCG, Mr. Hibberd was a Manager, leading client case teams in developing and implementing value-creating strategies for businesses in a variety of industry sectors. Prior to that, he held consulting positions at various companies and also was a Development Engineer for Albright & Wilson Americas from 1987 to 1990. Mr. Hibberd received an Engineering degree from the University of Toronto, Canada and his M.B.A. from the University of Western Ontario, Canada.

Nadine E. Padilla joined us as Director of Investor Relations and Corporate Communications in 1997 and was promoted to Vice President of Corporate and Investor Relations in October 2000. Prior to joining Biosite, Ms. Padilla was the Investor Relations Manager at Pyxis Corporation from its IPO in

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1992 until its acquisition by Cardinal Health, Inc. in 1995. From 1995 to 1997, she was the Product Director for Pyxis' Access Medical Systems product line. Ms. Padilla also held various investor relations and financial reporting positions at HomeFed Bank and Great American Bank between 1985 and 1992. Ms. Padilla holds a bachelor's degree from the University of California, San Diego and an M.B.A from the University of California, Los Angeles.

Christopher J. Twomey joined us as Director of Finance in March 1990 and was promoted to Vice President of Finance and Chief Financial Officer in 1993. From 1981 to March 1990, Mr. Twomey was employed at Ernst & Young LLP, where from October 1985 to March 1990, he served as an Audit Manager. Mr. Twomey holds a B.A. in Business Economics from the University of California at Santa Barbara.

Peter Witerzens, Ph.D., joined us as Vice President of Operations in February 2000. From 1998 to the end of 1999, Dr. Witerzens was the Senior Director, Lab Systems Operations at Roche Diagnostics Indianapolis where he was responsible for the manufacturing activities of Roche's Laboratory Systems products, including the consolidation and relocation of two Roche production sites. From 1989 to 1998 he was Senior Director, Production Immunological Test and Control Sera for Roche Diagnostics in Penzberg Germany. Dr. Witerzens received his Diploma in Chemistry and his Ph.D. in Pharmaceutical Chemistry from the University of Karlsruhe, Germany.

        Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is contained in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation

        The information required by this item is incorporated by reference from the information in the section entitled "Compensation of Executive Officers and Directors" in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

        The following table sets forth information as of January 31, 2002, regarding beneficial ownership of the Company's Common Stock by (i) each director and nominee for director, (ii) each of the Company's officers and former officers named in the Summary Compensation Table set forth herein, (iii) all current directors and executive officers of the Company as a group and (iv) each person who is known by the Company to beneficially own more than 5% of the Company's Common Stock. Except as otherwise indicated and subject to applicable community property laws, each person has sole investment

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and voting power with respect to the shares shown. Ownership information is based upon information furnished by the respective individuals or entities, as the case may be.

	Shares Beneficially Owned	Percent Beneficially Owned
Kopp Investment Advisers, Inc. (1) 7701 France Avenue South Suite 500 Edina, MN 55435	2,476,327	16.9	%
Citigroup Inc. (2) 399 Park Avenue New York, NY 10043	1,096,639	7.5	%
Wellington Management Company, LLP (3) 75 State Street Boston, MA 02109	848,500	5.8	%
Waddell & Reed Investment Management Company (4) 6300 Lamar Avenue Overland Park, KS 66202	771,500	5.3	%
Kim D. Blickenstaff (5)	429,299	2.9	%
Gunars E. Valkirs, Ph.D. (5)(6)	447,575	3.0	%
Kenneth F. Buechler, Ph.D. (5)(7)	413,236	2.8	%
Howard E. Greene (5)(8)	287,093	2.0	%
Thomas D. Watlington (5)(9)	216,986	1.5	%
Christopher J. Twomey (5)(10)	201,358	1.4	%
Timothy J. Wollaeger (5)(11)	22,783	*
Lonnie Smith (5)	16,274	*
Anthony DeMaria, M.D. (5)	8,517	*
All directors and executive officers as a group (12 persons) (12)	2,198,912	14.1	%

*

Less than 1%

(1)

Pursuant to its Schedule 13G/A dated January 23, 2002 that reported its holdings as of December 31, 2001, Kopp Investment Advisors, Inc. ("KIA") reported the beneficial ownership of 2,476,327 shares of Company Common Stock and stated that such shares are held in a fiduciary or representative capacity by KIA. KIA reports that it has sole voting power as to 689,450 shares, sole dispositive power as to 500,000 shares and shared dispositive power as to 1,976,327 shares. LeRoy C. Kopp owns 100% of the outstanding stock of Kopp Holding Company, of which KIA is a wholly-owned subsidiary. LeRoy C. Kopp reported beneficial ownership of 2,495,827 shares of Company Common Stock, sole voting power with respect to 19,500 shares and sold dispositive power over 19,500 shares.

(2)

Based on a Schedule 13G dated February 5, 2002 that reported its holdings as of December 31, 2001. The Schedule 13G was filed jointly by Salomon Smith Barney Fund ("SB Fund"), Salomon Smith Barney Holdings Inc. ("SSB Holdings") and Citigroup Inc. ("Citigroup"). According to this Schedule 13G, Citigroup is the sole stockholder of SSB Holdings and SSB Holdings is the sole stockholder of SB Fund. In the Schedule 13G, SB Fund reported beneficial ownership of 1,069,700 shares of the Company Common Stock, shared voting power as to 1,069,700 shares and shared dispositive power as to 1,069,700 shares; SSB Holdings reported beneficial ownership of 1,096,639 shares of the Company Common Stock, shared voting power as to 1,096,639 shares and shared dispositive power as to 1,096,639 shares; and Citigroup reported beneficial ownership of 1,096,639 shares of the Company Common Stock, shared voting power as to 1,096,639 shares and shared dispositive power as to 1,096,639 shares. Citigroup stated on this Schedule 13G that the numbers

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that it provided for beneficial ownership, shares as to which it has shared voting power and shares as to which it has shared dispositive power included shares held by other reporting persons.

(3)

Pursuant to its Schedule 13G dated February 14, 2002 that reported its holdings as of December 31, 2001, Wellington Company LLP ("Wellington") reported beneficial ownership of 848,500 shares on behalf of itself and its wholly-owned subsidiary, Wellington Trust Company NA. The Schedule 13G states that Wellington has shared voting power over 525,600 shares and shared dispositive power over 848,500 shares. The Schedule 13G further states that Wellington is filing the Schedule in its capacity as an investment advisor and that the shares as to which Wellington filed the Schedule are owned of record by its clients.

(4)

Based on a Schedule 13G dated January 7, 2002 that reported its holdings as of December 31, 2001. The Schedule 13G was filed jointly by Waddell & Reed Investment Management Company ("WRIMCO"), Waddell & Reed, Inc. ("WRI"), Waddell & Reed Financial Services Inc. ("WRFSI") and Waddell & Reed Financial, Inc. ("WDR"). According to this Schedule 13G, WRIMCO, WRI, WRFSI and WDR reported beneficial ownership of 771,500 shares of the Company Common Stock, sole voting power as to 771,500 shares and sole dispositive power as to 771,500 shares. In this Schedule 13G, WRIMCO, WRI, WRFSI and WDR state that the securities reported are beneficially owned by one or more open-end investment companies or other managed accounts which are advised or sub-advised by WRIMCO, an investment advisory subsidiary of WRI. WRI is a broker-dealer and underwriting subsidiary of WRFSI, a parent holding company. The Schedule 13G further states that WRFSI is a subsidiary of WDR, a publicly traded company. The investment advisory contracts grant WRIMCO all investment and/or voting power over securities owned by such advisory clients. The investment sub-advisory contracts grant WRIMCO investment power over securities owned by such sub-advisory clients and, in most cases, voting power. Any investment restriction of a sub-advisory contract does not restrict investment discretion or power in a material manner. Therefore, WRIMCO may be deemed the beneficial owner of the securities covered by the Schedule 13G. WRIMCO, WRI, WRFSI and WDR state in the Schedule 13G that they are of the view that they are not acting as a "group" for purposes of Section 13(d) under the 1934 Act. Indirect "beneficial ownership" is attributed to the respective parent companies solely because of the parent companies' control relationship to WRIMCO.

(5)

The amounts shown include shares which may be acquired currently or within 60 days after January 31, 2002, through the exercise of stock options as follows: Mr. Blickenstaff, 111,079 shares; Dr. Valkirs, 167,898 shares; Dr. Buechler, 121,681 shares; Mr. Greene, 8,774 shares; Mr. Watlington, 198,686 shares; Mr. Twomey, 128,730 shares; Mr. Wollaeger, 2,783 shares; Mr. Smith, 16,274 shares and Dr. DeMaria, 8,517 shares.

(6)

Includes 278,892 shares held of record by the Valkirs Family Trust as to which Dr. Valkirs has shared voting and investment power and 785 shares held by a family member as to which Dr. Valkirs has shared voting and investment power.

(7)

Includes 291,555 shares held in a trust for the benefit of Dr. Buechler's family as to which Dr. Buechler has shared voting and investment power.

(8)

Includes 278,319 shares held in a trust for the benefit of Mr. Greene's family as to which Mr. Greene has shared voting and investment power.

(9)

Includes 300 shares held in trust for the benefit of Mr. Watlington's niece over which Mr. Watlington has voting and investment power.

(10)

Includes 71,888 shares held in a trust for the benefit of Mr. Twomey's family and 740 shares held by a family member as to which Mr. Twomey has shared voting and investment power.

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(11)

Includes 20,000 shares held in trust for the benefit of Mr. Wollaeger's family as to which Mr. Wollaeger has shared voting and investment power.

(12)

Includes as outstanding an aggregate of 898,475 shares which may be acquired currently or within 60 days after January 31, 2002 pursuant to the exercise of options. Also includes 941,739 shares held by family trusts for the benefit of family members of directors and executive officers as to which such directors and executive officers have voting and investment power.

Item 13. Certain Relationships and Related Transactions

        The information required by this item is incorporated by reference from the information in the section entitled "Certain Relationship and Related Transactions" in the Proxy Statement.

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PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

(1)    Financial Statements

        Our financial statements are included herein as required under Item 8 of this annual report on Form 10-K. See Index on page F-l.

(2)

Financial Statement Schedules

        Schedule II Valuation and Qualifying Accounts

        The other financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

(3)

Exhibits

        The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K has been identified.

EXHIBIT NUMBER		DESCRIPTION OF DOCUMENT
3.(i	)(11)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended.
3.(ii	)(1)	Amended and Restated Bylaws of Biosite.
4.1(1	)	Form of Common Stock Certificate with rights legend.
10.1(1	)(A)	Amended and Restated 1989 Stock Plan of Biosite Incorporated.
10.2(4	)(A)	Amended and Restated 1996 Stock Incentive Plan of Biosite Incorporated ("1996 Stock Plan").
10.3(1	)(A)	Form of Incentive Stock Option Agreement under the 1996 Stock Plan.
10.4(1	)(A)	Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan.
10.5(5	)	Biosite Diagnostics Incorporated Employee Stock Purchase Plan.
10.6(1	)(A)	Form of Indemnity Agreement between the Company and its officers and directors.
10.7(1	)	Sublease Agreement between Biosite and General Atomics, dated February 17, 1992, as amended on August 10, 1992, January 21, 1993, October 29, 1993, March 1, 1995 and October 1, 1996.
10.8(1	)(+)	Antibody License Agreement between Biosite and Sandoz Pharma Ltd. (currently known as Novartis Pharma AG), dated September 22, 1995, as amended on July 26, 1996.
10.9(1	)(+)	Easy Assay License Agreement between Biosite and Sandoz Pharma Ltd. (currently known as Novartis Pharma AG), dated September 22, 1995.
10.11(1	)(+)	Development, Supply and Distribution Agreement between Biosite and Kyoto Dai-Ichi Kagaku Co., Ltd., dated as of February 14, 1995.
10.12(1	)(+)	Development and Supply Agreement between Biosite and LRE Relais + Elektronik GmbH — Medical Technology, dated September 23, 1994.
10.19(1	)	Debenture Purchase Agreement between Biosite and Sandoz Pharma Ltd. (currently known as Novartis Pharma AG), dated as of September 22, 1995.
10.20(1	)(+)	Settlement and License Agreement & Agreement of Dismissal with Prejudice, between Biosite and Abbott Laboratories, dated as of September 6, 1996.
10.21(1	)	Lease Agreement between Biosite and TCEP II Properties Limited Partnership dated July 26, 1996.
10.22(1	)	Lease Agreement between Biosite and Sorrento West Limited dated September 21, 1994.

-54-

10.24(3	)	Rights Agreement dated as of October 22, 1997 between Biosite (formerly Biosite Diagnostics Incorporated) and Fleet National Bank (f/k/a BankBoston, N.A.) as Rights Agent.
10.25(9	)	Amendment No. 1 to Rights Agreement dated as of December 9, 1999 between Biosite Incorporated (formerly Biosite Diagnostics Incorporated) and BankBoston, N.A. as Rights Agent.
10.26(10	)	Amendment No. 2 to Rights Agreement dated as of July 18, 2001 between Biosite Incorporated (formally Biosite Diagnostics Incorporated) and Fleet National Bank (f/k/a BankBoston, N.A.) and American Stock Transfer and Trust as successor Rights Agent.
10.27(6	) (+)	Letter Agreement between Biosite and Novartis Pharma AG, dated November 20, 1997.
10.28(7	) (+)	Distributorship Agreement between Biosite and Fisher Scientific Company L.L.C. dated April 3, 1998.
10.29(8	) (+)	Distributorship Agreement between Biosite and Fisher Scientific Company L.L.C. dated January 1, 2001.
10.30		Purchase Agreement and Escrow Instructions between Biosite and H.G. Fenton Company dated December 7, 2001.
10.31		First Amendment to Purchase Agreement and Escrow Instructions between Biosite and H.G. Fenton Company dated February 12.2002.
10.32		Second Amendment to Purchase Agreement and Escrow Instructions between Biosite and H.G. Fenton Company dated February 14.2002.
23.1		Consent of Ernst & Young LLP, independent auditors.

(1)

Incorporated by reference to the exhibits of the same number to Biosite's Registration Statement on Form S-1, No. 333-17657.

(2)

Incorporated by reference to Exhibit 16.23 to Biosite's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

(3)

Incorporated by reference to Exhibit 4.1 to Biosite's Registration Statement on Form 8-A, filed on October 28, 1997

(4)

Incorporated by reference to Exhibit A to Biosite's Definitive Proxy Statement dated April 28, 1999 and filed with the Securities and Exchange Commission.

(5)

Incorporated by reference to Exhibit 10.2 to Biosite's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

(6)

Incorporated by reference to Exhibit 10.25 to Biosite's Annual Report on Form 10-K for the year ended December 31, 1997.

(7)

Incorporated by reference to Exhibit 10.28 to Biosite's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

(8)

Incorporated by reference to Exhibit 10.28 to Biosite's Annual Report on Form 10-K for the year ended December 31, 2000.

(9)

Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to Biosite's Registration Statement on Form 8-A, filed on July 18, 2001.

(10)

Incorporated by reference to Exhibit 4.3 to Amendment No. 1 to Biosite's Registration Statement on Form 8-A, filed on July 18, 2001.

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(11)

Incorporated by reference to Exhibit 3(i) to Biosite's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(A)

Indicates management contract or compensatory plan or arrangement.

        (+) Confidential treatment has been granted for certain portions of these exhibits.

        (*) Confidential treatment has been requested for certain portions of this exhibit.

(b)

Reports on Form 8-K

        We did not file any report on Form 8-K in the quarter ended December 31, 2001.

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BIOSITE INCORPORATED
SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Biosite has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.

	BIOSITE INCORPORATED
Date: March 28, 2002	By:	/s/  KIM D. BLICKENSTAFF Kim D. Blickenstaff President and Chief Executive Officer

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

Name	Title	Date
/s/  KIM D. BLICKENSTAFF Kim D. Blickenstaff	President, Chief Executive Officer (Principal Executive Officer) and Director	March 28, 2002
/s/  CHRISTOPHER J. TWOMEY Christopher J. Twomey	Vice President and Chief Financial Officer (Principal Financial Officer and Accounting Officer)	March 28, 2002
/s/  TIMOTHY J. WOLLAEGER Timothy J. Wollaeger	Chairman of the Board	March 28, 2002
/s/  ANTHONY DEMARIA Anthony DeMaria, M.D.	Director	March 28, 2002
/s/  HOWARD E. GREENE, JR. Howard E. Greene, Jr.	Director	March 28, 2002
/s/  LONNIE M. SMITH Lonnie M. Smith	Director	March 28, 2002
/s/  GUNARS E. VALKIRS Gunars E. Valkirs, Ph.D.	Director	March 28, 2002

-57-

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Ernst & Young LLP, Independent Auditors	F-2
Balance Sheets as of December 31, 2001 and 2000	F-3
Statements of Income for each of the three years in the period ended December 31, 2001	F-4
Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001	F-5
Statements of Cash Flows for each of the three years in the period ended December 31, 2001	F-6
Notes to Financial Statements	F-7

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Biosite Incorporated

        We have audited the accompanying balance sheets of Biosite Incorporated as of December 31, 2001 and 2000, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biosite Incorporated as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

San Diego, California
January 18, 2002

F-2

BIOSITE INCORPORATED

BALANCE SHEETS

(in thousands, except par value)

				December 31,
				2001		2000
Assets
Current assets:
	Cash and cash equivalents			$	13,011	$	1,800
	Marketable securities, available-for-sale				42,486		34,400
	Accounts receivable				8,254		11,794
	Inventories				7,117		6,445
	Income taxes receivable				155		1,083
	Deferred income taxes				1,329		2,337
	Prepaid expenses and other current assets				1,450		2,228
		Total current assets			73,802		60,087
Property, equipment and leasehold improvements, net					13,840		10,681
Deferred income taxes					4,207		3,182
Patents and license rights, net					9,208		8,614
Deposits and other assets					1,683		450
			Total assets	$	102,740	$	83,014
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable			$	2,326	$	1,293
	Accrued salaries and other				3,953		3,103
	Current portion of long-term obligations				2,008		2,024
		Total current liabilities			8,287		6,420
Long-term obligations					3,542		3,708
Commitments and contingencies
Stockholders' equity:
	Preferred stock, $.01 par value, 5,000 shares authorized; no shares issued and outstanding at December 31, 2001 and 2000				—		—
	Common stock, $.01 par value, 25,000 shares authorized; 14,639 and 14,127 shares issued and outstanding at December 31, 2001 and 2000, respectively				146		141
	Additional paid-in capital				75,891		65,085
	Unrealized net gain (loss) on marketable securities, net of related tax effect of $270 and $(56) at December 31, 2001 and 2000, respectively				405		(83	)
	Retained earnings				14,469		7,743
		Total stockholders' equity			90,911		72,886
			Total liabilities and stockholders' equity	$	102,740	$	83,014

See accompanying notes.

F-3

BIOSITE INCORPORATED

STATEMENTS OF INCOME

(in thousands, except per share amounts)

			Year Ended December 31,
			2001			2000			1999
Revenues:
	Product sales		$	62,155		$	51,667		$	43,011
	Contract revenues			3,485			3,319			703
		Total revenues		65,640			54,986			43,714
Operating expenses:
	Cost of product sales			17,644			15,616			13,636
	Selling, general and administrative			22,864			18,471			17,581
	Research and development			13,946			13,303			13,347
	License and patent disputes			3,204			—			—
		Total operating expenses		57,658			47,390			44,564
Operating income (loss)				7,982			7,596			(850	)
Interest and other income, net				2,577			1,906			1,788
Income before benefit (provision) for income taxes				10,559			9,502			938
Benefit (provision) for income taxes				(3,833	)		(3,339	)		166
Net income			$	6,726		$	6,163		$	1,104
Net income per share:
	Basic		$	0.47		$	0.45		$	0.08
	Diluted		$	0.44		$	0.41		$	0.08
Shares used in calculating per share amounts:
	Basic			14,413			13,722			13,032
	Diluted			15,430			15,207			13,728

See accompanying notes.

