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

FORM 10-K

For the fiscal period ended December 31, 2001

OR

For the transition period from                              to                             

Commission File Number 000-23541

NANOGEN, INC.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (858) 410-4600

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 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 (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        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 25, 2002, as reported on the Nasdaq National Market was approximately $70,924,905. Shares of Common Stock held by each executive officer and director and by each person (including shares beneficially owned by Citigroup, Inc.) who own 10 percent or more of the outstanding Common Stock have been excluded in such calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The number of shares outstanding of the registrant's common stock was 21,805,368 as of March 25, 2002.

NANOGEN, INC.
FORM 10-K
INDEX

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PART I

Item 1. Business

        This Form 10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from those reflected in the forward-looking statements. Words such as "believes," "anticipates," "plans," "estimates," "future," "could," "may," "should," "expect," "envision," "potentially," variations of such words and similar expressions are intended to identify such forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the caption "Factors that May Affect Results" and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

Overview

        It is our goal to become a leading provider of molecular diagnostic tests. We integrate advanced microelectronics and molecular biology into a core technology platform with potentially broad and diverse commercial applications. Our primary areas of focus have been in genomics and biomedical research, medical diagnostics, forensics and drug discovery. The first application we have developed, the NanoChip® System, is an integrated bioassay system consisting of the NanoChip® Molecular Biology Workstation and the NanoChip® Cartridge. The NanoChip® Workstation is comprised of two automated instruments and the NanoChip® Cartridge, a consumable cartridge, which incorporates a proprietary microchip. The NanoChip® System provides a flexible tool for the rapid identification and precision analysis of biological test samples containing charged molecules. We launched the NanoChip® Molecular Biology Workstation and the NanoChip® Cartridge, our first commercial products, during the second quarter of the year 2000, beginning our transformation from a research and development company to a customer-oriented company. In 2001, we accelerated this shift to a commercial medical diagnostics company with the addition of Dr. Randy White as Chief Executive Officer to our Company. Dr. White came to us from one of the top five clinical laboratories in the United States, American Medical Laboratories. He has over 28 years of clinical laboratory experience. We believe he has relevant experience in clinical assay development and clinical markets to provide our Company with the leadership needed to make products available to the molecular diagnostics marketplace.

        The NanoChip® Molecular Biology Workstation had initially been targeted toward clinical researchers performing genetic-based analyses, particularly those involving single nucleotide polymorphisms ("SNPs"), short tandem repeats ("STRs"), single point mutations ("PMs") and other genetic variations. In 2001, we expanded our targeted customers to include more production-oriented customers such as high complexity Clinical Laboratory Improvement Amendments of 1988 ("CLIA") certified clinical reference laboratories.

        Through the use of microelectronics, our technology enables the active movement and concentration of charged molecules, such as DNA, to and from designated microlocations, or test sites, on our microchips. This electronic concentration of molecules greatly accelerates molecular binding at each microlocation. In addition, our technology allows the simultaneous analysis of multiple test results, or "multiplexing," from a single sample. We believe that our technology platform provides an accurate, versatile and highly efficient integrated system that may shift bioassay analysis from manual and mechanical methods to microelectronic systems, thereby significantly improving the quality and reducing the overall cost of research and medical diagnostics.

        During the year 2001, we accomplished the following:

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Validated the Company's first five DNA-based research protocols for use on the NanoChip® Molecular Biology Workstation;

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Increased the installed base of our NanoChip® Molecular Biology Workstation to sixty-one (61) instruments;



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Converted two of our existing Development Site customers into sales transactions;



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Expanded our intellectual property position for our core technology by adding twenty U.S. patents and seven foreign patents;



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Settled our outstanding litigation with Motorola, Genometrix and MIT;



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Formed a company with Aventis, Nanogen Recognomics GmbH, to research and develop new products and applications for the NanoChip® System; and



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Received an additional government grant that provides for a total of $1.5 million of continued funding for the development of our core technologies for use in biowarfare applications.

