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)

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.

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.


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.

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.

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

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

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.

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

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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:

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.

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

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.

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.

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

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.

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.

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

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.

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.

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

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, 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.

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

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."

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

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:

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".

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.

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.

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

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.

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".

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.

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.

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.

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.

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

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.

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

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.

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

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

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:

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.

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.

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

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.

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.

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.

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

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:

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.

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.

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

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.

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

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

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

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 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 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

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

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

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 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.

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.

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.

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

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 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
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
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.

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.

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

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:

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.

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.

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.

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 are successful in obtaining financing, and an increase in occupancy costs.

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

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.

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

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

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.

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.

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.

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

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:

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

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

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").

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

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

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.

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.

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

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	%

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.

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.

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

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.

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

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

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.

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

		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

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.

BIOSITE INCORPORATED

STATEMENTS OF INCOME

(in thousands, except per share amounts)

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.

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.

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.

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.

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

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 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.

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 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 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

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.

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

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.

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.

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

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.

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

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.

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

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

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.

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):

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):

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.

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.

	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

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):

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

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

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.

		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

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

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.

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

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.

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.

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

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	)%

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.

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.

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

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

			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

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.

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

				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

			Preferred Stock			Common Stock								Accumulated Other Comprehensive Income (Loss)
			Preferred Stock			Common Stock					Additional Paid-in Capital						Deferred Compensation			Retained Earnings		Total Stockholders' Equity
			Shares	Amount		Shares		Amount			Additional Paid-in Capital						Deferred Compensation			Retained Earnings		Total Stockholders' Equity
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

		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

		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

	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

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

	$	3,953	$	3,103

Year		Operating Leases
2002		$	1,383
2003			1,889
2004			1,188
2005			459
2006			—
Thereafter			—

	Total minimum lease payments	$	4,919

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

		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

			COL. C
	COL. B		Additions					COL. D			COL. E
COL. A	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	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts- Describe			Deductions Describe			Balance at End of Period
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