F-4

BIOSITE INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

			Preferred Stock			Common Stock								Accumulated Other Comprehensive Income (Loss)
											Additional Paid-in Capital						Deferred Compensation			Retained Earnings		Total Stockholders' Equity
			Shares	Amount		Shares		Amount
Balance at December 31, 1998			—	$	—	12,927		$	129		$	54,251		$	35		$	(208	)	$	476	$	54,683
Comprehensive income:
	Net income		—		—	—			—			—			—			—			1,104		1,104
	Other comprehensive income, net of tax
		Change in unrealized net gain (loss) on marketable securities	—		—	—			—			—			(166	)		—			—		(166	)
Comprehensive income			—		—	—			—			—			—			—			—		938
Issuance of common stock under employee stock plans			—		—	252			3			1,331			—			—			—		1,334
Repurchase and retirement of common stock			—		—	(38	)		(1	)		(358	)		—			—			—		(359	)
Deferred compensation related to cancelled stock options			—		—	—			—			(20	)		—			20			—		—
Amortization of deferred compensation			—		—	—			—			—			—			95			—		95
Income tax benefit from disqualifying dispositions of stock			—		—	—			—			194			—			—			—		194
Balance at December 31, 1999			—		—	13,141			131			55,398			(131	)		(93	)		1,580		56,885
Comprehensive income:
	Net income		—		—	—			—			—			—			—			6,163		6,163
	Other comprehensive income, net of tax
		Change in unrealized net gain (loss) on marketable securities	—		—	—			—			—			48			—			—		48
Comprehensive income			—		—	—			—			—			—			—			—		6,211
Issuance of common stock under stock plans, net			—		—	986			10			5,626			—			—			—		5,636
Amortization of deferred compensation			—		—	—			—			—			—			93			—		93
Compensation related to stock options granted to non-employees			—		—	—			—			76			—			—			—		76
Income tax benefit from disqualifying dispositions of stock			—		—	—			—			3,985			—			—			—		3,985
Balance at December 31, 2000			—		—	14,127			141			65,085			(83	)		—			7,743		72,886
Comprehensive income:
	Net income		—		—	—			—			—			—			—			6,726		6,726
	Other comprehensive income, net of tax
		Change in unrealized net gain (loss) on marketable securities	—		—	—			—			—			488			—			—		488
Comprehensive income			—		—	—			—			—			—			—			—		7,214
Issuance of common stock under stock plans, net			—		—	512			5			6,136			—			—			—		6,141
Compensation related to stock options granted to non-employees			—		—	—			—			50			—			—			—		50
Income tax benefit from disqualifying dispositions of stock			—		—	—			—			4,620			—			—			—		4,620
Balance at December 31, 2001			—	$	—	14,639		$	146		$	75,891		$	405		$	—		$	14,469	$	90,911

See accompanying notes.

F-5

BIOSITE INCORPORATED

STATEMENTS OF CASH FLOWS

(in thousands)

			Year ended December 31,
			2001			2000			1999
Operating activities:
Net income			$	6,726		$	6,163		$	1,104
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			4,173			4,108			3,661
	Amortization of deferred compensation and non-cash equity compensation			50			214			95
	Deferred income taxes			532			1,159			(325	)
	Changes in operating assets and liabilities:
		Accounts receivable		3,540			(5,602	)		382
		Inventory		(672	)		(386	)		(1,695	)
		Income taxes and other current assets		5,450			(379	)		94
		Accounts payable		1,033			(538	)		328
		Accrued liabilities		850			(141	)		720
Net cash provided by operating activities				21,682			4,598			4,364
Investing activities:
Proceeds from sales and maturities of marketable securities				44,865			27,220			29,082
Purchase of marketable securities				(52,136	)		(33,863	)		(23,570	)
Purchase of property, equipment and leasehold improvements				(6,583	)		(4,098	)		(5,180	)
Patents, license rights, deposits and other assets				(2,576	)		(1,966	)		(2,173	)
Net cash used in investing activities				(16,430	)		(12,707	)		(1,841	)
Financing activities:
Proceeds from issuance of equipment loans payable				1,951			1,841			2,094
Principal payments under long-term obligations				(2,133	)		(2,117	)		(1,760	)
Proceeds from issuance of stock under stock plans, net				6,141			5,591			1,334
Repurchase of common stock, net				—			—			(359	)
Net cash provided by financing activities				5,959			5,315			1,309
Increase (decrease) in cash and cash equivalents				11,211			(2,794	)		3,832
Cash and cash equivalents at beginning of year				1,800			4,594			762
Cash and cash equivalents at end of year			$	13,011		$	1,800		$	4,594
Supplemental disclosures of cash flow information:
	Interest paid		$	432		$	492		$	441
	Income taxes paid (refund)		$	(1,693	)	$	1,779		$	2
	Income tax benefit of disqualifying dispositions of stock		$	4,620		$	3,985		$	194

See accompanying notes.

F-6

BIOSITE INCORPORATED

NOTES TO FINANCIAL STATEMENTS

1. Organization and Summary of Significant Policies

Organization and Business Activity

        Biosite Incorporated was established in 1988. We are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician's ability to diagnose disease. We combine separate, yet integrated, discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis.

        Our diagnostics business is a leading provider of rapid immunoassays, or antibody-based diagnostic tests, that aid in the diagnosis of a variety of critical diseases. These tests are sold worldwide primarily for use in hospitals, although we believe that in the future certain tests may have applications in other clinical sites. Our two product platforms are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously. They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool.

        The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We focus our direct efforts on larger centers with more than 200 beds. In selling our products, we work with employees from a variety of areas within the hospital. These include laboratory administrators, who are generally the primary purchaser, emergency room physicians, specialists and administrative personnel. In marketing our products we utilize a direct sales team that includes account executives, who have extensive experience selling cardiovascular devices or drugs. The Fisher HealthCare division, Fisher, of the Fisher Scientific Company distributes our products in U.S. hospitals and supports our direct sales force, particularly in smaller hospitals. In international markets we utilize a network of country-specific and regional distributors.

        In March 1999, we launched Biosite Discovery, which is dedicated to the identification of new protein markers of acute diseases that lack good diagnostic tests. Through Biosite Discovery we access potential diagnostic targets via internal research or collaborations with partners. We access protein targets, select promising candidates, develop immunoassays for these targets and run the assays against patient samples provided by clinical collaborators in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers added to our product development pipeline. We conduct marker mining on known proteins identified through our independent research and on protein targets accessed from biotechnology and pharmaceutical partners. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use. In return, in addition to fees, we seek licenses to their protein targets' diagnostic rights. We believe this collaborative model is attractive to potential partners, that might otherwise have forego antibody development for certain targets or incur significant cost to access antibodies for their targets. Under Biosite Discovery, we have executed collaborative agreements with partners in the areas of cardiovascular, cerebrovascular, infectious disease and oncology.

F-7

Segment Information and Major Customers

        Financial Accounting Standards Board's Statement No. 131, Segment Information, FAS 131, amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in FAS 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by us in deciding how to allocate resources and in assessing performance. FAS 131 also requires disclosures about our products and services, geographic areas and major customers.

        Management of Biosite has determined that we currently operate principally in one operating segment: the discovery, development, manufacture and marketing of rapid, accurate and cost-effective diagnostic products that improve the quality of patient care and simplify the practice of laboratory medicine. Our chief operating decision-making group is the Management Group, which is comprised of the Chief Executive Officer, Senior Vice President and Vice Presidents. The Management Group primarily decides how to allocate resources based on the overall operating results and the contribution of each functional area towards achieving our business and financial goals. Our principal functional areas are: 1) Finance and Administration 2) Sales and Marketing 3) Research and Development and 4) Manufacturing.

        Our U.S. distributor accounted for 85%, 84% and 83% of the product sales in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, receivable amounts due from our U.S. distributor represented approximately 82% and 88%, respectively, of our accounts receivable. Export sales to international customers amounted to $7,719,000, $5,982,000, and $4,820,000 in 2001, 2000 and 1999, respectively.

Revenue Recognition

        We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment. Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

        Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain pre-clinical milestones and royalties should products successfully be commercialized as a result of the collaboration. Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless the Company has no further continuing performance obligations related to the fees. Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance. Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement. Contract revenues that are based on the performance of and collection by our collaborative partners or their partners are deferred until such performance is complete and collection is probable. We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

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Cash and Cash Equivalents

        Cash and cash equivalents consist of cash and highly liquid investments in debt securities with maturities of 90 days or less when purchased.

Marketable Securities

        Based on the nature of the assets held by us and management's investment strategy, our investments have been classified as available-for-sale. Management determines the appropriate classification of debt securities at the time of purchase. Securities classified as available-for-sale are carried at estimated fair value, as determined by quoted market prices, with unrealized gains and losses, net of tax, reported in a separate component of comprehensive income. At December 31, 2001, we had no investments that were classified as trading or held-to-maturity as defined by the Statement. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on sales of available-for-sale securities are computed based upon initial cost adjusted for any other than temporary declines in fair value and are included in interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income.

Inventories

        Inventories are valued at the lower of cost (first in, first out) or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

Property, Equipment and Leasehold Improvements

        Property, equipment and leasehold improvements are stated at cost.

Depreciation and Amortization

        Depreciation of property and equipment is computed using the straight-line method over three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term.

License Rights

        License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license.

Long-lived and Intangible Assets

        Our policy is to review the carrying amounts of long-lived and intangibles assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other items. In evaluating the recoverability

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of intangible assets, management's policy is to compare the carrying amounts of such assets with the estimated undiscounted future operating cash flows. In the event impairment exists, an impairment charge would be determined by comparing the carrying amount of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary. We do not believe the carrying amounts of intangible assets are impaired at December 31, 2001.

Stock Options

        We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, APB 25, and related interpretations in accounting for our stock options. For options granted during the one-year period prior to our initial public offering of common stock, we recorded and amortized, over the related vesting periods, deferred compensation representing the excess of the value for accounting purposes of the options granted over their aggregate exercise price. Stock options issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123 and EITF 96-18 and are periodically re-measured as the stock options vest.

Research and Development

        Research and development costs are expensed as incurred. Such cost include personnel costs, supplies, clinical trials, allocated facilities, depreciation, amortization and other indirect costs.

Concentration of Credit Risk

        We sell our products primarily to our U.S. distributor. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. Credit losses have been minimal and within management's expectations.

        We invest our excess cash in debt instruments of the U.S. Government, financial institutions and corporations with strong credit ratings. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. During the fourth quarter of 2000, we decided to sell one of our marketable debt securities that had fallen below our investment guidelines. The security was sold in January 2001 and resulted in a $300,000 realized loss, which was accrued at December 31, 2000 as a permanent decline in value of the security. We have experienced no other significant realized losses on our marketable securities.

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 reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Earnings Per Share

        Earnings per share, EPS, is computed in accordance with the Financial Accounting Standards Board's Statement No. 128, Earnings per share, FAS 128. FAS 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents which may be issuable upon exercise of outstanding common stock options. Common stock equivalents are not considered in loss years as the effect is antidilutive.

        Shares used in calculating basic and diluted earnings per share were as follows (in thousands):

		Year Ended December 31,
		2001	2000	1999
Shares used in calculating per share amounts — Basic (Weighted average common shares outstanding)		14,413	13,722	13,032
Effect of common share equivalents:
	Net effect of dilutive common stock options using the treasury stock method	1,017	1,485	696
Shares used in calculating per share amounts — Diluted		15,430	15,207	13,728

Comprehensive Income

        Financial Accounting Standards Board's Statement No. 130, Comprehensive Income, FAS 130, establishes rules for the reporting and display of comprehensive income and its components. FAS 130 requires the change in net unrealized gains or losses on marketable securities be included in comprehensive income. Net unrealized gains or losses on marketable securities are included in our Statements of Stockholders' Equity as other comprehensive income.

Effect of New Accounting Standards

        In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations,FAS 141 and No. 142, Goodwill and Other Intangibles Assets, FAS 142. FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives, but with no maximum life. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective October 1, 2002 but may early adopt in the first quarter of 2002. We do not believe that the adoption of these standards will have a material impact on the our financial statements.

        In October 2001, the FASB issued Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", FAS 144, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 supercedes the

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Financial Accounting Standards Board's Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30. FAS 144 is effective for fiscal years beginning after December 15, 2001. We do not believe the adoption of FAS 144 will have a significant effect on our financial statements.

Reclassification

        Certain amounts in the 1999 financial statements have been reclassified to conform to the presentation of the 2001 and 2000 financial statements.

2. Licensing Rights and Agreements

        We have entered into licensing agreements to utilize certain antibodies and/or technologies in exchange for up-front, annual, milestone, or royalty payments or a combination thereof. Certain of the up-front and annual payments are creditable towards future royalties payable. Royalties may be payable at various rates for product sales derived from the licensed technologies. At December 31, 2001 and 2000, total cost of license rights was $14.9 million and $13.4 million, respectively and accumulated amortization of the license rights was approximately $6.0 million and $5.4 million, respectively.

3. Biosite Discovery and Significant Collaborative and Distribution Agreements

        In March 1999, we launched Biosite Discovery, which is dedicated to the identification of new protein markers of acute diseases that lack good diagnostic tests. Through Biosite Discovery, we access protein targets, select promising candidates, develop immunoassays for these targets and run the assays against patient samples provided by clinical collaborators in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers added to our product development pipeline. We conduct marker mining on known proteins identified through our independent research and on protein targets accessed from biotechnology and pharmaceutical partners. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use. In return, we seek licenses to their protein targets diagnostic rights in addition to fees. We believe this collaborative model is attractive to potential partners, that might otherwise have forego antibody development for certain targets or incur significant cost to access antibodies for their targets. Under Biosite Discovery, we have executed collaborative agreements with partners in the areas of cardiovascular, cerebrovascular, infectious disease and oncology.

        In 2000 we entered into an agreement with Medarex, Inc. through which we are combining our proprietary phage display technology with Medarex's proprietary transgenic mouse technology to offer a process for high throughput development of high affinity fully human antibodies. This process is being provided as a service to biotechnology and pharmaceutical companies, which require high affinity, fully human antibodies for use in conducting drug target validation and, or, characterization experiments. Under the terms of the eight-year agreement, Medarex provides Biosite with research funding of $3 million per year.

        When Biosite and Medarex enter into agreements to provide high affinity, fully human antibodies to third-party biotechnology and pharmaceutical customers, we will generally receive a variety of

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payments and we will also seek exclusive or semi-exclusive diagnostic rights to the protein targets provided to us by biotechnology and pharmaceutical customers. Among the payments we might receive are: up-front technology access fees, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in drug development, milestone fees on targets that reach certain clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

        During 2001, 2000 and 1999, the Company recognized contract revenues of $3.5 million, $3.3 million and $703,000, respectively, related to activities performed or milestones achieved under the collaborative agreements. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $4.2 million, $3.5 million and $2.9 million in 2001, 2000 and 1999, respectively, and are included in research and development expenses.

4. Cash, Cash Equivalents and Marketable Securities

        The following is a summary of cash, cash equivalents and available-for-sale marketable securities by balance sheet classification at December 31, 2001 (in thousands):

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
	Cash	$	7,127	$	—	$	—		$	7,127
	Certificate of deposit		287		—		—			287
	U.S. Municipalities debt securities		340		—		—			340
	Money market fund		5,257		—		—			5,257
			13,011		—		—			13,011
Marketable securities:
	U.S. Government debt securities		12,606		233		(21	)		12,818
	U.S. Municipalities debt securities		1,360		31		—			1,391
	Corporate debt securities		25,516		442		(9	)		25,949
	Certificate of deposit		2,329		6		(7	)		2,328
			41,811		712		(37	)		42,486
Total cash, cash equivalents and available-for-sale marketable securities		$	54,822	$	712	$	(37	)	$	55,497

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        The following is a summary of cash, cash equivalents and available-for-sale marketable securities by balance sheet classification at December 31, 2000 (in thousands):

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
	Cash	$	1,054	$	—	$	—		$	1,054
	Money market fund		346		—		—			346
	Certificate of deposit		400		—		—			400
			1,800		—		—			1,800
Marketable securities:
	U.S. Government debt securities		7,288		28		(5	)		7,311
	Corporate debt securities		27,252		110		(273	)		27,089
			34,540		138		(278	)		34,400
Total cash, cash equivalents and available-for-sale marketable securities		$	36,340	$	138	$	(278	)	$	36,200

        The amortized cost and estimated fair value of available-for-sale marketable securities at December 31, 2001, by contractual maturity, are as follows (in thousands):

		Amortized Cost		Estimated Fair Value
Marketable securities:
	Due in one year or less	$	14,516	$	14,741
	Due after one year through two years		18,927		19,277
	Due after two years		8,368		8,468
		$	41,811	$	42,486

        Gross realized gains from the sale of cash, cash equivalents, and marketable securities were approximately $100,000, $6,000, and $8,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Gross realized losses from the sale of cash, cash equivalents, and marketable securities were approximately $128,000, $321,000 and $54,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

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5. Balance Sheet Information

        Net inventories consist of the following (in thousands):

	December 31,
	2001		2000
Raw materials	$	2,007	$	2,207
Work in process		3,809		3,287
Finished goods		1,301		951
	$	7,117	$	6,445

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

	December 31,
	2001			2000
Machinery and equipment	$	21,934		$	16,799
Computer equipment		4,022			3,287
Furniture and fixtures		1,215			1,194
Leasehold improvements		5,352			4,793
		32,523			26,073
Less accumulated depreciation and amortization		(18,683	)		(15,392	)
	$	13,840		$	10,681

        Depreciation expense was approximately $3,423,000, $3,354,000 and $2,987,000 for years ended December 31, 2001, 2000 and 1999, respectively.

        Accrued salaries and other liabilities consist of the following (in thousands):

	December 31,
	2001		2000
Salaries and employee benefits	$	2,851	$	2,225
Other accrued liabilities		1,102		878
	$	3,953	$	3,103

6. Debt and Commitments

        Debt consisted of the following (in thousands):

	December 31,
	2001		2000
Equipment financing notes, payable $221 monthly including interest at 5.91% to 8.72% due April 2002 to December 2006; secured by equipment	$	5,550	$	5,732
Less current portion		2,008		2,024
Total long-term obligations	$	3,542	$	3,708

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        As of December 31, 2001, approximate future principal payments of the equipment financing notes are due as follows: 2002—$2,008,000; 2003—$1,508,000; 2004—$1,135,000; 2005—$605,000; 2006—$294,000 and thereafter—$0.

        Interest charged to expense to arrive at operating income (loss) was approximately $432,000, $492,000, and $441,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

        We lease our office, manufacturing and research facilities under operating leases. The minimum annual rent on the facilities is subject to increases based on changes in the Consumer Price Index, taxes, insurance and operating costs, subject to certain minimum and maximum annual increases. We record rent expense on a straight-line basis over the term of the leases.

        Approximate annual future minimum operating lease payments as of December 31, 2001 are as follows (in thousands):

Year		Operating Leases
2002		$	1,383
2003			1,889
2004			1,188
2005			459
2006			—
Thereafter			—
	Total minimum lease payments	$	4,919

        Rent expense for the years ended December 31, 2001, 2000 and 1999 was approximately $1,409,000, $1,296,000 and $1,076,000, respectively. Cost of equipment under equipment financing notes was approximately $10,957,000 and $10,612,000 at December 31, 2001, and 2000, respectively. Accumulated depreciation of equipment under equipment financing at December 31, 2001 and 2000 was approximately $6,039,000 and $5,534,000, respectively.

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $27.5 million. As of December 31, 2001 we have deposited $250,000 in escrow, and committed to provide an additional $750,000 upon satisfaction of certain contingencies. The total $1 million would serve as an initial escrow deposit. There are various contingencies that remain before the close of escrow, including obtaining city permits, the grading of the land and construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of first quarter of 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase are estimated to be $70.0 million. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in cash expenditures prior to occupancy for the purchase of land and

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construction costs which would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

7. Stockholders' Equity

Stock Plans

        In December 1996, we adopted the 1996 Stock Incentive Plan (the "1996 Stock Plan"). The 1996 Stock Plan replaced our 1989 Stock Plan. Although all future awards will be made under the 1996 Stock Plan, awards made under the 1989 Stock Plan will continue to be administered in accordance with the 1989 Stock Plan. The Stock Plans provide for awards in the form of restricted shares, stock units, options or stock appreciation rights or any combination thereof. As of December 31, 2001, a pool of 4,400,000 shares has been reserved for issuance under the 1996 Stock Plan. Additionally, any unpurchased shares of common stock pursuant to unissued, expired or cancelled options under the 1989 Stock Plan become available for awards under the 1996 Stock Plan. During the year ended December 31, 2001, we issued no shares of common stock to outside consultants for services received by the Company. As of December 31, 2001, 144,476 shares have been sold directly under the 1989 Plan and no shares were available for future issuance under the 1989 Stock Plan.

        The options are generally subject to four-year vesting and expire ten years from the date of grant. At December 31, 2001, 373,720 shares were available for future issuance of common stock or grant of options to purchase common stock under the 1996 Stock Plan.