Year 2001 Accomplishments

First Five DNA-based Research Protocols

        In the second half of 2001, our introduction of five DNA-based research protocols moved us closer towards entry into the molecular diagnostic marketplace. Four of the protocols internally validated are associated with cardiovascular disease and the pathology of thrombosis. They include Factor V Leiden, Factor II (Prothrombin), a multiplexed protocol (i.e. a compilation of complete detailed steps and procedures to correctly genotype a single nucleotide polymorphism from a sample of purified genomic DNA), for both of these mutations at a single location on our microarray, and MTHFR. The fifth protocol is for a mutation related to Hereditary Hemochromotosis, a disorder that causes excess iron to be stored in cells of the liver, heart, pancreas and other organs. We believe that high complexity Clinical Laboratory Improvement Amendments of 1988 ("CLIA") certified laboratories that adopt our technology may further validate these protocols for internal use under "home-brew" formats. Eventually We plan to develop analytic specific reagents ("ASRs") for use by such high complexity CLIA certified labs that can generate revenue without the Company having to file for Food and Drug Administration ("FDA") approval.

Increased the Installed Base of the NanoChip® Molecular Biology Workstation

        We ended 2001 with an installed base of sixty-one instruments, thirty-eight of which were placed in 2001. The thirty-eight shipments include fifteen title transfer transactions representing sales, thirteen of which were recorded as product revenue and two of which were recorded as sponsored research revenue as they were funded by corporate alliances. An additional two placements occurred for which revenue was deferred due to the structure of the transactions. The remaining placements were strategic placements made pursuant to development site agreements under non-title transfer transactions. Non-title transfer transactions may include development site agreements, leases and reagent rentals. Title transfer transactions normally result in recording of full instrument revenue at the time of the transaction, while non-title transfer transactions may spread instrument revenue associated with the transaction, if any, over the life of the instrument or the agreement.

        As of December 31, 2001, our placements were with customers and partners in ten countries, including the research and high complexity CLIA certified laboratories of hospitals, universities, government organizations and pharmaceutical companies.

Two Development Sites converted into sales transactions

        We believe that the conversion of two of our Development Sites into sales transactions validates our previously stated belief that Development Site Agreements may lead to potential sales of our NanoChip® System. We also believe these Development Site Agreements may eventually assist in the

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development of customer-generated content in the form of assays, intellectual property, know-how and other developments to be used on the NanoChip® System for clinical research and diagnostic protocol development. At year-end 2001, we have been informed that our customers evaluated approximately forty-seven assays on our platform, validating this belief. We have certain potential intellectual property rights to assays developed by our customers. We believe customer developed assays help demonstrate the value of having an open platform. We believe that we may benefit from increased consumables usage as a result of the assays being evaluated by our customers.

Expanded our intellectual property portfolio

        During 2001, we expanded our intellectual property portfolio adding twenty additional U.S. patents and seven additional foreign patents. As of December 31, 2001, we had a total of forty U.S. patents and twenty foreign patents.

Settled our litigation with Motorola, Genometrix and the Massachusetts Institute of Technology

        We resolved our litigation with Motorola, Genometrix and the Massachusetts Institute of Technology during 2001. As part of the settlement, we obtained a license to and freedom to operate under certain patent claims relating to electronic hybridization. We obtained this license without providing Motorola access to our own technology, a key component of our litigation strategy. We believe that we remain the only current provider of commercially available electronic addressing and hybridization products.

Formed Nanogen Recognomics, a company with Aventis Research and Technologies, an affiliate of Hoechst AG ("Aventis")

        In July 2001 we formed a new company, Nanogen Recognomics GmbH, with Aventis. We believe Nanogen Recognomics may allow us to benefit from the development of new technological advances for our platform technology while still focusing on our primary near-term goal of entry into molecular diagnostics. Aventis has been a collaborator with us since December 1997. Nanogen Recognomics adds intellectual property and expertise in synthetic oligonucleotide chemistry and advanced molecular biology to our Company, and we believe this expertise will bear fruit in our future development efforts.

Received additional government grant

        In October 2001, we were awarded a three-year, $1.5 million grant from the U.S. Army to develop a miniaturized electronic device for isolating and detecting biological warfare and infectious disease agents from human blood samples. The U.S. Army Medical Research Institute of Infectious Disease at Fort Detrick, Maryland will supervise the research. This is the second 'Dual Use Science and Technology' grant awarded to Nanogen by the US Army Medical Research Acquisition Activity, the first one coming in October 5, 2000. We believe that the actions we are taking to develop our product platform for use in molecular diagnostics are directly portable and complementary to what we are doing in the biowarfare arena for the U.S. Army. As a result, we believe that our government and commercial programs complement one another. We also believe that certain technology developed from the government programs are directly portable over to what we are doing to enter into the molecular diagnostic market, the main focus of Nanogen.