        Information with respect to our Stock Plans option activity is as follows:

		Shares		Weighted average exercise price
		(in thousands)
Balance at December 31, 1998		2,260		$	8.24
	Granted at fair value	965		$	10.11
	Exercised	(192	)	$	4.23
	Cancelled	(183	)	$	10.98
Balance at December 31, 1999		2,850		$	8.97
	Granted at fair value	1,110		$	29.60
	Exercised	(935	)	$	6.08
	Cancelled	(173	)	$	13.50
Balance at December 31, 2000		2,852		$	17.67
	Granted at fair value	1,225		$	34.57
	Exercised	(422	)	$	11.51
	Cancelled	(198	)	$	26.58
Balance at December 31, 2001		3,457		$	23.90

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        The following is a further breakdown of the options outstanding under the 1989 Stock Plan and 1996 Stock Plan as of December 31, 2001:

Range of exercise price		Options outstanding (in thousands)	Weighted average remaining contractual life in years	Weighted average exercise price		Options exercisable (in thousands)	Weighted average exercise price of options exercisable
$	1.00-$12.12	917	6.75	$	8.87	636	$	8.47
$	12.13-$23.77	898	7.84	$	16.14	445	$	15.19
$	24.21-$38.00	878	8.64	$	31.49	290	$	31.59
$	38.06-$69.56	764	9.39	$	42.34	117	$	42.67
$	1.00-$69.56	3,457	8.10	$	23.90	1,488	$	17.68

        Adjusted pro forma information regarding net income is required by SFAS 123, and has been determined as if we had accounted for our employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes method for option pricing with the following weighted-average assumptions for 2001, 2000 and 1999:

	2001		2000		1999
Risk-free interest rate	4.46	%	5.16	%	6.36	%
Volatility	90	%	92	%	83	%
Dividend yield	0	%	0	%	0	%
Expected life of options	5.5 years		6 years		5 years

        For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our adjusted pro forma information is as follows:

	Year ended December 31,
	2001			2000			1999
	(in thousands, except per share data)
Adjusted pro forma net income (loss)	$	(6,329	)	$	(888	)	$	(2,249	)
Adjusted pro forma basic net income (loss) per share	$	(0.44	)	$	(0.06	)	$	(0.17	)

        The pro forma effects on net income for 2001, 2000 and 1999 are not likely to be representative of the effects on reported net income or loss in future years. In management's opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Changes in such subjective input assumptions can materially affect the fair value estimate of employee stock options.

Employee Stock Purchase Plan

        In December 1996, we adopted an Employee Stock Purchase Plan ("ESPP") which provides employees the opportunity to purchase common stock at a discount and pay for such purchases through payroll deductions, subject to certain limitations. A pool of 550,000 shares of common stock has been

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reserved for issuance under the ESPP (subject to anti-dilution provisions). During the years ended December 31, 2001, 2000 and 1999, 91,857, 82,610 and 60,773 shares, respectively, were issued under the ESPP. As of December 31, 2001, 188,702 shares of common stock were available for issuance under the ESPP.

        At December 31, 2001, a total of 562,422 shares of the Company's common stock were reserved for future issuances under the Company's stock plans and employee stock purchase plan.

Stockholder Rights Plan

        In October, 1997, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of common stock of Biosite held of record at the close of business on November 3, 1997. Each Right represents a contingent right to purchase, under certain circumstances, one-one-thousandth of a share of a new series of Biosite preferred stock at a price of $50.00 per one one-thousandth of a share, subject to adjustment. The Rights would be traded independently from Biosite's common stock and become exercisable under certain circumstances involving the acquisition or a tender or exchange offer by a person or group for 15% or more of Biosite's common stock. In December 1999, the agreement governing the Rights was amended to provide that Kopp Holding Company and related entities could acquire up to 20% of Biosite's outstanding common stock without making the Rights exercisable. The Rights expire on October 22, 2007, unless redeemed by the Company's Board of Directors. The Rights can be redeemed by the Board at a price of $0.01 per Right at any time before the Rights become exercisable, and in limited circumstances thereafter.

8. Income Taxes

        Significant components of the income tax benefit (provision) are as follows (in thousands):

		Year Ended December 31,
		2001			2000			1999
Current:
	Federal	$	0		$	0		$	(124	)
	State		(89	)		(150	)		(35	)
			(89	)		(150	)		(159	)
Deferred:
	Federal		(3,422	)		(2,815	)		229
	State		(322	)		(374	)		96
			(3,744	)		(3,189	)		325
		$	(3,833	)	$	(3,339	)	$	166

        As of December 31, 2001, we had federal research and development, California research and development, and California manufacturers' credit carryforwards of approximately $2,487,000, $1,561,000, and $530,000, respectively. The federal research and development, California research and development, and California manufacturers' credits will begin expiring in 2004, unless previously utilized. As of December 31, 2001, we had federal and California tax net operating loss carryforwards

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of approximately $1,446,000 and $546,000, respectively, which will begin to expire in 2019 and 2004, respectively, unless previously utilized.

        Pursuant to Internal Revenue Code Section 382 and 383, use of the Company's tax credit and loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period. However, any annual limitation is not expected to have a material adverse effect on our ability to utilize its tax credit carryforwards.

        Significant components of our deferred tax assets as of December 31, 2001 and 2000 are as follows (in thousands):

			December 31,
			2001			2000
Deferred tax assets:
	Research and development credit		$	3,517		$	3,119
	Alternative minimum tax credit			288			287
	California manufacturers' investment credit			350			388
	Net operating loss carryforwards			524			856
	Reserves and accruals			781			599
	Other, net			150			412
		Total deferred tax assets		5,610			5,661
Deferred tax liability:
	Tax over book amortization			(74	)		(142	)
Net deferred tax assets			$	5,536		$	5,519

        No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that such assets will be realized. We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets.

        The reconciliation of income tax computed at the federal statutory tax rate to the benefit (provision) for income taxes at the U.S. federal statutory tax rate to income tax expense is as follows:

	December 31,
	2001		2000		1999
Tax at federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	5.9		5.9		7.4
Federal tax credits	(2.8	)	(3.5	)	(47.3	)
State tax credits	(2.4	)	(2.7	)	(22.4	)
Other	0.6		0.4		9.6
Effective rate	36.3	%	35.1	%	(17.7	)%

F-20

9. Employee Savings Plan

        In 1991, we implemented a 401(k) program that allows all qualifying employees to contribute up to a maximum of 20% of their annual salary, subject to annual limits. The Board of Directors may, at its sole discretion, approve Company contributions. No such contributions have been approved or made.

10. License and Patent Disputes

        Expenses associated with license and patent disputes incurred during the year ended December 31, 2001 totaled $3.2 million. The expenses consisted primarily of legal costs related to our litigation with XOMA Ltd. and its affiliates, ("XOMA"). No expenses associated with the XOMA litigation were incurred prior to May 2001. On May 10, 2001, we received notice from XOMA, alleging that we have breached our obligations under three license agreements with XOMA. The license agreements relate to the bacterial expression of antibodies. On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA's threats to terminate the agreements. On July 5, 2001, XOMA filed a complaint in the same court (the "XOMA action"). In September, 2001, the Court denied Biosite's request for a preliminary injunction, dismissed XOMA's action in part with leave to amend, and dismissed Biosite's action without prejudice to Biosite's right to plead its claims in defense and counterclaims in the XOMA action. XOMA's complaint, which has now been amended, alleges fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite. XOMA seeks injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages. On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference. Biosite intends to contest XOMA's claims vigorously. We believe that there has been no misrepresentation or breach of the agreements, that our rights under the agreements have not been terminated and, accordingly, no misappropriation or unfair business practice has occurred, and that our activities do not infringe XOMA's patents. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction of our contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA.

11. Quarterly Information (Unaudited)

        The following quarterly information includes all adjustments which management considers necessary for a fair statement of such information. For interim quarterly financial statements, the

F-21

provision for income taxes is estimated using the best available information for projected results for the entire year.

		2001
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
		(in thousands, except per share data)
Product sales		$	14,197	$	15,339	$	15,941	$	16,678
Contract revenues			954		877		1,066		588
Gross profit — product sales			9,857		10,992		11,797		11,865
Income before income taxes			2,497		3,164		3,449		1,449
Net income			1,529		1,917		2,130		1,150
Net income per share
	•    Basic	$	0.11	$	0.13	$	0.15	$	0.08
	•    Diluted	$	0.10	$	0.12	$	0.14	$	0.08
Shares used in calculating per share amounts
	•    Basic		14,153		14,373		14,538		14,582
	•    Diluted		15,317		15,751		15,463		15,109

		2000
		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
		(in thousands, except per share data)
Product sales		$	12,198	$	13,134	$	13,330	$	13,005
Contract revenues			715		310		1,052		1,241
Gross profit — product sales			8,361		9,581		9,394		8,715
Income before income taxes			2,026		2,231		3,322		1,924
Net income			1,324		1,356		2,022		1,462
Net income per share
	•    Basic	$	0.10	$	0.10	$	0.15	$	0.11
	•    Diluted	$	0.09	$	0.09	$	0.13	$	0.10
Shares used in calculating per share amounts
	•    Basic		13,237		13,681		13,923		14,035
	•    Diluted		14,840		15,019		15,620		15,206

F-22

Schedule II

Biosite Incorporated

Valuation and Qualifying Accounts

			COL. C
	COL. B		Additions					COL. D			COL. E
COL. A
	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts- Describe			Deductions Describe			Balance at End of Period
Description
Year ended December 31, 2001
Allowance for doubtful accounts	$	5,302	$	53,723	$	266,500	(4)	$	6,563	(1)	$	318,962
Reserve for obsolete or excess inventory	$	437,737	$	249,949	$	—		$	249,761	(2)	$	437,925
Warranty reserve for Triage Meters	$	63,727	$	54,801	$	—		$	—		$	118,528
Year ended December 31, 2000
Allowance for doubtful accounts	$	17,651	$	16,572	$	—		$	28,921	(1)	$	5,302
Reserve for obsolete or excess inventory	$	630,651	$	378,650	$	—		$	571,564	(2)	$	437,737
Warranty reserve for Triage Meters	$	170,373	$	—	$	—		$	106,646	(3)	$	63,727
Year ended December 31, 1999
Allowance for doubtful accounts	$	18,032	$	4,999	$	—		$	5,380	(1)	$	17,651
Reserve for obsolete or excess inventory	$	798,644	$	741,856	$	—		$	909,849	(2)	$	630,651
Warranty reserve for Triage Meters	$	—	$	170,373	$	—		$	—		$	170,373

(1)

Uncollectible accounts written off, net of recoveries

(2)

Write off of obsolete or excess inventory

(3)

Adjustment of estimated warranty reserve based on ability to pass through warranty responsibilities to manufacturer

(4)

Allowance for uncollectible contract revenue. Expense charged against contract revenue.

QuickLinks

DOCUMENTS INCORPORATED BY REFERENCE
BIOSITE INCORPORATED FORM 10-K INDEX
PART I
RISK FACTORS
PART II
PART III
PART IV
BIOSITE INCORPORATED SIGNATURES
INDEX TO FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BIOSITE INCORPORATED BALANCE SHEETS (in thousands, except par value)
BIOSITE INCORPORATED STATEMENTS OF INCOME (in thousands, except per share amounts)
BIOSITE INCORPORATED STATEMENTS OF CASH FLOWS (in thousands)
BIOSITE INCORPORATED NOTES TO FINANCIAL STATEMENTS
Schedule II Biosite Incorporated Valuation and Qualifying Accounts

EX-10.30

                                                                   Exhibit 10.30


                   PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS





                              H. G. FENTON COMPANY,
                            A CALIFORNIA CORPORATION

                                    "SELLER"




                              BIOSITE INCORPORATED,
                             A DELAWARE CORPORATION

                                     "BUYER"










                   PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS


         THIS PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS ("Agreement"), dated as
of December 7, 2001, is between H. G. FENTON COMPANY, a California corporation
which acquired title as H. G. Fenton Material Company ("Seller"), and BIOSITE
INCORPORATED, a Delaware corporation ("Buyer"). This Agreement is entered into
with reference to the recitals set forth in Article 1 and constitutes (i) a
contract of purchase-and-sale between the parties (which Seller intends to
convert into a tax-deferred exchange), and (ii) escrow instructions to STEWART
TITLE OF CALIFORNIA, INC. ("Escrow Holder"), the consent of which appears at the
end of this Agreement.

                               ARTICLE 1. RECITALS

         1.1      THE LAND. Seller is the owner of the real property consisting
of approximately 34.7 gross acres in the Carroll Canyon area of San Diego,
California ("Land"), which real property currently encompasses portions of
Parcels 1, 2 and 3 of Parcel Map No. 17983, filed in the Office of the County
Recorder of San Diego County on January 30, 1998. The Land is depicted as Lots 1
through 10 of Fenton Technology Park as shown on the Tentative Map (defined in
Article 2 below, as are other initially capitalized terms not defined when first
used). The parties contemplate that Seller will first record the Interim Map,
which will consolidate Lots 1 through 10 shown on the Tentative Map into five or
more lots or parcels as to which all building rights will be restricted or
relinquished, but without dedication for public use of the two cul-de-sacs
currently shown on the Tentative Map. The parties also contemplate that, several
months after recordation of the Interim Map and using the City's substantial
conformance review process, the Final Map will be approved and recorded, in the
same form (and with the same number and configuration of lots) as the Interim
Map, but with the building restriction rescinded, so that the Land has become
five or more buildable lots or parcels. The Land is a portion of the Carroll
Canyon Land. The Land to be conveyed hereunder includes all right, title and
interest of Seller therein, including, without limitation, all easements,
appurtenances, privileges, rights, profits and preferences, together with all
intangible rights, warranties, guaranties, contract rights and/or other claims,
permits and licenses, related to, arising out of or benefitting, the real
property comprising the Land, to the extent of Seller's interest therein and to
the extent assignable, excluding, however, any rights reserved by Seller as
declarant under the CC&Rs or in Seller's Grant Deed (as those terms are defined
below).

         1.2      THE BUSINESS PARK. The Land is part of Seller's planned
development known as Fenton Technology Park ("Business Park"), which includes
portions of the Carroll Canyon Land and is depicted on EXHIBIT A attached hereto
("Site Plan"). The Business Park will comprise twenty-four (24) buildable lots
and associated open space areas, and is being developed pursuant to the
Entitlements, which Seller anticipates will be approved in the calendar fourth
quarter of 2001. Seller anticipates that the Entitlement Approval Conditions
will require that Seller construct the Infrastructure Improvements including,
without limitation, the Camino Santa Fe Improvements.

         1.3      INTENTION OF THE PARTIES. Buyer wishes to purchase the Land
from Seller, in order to use all of the Land as Buyer's corporate headquarters
and as the site of its San Diego operations. Buyer's intended use of the Land
fits Seller's goals for the overall Business Park, and Seller is accordingly
willing to sell the Land to Buyer, on the terms and subject to the conditions of
this Agreement.

                             ARTICLE 2. DEFINITIONS

         2.1      DEFINITIONS. Unless the context otherwise indicates, whenever
used in this Agreement:

                  2.1.1    "ADDITIONAL DEPOSITS" means the First Additional
Deposit and the Second Additional Deposit.

                  2.1.2    "ADTs" means average daily trips, as used by City in
measuring and authorizing traffic generation caused by development.


                                      -1-



                  2.1.3    "ACCEPTABLE ENTITLEMENT APPROVAL CONDITIONS" means
those Entitlement Approval Conditions that Seller anticipates may be imposed by
City as conditions to approval of the Entitlements and that would be acceptable
to Seller, as set forth on EXHIBIT D.

                  2.1.4    "ASSESSMENT DISTRICT" means an assessment district or
Community Facilities District that may be established by Seller pursuant to
Paragraph 7.5, either before or after the Close of Escrow, to finance the cost
of constructing some or all of the Seller Improvements.

                  2.1.5    "ASSESSMENT DISTRICT CREDIT" means an amount to
compensate Buyer for the Land's allocable assessment if Seller elects to form an
Assessment District that includes the Land. The Assessment District Credit may
be determined in time to be applied as a credit against the Purchase Price, or
it may be payable by Seller to Buyer following the Close of Escrow, as set forth
in Paragraph 7.5 below.

                  2.1.6    "ASSIGNMENT OF WARRANTIES AND INTANGIBLE RIGHTS"
means an instrument in the form attached as EXHIBIT E.

                  2.1.7    "BUSINESS DAY" means any day when City's
administration offices are open for the transaction of business by members of
the general public.

                  2.1.8    "BUYER'S PROJECT" means Buyer's intended development
of the Land.

                  2.1.9    "CAMINO SANTA FE IMPROVEMENTS" means the construction
of Camino Santa Fe and the "loop" road depicted on the Site Plan.

                  2.1.10   "CARROLL CANYON LAND" means the real property owned
by Seller that will be included within the Business Park or be dedicated for the
Camino Santa Fe right of way or to satisfy other Entitlement Approval
Conditions.

                  2.1.11   "CASH" means (i) currency, or (ii) a check(s),
currently dated, payable to Escrow Holder and honored upon presentation for
payment or otherwise constituting immediately available funds, or (iii) if
Escrow Holder requires or if the party depositing funds so desires, funds
wire-transferred into Escrow Holder's general escrow account(s).

                  2.1.12   "CC&RS" means the Declaration Establishing Covenants,
Conditions and Restrictions and Grants of Easements for Fenton Technology Park,
in the form prepared by Seller and delivered to Buyer pursuant to Paragraph 7.2.

                  2.1.13   "CITY" means the City of San Diego, California.

                  2.1.14   "CLOSE OF ESCROW" or "CLOSING" means the date
Seller's Grant Deed is filed for record with the County Recorder of San Diego
County, conveying the Land from Seller to Buyer.

                  2.1.15   "CLOSING DATE" means a date which is thirty (30) days
following Buyer's receipt of the latest to be delivered of (i) Seller's written
notification of its intent to effect the Closing, (ii) the Grading
Certifications, and (iii) Seller's delivery of the notice specified in Paragraph
6.1.5. The currently anticipated Closing Date is July 30, 2002. The Closing Date
is subject to extension by Seller to no later than the Latest Closing Date
pursuant to Paragraph 6.2 below.

                  2.1.16   "CONTINGENCY DATE" means the date which is the later
to occur of (i) December 14, 2001, or (ii) ten (10) Business Days after Buyer's
receipt of the CC&Rs.

                  2.1.17   "COUNTY" means the County of San Diego, California.

                  2.1.18   "DEPOSITS" means the Escrow Opening Deposit and the
Additional Deposits.


                                      -2-



                  2.1.19   "DEVELOPMENT DECLARATION" means the Declaration
Establishing Covenants, Conditions and Restrictions in the form of EXHIBIT F
attached hereto.

                  2.1.20   "ENTITLEMENT APPROVAL NOTICE" means written notice
from Seller to Buyer and Escrow Holder, to be sent by Seller not later than
January 31, 2002, certifying that (i) City's City Council has approved the
Entitlements, and (ii) Seller has approved the Entitlement Approval Conditions
pursuant to Paragraph 6.1.3 below.

                  2.1.21   "ENTITLEMENT APPROVAL CONDITIONS" means the payment
or construction obligations that are imposed on Seller by City as conditions to
approval of the Entitlements.

                  2.1.22   "ENTITLEMENTS" means the Tentative Map, the PDP, and
any other land use approvals necessary to authorize the recordation of the
Interim and Final Maps and the development of the Business Park.

                  2.1.23   "ESCROW" means the escrow created hereby.

                  2.1.24   "ESCROW HOLDER" means Stewart Title of California,
Inc.

                  2.1.25   "ESCROW OPENING DATE" means the date upon which
Escrow Holder has received counterparts of this Agreement signed by both Buyer
and Seller.

                  2.1.26   "ESCROW OPENING DEPOSIT" means the sum of Two Hundred
Fifty Thousand Dollars ($250,000), which shall be delivered by Buyer to Escrow
Holder within one Business Day after the Escrow Opening Date and which shall be
applicable to the Purchase Price.

                  2.1.27   "EXCHANGE" means an exchange qualifying for
nonrecognition of gain under Internal Revenue Code Section 1031 and the
applicable provisions of the California Revenue and Taxation Code.

                  2.1.28   "FINAL MAP" means a final subdivision map recorded in
the Official Records in substantial conformance to the Tentative Map and the
Site Plan, in the same form and content (and with the same number and
configuration of lots) as the Interim Map but without any relinquishment of
building rights as to the Land.

                  2.1.29   "FIRST ADDITIONAL DEPOSIT" means the sum of Two
Hundred Fifty Thousand Dollars ($250,000), to be delivered by Buyer prior to the
Contingency Date to evidence satisfaction of the Feasibility Conditions.

                  2.1.30   "GENERAL AND SPECIAL REAL ESTATE TAXES" means all
real property taxes and assessments levied against the Land evidenced by the
secured tax bill issued by the Tax Collector of the County.

                  2.1.31   "GRADING CERTIFICATIONS" means written certifications
from (i) Seller's soils consultant, certifying to Buyer that the grading of the
Land has been completed in substantial conformance with the project soils report
and grading specifications for the Business Park, and (ii) Seller's civil
engineer, certifying to Buyer: (x) that the lots comprising the Land have been
graded in substantial conformance with the grading plans (which have been
prepared for Seller as part of the reclamation of the Carroll Canyon Land, and
not in connection with a City-issued grading permit); and (y) the Net Salable
Area of the Land in its as-graded condition. The Grading Certifications shall
not reflect any material deviations from the soils reports and grading plans and
specifications that are not approved or deemed approved by Buyer in accordance
with Paragraph 7.4.

                  2.1.32   "HAZARDOUS MATERIALS" means any substance, material
or other thing regulated by or pursuant to any federal, state or local statute
or ordinance by reason of its potential for harm to human health or the
environment, or because of its flammability, toxicity, reactivity or
corrosiveness, including but not limited to those substances defined as
"hazardous substances", "hazardous materials", or "toxic substances"


                                      -3-



in the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. Section 9601 et seq.; or the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq.; or the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901 et seq.; and also including those
substances defined as "hazardous wastes" in Section 25117 of the California
Health & Safety Code or as "hazardous substances" in Section 25316 of the
California Health & Safety Code; in the regulations adopted and publications
promulgated pursuant to all such current and future federal and state laws and
local ordinances; and those chemicals to which reference is made in the Safe
Drinking Water and Toxic Enforcement Act of 1986, Section 25249.5 et seq. of the
California Health & Safety Code.

                  2.1.33   "INFRASTRUCTURE IMPROVEMENTS" means the improvements
required by the Entitlement Approval Conditions, which Seller anticipates will
include construction of the Camino Santa Fe Improvements, plus all associated
utilities. The Infrastructure Improvements are part of the Seller Improvements.

                  2.1.34   "INTERIM MAP" means a final subdivision map recorded
in the Official Records, consolidating Lots 1 though 10 shown on the Tentative
Map into five or more lots or parcels which are restricted from being built
upon, but which are in all other respects legally conveyable lots or parcels in
accordance with the California Subdivision Map Act and applicable law.

                  2.1.35   "LATEST CLOSING DATE" means January 31, 2003, which
shall be extended day-for-day, to a maximum extension of six (6) months, for
each day of Unavoidable Delay that is caused by restrictions on grading or other
Pre-Closing Improvements incident to storm-water runoff requirements.

                  2.1.36   "NATURAL HAZARD DISCLOSURE" means the disclosure
required to be delivered pursuant to the Natural Hazard Disclosure Act,
California Government Code Sections 8589.3, 8589.4, and 51183.5, and California
Public Resources Code Sections 2621.9, 2694, and 4136.

                  2.1.37   "NET SALABLE AREA" means the gross area of the Land,
minus (i) slope areas beyond the initial three feet (3') of slope (which will be
included in Net Salable Area), and (ii) the open space area in the southeast
portion of the Land surrounding the SDG&E power poles, as shown on the Site
Plan. The term Net Salable Area shall include those areas shown on the Site Plan
as cul-de-sacs off the loop road, and the access easements contemplated in
Paragraph 1.1. The Net Salable Area shall be certified to the parties and to
Escrow Holder in the Grading Certification from Seller's civil engineer.

                  2.1.38   "OFFICIAL RECORDS" means the Official Records of the
County Recorder of the County.

                  2.1.39   "PDP" means City of San Diego Planned Development
Permit No. 98-1199, being processed by Seller with City as one of the
Entitlements.

                  2.1.40   "PERMITTED EXCEPTIONS" means each of the following:
(i) those covenants, conditions, reservations, restrictions, easements and other
matters (excepting taxes, deeds of trust or other liens, and LIS PENDENS
notices) that are listed as exceptions to coverage in the Pro Forma Title Policy
approved by Buyer no later than the Contingency Date; (ii) all easements,
dedications and other matters shown on the Tentative Map or Final Map; (iii) the
PDP; (iv) the matters reserved or excepted in Seller's Grant Deed; and (v) the
CC&Rs in the form provided to Buyer prior to expiration of the Contingency Date,
and any revisions thereto which are either reasonably approved by Buyer or do
not materially affect the development, use, or value of the Land.

                  2.1.41   "PRE-CLOSING IMPROVEMENTS" means that portion of the
Seller Improvements comprising the grading of the Land in substantial
conformance with the project soils report for the Business Park and the grading
plans. Completion of the Pre-Closing Improvements shall be conclusively
evidenced by Seller's delivery of the Grading Certifications.

                  2.1.42   "PRELIMINARY REPORT" means the preliminary title
report of the Land issued by Title Insurer as of July 26, 2001, under Order No.
01-0207326A.


                                      -4-



                  2.1.43   "PRO FORMA TITLE POLICY" means a pro forma CLTA
owner's policy of title insurance, reflecting the description of the Land
following recordation of the Final Map and based on the Preliminary Title
Report. The Pro Forma Title Policy may reflect deletion or endorsement of
certain matters shown in the Preliminary Report that would otherwise affect the
Land following recordation of the Final Map, but Seller shall have no obligation
with respect to such matters (or other endorsements) except to the extent Seller
specifically undertakes such obligation.

                  2.1.44   "PROPERTY DOCUMENTS" means each of the following: (i)
Vesting Tentative Map/PDP Grading Plan prepared by Rick Engineering and revised
as of August 10, 2001; (ii) September 2001 draft Design Guidelines for the
Business Park; (iii) Geotechnical Investigation of the Carroll Canyon Land
prepared by Geocon, Inc. as dated July 30, 2001; (iv) Draft Environmental Impact
Report dated March 16, 2001, with appendices, Volumes I and II; and (v) the Pro
Forma Title Policy.

                  2.1.45   "PURCHASE PRICE" means the amount payable by Buyer to
Seller for the Land, which shall be $24.50 per square foot of Net Salable Area
of the Land. Based on the parties' anticipation that the Net Salable Area will
be 25.8 acres or 1,123,848 square feet, the Purchase Price is expected to be
$27,534,276. After Buyer's approval of the Grading Certifications, the parties
shall jointly advise Escrow Holder in writing of the actual Purchase Price.

                  2.1.46   "SECOND ADDITIONAL DEPOSIT" means the sum of Five
Hundred Thousand Dollars ($500,000), to be delivered by Buyer pursuant to
Paragraph 4.3 within two (2) Business Days after Seller's delivery of the
Entitlement Approval Notice.

                  2.1.47   "SELLER IMPROVEMENTS" means the improvements to be
constructed by Seller, including the Infrastructure Improvements, as set forth
on EXHIBIT C.

                  2.1.48   "SELLER'S GRANT DEED" means a fully executed and
acknowledged original grant deed in the form of EXHIBIT B, conveying the Land to
Buyer.

                  2.1.49   "SELLER'S WARRANTIES" means each of the matters set
forth in Paragraph 12.2 below.

                  2.1.50   "TENTATIVE MAP" means Vesting Tentative Map No.
98-1199, encompassing the Carroll Canyon Land, being processed with City by
Seller as one of the Entitlements, in the form provided to Buyer as part of the
Property Documents.

                  2.1.51   "TITLE INSURER" means Stewart Title Insurance
Company.

                  2.1.52   "TITLE POLICY" means a CLTA owner's policy of title
insurance, with liability in the amount of the Purchase Price, insuring that the
fee title to the Land vests in Buyer subject only to the Permitted Exceptions.
The actual Title Policy may contain additional endorsements requested by Buyer,
but Seller shall have no obligation with respect to any such additional
endorsements except to the extent Seller expressly assumes such obligation. At
Buyer's election and sole expense, Buyer may elect that the Title Policy be
written with ALTA Extended Coverage pursuant to Paragraph 8.2 below.

                  2.1.53   "UNAVOIDABLE DELAY" means delays caused by any of the
following, which to the extent they cause a delay in a party's performance shall
excuse the delay and extend the time for such party's performance: acts of the
other party; action of the elements; war, terrorism, riot, or civil
insurrection; building moratoria, trip generation restrictions or other similar
action by the City or other governmental agency or entity; labor disputes;
inability to procure or a general shortage of labor or materials in the normal
channels of trade; delay in transportation; delay in inspections; delays in or
restrictions on grading or other Pre-Closing Improvements incident to
storm-water runoff requirements; or any other cause beyond the reasonable
control of the party so obligated, whether similar or dissimilar to the
foregoing. Notwithstanding the foregoing, in no event shall delays caused by a
party's financial inability or shortage of funds constitute Unavoidable Delay.

                    ARTICLE 3. AGREEMENT OF PURCHASE AND SALE


                                      -5-



         3.1      AGREEMENT OF PURCHASE AND SALE. In consideration of the
covenants contained in this Agreement, Buyer shall purchase the Land from
Seller, and Seller shall sell the Land to Buyer, for the Purchase Price and upon
the terms and subject to the conditions of this Agreement.

         3.2      PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by
Buyer according to the following summary:

                                                                                
Escrow Opening Deposit:                                                               $250,000

First Additional Deposit to be delivered to Escrow Holder on or
before the Contingency Date subject to Article 6 below:                               $250,000

Second Additional Deposit to be delivered to Escrow Holder within
two (2) Business Days after Seller's delivery of the Entitlement                      $500,000
Approval Notice:

Cash to be delivered to Escrow Holder upon the Closing Date, LESS interest
credited to Buyer on the Deposits and (if applicable) the Assessment District
Credit [to be adjusted based on the
actual Net Salable Area]:                                                          $26,534,276





                 ARTICLE 4. BUYER'S DELIVERIES TO ESCROW HOLDER

         4.1      ESCROW OPENING DEPOSIT. Buyer shall, within one (1) Business
Day after the Escrow Opening Date, deliver the Escrow Opening Deposit to Escrow
Holder.

         4.2      FIRST ADDITIONAL DEPOSIT. Buyer shall, on or before the
Contingency Date and concurrently with satisfaction of the special conditions of
Paragraphs 6.1.1 and 6.1.2, deliver the First Additional Deposit to Escrow
Holder.

         4.3      SECOND ADDITIONAL DEPOSIT. Buyer shall, within two (2)
Business Days after Seller's delivery of the Entitlement Approval Notice,
deliver the Second Additional Deposit to Escrow Holder.

         4.4      DELIVERIES BEFORE CLOSING DATE. Buyer shall, no later than
4:00 p.m. of the last Business Day before the Closing Date (or with respect to
the Cash delivery, by wire transfer received by Escrow Holder in time for Escrow
Holder to authorize recording of Seller's Grant Deed in the Official Records on
the Closing Date), deliver to Escrow Holder each of the following:

                  4.4.1    CASH FOR PURCHASE PRICE. In Cash, the balance of the
Purchase Price, as the Purchase Price has been determined based on the actual
Net Salable Area certified by Seller's civil engineer in the Grading
Certifications, less any interest credited to Buyer pursuant to Paragraph 10.1
below and less any Assessment District Credit as to which the parties notify
Escrow Holder pursuant to Paragraph 7.5.2 below.

                  4.4.2    BUYER'S CHARGES. In Cash, the charges which are
payable by Buyer under Article 9 below.

         4.5      CONDITION TO DELIVERY. Buyer's obligation to deliver funds and
instruments under Paragraph 4.4 is conditional upon Buyer's receipt of written
or telephonic notification by Escrow Holder that, except for the delivery of
such funds and the recordation of documents, this Escrow is in condition to be
closed. Escrow Holder is instructed to give the notification to Buyer when this
Escrow can, except as to the receipt and disbursement of Cash and the recording
of documents, be closed.

         4.6      BREACH. The failure of Buyer to make any delivery described
above by the date, or within the time, set forth above shall be a material
breach of this Agreement by Buyer.


                                      -6-



                 ARTICLE 5. SELLER'S DELIVERIES TO ESCROW HOLDER

         5.1      DELIVERIES BEFORE CLOSING DATE. Seller shall (i) convey to
Buyer the fee estate to the Land, together with all other right, title and
interest, tangible and intangible, in and to the real property comprising the
Land, free of all encumbrances and matters subject only to the Permitted
Exceptions, and (ii) no later than 3:00 p.m. of the day before the Closing Date
deliver to Escrow Holder:

                  5.1.1    SELLER'S GRANT DEED. Seller's Grant Deed, conveying
the Land to Buyer and meeting the requirements of Title Insurer in order to
issue the Title Policy.

                  5.1.2    FIRPTA/CAL-FIRPTA AFFIDAVIT. An affidavit stating in
favor of Buyer that Seller is not a "foreign person" as defined in the federal
Foreign Investment in Real Property Tax Act of 1980 and the 1984 Tax Reform Act
and California Revenue and Taxation Code Sections 18805 and 26131 and otherwise
meeting the requirements of such statutes such that Buyer is not responsible for
withholding any portion of the Purchase Price with respect thereto.

                  5.1.3    ASSIGNMENT OF WARRANTIES AND INTANGIBLE RIGHTS. The
Assignment of Warranties and Intangible Rights, signed by Seller as Assignor.

                  5.1.4    CERTIFICATION OF SELLER. Seller's certification to
Buyer of the truth and accuracy of Seller's Warranties, as of the Close of
Escrow.

         5.2      BREACH. The failure of Seller to make any delivery described
above by the date, or within the time, set forth above shall be a material
breach of this Agreement by Seller.

       ARTICLE 6. SPECIAL CONDITIONS; TERMINATION; CONSEQUENCES OF FAILURE

         6.1      SPECIAL CONDITIONS. The Close of Escrow is subject to the
following special conditions:

                  6.1.1    TITLE. Buyer's approval of the covenants, conditions,
reservations, restrictions, easements and other matters (excepting taxes, deeds
of trust or other liens) described in the Preliminary Report. Unless Buyer
delivers written notice of approval of the state of title to Escrow Holder on or
before the Contingency Date, this special condition shall be conclusively deemed
to have failed and Buyer shall be entitled to the return of the Deposits then
made (subject to any deductions pursuant to Paragraph 8.4.1). If Buyer does
approve this condition, all covenants, conditions, reservations, restrictions,
easements and other matters (excepting taxes, deeds of trust, mechanic's liens,
and LIS PENDENS notices) listed as exceptions to coverage in the Preliminary
Report shall be conclusively deemed to be Permitted Exceptions. Notwithstanding
anything in the foregoing to the contrary, in no event will any taxes, deeds of
trust, mechanic's liens, or LIS PENDENS notices be deemed to be Permitted
Exceptions. Nothing in this Paragraph 6.1.1 shall limit or otherwise affect
Buyer's right in its sole and absolute discretion to disapprove the suitability
of the Land pursuant to Paragraph 6.1.2.

                  6.1.2    SUITABILITY OF LAND. Buyer's approval of the Property
Documents, the Entitlements, the ADTs, the CC&Rs and the physical condition,
soils, development potential, marketability and all other aspects of the Land
which Buyer, in its sole discretion, deems material to Buyer's decision to
purchase the Land. Unless Buyer has delivered to Escrow Holder, no later than
4:30 on the Contingency Date, both written notice of approval of this condition
and the First Additional Deposit, this condition shall be conclusively deemed to
have failed. If Buyer does not timely approve this condition, Buyer shall be
entitled to the return of the Escrow Opening Deposit (subject to any deductions
pursuant to Paragraph 6.4). Buyer's approval of the Land and Property Documents
as of the Contingency Date shall not be deemed to extend to any material change
or modification therein occurring after the Contingency Date.

                  6.1.3    APPROVAL OF ENTITLEMENTS. City's approval of the
Entitlements and Seller's approval of the Entitlement Approval Conditions.
Unless Seller delivers the Entitlement Approval Notice to Buyer and Escrow
Holder on or before January 31, 2002, this special condition shall be
conclusively deemed to have failed and Buyer shall be entitled to the return of
the Escrow Opening Deposit (subject to any deductions


                                      -7-



pursuant to Paragraph 6.4). The parties acknowledge and agree that unless the
Entitlement Approval Conditions are wholly consistent with and do not go beyond
the Acceptable Entitlement Approval Conditions listed in EXHIBIT D, Seller shall
have the right, in Seller's sole discretion and notwithstanding City's
conditional approval of the Entitlements, to determine that the Entitlement
Approval Conditions are unacceptable and therefore not to send the Entitlement
Approval Notice. In such event, this special condition will fail, and Buyer
shall be entitled to the return of the Deposits (subject to any deductions
pursuant to Paragraph 6.4) and to reimbursement of out-of-pocket expenses
pursuant to Paragraph 6.4 below.

                  6.1.4    INFRASTRUCTURE IMPROVEMENT PERMIT AND BOND. City's
issuance to Seller of a permit for construction of the Camino Santa Fe
Improvements and Seller's having posted all bonds required by City in connection
therewith. This condition shall be deemed satisfied only upon Seller's delivery
of written notice to Buyer that the Camino Santa Fe Improvements have been
bonded and permitted, accompanied by copies of the permit and bonds.

                  6.1.5    GRADING CERTIFICATIONS. Seller's delivery of the
Grading Certifications to Buyer and Escrow Holder.

                  6.1.6    FINAL MAP. Recordation of the Final Map prior to the
Closing Date, such that (i) Seller may convey the Land in compliance with the
California Subdivision Map Act and other applicable law, and (ii) any
relinquishment of building rights shown on the Interim Map have been rescinded
or otherwise made inapplicable to the Land.

                  6.1.7    NO MATERIAL ADVERSE CHANGE. No event or circumstance
shall have occurred that materially and adversely affects the physical condition
of the Land from that contemplated by the Grading Certifications, or that causes
the release or discharge of any material quantity of Hazardous Materials on or
beneath the Land in violation of applicable law, or that changes the Land's
zoning to be inconsistent with the approved Entitlements. This condition shall
be conclusively deemed satisfied unless Buyer delivers written notice to Seller
and Escrow Holder, at least one (1) Business Day prior to the then-scheduled
Closing Date, setting forth a detailed description of the events or conditions
giving rise to Buyer's claim that this special condition has failed.

                  6.1.8    UNTRUTH OR INVALIDITY OF CERTAIN REPRESENTATIONS AND
WARRANTIES. There shall have occurred no events or circumstances following the
Escrow Opening Date that would both (i) render invalid any of the
representations and warranties of Seller set forth in Paragraphs 12.2.5 through
12.2.12 below, and also (ii) materially and adversely affect Buyer's Project.
This condition shall be conclusively deemed to have been satisfied unless Buyer
delivers to Escrow Holder, on or before 3:30 p.m. on the last Business Day
before the Closing Date, written notice accompanied by a statement setting forth
in detail of the specific representation and warranty which is invalid, and the
facts or circumstances which have rendered it invalid, and the nature of the
material and adverse effect of those facts or circumstances on Buyer's Project.

         6.2      EXTENSION OF CLOSING DATE.

                  6.2.1    TO ACCOMMODATE SELLER'S EXCHANGE. Seller shall have
the right to extend the Closing Date one or more times to a date that is no
later than the Latest Closing Date, in order to accommodate Seller's Exchange,
by delivery each time to Escrow Holder and to Buyer of written notice of
extension at least ten (10) Business Days before the then-scheduled Closing
Date.

                  6.2.2    TO ACCOMMODATE DELAY IN PERMIT, FINAL MAP OR GRADING
CERTIFICATIONS. If the requirements under Paragraph 6.1.4 above have not been
met, or if the Grading Certifications have not been delivered, or the Final Map
has not been recorded, by the tenth (10th) Business Day before the
then-scheduled Closing Date, the Closing Date shall be automatically extended
until the date which is the earlier to occur of the Latest Closing Date or ten
(10) Business Days after satisfaction of all such requirements.

         6.3      WAIVER. The special conditions described in Paragraphs 6.1.1,
6.1.2, 6.1.7 and 6.1.8 are for the benefit of Buyer, and if not timely satisfied
(or deemed satisfied) may thereafter be waived unilaterally by Buyer unless and
until such time as either party elects to terminate this Escrow pursuant to the
following Paragraph. The special conditions of Paragraphs 6.1.3 through 6.1.5
are for the benefit of both parties, and if


                                      -8-



not timely satisfied may thereafter be waived only by both parties. Any such
waiver will be effective only if the same is in writing, signed by the waiving
party, and delivered to Escrow Holder prior to delivery by either party of a
written notice of termination pursuant to the following Paragraph. The special
condition described in Paragraph 6.1.6 cannot be waived.