Our Technology and Relevant Markets

Limitations of Current Assay Technologies

        Many bioassay techniques have been developed from a wide variety of different scientific disciplines for molecular biology and clinical diagnostic laboratories. Many of these techniques are technically demanding, difficult to perform, expensive or inflexible and may lack acceptable clinical

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accuracy. In addition, technologies well suited or targeted to one market, such as the biomedical research or drug discovery markets, often are unable to bridge the gap to serve downstream markets such as clinical diagnostics.

        Despite recent advances in technology, many bioassays are too specialized or inflexible to be used throughout the various departments of a life sciences laboratory. Current bioassay tools were designed for large scale data generation, the automation of repetitious tasks such as very high throughput discovery and the narrowing of genetic targets from thousands of genes to a small set of perhaps 1 to 20 genes that function in a selected biological process. In addition, many of these systems are not useful in molecular, protein, enzyme, cell biology, and forensics laboratories. These tools fall primarily into three categories: high-density arrays; high throughput sequencing and SNP discovery tools; and gel-based methods. While these technologies each have certain advantages, they also have significant drawbacks that inhibit their broad applicability across the life sciences market and in particular in the molecular diagnostics market, including:

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Low Degree of Accuracy. A high degree of accuracy is essential to detect and quantify genetic variations, which may involve the analysis of thousands of genetic variations per individual. Some conventional methods can result in one or more tests in ten being inaccurate. These inaccuracies are magnified in tests for multiple variations. For example, in a test panel involving six genetic variations, the overall panel accuracy for a technology having a 95% accuracy per result would be only 74%. Accuracy is critical in molecular diagnostics.



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Difficulty of Use. Many of the conventional analysis methods involve multiple technical steps requiring human intervention, which make the analysis difficult to perform and difficult to fully automate.



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Lack of Specificity. Many of the conventional analysis methods use a passive array in which what you do to one site on the array, you do to all sites. This results in a lack of flexibility for the customer in using these technologies as they cannot mix different assays on a single array or may not fully use every site on the array.



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Lack of Menu. Many of the conventional methods of analysis cannot be done on multiple instrument platforms and many require its own instrumentation, requiring customers to purchase different instruments for each analysis performed.



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Limited Clinical Viability. Because of the low degree of accuracy and difficulties associated with product development and use, conventional methods have not been shown to be broadly applicable to clinical settings.

The Nanogen Solution

        We believe that our initial product, the NanoChip® Molecular Biology Workstation, or the NanoChip® System, provides the accuracy, flexibility, versatility and ease-of-use features required to serve a wide range of genomic and biomedical as well as many other applications. We are promoting the NanoChip® System as the research and high complexity CLIA certified laboratory standard for molecular biologists, and eventually the industry standard for accurate, targeted genomics in both laboratory and non-laboratory settings. The NanoChip® System provides the following advantages:

Accuracy

        Accuracy is critical in laboratory analysis. The NanoChip® Molecular Biology Workstation, with its precision electronic addressing and high degree of stringency, equaled or exceeded the accuracy of current "gold standard" techniques in the SNP studies conducted at multiple locations to date.

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Flexibility

        Nanogen's technology is highly flexible. The NanoChip® System is centered around an electronics microarray containing 100 individually controllable and programmable electronic test sites. Both of the major bioassay formats are conveniently handled by the NanoChip® System and customers can design arrays in several different formats to meet their specific needs. Customers can combine several types of assays on one chip. Additionally, our platform will allow multiple Loaders to be controlled by one Reader.

Versatility

        Our NanoChip® System is designed to analyze virtually any charged molecule. It can analyze DNA for SNP's, including those that are hard to score, insertions, deletions, STRs, single point mutations and other genetic variations. Our electronic-based technology is potentially applicable to biological analyses beyond genomics and biomedical research including immunoassays, enzyme assays, cell separation and cell receptor studies. We have chosen to focus on the most promising market for our platform first, and then plan to branch out into additional markets if we are successful in the molecular diagnostics market.

Fast Array Design

        We believe that experimental design of arrays on the NanoChip® Cartridge is relatively straightforward. Our customers can program NanoChip® arrays in their own laboratories, allowing for faster turnaround times and higher levels of confidentiality. Additionally, we have created and validated protocols for research use for customers that do not wish to develop their own protocols.

Ease of use

        We believe that assays are easy to perform on our system. Our fully automated Loader allows the simultaneous programming of up to four NanoChip® arrays. A loaded cartridge is inserted and then analyzed on the Nanogen Reader. The NanoChip® System includes proprietary software to automate assay operation and provide results in "real time." Data interpretation is clear-cut and presented in a user-friendly format.

Throughput

        Our system's ability to program as many as 100 test sites at a time allows for higher throughput than is achievable with some competitive technologies. This throughput capacity permits highly efficient workflow for many biomedical applications in a variety of laboratory settings.

Cost effectiveness

        We believe that we have designed the NanoChip® System to be a cost-effective solution for most molecular biology assays. Our system's custom features allow users to employ their own reagents in designing arrays for specific purposes. We also plan to begin selling Analytic Specific Reagents ("ASR's") in 2002 so that customers may purchase reagents from our Company. Since the NanoChip® System consumes small quantities of reagents, generally at low concentration, bioassay reagent costs (such as DNA) per result may be relatively low. Walk-away automation conserves direct labor while improving the overall effectiveness of the laboratory operation. In addition, user definability allows important experiments to be done quickly, both accelerating the discovery process and simplifying the validation of important targets.

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Commercialization Strategy

        Our primary commercialization strategy is to research, develop, manufacture and market instruments and consumables, independently and in conjunction with highly regarded corporate and government partners, to facilitate breakthrough genetic analyses. Our NanoChip® System is designed to eventually bridge the gap between scientific research and clinical practice. Our strategy is to make our proprietary bioassay technology platform a standard for molecular identification and analysis across a broad range of applications. Our initial commercial product is a bench-top system for use in biomedical research and genomic applications with a plan to migrate into the molecular diagnostic market. The capabilities that are incorporated into this system are the core technology platform that will serve as the basis for expanding the menu of protocols available on our platform and eventually into other biological and non-biological areas. In addition, we believe we have the core technology that will enable us to design and deliver products incorporating molecular biology and electronics in additional formats, beyond the microchip format. These new product forms may broaden the markets we serve. Our initial strategy to drive consumable revenues for our system is three-fold. First, increase the installed base of the instrument second, increase the menu of protocols that may be performed on our platform, and third broaden our product line to include consumable reagents such as ASR's and FDA approved kits.

Continue to pursue genomics and biomedical research applications

        While researchers want to use high throughput devices to discover genes and genetic mutations, they will want to explore the function and impact of these genes and mutations with a more accurate and targeted technology. We seek to position the NanoChip® System as such a technology. We intend to further pursue the genomics and biomedical research markets by taking advantage of the open architecture design of our technology that allows end users to customize microchips to meet their individual research needs and help drive development of novel applications.

Pursue multiple applications

        We intend to use substantially the same core hardware and consumable cartridge platform across a spectrum of applications (menu of protocols.) By doing this, we believe we can establish our platform as an industry standard and also reduce development costs for follow-on applications. This approach should also allow us to achieve manufacturing economies of scale that may help reduce per unit costs and improve margins over time. For our initial commercial markets, the biomedical research market and high complexity CLIA certified lab market, we do not anticipate the need for Food and Drug Administration ("FDA") or other regulatory approval. Over time, we expect that additional features, such as genetic content-based kits, sample-to-answer capabilities and portability at reduced cost, may broaden the market potential from the research market to larger markets that include drug discovery, diagnostics, forensics, agriculture and environmental applications. Some of these applications would require FDA or other regulatory approval.

Develop recurring revenue stream through bench-top and consumable product sales

        We are selling bench-top instruments that we anticipate will lead to a recurring stream of revenue from the sale of consumables such as cartridges, ASR's and eventually kits. We believe that widespread market penetration of our instruments and the open architecture of the system will promote sustained demand for our consumables.

Continue to establish strategic collaborations

        We intend to continue to enter into collaborations to expand applications of our technology platform and to accelerate the commercialization of our products. By partnering with other companies, we believe that we can gain broader access to global markets without shifting our resources from the

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development of our core technology platform. In addition, as part of these arrangements, we believe we can better focus our efforts on tailoring our technology to expanding markets while our collaborative partners contribute their technology and expertise in areas such as sales, marketing and regulatory approval.

Our Platform Technology

        Our proprietary platform technology takes advantage of the fact that most biological molecules are either positively or negatively charged. Through the use of microelectronics, this technology enables the active movement and concentration of electronically charged molecules such as DNA to and from designated test sites on a semiconductor microchip or other electronics device. In the NanoChip® Cartridge, these test sites are arranged in an array on our proprietary microchips. In addition, the technology allows for the simultaneous analysis of multiple test results, or "multiplexing," from a single sample. We believe these attributes make our technology well suited to unraveling complex genetic information. We have initially focused on DNA-based sample analysis in developing applications utilizing our platform.