         6.4      TERMINATION. If any of the special conditions described in
Paragraph 6.1 has been neither satisfied nor waived in the manner and by the
time specified therein, a party who is not then in default hereunder shall have
the right to terminate this Agreement (and the Escrow) by delivering a written
notice of termination to Escrow Holder. The right to so terminate this Agreement
(and the Escrow) shall be optional, not mandatory. If the notice is delivered,
the provisions of Paragraph 8.4 shall apply. In addition, if the grounds for
termination is Seller's failure to approve the Entitlement Approval Conditions
pursuant to Paragraph 6.1.3, Seller shall reimburse Buyer, within thirty (30)
days after receipt of paid invoices and other documentation reasonably requested
by Seller, for all out-of-pocket expenses reasonably incurred by Buyer for
third-party consultants, engineers, attorneys and others involved in Buyer's
investigation of the Property or negotiation and documentation of this Agreement
and shall be responsible for all escrow termination costs and fees. In all other
instances of a permitted termination of this Agreement, escrow termination fees
and costs shall be split equally between the parties.

                  ARTICLE 7. PRE-CLOSING RIGHTS AND OBLIGATIONS

         7.1      LIMIT ON ESCROW HOLDER'S RESPONSIBILITIES. Escrow Holder shall
have no concern with, nor liability nor responsibility for, this Article.

         7.2      DELIVERY OF DOCUMENTS; COOPERATION. Buyer acknowledges having
received and reviewed the Property Documents, the CC&Rs and a Natural Hazard
Disclosure. Seller shall make available to Buyer any updates or replacements of
any of the delivered Property Documents that Seller receives during the term of
this Agreement. Also during the term of this Agreement, Seller shall allow Buyer
and its agents, consultants and advisors access, during normal business hours
and on reasonable advance notice, to any other documents relating to the Land
that are in Seller's files or reasonably accessible to Seller. Seller shall
cooperate as reasonably requested by Buyer in connection with Buyer's
investigation of the Land, but at no expense to Seller.

         7.3      PROCESSING OF INTERIM AND FINAL MAPS AND IMPROVEMENT PLANS.
Promptly following Seller's delivery of the Entitlement Approval Notice, Seller
shall apply for, and thereafter diligently process with City, at Seller's sole
expense, the Interim and Final Maps and the improvement plans for the
Infrastructure Improvements and other Seller Improvements. Because all of the
Land will be used for Buyer's Project, in order to eliminate the need for the
two cul-de-sacs shown on the Tentative Map, the process Seller intends using to
obtain recordation of the Final Map involves Seller's first processing and
recording the Interim Map, which will consolidate Lots 1 through 10 shown on the
Tentative Map into no fewer than five lots or parcels as to which all building
rights will be restricted or relinquished, but without dedication for public use
of the two cul-de-sacs shown on the Tentative Map. With respect to the
cul-de-sacs, Buyer acknowledges that City may require reservation on the Interim
and Final Maps of access easements in the approximate locations of the
cul-de-sacs, with the easements to be extinguishable on City's approval of the
site plan to be processed by Buyer as part of Buyer's Project. Several months
after recordation of the Interim Map, using the City's substantial conformance
review process, Seller expects to obtain approval and recordation of the Final
Map, in the same form (and with the same number and configuration of lots) as
the Interim Map but with the building restriction rescinded, so that the Land
will exist as five or more buildable lots or parcels. In processing the Interim
and Final Maps, Seller shall seek input from and consult with Buyer (including
without limitation as to the number and configuration of the five or more lots
or parcels to be created on the Interim and Final Maps), and shall afford Buyer
the opportunity to be present in discussions with City regarding the maps.
Seller shall use reasonable efforts to prevent imposition by City of, and Buyer
shall have the right reasonably to approve, any conditions that would impose on
Buyer any off-site improvement obligations or additional fees (beyond those
payable at building permit issuance and the anticipated Mira Mesa Facilities
Benefit Assessment fees).

         7.4      PRE-CLOSING IMPROVEMENTS BY SELLER. Seller shall use
commercially reasonable efforts to obtain a permit for construction of the
Camino Santa Fe Improvements, to post all bonds required by City in connection
therewith. Following City's approval of the improvement plans for the
Infrastructure Improvements,


                                      -9-



Seller shall use commercially reasonable efforts to promptly obtain the
necessary other permits for and shall commence and complete construction of the
Pre-Closing Improvements as soon as practicable. Buyer shall be entitled to
observe the grading of the Land, and bring to Seller's attention any perceived
discrepancies or deviations from the grading plans and specifications. The
parties acknowledge, in this regard, the possibility that in the course of the
grading of the Land, Seller's soils consultant and/or civil engineer may propose
changes to the grading plans or specifications to address conditions in the
field. If any such proposed changes would materially and adversely affect the
Land or Buyer's Project (E.G., by the loss of a material portion of the pad area
usable for Buyer's Project), Seller shall deliver to Buyer notice of the
proposed change and reasonable supporting information, and Buyer shall have a
period of five (5) Business Days in which to approve or disapprove the change.
Buyer's failure to respond within the specified period shall be conclusively
deemed Buyer's approval of the proposed change. Any change that is approved or
deemed approved by Buyer shall thereafter be deemed part of the approved soils
report, grading specifications and/or grading plans, for purposes of the Grading
Certifications. If the Grading Certifications as presented by Seller do reflect
any material deviation from the approved soils report, grading specifications
and/or grading plans (as the same may have been modified pursuant to the
preceding sentence), Buyer shall have a period of five (5) Business Days in
which to approve or disapprove the deviation; in the absence of any such
material deviation, Buyer shall have no right to approve or disapprove the
Grading Certifications.

         7.5      ASSESSMENT DISTRICT FOR INFRASTRUCTURE IMPROVEMENTS.

                  7.5.1    GENERAL. Buyer acknowledges that Seller may join with
the owner of the real property to the east of Camino Santa Fe in forming an
Assessment District to finance approximately $11,000,000 of the costs of
constructing some or all of the Seller Improvements and other infrastructure
serving the Carroll Canyon Land, and that the Land will likely be included in
the Assessment District. The parties also acknowledge that the Purchase Price
has been determined to reflect Seller's being responsible for the Infrastructure
Improvements and other improvements that may be financed by the Assessment
District. Accordingly, subject to the provisions of this Paragraph 7.5, the
parties wish to provide for Seller's right to include the Land in an Assessment
District, whether the same is formed before or after the Close of Escrow, and
for Seller, not Buyer, to bear the cost of the Land's allocable share of any
assessments imposed by the Assessment District. Subject to the provisions of
this Paragraph 7.5, Buyer agrees to take title to the Land subject to the lien
of the Assessment District, and to cooperate with Seller as is reasonably
necessary in Seller's efforts to form the Assessment District. Seller shall keep
Buyer informed of Seller's decision whether to seek the Land's inclusion in an
Assessment District, and shall provide Buyer with copies of the material
correspondence and other documents relating to formation of any Assessment
District.

                  7.5.2    PRE-CLOSING FORMATION OF ASSESSMENT DISTRICT. If,
prior to the Close of Escrow, the Assessment District has been formed and the
amount of the Land's allocable assessment thereunder is known, then Buyer shall
be entitled to the Assessment District Credit to be applied against the Purchase
Price. The amount of the Assessment District Credit shall be determined at
Buyer's election, as either (i) the amount necessary to pay in full the Land's
share of such assessment prior to issuance of bonds, or (ii) the present value
of the aggregate of the Land's future assessment payments taken to term, using
the bonds' effective interest rate as the discount rate for present value
determination. Upon determination of the amount of the Assessment District
Credit, if any, the parties shall notify Escrow Holder in writing and such
amount shall not be required to be deposited by Buyer into Escrow as part of the
Purchase Price. If Land has been irrevocably subjected to the Assessment
District but the exact amount of the Land's assessment has not been determined,
then at Seller's election, either of the following shall apply:

                             (a) Seller shall provide a letter of credit issued
         by a bank reasonably approved by Buyer (or other security reasonably
         satisfactory to Buyer) in the amount reasonably estimated by Seller and
         approved by Buyer as the likely amount of the Assessment District
         Credit as security for Seller's reimbursement obligation, Buyer shall
         pay the full Purchase Price without the Assessment District Credit, and
         upon the post-Closing determination of the exact amount of the Land's
         share of the assessment, Seller shall reimburse Buyer, in Cash, for the
         amount that would have been the Assessment District Credit.

                             (b) The parties shall instruct Escrow Holder to
         retain as security for Seller's reimbursement obligation, from funds
         that would otherwise have been payable to Seller, the amount reasonably
         estimated by Seller and approved by Buyer as the likely amount of the
         Assessment


                                      -10-



         District Credit, and upon the post-Closing determination of the exact
         amount of the Land's share of the assessment, Buyer shall be entitled
         to that portion of the held-back funds in the amount that would have
         been the Assessment District Credit, and Seller shall be entitled to
         the balance, if any. If the amount of the held-back funds is less than
         the amount that would have been the Assessment District Credit, Seller
         shall pay the difference to Buyer within thirty (30) days after the
         determination of the amount has been made.

                  7.5.3    POST-CLOSING FORMATION OF ASSESSMENT DISTRICT. If the
Assessment District has not been formed as of the Close of Escrow, for a
period of three (3) years after the Close of Escrow (or until such earlier
time as Seller notifies Buyer in writing that Seller will not be seeking the
Land's inclusion within an Assessment District), Buyer shall cooperate as
reasonably requested by Seller in forming the Assessment District following
the Close of Escrow, including, without limitation, voting in favor of the
formation thereof in the manner and at the times as are determined by Seller
in its sole discretion. Upon the determination of the exact amount of the
Land's share of the assessment, Seller shall reimburse Buyer, in Cash, for
the amount that would have been the Assessment District Credit; provided,
however, that Buyer shall have no obligation to subject the Land to the
Assessment District unless and until Seller provides Buyer a letter of credit
issued by a bank reasonably approved by Buyer (or other security reasonably
satisfactory to Buyer) in the amount reasonably estimated by Seller and
approved by Buyer as the likely amount of the Assessment District Credit, as
security for Seller's reimbursement obligation. Upon the expiration of the
three-year period after the Close of Escrow, or following Seller's written
notification to Buyer that Seller will not be seeking the Land's inclusion
within an Assessment District, Buyer shall have no further obligation to
cooperate with Seller's efforts to form the Assessment District. Until such
time, and subject to Buyer's receipt of the letter of credit or other
security:

                             (a) Buyer shall not file any written or oral
         protest or opposition of any kind to the formation of the Assessment
         District or the levying of liens, assessments, taxes, special taxes,
         exactions, fees, and/or charges (collectively "Impositions") through
         the Assessment District.

                             (b) Buyer shall consent to, or, if an election is
         called, cast its vote in favor of the Assessment District and the
         levying of Impositions by the Assessment District.

                             (c) Buyer shall not take any action that would in
         any way interfere with the formation of the Assessment District or
         decisions made or actions taken by Seller with respect to the
         Assessment District or the bond financing relating thereto, including,
         without limitation, the timing of commencement of Impositions, the
         amount of Impositions, the spreading of Impositions and the use of the
         Impositions collected by the Assessment District.

                             (d) To the extent any owner of record of the Land
         has the right to protest the formation of the Assessment District,
         those rights shall be held solely by Seller. Upon the request of
         Seller, Buyer shall grant Seller its proxy to vote its interest as a
         landowner in any election involving the Assessment District.

         7.6      COOPERATION WITH SELLER'S EXCHANGE. Buyer agrees to cooperate
with Seller in effecting an Exchange, including, without limitation, consenting
to the assignment of this Agreement to a qualified intermediary selected by
Seller, provided that any such exchange transaction, and the related
documentation, shall not: (i) require Buyer to execute any contract (other than
as set forth herein), make any commitment, or incur any cost, liability or
obligations, contingent or otherwise, to third parties which would expand
Buyer's obligations beyond those arising under this Agreement absent the
Exchange, (ii) delay the Closing or the transaction contemplated by this
Agreement except as provided in Paragraph 6.2 above, or (iii) require Buyer to
acquire title to any other real property. In connection with and without
limiting the foregoing, Buyer shall sign and deliver to the Seller, no later
than five (5) days prior to the Closing Date, documents substantially similar to
those which are attached as EXHIBIT D. Notwithstanding any assignment by Seller
in connection with an Exchange, all representations, warranties and covenants of
Seller expressly set forth herein shall continue to be for the benefit of Buyer.

                             ARTICLE 8. THE CLOSING


                                      -11-



         8.1      CONDITIONS TO CLOSING. Escrow Holder shall close this Escrow
on the Closing Date (as the same may have been extended pursuant to Paragraph
6.2) by (i) filing in the Official Records the Development Declaration, Seller's
Grant Deed and such other documents as may be necessary to procure the Title
Policy, and (ii) delivering funds and documents to the parties (as set forth in
the Article of this Agreement entitled "Distribution of Funds and Documents")
WHEN AND ONLY WHEN each of the following conditions has been satisfied:

                  8.1.1    DELIVERIES. All funds and documents described in
Articles 4 and 5 have been delivered to Escrow Holder.

                  8.1.2    THE TITLE POLICY. Title Insurer is irrevocably
committed to issue the Title Policy.

                  8.1.3    SPECIAL CONDITIONS. The special conditions of
Paragraph 6.1 have been either satisfied or waived.

         8.2      ALTA EXTENDED COVERAGE TITLE POLICY. Buyer may, at its option,
direct Escrow Holder to procure an ALTA Extended Coverage Title Policy from
Title Insurer, with liability in the amount of the Purchase Price. If Buyer does
so elect an ALTA Extended Coverage Title Policy, then all references in this
Agreement to the "Title Policy" shall refer to the ALTA Extended Coverage Title
Policy; provided, however, Buyer shall be solely responsible to timely supply to
Title Insurer, at Buyer's sole cost, any ALTA survey required by Title Insurer
as a condition to the issuance of the ALTA Extended Coverage Title Policy, and
provided further, that the term "Permitted Exceptions shall thereafter include
both (i) the exclusions listed in the standard "Schedule of Exclusions from
Coverage" of the ALTA tended Coverage Title Policy, and (ii) any off-record
matters not reflected in the Pro Forma Title Policy that Title Insurer
determines, by an ALTA survey or otherwise, will affect the Land.

         8.3      EARLY CLOSING. If all of the conditions set forth in Paragraph
8.1 become satisfied at a date earlier than the Closing Date, Escrow Holder
shall, at Buyer's request and subject to Seller's approval, close this Escrow at
the earlier date.

         8.4      DELAYED CLOSING; TERMINATION. If Escrow Holder cannot close
this Escrow on or before the Closing Date, it shall, nevertheless, close the
Escrow when all conditions have been satisfied or waived, unless after the
Closing Date and prior to the Close of Escrow, Escrow Holder receives a written
notice to terminate this Agreement and the Escrow from a party who, at the time
the notice is delivered, is not in default under this Agreement; provided,
however, Seller's failure to effect the Exchange by the Closing Date shall not
be grounds for termination of this Agreement or the Escrow by Seller. The right
to terminate this Agreement and this Escrow will be optional, not mandatory.

                  8.4.1    TERMINATION OF ESCROW. Escrow Holder shall have no
liability or responsibility for determining that a party giving a written notice
to terminate is not in default under this Agreement. Within five (5) Business
Days after receipt of a notice from one party, Escrow Holder shall deliver one
copy of such notice to the other party. Unless written objection to termination
of this Escrow is received by Escrow Holder within five (5) Business Days after
Escrow Holder delivers such notice to the other party, Escrow Holder shall
promptly terminate this Escrow and, unless Paragraph 6.4 specifies otherwise,
return all funds and documents held by it to the party who deposited the same.
If written objection to the termination of this Escrow is delivered to Escrow
Holder within such five (5) Business Day period, Escrow Holder is authorized to
hold all funds and documents delivered to it in connection with this Escrow and
Escrow Holder may, in Escrow Holder's sole discretion, take no further action
until otherwise directed, either by the parties' mutual written instructions or
by a final order or judgment of a court of competent jurisdiction. In the event
of any litigation involving the retention of the Deposits, all costs associated
therewith (including any costs incurred by Escrow Holder in an interpleader
action) shall be borne by the party who is not the "prevailing party" as
determined pursuant to Paragraph 19.1 below.

                  8.4.2    LEGAL REMEDIES OF PARTIES NOT AFFECTED. Subject to
the possible applicability of Paragraphs 14.3 or 14.4, neither (i) the exercise
of such right of termination, (ii) delay in the exercise of such right, nor
(iii) the return of funds and documents, shall affect the right of the party
giving the notice of termination to recover damages or pursue other available
legal remedies for the other party's breach of this


                                      -12-



Agreement. Nor shall (a) the receipt of the notice, (b) any failure to object to
termination of this Escrow, or (c) the return of funds and documents affect the
right of the other party to recover damages or pursue other available legal
remedies for the breach of the party who gives the notice of termination.

                      ARTICLE 9. PRORATIONS, FEES AND COSTS

         9.1      PRORATION OF PROPERTY TAXES. Escrow Holder shall prorate
(I.E., apportion) between the parties, in Cash, to the Close of Escrow, General
and Special Real Estate Taxes, based on the latest information available to
Escrow Holder from the appropriate city or county office; provided, however,
that the prorations shall be made by Escrow Holder without regard to any
supplemental assessments levied pursuant to California Revenue & Taxation Code,
Section 75 and following, which shall be prorated pursuant to Paragraph 9.2
below. All prorations shall be done based strictly upon the date on which the
Close of Escrow occurs, without regard to the payment due date. All General and
Special Real Estate Taxes levied on the Land with respect to periods up to and
including the Closing Date shall be the responsibility of Seller and all such
amounts levied with respect to periods subsequent to the Closing shall be the
responsibility of Buyer.

         9.2      SUPPLEMENTAL TAXES. A supplemental tax bill representing the
tax due on any supplemental assessment relating to a date prior to the Close of
Escrow may be issued either before the Close of Escrow or subsequent thereto. If
a supplemental tax bill is received by Seller and delivered to Escrow Holder
prior to the Close of Escrow, Escrow Holder shall prorate said bill as specified
in Paragraph 9.1 above. If a supplemental tax bill is received by either party
after the Close of Escrow, the parties agree to prorate the amount of the
supplemental assessment relating to the times before and after the Close of
Escrow as specified in Paragraph 9.1 above. Within ten (10) Business Days after
written demand by Buyer for Seller's pro rata share of such supplemental tax
bill, Seller shall pay Buyer therefor. In the event Seller should fail to pay
said sums to Buyer when due, the same shall accrue interest at the maximum legal
rate from the date due until fully paid. As a post-closing covenant, (i) Buyer
agrees to hold Seller harmless from and indemnify it against any and all such
supplemental real property taxes (but not any penalties or interest resulting
from Seller's delayed forwarding or payment of the supplemental tax bill) which
may be imposed on the Land which relate to any period after the Close of Escrow,
and (ii) Seller agrees to hold Buyer harmless from and indemnify it against any
and all such supplemental real property taxes (but not any penalties or interest
resulting from Buyer's delayed forwarding or payment of the supplemental tax
bill) which may be imposed on the Land which relate to any period prior to the
Close of Escrow.

         9.3      POST-CLOSING ADJUSTMENTS. Buyer and Seller agree to re-prorate
any of the above-referenced prorations if, after the Close of Escrow, more
accurate or definitive information becomes available with respect thereto. The
party receiving such information shall deliver written notice thereof to the
other party within five (5) days of such receipt and, within five (5) days
thereafter, the parties shall re-prorate the affected matter and a party which
is thereby shown to have received an excess credit shall to the extent of such
excess immediately reimburse the other party.

         9.4      SELLER'S CHARGES. Seller shall pay (i) all documentary
transfer tax with respect to Seller's Grant Deed, (ii) the Title Policy premium,
including the cost of any endorsements expressly agreed to be provided by Seller
(but not including for any additional premium incident to Buyer's ordering an
ALTA Extended Coverage Policy), (iii) one-half of Escrow Holder's fee or
termination charge, (iv) fees for beneficiaries' statements, and (v) usual
seller's document-drafting and recording charges, including, without limitation,
with respect to the Final Map.

         9.5      BUYER'S CHARGES. Buyer shall pay (i) one-half of Escrow
Holder's fee or termination charge, (ii) the cost of any Title Policy
endorsements not expressly agreed to be provided by Seller, (iii) survey costs
and/or additional premiums incident to the ALTA Extended Coverage Policy (if
ordered by Buyer pursuant to Paragraph 8.2 above), and (iv) usual buyer's
document-drafting and recording charges.

                 ARTICLE 10. DISTRIBUTION OF FUNDS AND DOCUMENTS

         10.1     INTEREST. Any sums delivered by Buyer to Escrow Holder
pursuant to this Agreement and not immediately released to Seller shall be
deposited by Escrow Holder into a liquid money market account with a bank
approved by Buyer. Interest earned on Buyer's deposits shall belong to Buyer and
shall be credited upon


                                      -13-



receipt to Buyer's funds held by Escrow Holder. Escrow Holder's processing fee
for establishing the account shall be paid by Buyer.