        We believe our technology platform may be applicable to a number of other types of analyses, in addition to DNA applications, including antigen-antibody, enzyme-substrate, cell-receptor, and cell separation techniques.

        Our system can integrate in a single platform the following electronic operational features:

Electronic addressing

        Electronic addressing is the process by which we place charged molecules at specific test sites. Since DNA has a strong negative charge, it can be electronically moved to an area of positive charge. A group of test sites on the microchip is electronically activated with a positive charge. A solution of DNA probes is introduced onto the microchip. The negatively charged probes rapidly move to the positively charged sites, where they concentrate and are chemically bound to those sites. The microchip is then washed and another solution of distinct DNA probes can be added. Site by site, row by row, an array of specifically bound DNA probes can be addressed on the microchip. Multiplexed sites can be addressed simultaneously, allowing for speed and flexibility of array assembly. With the ability to electronically address capture probes to specific sites, the NanoChip® System allows end users to build custom arrays through the placement of specific capture probes on a microchip. Alternatively, the target samples themselves can be electronically addressed to the test sites. All tests are performed using replicate probes or samples for control purposes. These microchip arrays provide research professionals with a powerful and versatile tool to process and analyze molecular information.

Electronic concentration and hybridization

        Following electronic addressing, we use electronics to move and concentrate target molecules to one or more test sites on the microchip. In contrast to the passive hybridization process, the electronic concentration process has the advantage of significantly accelerating the rate of hybridization of a given target molecule with complementary capture probes. In addition, because we use buffers with low ionic strength, we improve the system's accuracy by reducing the occurrence of undesirable, non-specific hybridization. Again, the alternative method of attaching the target molecules to the test sites and then adding probes to interrogate the targets electronically is also available. All tests are performed using replicate probes or samples for control purposes.

Stringency control

        In addition to utilizing conventional thermal and chemical stringency techniques, the NanoChip® System is capable of utilizing electronic stringency control when appropriate. Electronic stringency

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control can provide a means to quickly and easily remove non-complementary DNA as part of the hybridization process. Electronic stringency can provide quality control for the hybridization process and ensures that any bound pairs of DNA are truly complementary. The precision, control, and accuracy of our platform technology permits the detection of single point mutations, single base pair mismatches or other genetic mutations which have significant implications in a number of disease states. Electronic control allows rapid and selective stringency conditions to be applied to individual test sites, which cannot be achieved with conventional methods. In contrast to conventional approaches, our technology can also accommodate both short and long single-stranded fragments of DNA on the same chip. This flexibility reduces the required number of probes or samples and related test sites on the microchip. Other currently marketed DNA arrays either are more difficult to control and/or require more uniformity in the preparation of the sample.

Electronic multiplexing

        Our electronic multiplexing feature allows the simultaneous analysis of multiple tests from a single sample or multiple samples to be queried during the hybridization process. Electronic multiplexing is facilitated by the ability to control individual test sites (for addressing of capture probes and concentration of test sample molecules) which allows for the simultaneous use of biochemically unrelated molecules on the same microchip. Sites on a conventional DNA array cannot be individually controlled, and therefore the same process steps must be performed on the entire array. The use of electronics in our technology provides increased versatility and flexibility over these conventional methods.

Strand Displacement Amplification

        Strand Displacement Amplification, or SDA, is a proprietary target amplification process whereby very low numbers of diagnostic targets in a test sample are enzymatically amplified to exponentially higher levels, greatly simplifying accurate detection of these targets. Because this process does not require thermal cycling, it is extremely fast, and complex instrumentation for thermal regulation is not required. The Nanogen/Becton Dickinson Partnership was granted rights to Becton Dickinson's patents relating to SDA in infectious disease diagnostics. During 2000, we revised our relationship with Becton Dickinson. We were granted rights to use SDA in the fields of in vitro human genetic testing and cancer diagnostics for use outside The Nanogen/Becton Dickinson Partnership. We believe that SDA may be an important element in the development of sample-to-answer applications for our technology platform. We believe that SDA may potentially provide our customers with both operational benefits as well cost benefits due to the high cost of the most common amplification method.

The NanoChip® System's Components

        The NanoChip® System consists of both a consumable cartridge containing a proprietary semiconductor microchip and a fully automated instrument that controls all aspects of microchip operations, processing, detection and reporting. The system has been designed so that after insertion of a consumable cartridge containing a test sample into the instrument, all subsequent steps are handled automatically under computer control.