         10.2     DISBURSEMENTS. All disbursements by Escrow Holder shall be
made by checks of Escrow Holder or, at the request of the party to whom
disbursement is made, by wire transfer.

         10.3     PAYMENT OF ENCUMBRANCES. Escrow Holder shall, at the Close of
Escrow, pay, from funds to which Seller will be entitled, to the appropriate
obligees, all liens, claims and encumbrances other than those set forth in the
Pro Forma Title Policy or those of any Assessment District formed in accordance
with Paragraph 7.5 above.

         10.4     RETURN AFTER RECORDING. Escrow Holder shall cause the County
Recorder of San Diego County to mail Seller's Grant Deed after recordation to
the grantee.

         10.5     DELIVERY OF INSTRUMENTS. Escrow Holder shall, at the Close of
Escrow, deliver by United States mail (or shall hold for personal pickup, if
requested) each non-recorded instrument received by Escrow Holder to the payee
or person (i) acquiring rights under the instrument, or (ii) for whose benefit
the instrument was acquired.

         10.6     DELIVERY OF CASH. Escrow Holder shall, at the Close of Escrow,
deliver by Federal Express or United States mail (or shall hold for personal
pickup, if requested) (i) to Seller, or order, the balance of the Cash portion
of the Purchase Price to which Seller will be entitled after payment of Seller's
charges, and (ii) to Buyer, or order, any excess funds delivered to Escrow
Holder by Buyer.

         10.7     REPORTING TO INTERNAL REVENUE SERVICE. Any returns, statements
or reports required to be filed under Section 6045(e) of the INTERNAL REVENUE
CODE OF 1986 (or any similar reports required by state or local law) or relating
to the Land shall be filed by Escrow Holder. In no event shall this Agreement be
construed so as to require that such returns, reports or statements be filed by
Buyer, Buyer's counsel, Seller or Seller's counsel. Within five (5) days of the
date Escrow Holder shall receive a written request from Seller and/or Buyer to
do so, Escrow Holder shall provide evidence to Seller and/or Buyer of its
compliance with the provisions of this Paragraph.

         10.8     SETTLEMENT STATEMENT. On the Closing Date, Seller and Buyer
shall have approved an estimated settlement statement setting forth all
prorations, disbursements and allocations of funds deposited into Escrow as a
condition to Closing.

                     ARTICLE 11. POSSESSION; ENTRY BY BUYER

         11.1     LIMIT ON ESCROW HOLDER'S RESPONSIBILITIES. Escrow Holder shall
have no concern with, nor liability nor responsibility for, this Article.

         11.2     ENTRY BY BUYER. Buyer may, during the term of this Escrow,
reasonably go upon the Land for purposes of (i) inspecting the Land, (ii)
surveying, testing, improvement designing, performing environmental studies and
the like, and (iii) determining the suitability of the Land for Buyer's
contemplated use thereof. Buyer shall hold Seller and the Land harmless from any
claim, cost, lien, action or judgment (including, without limitation, Seller's
attorneys' fees and defense costs) (a) incurred for surveyors, engineers,
architects, environmental and utility consultants, and others implementing the
purposes, and (b) for personal injury and property damage caused by Buyer or any
of its employees, agents or independent contractors. Before doing any work
contemplated by this Paragraph, Buyer shall secure and maintain, at Buyer's sole
cost, a commercial general liability and property damage insurance policy
covering Buyer's activities on the Land, with combined limits of $1,000,000 for
personal injury or death, $1,000,000 for property damage, and $1,000,000 policy
limit for aggregate operations on an occurrence basis, which shall name Seller
as an additional insured and contain a provision that such policy may not be
terminated until thirty (30) days' written notice of the proposed termination
has been delivered to Seller. Buyer shall not be liable or responsible for
temporary damage to the Land which is reasonably necessary to the investigation
of its physical characteristics, including soils tests and surveying, or any
claim that arises due to a pre-existing condition on the Land or due to the
negligent or intentional acts of Landlord or its agents or employees. If this
Agreement is terminated for any reason, Buyer


                                      -14-



shall, as soon as practicable after such termination, at Buyer's sole cost,
repair any physical damage resulting from its activities thereon and restore the
Land to substantially the same condition it was in prior to Buyer's entry
thereon.

         11.3     POSSESSION. Possession of the Land shall pass to Buyer at the
Close of Escrow.

     ARTICLE 12. ACKNOWLEDGMENTS, WARRANTIES, REPRESENTATIONS AND COVENANTS

         12.1     LIMIT ON ESCROW HOLDER'S RESPONSIBILITIES. Escrow Holder shall
have no concern with, nor liability nor responsibility for, this Article.

         12.2     SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents
that each of the Seller's Warranties set forth in this Paragraph is true and
correct as of the date the Agreement was signed and will be true, subject to the
possible application of Paragraph 12.3, as of the Close of Escrow.

                  12.2.1   DULY ORGANIZED. Seller is duly organized, validly
existing and in good standing under the laws of the State of California, has
stock outstanding which has been duly and validly issued, and is qualified to do
business and in good standing in the State of California, with full power and
authority to consummate the transaction contemplated hereby.

                  12.2.2   DUE AUTHORIZATION. This Agreement has been duly
authorized by all requisite action, and Seller has full power and authority to
execute this Agreement, to undertake and consummate the transactions
contemplated hereby, and to pay, perform and observe all of the conditions,
covenants, agreements and obligations contained herein.

                  12.2.3   NO DEFAULT OR INSOLVENCY. The consummation of the
transaction contemplated by this Agreement, and the payment and performance of
all of the obligations of Seller hereunder, will not result in any breach of, or
constitute a default under, any contract, loan or credit agreement, corporate
charter, bylaws, trust indenture or, to Seller's current actual knowledge, any
other instrument, to which Seller is a party or by which Seller may be bound or
affected. Seller is not insolvent or the subject of any bankruptcy or creditor's
rights action or proceeding.

                  12.2.4   AGREEMENT ENFORCEABLE. No consent, approval or other
authorization of, or registration, declaration or filing with, any court,
governmental agency or commission, or lender is required for the due execution
and delivery of this Agreement or for the validity or enforceability thereof
against Seller.

                  12.2.5   OWNERSHIP OF THE LAND. Seller holds fee title to the
Land free of claims of any other party, including tenancies and other rights of
possession or occupancy, except as is shown on the Preliminary Report and has
granted no options to purchase, lease, hold or occupy the Land other than
pursuant to this Agreement.

                  12.2.6   NO MECHANIC'S LIENS. To Seller's current actual
knowledge, there are now, and will at the Closing be, no claims in favor of any
person or entity which are or could become a lien on the Land arising on account
of the furnishing of labor and/or materials to the Land.

                  12.2.7   NO PENDING LITIGATION, CONDEMNATION OR REGULATORY
ACTIONS. Except as disclosed on SCHEDULE 12.2 attached hereto, there are no
actions, proceedings, investigations or condemnation or eminent domain
proceedings pending or, to Seller's current actual knowledge, threatened against
Seller or the Land, before or by any court, arbitrator, administrative agency or
other governmental authority which would affect the ability of Seller to convey
the Land to Buyer. To Seller's current actual knowledge, except as disclosed on
SCHEDULE 12.2, there are no actions pending or recommended by the appropriate
state or federal agency having jurisdiction thereof, which would have a material
adverse effect on the development of the Land for Buyer's Project.

                  12.2.8   NO KNOWN VIOLATIONS. To Seller's current actual
knowledge, except as disclosed on SCHEDULE 12.2, Seller has received no notices
from governmental authorities or private parties pertaining to violations of law
or governmental regulations with respect to the Land, with which Seller has not
fully complied


                                      -15-



or corrected, and Seller has no current actual knowledge of any such violations
which have not been the subject of any such governmental notices or notices from
the applicable private parties.

                  12.2.9   NO KNOWN CLAIMS. Except as disclosed on SCHEDULE
12.2, Seller has no current actual knowledge of any pending or threatened claims
by third parties with respect to the Land.

                  12.2.10  HAZARDOUS MATERIALS. Except as otherwise disclosed in
the Property Documents or on SCHEDULE 12.2: (i) no Hazardous Materials are
stored on the surface of the Land in violation of applicable law; and (ii) there
have been no past or present claims, complaints, litigation or governmental or
administrative proceedings or other restrictions of any nature brought or
threatened to be brought against the Land, nor any settlement reached with any
party or parties alleging the presence, release or threatened release of any
Hazardous Materials from or under the Land.

                  12.2.11  NO KNOWN DEFECTS. To Seller's current actual
knowledge, except as disclosed on SCHEDULE 12.2 or in the Property Documents, no
latent or patent defects in the Land have been caused by the act or omission of,
or have been consented to or suffered by, Seller during the term of Seller's
ownership of the Land.

                  12.2.12  INFORMATION PROVIDED TO BUYER. To Seller's current
actual knowledge, all documents delivered to or inspected by Buyer pursuant to
the terms of this Agreement are either original counterparts or complete and
true copies of such documents, and while Seller does not warrant the accuracy of
any such information, Seller is aware of no material inaccuracy or omission
therein or material misrepresentation of the matters purported to be contained
therein. Nothing herein limits or restricts Buyer's obligation to independently
verify the truth of any property information or other documents or materials
provided by Seller, or limits the scope or effect of any "as is" provisions of
this Agreement.

                  12.2.13  SELLER NOT A FOREIGN PERSON. Seller warrants that no
individual or entity which, under the terms of this Agreement, will transfer
United States Real Property Interests, as defined in Section 897(c) of the
INTERNAL REVENUE CODE, is a "foreign person" within the meaning of Section
1445(f) of the Internal Revenue Code. Seller also warrants that Buyer as
transferee will not be required to withhold tax pursuant to Section 26131 of the
California REVENUE AND TAXATION CODE.

         12.3     OTHER PROVISIONS RELATING TO SELLER'S WARRANTIES. Except as
expressly stated herein, Seller makes no representation or warranty as to the
truth, accuracy or completeness of any materials, data or information delivered
by Seller to Buyer in connection with the transaction contemplated hereby.
Seller's Warranties and any other representations made in this Agreement or any
other document executed in connection with the transaction shall survive the
Closing for a period of twelve (12) months. Any reference to the "knowledge" or
"current actual knowledge" of Seller shall refer only to the then current actual
knowledge of Seller's officers Henry F. Hunte, Michael P. Neal and Allen M.
Jones (whom Seller represents are the current employees of Seller most
knowledgeable about the Land), without inquiry or investigation or duty of
investigation and without imputation to any such individual of the knowledge of
others, whether or not any such others would be deemed agents of such
individuals. Buyer acknowledges and agrees that the use of the named individuals
is solely for the purpose of establishing a standard for measurement of Seller's
knowledge, and nothing herein shall impose any personal liability on any such
individual for any representation, warranty or covenant of Seller hereunder. To
the extent that Buyer knows, or to the extent that the Property Documents or any
other studies or reports commissioned or obtained by Buyer reveal, that any of
Seller's Warranties are inaccurate, untrue or incorrect, such representations
and warranties shall be deemed modified to reflect Buyer's knowledge or the
content of such documents, as the case may be; provided, however, that for the
limited purpose of Paragraph 6.1.8 only, no such modification of the
representations set forth in Paragraphs 12.2.5 through 12.2.11 shall be deemed
to occur by reason of events occurring after the Escrow Opening Date. Subject to
the foregoing, Seller shall certify as of the Close of Escrow that all Seller's
Warranties remain true and correct in all material respects.

         12.4     BUYER'S REPRESENTATIONS RE DUE DILIGENCE AND RELIANCE. Buyer
acknowledges being advised by Seller that in the past the Carroll Canyon Land
and the adjacent land to the east were used by Seller and its licensees for a
rock plant and various other vacant land uses, and that portions of the Land
have been produced by backfilling following mining operations. Buyer
acknowledges and represents that prior to the


                                      -16-



Contingency Date, Buyer will have conducted (or will have waived its right to
conduct) all such inspections, investigations, tests, analyses, appraisals and
evaluations of the Land (including those for Hazardous Materials or such past
land uses) as Buyer considers necessary or appropriate (all of such inspections,
investigations, tests, analyses, appraisals and evaluations being herein
collectively called the "Investigations"); and that Seller has made the Property
Documents available to Buyer. Buyer has reviewed, examined, evaluated and
verified the Property Documents and the results of the Investigations to the
extent it deems necessary or appropriate with the assistance of such experts as
Buyer deemed appropriate. Buyer represents, acknowledges and agrees that (i)
Buyer is familiar with the physical condition of the Land, (ii) Buyer has
completed its due diligence with respect to the Land and the Property Documents
to its satisfaction, and (iii) except for Seller's Warranties, Buyer is
acquiring the Land based exclusively upon its own investigations and inspections
of the Land and the Property Documents. Without limiting the generality of the
foregoing, Buyer agrees that BUYER HAS NOT RELIED AND WILL NOT RELY ON, AND
SELLER SHALL NOT BE LIABLE FOR OR BOUND BY, ANY EXPRESSED OR IMPLIED WARRANTIES,
GUARANTIES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE LAND OR
RELATING THERETO (INCLUDING SPECIFICALLY, WITHOUT LIMITATION, THE PROPERTY
DOCUMENTS) MADE OR FURNISHED BY SELLER, OR ANY REAL PROPERTY BROKER OR AGENT
REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER MADE OR GIVEN,
DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING, UNLESS SPECIFICALLY SET FORTH AS A
SELLER'S WARRANTY IN THIS AGREEMENT. BUYER REPRESENTS TO SELLER THAT BUYER HAS
CONDUCTED, OR WILL CONDUCT PRIOR TO CLOSING, SUCH INVESTIGATIONS OF THE LAND,
INCLUDING BUT NOT LIMITED TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF,
AS BUYER DEEMS NECESSARY TO SATISFY ITSELF AS TO THE CONDITION OF THE LAND AND
THE EXISTENCE OR NONEXISTENCE OR CURATIVE ACTION TO BE TAKEN WITH RESPECT TO ANY
HAZARDOUS MATERIALS ON OR DISCHARGED FROM THE LAND, AND WILL RELY SOLELY UPON
SAME AND NOT UPON ANY INFORMATION PROVIDED BY OR ON BEHALF OF SELLER OR ITS
AGENTS OR EMPLOYEES WITH RESPECT THERETO, OTHER THAN SUCH SELLER'S WARRANTIES AS
ARE EXPRESSLY SET FORTH IN THIS AGREEMENT.

                  Buyer's Initials:
                                    ---------

         12.5     BASIS OF PURCHASE. Buyer acknowledges that it is purchasing
the Land in reliance solely on (i) Buyer's own inspection of the Land, (ii)
Buyer's independent verification of the truth of any documents delivered by
Seller to Buyer, (iii) Buyer's independent determination of the viability of the
Buyer's proposed development project, (iv) the opinions and advice concerning
the Land provided by consultants engaged by Buyer, and (v) the representations,
warranties and covenants of Seller expressly set forth in this Agreement.
Subject to the completion of the Seller Improvements and the representations,
warranties and covenants of Seller expressly set forth in this Agreement, Buyer
shall accept the Land, and the matters relating to the Land listed below, in
their "as is, where is, with all faults" condition or status as of the Closing
Date. The matters are: soils and geological condition, topography, area and
configuration of the Land; availability of utilities, schools, public access and
fire and police protection; any easement, license or encroachment which is not a
matter of public record, whether or not visible upon inspection of the Land; any
existing or future planning, zoning and subdivision statutes, ordinances,
regulations and permits; the character and amount of park fees, public
facilities fees, school fees, inspection fees, traffic impact fees, bridge and
thoroughfare fees, drainage fees, growth management fees and any other fee or
charge which must be paid to develop the Land; and any all other matters
relating to the Land including, but not limited to, value, feasibility, cost,
marketing and investment return. Subject to the representations, warranties and
covenants of Seller expressly set forth in this Agreement, Buyer agrees to
assume, effective upon the Close of Escrow, any and all risk that any adverse
matters (including, without limitation, physical, geotechnical and environmental
conditions and the presence of any Hazardous Materials) relating to the Land may
not have been revealed by Buyer's inspections and investigations of the Land.
Buyer, for itself and its affiliates, successors and assigns (for purposes of
this Paragraph, "Releasing Parties"), hereby fully and forever releases and
discharges Seller and its affiliates and each of their agents, directors,
shareholders, employees, officers, consultants, representatives, attorneys,
successors and assigns of and from any and all past, present and future claims,
damages, losses, warranties (express or implied), debts, liabilities,
obligations, costs, expenses, demands and causes of action of any kind or
nature, whether known or unknown, foreseen or unforeseen, suspected or
unsuspected, fixed or contingent, matured or unmatured (collectively, "Claims")
that the Releasing Parties or any of them have or may have or may claim to have
in any way arising out of, related to or connected with (i) any latent or patent
defect in the Land not


                                      -17-



caused by the act or omission of, or consented to by, Seller, or (ii) the
presence, removal or other remediation of Hazardous Materials within, under or
upon, or in the vicinity of, the Land under circumstances not constituting a
breach of any representation or warranty of Seller hereunder; provided, however,
that the foregoing release and discharge do not apply to any Claims arising from
a material default by Seller in the performance of its obligations under the
terms of this Agreement or a breach of Seller's representation in Paragraph
12.2.11. With respect to the foregoing release, Buyer hereby acknowledges that
it has read and is familiar with the provisions of, and expressly waives all
rights arising under, California CIVIL CODE Section 1542, which is set forth
below:

                  "A general release does not extend to claims which the
                  creditor does not know or suspect to exist in his favor at the
                  time of executing the release, which if known by him must have
                  materially affected his settlement with the debtor."

                  Buyer's Initials:
                                    -----------

         12.6     DEVELOPMENT FEES. Buyer acknowledges and agrees that in
connection with its development of the Land, Buyer will be subject to and will
have to comply with numerous federal, state and local statutes, ordinances,
laws, rules, regulations and restrictions and will have to pay various fees and
expenses. Buyer acknowledges and agrees that except as expressly provided in
this Agreement to the contrary, Seller shall have no liability, obligation or
responsibility of any kind with respect to any such compliance or the payment of
such fees. Nothing herein shall relieve Seller of any assessment or other
obligations of Seller as Declarant under the CC&Rs or as an owner of other
property within the Business Park.

         12.7     OTHER BUYER REPRESENTATIONS AND WARRANTIES. Buyer represents
that each of the matters set forth in this Paragraph is true and correct as of
the date the Agreement was signed.

                  12.7.1   DULY ORGANIZED. Buyer is duly organized, validly
existing and in good standing under the laws of the State of Delaware, and is
qualified to do business and in good standing in the State of California, with
full power and authority to consummate the transaction contemplated hereby.

                  12.7.2   DUE AUTHORIZATION. This Agreement has been duly
authorized by all requisite action, and Buyer has full power and authority to
execute this Agreement, to undertake and consummate the transactions
contemplated hereby, and to pay, perform and observe all of the conditions,
covenants, agreements and obligations contained herein.

                  12.7.3   NO DEFAULT. The consummation of the transaction
contemplated by this Agreement, and the payment and performance of all of the
obligations of Buyer hereunder, will not result in any breach of, or constitute
a default under, any contract, loan or credit agreement, corporate charter,
bylaws, trust indenture or, to Buyer's current actual knowledge, any other
instrument, to which Buyer is a party or by which Buyer may be bound or
affected.

                  12.7.4   AGREEMENT ENFORCEABLE. No consent, approval or other
authorization of, or registration, declaration or filing with, any court,
governmental agency or commission, or lender is required for the due execution
and delivery of this Agreement or for the validity or enforceability thereof
against Buyer.

         12.8     BROKERAGE COMMISSIONS. Seller has agreed to pay a brokerage
commission, if and only if the Escrow actually closes, to be divided equally
between Seller's broker CB Richard Ellis and Buyer's broker Burnham Real Estate
Services. Except for the foregoing commission, entitlement to and payment of
which shall be governed solely by a separate agreement between Seller and CB
Richard Ellis, each party warrants to the other that the warranting party has
incurred no obligation by reason of this Agreement or the transaction
contemplated by this Agreement, for any other real estate brokerage commission
or finder's fee for which the other party would be liable. Each party will hold
the other party free and harmless from and against any damage or expense the
other party may incur by reason of the untruth as to the warranting party of the
foregoing warranty, including expenses for attorneys' fees and court costs.

                      ARTICLE 13. POST-CLOSING OBLIGATIONS


                                      -18-



         13.1     LIMIT ON ESCROW HOLDER'S RESPONSIBILITIES. Escrow Holder shall
have no concern with, nor liability nor responsibility for, this Article.

         13.2     POST-CLOSING COMPLETION OF SELLER IMPROVEMENTS. The following
provisions shall apply if the Seller Improvements have not been completed prior
to the Close of Escrow:

                  13.2.1   COMPLETION OF INFRASTRUCTURE IMPROVEMENTS. Subject to
the occurrence of Unavoidable Delay, Seller shall complete Camino Santa Fe and
the loop road around the Land sufficient so that City has approved or authorized
both for vehicular and pedestrian access within six (6) months after the Close
of Escrow.

                  13.2.2   MECHANIC'S LIEN PROTECTION. If any claim of lien is
recorded which affects the Land and results from Seller's activities or anyone
acting through, or for the benefit of Seller, Seller shall, within 20 days after
such recording or service, (i) pay and discharge the same, (ii) effect the
release thereof by recording or delivering to Buyer a surety bond in form and
amount satisfactory to Buyer, or (iii) provide Buyer with other assurance which
Buyer, in its sole discretion, deems to be satisfactory for the payment of such
lien and for the full and continuous protection of Buyer and the Land from the
effect thereof. If Seller fails to do so, Buyer may pay such lien, or may
contest the validity thereof, paying all costs and expenses of contesting the
same, including attorneys' fees, and all such sums shall be reimbursed by Seller
within ten (10) days after demand therefor.

                  13.2.3   INDEMNITY. Seller shall indemnify, defend and hold
Buyer harmless from liability for any losses, costs (including reasonable
attorneys' fees), claims, liabilities, expenses and demands arising out of any
entry upon the Land by Seller or its contractors during the course of Seller's
post-Closing completion of the Seller Improvements.

                  13.2.4   INSURANCE. Seller shall, at its sole expense,
maintain a policy of commercial general liability insurance, including direct
contractual and contingent liability, with limits of $5,000,000.00 for bodily
injury to, or death of, any one person, $5,000,000.00 for bodily injury to, or
death of, more than one person on an occurrence basis, $5,000,000.00 for
property damage in any one accident, and $5,000,000.00 policy limit for
aggregate operations on an occurrence basis. Such insurance shall name Buyer as
an additional insured, shall provide that the policy is primary and
non-contributing with any other insurance carried by Buyer, and shall contain a
provision that the naming of an additional insured shall not negate any right
the additional insured would have had as claimant under the policy if not so
named.

                  13.2.5   ASSIGNMENT OF ADTs. Effective as of the Close of
Escrow, Seller assigns to Buyer a total of 6,400 ADTs for use in connection with
the use and occupancy of the Land, with peak period trips of 704 in the morning
and 768 in the evening. Seller reserves to itself, for use elsewhere in the
Business Park, any other ADTs approved for the Business Park as part of the
Entitlements. Buyer acknowledges and agrees that Buyer's Project must be planned
within the constraints of the assigned ADTs and peak period trips as specified
herein.

         13.3     POST-CLOSING TEMPORARY CONSTRUCTION LICENSE. The parties
acknowledge that in the course of developing Buyer's Project, Buyer may require
temporary access to other portions of the Carroll Canyon Land for construction
purposes. During and after the term of the Escrow, Seller shall provide the
required access subject to reasonable and ordinary conditions similar to those
set forth in Paragraph 11.2, which shall be embodied in an entry permit or
license agreement prepared by Seller and reasonably approved by Buyer.

                   ARTICLE 14. DELIVERY OF DOCUMENTS; REMEDIES

         14.1     LIMIT ON ESCROW HOLDER'S RESPONSIBILITIES. Escrow Holder shall
have no concern with, nor liability nor responsibility for, this Article.

         14.2     DELIVERY OF DEVELOPMENT PRODUCT. If this Escrow is terminated
for any reason (other than the default of Seller), Buyer shall, within fifteen
(15) days following the termination, deliver to Seller, at no cost


                                      -19-



or expense to Seller but without representation or warranty and only to the
extent assignable, all Property Documents, all soils or geotechnical reports and
other studies obtained by Buyer from its third-party consultants, or previously
delivered to Buyer by Seller. All of the foregoing shall be delivered to Seller,
without representation or warranty by Buyer, at no cost or expense to Seller.

         14.3     LIQUIDATED DAMAGES. THE PARTIES AGREE THAT THE PURCHASE PRICE
HAS BEEN DETERMINED NOT ONLY BY A CONSIDERATION OF THE VALUE OF THE LAND PER SE
BUT ALSO BY A CONSIDERATION OF THE VALUE OF THE VARIOUS COVENANTS, CONDITIONS
AND WARRANTIES OF THIS AGREEMENT AS THEY RELATE TO THE LAND. THE IMPLICATIONS OF
SUCH VALUES, SOMETIMES MEASURABLE IN RELATION TO KNOWN EXTERNAL STANDARDS AND
SOMETIMES DETERMINED ONLY BY SUBJECTIVE BUSINESS JUDGMENTS OF THE PARTIES, ARE
ALL INTERRELATED AND AFFECTED BY THE PARTIES' ULTIMATE AGREEMENT UPON THE
PURCHASE PRICE. THE PARTIES HAVE DISCUSSED AND NEGOTIATED IN GOOD FAITH UPON THE
QUESTION OF THE DAMAGES THAT WOULD BE SUFFERED BY SELLER IN THE EVENT BUYER
BREACHES THIS AGREEMENT. THE PARTIES HAVE ENDEAVORED TO REASONABLY ESTIMATE SUCH
DAMAGES AND THEY HEREBY AGREE THAT, BY REASON OF THE AFORESAID CONSIDERATIONS,
(I) SUCH DAMAGES ARE AND WILL BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX,
(II) LIQUIDATED DAMAGES IN THE AMOUNT OF THE ESCROW OPENING DEPOSIT (AND, AFTER
DELIVERY THEREOF, EACH OF THE ADDITIONAL DEPOSITS) ARE AND WILL BE REASONABLE,
(III) IN THE EVENT OF SUCH BREACH, SELLER SHALL RECEIVE THE ESCROW OPENING
DEPOSIT AND (IF DELIVERED) THE ADDITIONAL DEPOSITS AS SUCH LIQUIDATED DAMAGES,
AND (IV) IN CONSIDERATION OF THE PAYMENT OF SUCH LIQUIDATED DAMAGES, SELLER
SHALL BE DEEMED TO HAVE WAIVED ANY AND ALL CLAIMS AT LAW OR IN EQUITY, INCLUDING
ANY CLAIM FOR DAMAGES OR FOR SPECIFIC PERFORMANCE, EXCEPT FOR: (A) CLAIMS FOR
INDEMNITY PURSUANT TO PARAGRAPH 11.2; (B) ACTIONS FOR THE RECOVERY OF THE
DEPOSITS FROM ESCROW HOLDER AS LIQUIDATED DAMAGES OR FOR THE RETURN OF DOCUMENTS
PURSUANT TO PARAGRAPH 14.2; (C) ACTIONS TO EXPUNGE A LIS PENDENS OR OTHERWISE TO
CLEAR TITLE OF ANY LIEN WRONGFULLY FILED OR WRONGFULLY IMPOSED BY BUYER; AND (D)
REASONABLE ATTORNEYS' FEES AND COSTS INCURRED BY SELLER INCIDENT TO CLAUSES (A)
THROUGH (C).

            Seller's Initials            Buyer's Initials
                              -------                    -------

         14.4     BUYER'S REMEDIES. In the event that this Agreement is
terminated or this Escrow is prevented from closing by reason of Seller's
default, Buyer shall be entitled to the return of the Deposits, and Buyer, as
its sole and exclusive remedy, may exercise either of the following: (i) Buyer
may seek specific performance of this Agreement; or (ii) Buyer may bring an
action against Seller to collect actual monetary damages for Seller's breach, in
an amount that does not exceed the lesser of $250,000 or the actual
out-of-pocket expenses incurred by Buyer in connection with this Agreement and
Buyer's investigation of the Land and Buyer's Project.

                         ARTICLE 15. ASSIGNMENT BY BUYER

         15.1     ASSIGNMENT. Buyer acknowledges that a material inducement to
Seller's entry into this Agreement was Buyer's representation that it intends to
develop all of the Land for Buyer's own use as described in Paragraph 1.3. Buyer
shall have no right to assign any or all of Buyer's rights in this Agreement to
any person(s) without Seller's prior written consent, which (i) shall be granted
for an assignment to an affiliate or acquirer by merger of Buyer, or to any
entity which acquires substantially all of the assets of Buyer, (ii) shall not
be unreasonably withheld for an assignment to a joint venture between Buyer and
another entity in the same industry as Buyer, where the assignee will be
developing Buyer's Project on the Land for Buyer's use as contemplated herein,
and (iii) may be granted or withheld at Seller's sole and absolute discretion,
and may be conditioned upon any matters Seller wishes to impose, for any other
proposed assignment. Any permitted assignment may be exercised only by written
assignment executed by Buyer and accepted in writing by the assignee (which
must, in such written acceptance, obligate itself to perform the assignor's
obligations under this Agreement), and delivered to Escrow Holder and Seller
prior to the close of this escrow. Any assignment of Buyer's rights made or
attempted without Seller's consent or without such written assignment and
acceptance shall be void and of no force or effect.


                                      -20-



         15.2     EFFECT OF APPROVED ASSIGNMENT. In the event of an approved or
permitted assignment, the assignee will be and become: (i) the grantee of
Seller's Grant Deed; (ii) the beneficiary of any representations, warranties and
covenants made by Seller herein; (iii) the insured owner under the Title Policy;
and (iv) the person(s) having the right or obligation to (a) deliver statements,
(b) deliver documents, (c) give approvals, (d) waive conditions, or (e) make
demands, all as may be permitted or required by this Agreement and not then
already accomplished by Buyer or another approved assignee.

                           ARTICLE 16. EMINENT DOMAIN

         16.1     EMINENT DOMAIN. In the event that prior to the Close of Escrow
all or any material portion of the Land should be taken or appropriated by any
public authority under the power of eminent domain, then Buyer may at its option
terminate this Agreement and Escrow without further liability by delivering
written notice of termination within fifteen (15) days after receiving notice of
the taking or appropriation. Seller shall promptly notify Buyer of any such
taking or appropriation. If Buyer does not exercise its option to terminate and
the Closing actually occurs, then all proceeds of the award for the taking that
are applicable to the Land shall belong to Buyer. Seller assumes all risk of
loss to the Land as a result of casualty thereto up to and through the Closing.

                               ARTICLE 17. NOTICES

         17.1     TIME OF DELIVERY; ADDRESSES. Unless otherwise specifically
provided herein, all notices, demands or other communications given hereunder
shall be in writing and shall be deemed to have been duly delivered upon
confirmed personal delivery, or by Federal Express (or similar reputable express
delivery service), or by confirmed telecopier transmission with back-up copy
mailed the same day, or as of the second business day after mailing by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:

         If to Seller, to:          H. G. Fenton Company
                                    7588 Metropolitan Drive
                                    San Diego, California 92108
                                    Telephone: (619) 400-0120
                                    Telecopier: (619) 400-0111
                                    Attention: Mr. Michael P. Neal

                                    WITH A COPY TO:
                                    --------------

                                    Mr. David W. Bagley, II
                                    Hecht, Solberg, Robinson & Goldberg LLP
                                    600 West Broadway, 8th Floor
                                    San Diego, California 92102
                                    Telephone: (619) 239-3444
                                    Telecopier: (619) 232-6828

         If to Buyer, to:           Biosite Incorporated
                                    11030 Roselle Street
                                    San Diego, California 92121
                                    Telephone: (858) 597-4815
                                    Facsimile: (858) 642-2512
                                    Attention: Director of Facilities;
                                                  Chief Financial Officer

                                    WITH A COPY TO:
                                    --------------

                                    Mr. Eric A. Kremer
                                    Pillsbury Winthrop LLP
                                    11975 El Camino Real, Suite 200


                                      -21-



                                    San Diego, California 92130
                                    Telephone: (858) 509-4021
                                    Telecopier: (858) 509-4010

         If to Escrow Holder, to:   Stewart Title of California, Inc.
                                    3111 Camino del Rio North, Suite 900
                                    San Diego, California 92108
                                    Telephone: (619) 692-1600
                                    Telecopier: (619) 295-2972
                                    Attention: Ms. Patty McHugh
                                    Escrow No.
                                               -------------------

or to such other address or to such other person as any party shall designate to
the others for such purpose in the manner hereinabove set forth.

                       ARTICLE 18. EXCULPATORY PROVISIONS

         18.1     NEGLECT, MISCONDUCT. Escrow Holder shall not be liable for any
of its acts or omissions unless the same constitutes negligence or willful
misconduct.

         18.2     FORM, VALIDITY AND AUTHORITY. Escrow Holder shall not be
responsible for (i) the sufficiency or correctness as to form or the validity of
any document deposited with Escrow Holder, (ii) the manner of execution of any
such deposited document, unless such execution occurs in Escrow Holder's
premises and under its supervision, or (iii) the identity, authority or rights
of any person executing any document deposited with Escrow Holder unless under
Escrow Holder's supervision or control.

         18.3     CONFLICTING INSTRUCTIONS. Upon receipt of any conflicting
instructions, Escrow Holder shall have the right to take no further action until
otherwise directed, either by the parties' mutual written instructions or a
final order or judgment of a court of competent jurisdiction.

         18.4     INTERPLEADER. Escrow Holder shall have the absolute right, at
its election, to file an action in interpleader requiring the parties to answer
and litigate their several claims and rights among themselves, and Escrow Holder
is authorized to deposit with the clerk of the court all documents and funds
held in this Escrow. If such action is filed, the parties shall jointly and
severally pay Escrow Holder's termination charges and costs and reasonable
attorney's fees which Escrow Holder is required to expend or incur in the
interpleader action, the amount thereof to be fixed and judgment therefor to be
rendered by the court; provided, however, that as between themselves, the losing
party shall be solely responsible for any such charges, costs and attorneys'
fees. Upon the filing of such action, Escrow Holder shall be and become fully
released and discharged from all obligations to further perform any obligations
imposed by this Agreement.

         18.5     MISCELLANEOUS. Recordation of any instruments delivered
through this Escrow, if necessary or proper in the issuance of the Title Policy,
is authorized. No examination or insurance as to the amount or payment of real
or personal property taxes is required unless the real property tax is payable
on or before the date of the Title Policy. If any party is seeking to obtain a
loan secured by the Property, then, during the pendency of this Escrow, Escrow
Holder is authorized to furnish the lender, or anyone acting on its behalf, any
information concerning this Escrow, including, but not limited to, a certified
copy of this Agreement and any amendments thereto. If any party uses
facsimile-transmitted signed documents, Escrow Holder is authorized to rely upon
such documents as if they bore original signatures unless written notice to the
contrary is received from any signatory to any such documents; provided,
however, that facsimile-transmitted signed documents will not be accepted for
recordation in the Official Records.

         18.6     ADDITIONAL INSTRUCTIONS. Escrow Holder may request that Buyer
and Seller sign additional instructions related to the Escrow created by this
Agreement. Buyer and Seller agree to be reasonable in reviewing, commenting on,
proposing changes to, approving and entering into any such additional
instructions; provided, however, Seller, Buyer and Escrow Holder agree that in
the event of any conflict or inconsistency between this Agreement and such
additional instructions, the terms, conditions and provisions of this Agreement
shall govern and control.


                                      -22-



                         ARTICLE 19. GENERAL PROVISIONS

         19.1     ATTORNEYS' FEES. If either party commences litigation for the
judicial interpretation, reformation, enforcement or rescission of this
Agreement, the prevailing party will be entitled to a judgment against the other
for, and to collect, an amount equal to reasonable attorneys' fees and court and
other costs incurred. The "prevailing party" shall be the party who is entitled
to recover its costs of suit, whether or not the suit proceeds to final
judgment. A party not entitled to recover its costs shall not recover attorneys'
fees. No sum for attorneys' fees shall be counted in calculating the amount of a
judgment for the purposes of determining whether a party is entitled to recover
its costs or attorneys' fees.

         19.2     GENDER, NUMBER. Whenever the context requires, the use herein
of (i) the neuter gender includes the masculine and the feminine, and (ii) the
singular number includes the plural.

         19.3     TIME OF THE ESSENCE. Time is of the essence of each covenant
of this Agreement for which a date of performance is specified.

         19.4     BUSINESS DAYS. If the (i) stated Closing Date (as extended, if
applicable), or (ii) last day for performance of an act falls upon a day during
which Escrow Holder is not open for business, the Closing Date (as extended, if
applicable) or such last day, as the case may be, shall be the next following
Business Day.

         19.5     SURVIVAL OF PROVISIONS. The representations, warranties,
agreements and indemnities set forth in this Agreement shall remain operative,
shall be deemed made at the Close of Escrow, and shall survive the closing and
the execution and delivery of Seller's Grant Deed and shall not be merged in
Seller's Grant Deed.

         19.6     AUTHORITY OF SIGNATORIES. Each individual signing this
Agreement on behalf of a corporation warrants that he or she is duly authorized
to sign and deliver this Agreement on behalf of the corporation, in accordance
with a duly adopted resolution of the board of directors of the corporation or
in accordance with the bylaws of the corporation, and that this Agreement is
binding upon the corporation in accordance with its terms. Each individual
signing this Agreement on behalf of any other entity warrants that he or she is
duly authorized to sign and deliver this Agreement on behalf of the entity,
either with authority under the entity's organizational documents so to sign, or
as the entity's duly authorized agent with authority to bind the entity.

         19.7     CAPTIONS. Captions in this Agreement are inserted for
convenience of reference only and do not define, describe or limit the scope or
the intent of this Agreement.

         19.8     APPLICABLE LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of California.

         19.9     ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties relating to the transaction contemplated hereby and all
prior or contemporaneous agreements, understandings, representations and
statements, oral or written, are merged herein.

         19.10    MODIFICATIONS. No modification, waiver or discharge of this
Agreement shall be valid unless the same is in writing and signed by the party
against which the enforcement of such modification, waiver or discharge is or
may be sought.

         19.11    SUCCESSORS. All terms of this Agreement shall be binding upon
and inure to the benefit of the parties and their respective administrators or
executors, successors and assigns; nothing contained in this Paragraph shall
affect the Article of this Agreement entitled "Assignment by Buyer".

         19.12    INVALIDITY OF MATERIAL PROVISION. If any material covenant,
condition or provision herein contained is held to be invalid, void or
unenforceable by a final judgment of any court of competent jurisdiction, this
Agreement shall become rescinded unless the party benefitted by such covenant,
condition or provision delivers to the other party and Escrow Holder, within
five (5) days after the judgment becomes final, a written


                                      -23-



waiver of the covenant, condition or provision, in which case the remainder of
this Agreement shall be enforceable.

         19.13    FURTHER ASSURANCES. Each party to this Agreement, for itself
and its successors and assigns, agrees to take such additional actions and
execute such additional instruments as may be reasonably requested by Escrow
Holder or the other party in order to give effect to the transaction
contemplated hereby.

         19.14    COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one instrument.

         19.15    EXHIBITS. The following exhibits are attached and are part of
this Agreement:

                       A          Site Plan of Fenton Technology Park
                       B          Form of Seller's Grant Deed
                       C          The Seller Improvements
                       D          The Acceptable Entitlement Approval Conditions
                       E          Assignment of Warranties and Intangible Rights
                       F          Form of Development Declaration

         19.16    SUBMISSION OF AGREEMENT NOT AN OPTION. Submission by Seller of
this Agreement for examination or signature by Buyer shall not constitute an
option to purchase the Land. Accordingly, this Agreement shall not become
effective, and Buyer shall have no rights hereunder or to the Land unless and
until this Agreement is executed by Seller and delivered to Buyer.

         This Agreement has been executed at San Diego, California, as of the
date set forth at the beginning hereof.


SELLER:                                                       BUYER:

H. G. FENTON COMPANY, a California             BIOSITE INCORPORATED, a Delaware
corporation                                    corporation


By                                             By
    ------------------------------                ------------------------------
Its                                            Its
    ------------------------------                ------------------------------


By                                             By
    ------------------------------                ------------------------------
Its                                            Its
    ------------------------------                ------------------------------



                            CONSENT OF ESCROW HOLDER

         The undersigned Escrow Holder hereby agrees to (i) accept the foregoing
Agreement, (ii) be Escrow Holder under the Agreement, and (iii) be bound by the
Agreement in the performance of its duties as Escrow Holder; provided, however,
the undersigned shall have no obligations, liability or responsibility under (a)
this Consent or otherwise, unless and until the Agreement, fully signed by the
parties, has been delivered to the undersigned, or (b) any amendment to said
Agreement unless and until the same is accepted by the undersigned in writing.

Date:                                      STEWART TITLE OF CALIFORNIA, INC.
     ---------------


                                           By
                                             -----------------------------------
                                                 Patty McHugh, Escrow Officer


                                      -24-



                                  SCHEDULE 12.2

                                DISCLOSURE ITEMS


Section 12.2.7:   Seller has disclosed that Hanson Aggregates Pacific
                  Southwest, Inc., a Delaware corporation ("Hanson"), the owner
                  of the real property to the east of the Carroll Canyon Land,
                  has expressed CEQA concerns about the planned configuration of
                  Camino Santa Fe as a major collector road.


                                      -25-



                                    EXHIBIT B

                           FORM OF SELLER'S GRANT DEED


Recording Requested By

Stewart Title Company

When Recorded Mail To:

Mr. Eric A. Kremer
Pillsbury Winthrop LLP
11975 El Camino Real, Suite 200
San Diego, California 92130

Mail Tax Statement To:

Biosite Incorporated
11030 Roselle Street
San Diego, CA  92121
Attn:  Director of Facilities


                                   GRANT DEED

THE UNDERSIGNED GRANTOR DECLARES:

         In accordance with Section 11932 of the California Revenue and Taxation
         Code, Grantor has declared the amount of the transfer tax which is due
         by a separate statement which is not being recorded with this Grant
         Deed.

         FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
H. G. FENTON COMPANY, a California corporation formerly known as H. G. Fenton
Material Company("Grantor"), hereby GRANTS to BIOSITE INCORPORATED, a Delaware
corporation ("Grantee"), the real property in the City of San Diego, County of
San Diego, State of California, more particularly described on Exhibit 1
attached hereto ("Land").

         THIS GRANT DEED is made and accepted upon (i) that certain Declaration
Establishing Covenants, Conditions and Restrictions and Grants of Easements for
Fenton Technology Park, which was recorded in the Office of the County Recorder
of San Diego County on _________, 2002 as Document No. 2002-__________
("Business Park Declaration"); (ii) the Development Declaration made by Grantor,
which is being recorded in the Office of the County Recorder of San Diego County
substantially concurrently herewith, and (iii) all other covenants, conditions,
restrictions, reservations, easements and exceptions of record.

         THIS GRANT DEED includes the right to generate a total of 6,400 average
daily trips, as that term is used by The City of San Diego in measuring and
authorizing traffic generation caused by development ("ADTs"), with peak period
trips of 704 in the morning and 768 in the evening. Grantor reserves to itself,
for use elsewhere within the real property encumbered by or annexable to the
Business Park Declaration described above ("Business Park"), any other ADTs
approved for the Business Park.

Date:                             H. G. FENTON COMPANY, a California corporation
     --------------

                                  By
                                     -------------------------------------------
                                  Its
                                     -------------------------------------------


                                      B-1



                                  By
                                     -------------------------------------------
                                  Its
                                     -------------------------------------------

                              [Add acknowledgments]













                                      B-2



                             EXHIBIT 1 TO GRANT DEED

                                LEGAL DESCRIPTION


                 [To be attached upon approval of the Final Map]

















                                      B-3



                                    EXHIBIT C

                               SELLER IMPROVEMENTS


THE SELLER IMPROVEMENTS:

         PRE-CLOSING IMPROVEMENTS. Prior to Closing, Seller will cause the Land
         to be sheet graded in accordance with Seller's soil engineer's
         recommendations and the grading plans, and shall deliver the Grading
         Certifications to evidence completion of the Pre-Closing Improvements.

         OTHER SELLER IMPROVEMENTS. Seller will construct the improvements
         required by the Entitlement Approval Conditions.
















                                      C-1



                                    EXHIBIT D

                   ACCEPTABLE ENTITLEMENT APPROVAL CONDITIONS

1.       Construction of Camino Santa Fe from its current termination south of
         Fenton Road to connect with the currently paved segment to the north,
         on terms that provide for the payment (or reimbursement to Seller) of
         at least 50% of the construction costs by the owners of the real
         property located east of Camino Santa Fe.

2.       Bonded deferral agreement for the future construction to the west of
         Carroll Canyon Road, which is located south of the Business Park.

3.       Installation of a controlled intersection at both intersections of the
         loop road and Camino Santa Fe, and at the future Carroll Canyon Road
         extension.

4.       Construction of a box culvert at the south end of Camino Santa Fe.

5.       Installation of wet and dry utilities serving the Business Park.










                                      D-1



                                    EXHIBIT E

             FORM OF ASSIGNMENT OF WARRANTIES AND INTANGIBLE RIGHTS


                 ASSIGNMENT OF WARRANTIES AND INTANGIBLE RIGHTS

         For valuable consideration, receipt of which is hereby acknowledged, H.
G. FENTON COMPANY, a California corporation ("Assignor") does hereby assign to
BIOSITE INCORPORATED, a Delaware corporation ("Assignee"), to the extent
assignable, all of Assignor's right, title and interest in and to all easements,
appurtenances, privileges, rights, profits and preferences, together with all
intangible rights, warranties, guaranties, contract rights and/or other claims,
permits and licenses, appurtenant to or benefitting the unimproved real property
in the Carroll Canyon area of San Diego, California, consisting of approximately
34.7 gross acres more particularly described as

         Lots 1 through 10, inclusive, and FENTON TECHNOLOGY PARK, in the City
         of San Diego, County of San Diego, State of California, according to
         Map thereof No. _________, filed in the Office of the County Recorder
         of San Diego County on ________________

("Land"); excluding, however, any rights reserved by Assignor as declarant under
the CC&Rs or in Seller's Grant Deed (as those terms are defined in the Purchase
Agreement described below).

         Assignor also assigns to Assignee a total of 6,400 ADTs (as defined in
the Purchase Agreement) for use in connection with the use and occupancy of the
Land, with peak period trips of 704 in the morning and 768 in the evening.

         This Assignment is made pursuant to that certain Purchase Agreement and
Escrow Instructions dated as of December 7, 2001 between Assignor as Seller and
Assignee as Buyer ("Purchase Agreement"), which is incorporated herein by this
reference. The enumeration of any of the foregoing categories of personal
property shall not be deemed a representation or warranty by Assignor as to the
existence of any such property, and except as set forth in the Purchase
Agreement, Assignor makes no warranties of any kind or nature, express or
implied, regarding the assigned interests.


Date:                             ASSIGNOR:
     -----------------

                                  H. G. FENTON COMPANY, a California corporation


                                  By
                                     -------------------------------------------
                                  Its
                                     -------------------------------------------

                                  By
                                     -------------------------------------------
                                  Its
                                     -------------------------------------------


                                      E-1



                                    EXHIBIT F

                         FORM OF DEVELOPMENT DECLARATION


Recording Requested By:


When Recorded Return To:

HECHT, SOLBERG, ROBINSON & GOLDBERG LLP
Attn: David W. Bagley, II
600 West Broadway, Eighth Floor
San Diego, California 92101



                           DECLARATION OF DEVELOPMENT
                     COVENANTS, CONDITIONS AND RESTRICTIONS

                        FENTON TECHNOLOGY PARK, LOTS 1-10


         This DECLARATION OF DEVELOPMENT COVENANTS, CONDITIONS AND RESTRICTIONS
("Declaration") is made as of _______________, 2002 by H. G. FENTON COMPANY, a
California corporation which acquired title as H. G. Fenton Material Company
("Declarant"), with reference to the following:

                                    RECITALS

         A.       Declarant owns that certain real property located in the Mira
Mesa community of the City of San Diego, County of San Diego, State of
California, more particularly described on EXHIBIT A attached hereto and by this
reference made a part hereof ("Land").

         B.       Declarant intends to convey the Land pursuant to that certain
Purchase Agreement and Escrow Instructions dated as of December 7, 2001
("Purchase Agreement"), between Declarant as "Seller" and BIOSITE INCORPORATED,
a Delaware corporation ("Biosite"), as "Buyer". By this reference, the Purchase
Agreement is incorporated herein, the same as if set forth in its entirety.
Initially capitalized terms not otherwise defined herein shall have the same
meanings as in the Purchase Agreement.

         C.       The Land is a portion of Declarant's larger holdings in the
Mira Mesa area of San Diego, which include the real property described on
EXHIBIT B attached hereto and by this reference made a part hereof ("Benefitted
Land").

         D.       Declarant wishes to subject the Land to certain covenants set
forth in the Purchase Agreement, for the benefit of the Benefitted Land.
Declarant intends that the provisions of this Declaration will be restrictive
covenants made pursuant to Section 1468 of the California CIVIL CODE.

         NOW, THEREFORE, Declarant hereby covenants and declares that the Land
shall be held and conveyed subject to the following covenants, conditions and
restrictions. These covenants, conditions and restrictions shall run with the
Land or any portion into which it may be divided until released as provided
herein and shall be binding upon all parties having or acquiring any right or
title in the Land or any part thereof, and subject to any restrictions set forth
below, shall inure to the benefit of the fee owners of the Benefitted Land


                                      F-1



and are imposed upon the Land and every part thereof as a servitude in favor of
the Benefitted Land and every portion thereof as the dominant tenement.

         1.       FORMATION OF ASSESSMENT DISTRICT. Paragraph 7.5 of the
Purchase Agreement relates to the formation of an assessment district by Seller
to finance the costs of certain infrastructure improvements, and includes in
Paragraph 7.5.3 the following covenants, which shall be covenants running with
the Land:

                             "7.5.3 POST-CLOSING FORMATION OF ASSESSMENT
         DISTRICT. If the Assessment District has not been formed as of the
         Close of Escrow, for a period of three (3) years after the Close of
         Escrow (or until such earlier time as Seller notifies Buyer in writing
         that Seller will not be seeking the Land's inclusion within an
         Assessment District), Buyer shall cooperate as reasonably requested by
         Seller in forming the Assessment District following the Close of
         Escrow, including, without limitation, voting in favor of the formation
         thereof in the manner and at the times as are determined by Seller in
         its sole discretion. Upon the determination of the exact amount of the
         Land's share of the assessment, Seller shall reimburse Buyer, in Cash,
         for the amount that would have been the Assessment District Credit;
         provided, however, that Buyer shall have no obligation to subject the
         Land to the Assessment District unless and until Seller provides Buyer
         a letter of credit issued by a bank reasonably approved by Buyer (or
         other security reasonably satisfactory to Buyer) in the amount
         reasonably estimated by Seller and approved by Buyer as the likely
         amount of the Assessment District Credit, as security for Seller's
         reimbursement obligation. Upon the expiration of the three-year period
         after the Close of Escrow, or following Seller's written notification
         to Buyer that Seller will not be seeking the Land's inclusion within an
         Assessment District, Buyer shall have no further obligation to
         cooperate with Seller's efforts to form the Assessment District. Until
         such time, and subject to Buyer's receipt of the letter of credit or
         other security:

                                    "(a) Buyer shall not file any written or
                  oral protest or opposition of any kind to the formation of the
                  Assessment District or the levying of liens, assessments,
                  taxes, special taxes, exactions, fees, and/or charges
                  (collectively "Impositions") through the Assessment District.

                                    "(b) Buyer shall consent to, or, if an
                  election is called, cast its vote in favor of the Assessment
                  District and the levying of Impositions by the Assessment
                  District.

                                    "(c) Buyer shall not take any action that
                  would in any way interfere with the formation of the
                  Assessment District or decisions made or actions taken by
                  Seller with respect to the Assessment District or the bond
                  financing relating thereto, including, without limitation, the
                  timing of commencement of Impositions, the amount of
                  Impositions, the spreading of Impositions and the use of the
                  Impositions collected by the Assessment District.

                                    "(d) To the extent any owner of record of
                  the Land has the right to protest the formation of the
                  Assessment District, those rights shall be held solely by
                  Seller. Upon the request of Seller, Buyer shall grant Seller
                  its proxy to vote its interest as a landowner in any election
                  involving the Assessment District."

         2.       COVENANTS RUNNING WITH THE LAND. The matters described in
Paragraph 1 above shall be a burden upon the Land that will survive the
conveyance of the Land or any portion thereof by Buyer to any transferee, and
will be enforceable for a period ending upon the earlier of three (3) years
following recordation of this Declaration or Declarant's conveyance of the
Benefitted Land to an unaffiliated third party, at which time this Declaration
shall terminate as to all of the Land, without further action by either party.

         3.       OTHER PROVISIONS.

                  a.       The term Buyer, as used in this Declaration, shall
refer to Biosite and to its successors in interest as owners of the Land. Each
successive owner, during its ownership of any portion of


                                      F-2



the Land, and each person having any interest in the Land derived through any
such successive owner, shall be bound hereby for the benefit of the Benefitted
Land.

                  b.       Any violation of the provisions herein contained will
be deemed to be a continuing violation and no delay in the delivery of any
notice of any violation hereof or in the enforcement of any rights or the
seeking of any remedies provided hereunder will constitute, or be deemed to
constitute, a waiver of the right to give such notice, enforce such right or
seek such remedy at any time after the occurrence of such violation.

                  c.       No breach or violation of the terms of the
Declaration shall defeat or render invalid the lien of any mortgage, deed of
trust or similar instruments securing a loan made in good faith and for value
concerning the development or permanent financing of the Land or any portion
thereof.

                  d.       This Declaration may be modified or extinguished by
an instrument in writing signed, acknowledged and recorded by Declarant, and
will be automatically extinguished, without action by Declarant, upon the
earlier of three (3) years following recordation of this Declaration or Seller's
conveyance of the Benefitted Land to an unaffiliated third party. If termination
occurs because of the conveyance of the Benefitted Land to an unaffiliated third
party, Declarant Seller shall upon request by Buyer record an instrument
evidencing termination of this Declaration.

                  e.       The provisions herein contained are covenants and are
for the benefit of each party's land and have been made with the intent of
satisfying the requirements of California CIVIL CODE Section 1468.

         IN WITNESS WHEREOF, Declarant has signed and made this Declaration as
of the date first above written.


DECLARANT:                 H. G. FENTON  COMPANY, a California corporation which
                           acquired title as H. G. Fenton Material Company


                           By
                              --------------------------------------------------
                           Its
                              --------------------------------------------------


                           By
                              --------------------------------------------------
                           Its
                              --------------------------------------------------


[Add acknowledgments and legal descriptions of the Land and the Benefitted Land]


                                      F-3

EX-10.31

                                                                   Exhibit 10.31


                               FIRST AMENDMENT TO
                   PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS


         THIS FIRST AMENDMENT TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS
("Amendment") is entered into at San Diego, California as of February 12, 2002,
between H. G. FENTON COMPANY, a California corporation which acquired title as
H. G. Fenton Material Company ("Seller"), and BIOSITE INCORPORATED, a Delaware
corporation ("Buyer"), with reference to the following

                                R E C I T A L S:

         A.       Seller and Buyer are the parties to a Purchase Agreement and
Escrow Instructions dated as of December 7, 2001 ("Agreement"), relating to that
certain real property consisting of approximately 34.7 gross acres in the
Carroll Canyon area of San Diego, California ("Land"). Initially capitalized
terms not otherwise defined in this Amendment have the same meanings as in the
Agreement, as previously amended. Pursuant to the Agreement, the parties have
established Escrow No. 51943-PM with Stewart Title of California, Inc. as Escrow
Holder.

         B.       The Contingency Date under the Agreement was the later to
occur of (i) December 14, 2001, or (ii) ten (10) Business Days after Buyer's
receipt of the CC&Rs. Buyer received the CC&Rs with all exhibits thereto on
February 4, 2002, with the result that the initially established Contingency
Date became February 13, 2002. The parties now wish to extend the Contingency
Date by two days.

         THE PARTIES AGREE:

         1.       EXTENSION OF CONTINGENCY DATE. The parties agree that
Paragraph 2.1.16 of the Agreement shall be amended to read in its entirety as
follows:

                  "CONTINGENCY DATE" means February 15, 2002.

         2.       OTHER MATTERS OF AGREEMENT.

                  (a)      This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one instrument.

                  (b)      Except to the extent modified hereby, all provisions
of the Agreement shall remain in full force and effect.


SELLER:                                        BUYER:

H. G. FENTON COMPANY, a California             BIOSITE INCORPORATED, a Delaware
corporation                                    corporation

By                                             By
    -------------------------------              -------------------------------
Its                                            Its
    -------------------------------              -------------------------------


By                                             By
    -------------------------------              -------------------------------
Its                                            Its
    -------------------------------              -------------------------------


                                      -1-

EX-10.32

                                                                   Exhibit 10.32


                               SECOND AMENDMENT TO
                   PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS


         THIS SECOND AMENDMENT TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS
("Amendment") is entered into at San Diego, California as of February 14, 2002,
between H. G. FENTON COMPANY, a California corporation which acquired title as
H. G. Fenton Material Company ("Seller"), and BIOSITE INCORPORATED, a Delaware
corporation ("Buyer"), with reference to the following

                                R E C I T A L S:

         A.       Seller and Buyer are the parties to a Purchase Agreement and
Escrow Instructions dated as of December 7, 2001 and previously amended as of
February 12, 2002 ("Agreement"), relating to that certain real property
consisting of approximately 34.7 gross acres in the Carroll Canyon area of San
Diego, California ("Land"). Initially capitalized terms not otherwise defined in
this Amendment have the same meanings as in the Agreement, as previously
amended. Pursuant to the Agreement, the parties have established Escrow No.
51943-PM with Stewart Title of California, Inc. as Escrow Holder.

         B.       The parties wish to make certain changes to the Agreement.

         THE PARTIES AGREE:

         1.       SATISFACTION OF SPECIAL CONDITIONS. The parties acknowledge
and agree that the special conditions of Paragraphs 6.1.1, 6.1.2 and 6.1.3 have
all been satisfied or waived.

         2.       CC&RS. Buyer acknowledges having received and approved in all
material respects the CC&Rs. Seller acknowledges that Buyer may wish to propose
certain minor changes to the CC&Rs, and agrees to work in good faith with Buyer
with respect thereto; provided, however, that the parties' agreement on any such
further changes to the CC&Rs shall not be a condition precedent to Buyer's
obligations under the Agreement.

         3.       DESIGN GUIDELINES. Buyer acknowledges having received and
approved in all material respects the most recent Design Guidelines for the
Business Park. Buyer acknowledges that Seller may wish to make certain minor
changes to the Design Guidelines before the Closing, and the parties agree that
without Buyer's prior approval, Seller shall make no changes to the Design
Guidelines which would affect in any material way the design of Buyer's Project
or the development, use or occupancy of the Land.

         4.       CLOSING DATE. The definitions of Closing Date and Latest
Closing Date shall be modified to read as follows:

                           "CLOSING DATE" means a date which is thirty (30) days
         following Buyer's receipt of the latest to be delivered of (i) Seller's
         written notification of its intent to effect the Closing, (ii) the
         Grading Certifications, and (iii) Seller's delivery of the notice
         specified in Paragraph 6.1.5. The currently anticipated Closing Date is
         October 1, 2002. The Closing Date is subject to extension by Seller to
         no later than the Latest Closing Date pursuant to Paragraph 6.2.

                           "LATEST CLOSING DATE" means March 31, 2003, which
         shall be extended day-for-day, to a maximum extension of six (6)
         months, for each day of Unavoidable Delay that is caused by
         restrictions on grading or other Pre-Closing Improvements incident to
         storm-water runoff requirements.


                                      -1-


         5.       OTHER MATTERS OF AGREEMENT.

                  (a)      This Amendment may be executed in any number of
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one instrument.

                  (b)      Except to the extent modified hereby, all provisions
of the Agreement as previously amended shall remain in full force and effect.



SELLER:                                        BUYER:

H. G. FENTON COMPANY, a California             BIOSITE INCORPORATED, a Delaware
corporation                                    corporation

By                                             By
    -------------------------------              -------------------------------
Its                                            Its
    -------------------------------              -------------------------------


By                                             By
    -------------------------------              -------------------------------
Its                                            Its
    -------------------------------              -------------------------------


                                      -2-

EX-23.1

                                                                    EXHIBIT 23.1



               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statements
Forms S-8 Nos. 333-21537, 333-59701 and 333-63682 pertaining to the Employee
Stock Purchase Plan and Nos. 333-26763, 333-59705, 333-83429 and 333-63684
pertaining to the Amended and Restated 1996 Stock Incentive Plan of Biosite
Incorporated of our report dated January 18, 2002, with respect to the financial
statements and schedule of Biosite Incorporated included in the Annual Report
(Form 10-K) for the year ended December 31, 2001.




                                ERNST & YOUNG LLP

San Diego, California
March 25, 2002