Consumable cartridge

        The consumable NanoChip® Cartridge consists of a proprietary semiconductor microchip with electrical and fluidic connections to the instrument. We expect that over time the consumable cartridge and microchip may be manufactured in high volumes at a low cost relative to many current technologies.

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Semiconductor microchip

        Our proprietary microchip (the "NanoChip® Electronic Microarray") utilizes advances in the semiconductor industry and is designed and constructed using microlithography and fabrication techniques. The NanoChip® Electronic Microarray is mounted within the consumable cartridge and is coated with a proprietary permeation layer to which either capture probes or target samples can be attached. We have developed arrays of various sizes utilizing both passive and active CMOS microchips, as well as flip chip assembly technologies. Our current production of consumable cartridges employs 100 different test sites on a single NanoChip® Electronic Microarray's.

Permeation layer

        Our proprietary permeation layer, which is critical to the proper functioning of our system, is the interface between the surface of the microchip and the biological test environment. The permeation layer isolates the biological materials from the harsh electrochemical environment near the electrode surface and provides the chemistry necessary for attachment of capture probes or target samples.

Capture probes or target samples

        Capture probes or target samples are electronically addressed to the desired microlocations and attached to the permeation layer. Because independent control can be applied at any test site on our microchip, different capture probes or target samples can be addressed on the same microchip, allowing multiple tests to be processed simultaneously. Our cartridges can be customized by the end user. This format will allow the customer to assemble specific probes onto a microchip to perform individualized analyses. In the future, we may also offer cartridges preloaded with sets of probes or samples.

Our instruments

        Our fully integrated NanoChip® instrument system consists of four major subsystems: (1) a freestanding microchip Loader to perform electronic addressing of blank microchips, (2) a highly sensitive, laser-based fluorescence scanner that detects molecular binding, (3) a fluid handling subsystem that controls test sample application and washing steps, ((2) and (3) are, collectively referred to as, the "Reader"), and (4) computer hardware and software that allow the operator to select assays from a graphical user menu which controls all microchip operations, tabulates test results and prints test reports.

Microchip Loader

        For biomedical research applications, our system includes a cartridge/microchip Loader that will allow users to electronically address their own target samples or probes to test sites on up to four chips simultaneously. In addition, hybridization can be performed on the Loader or on the Reader. Multiple Loaders can operate concurrently under the control of one system.

Fluorescent array scanner

        The fluorescent scanner component of the system uses pattern recognition techniques and optoelectronic technology to reduce instrument cost and size and eliminate the need for complicated array positioning mechanics. In its present configuration, the scanner is able to perform high sensitivity scans of arrays of 100 test sites in less than five minutes.

Fluidics station

        Within the fluorescent array scanner component of the system, the fluidics station automates the movement of the reagents and test sample onto the consumable cartridge. The fluidic subassembly of

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the instrument includes a panel of precision syringe pumps, a cartridge-mounted sample assembly and fluidic connections between the instrument and the consumable cartridge.

Computer hardware and software system

        A multi-tasking operating system and microprocessor control all aspects of the systems operations, including bar-coded assay selection, assay operation, fluorescent signal detection and signal processing, calculation of assay results and report generation. Each of the individual array locations is separately controlled by the microprocessor. Fluorescent signals emanating from positive test sites are scanned, monitored and quantitated.

NanoChip® Analysis Process

Cartridge

        An active microelectronic chip is mounted within a plastic molded cartridge. The bar-coded cartridge is delivered in a ready-to-address format with no genetic sequences pre-attached at this time.

Electronic addressing

        Users design and create their own genetic arrays on the microelectronic chip with our automated system. A 96 well or 384 well microtiter plate containing different genetic sequences is placed in the Loader instrument. The system then automatically electronically addresses the microchip to the user-defined arrays.

Electronic hybridization and stringency

        Users may add test samples or probes to the cartridge and insert the cartridge into the Reader. The instrument then automatically performs electronic hybridization and the appropriate stringency control. The electronically enhanced process speeds and improves the genetic analysis, allowing single-base accuracy.

Simple-to-read output

        Within minutes of inserting the bar-coded cartridge for analysis, easy-to-read and interpret output is available. Data can be automatically downloaded to network systems and to standard software spreadsheet packages. The entire electronic addressing and data output process can be completed rapidly, allowing users to accelerate their research process by creating new genetic arrays based on previous experimental results.

Revenue Producing Transactions

        We currently have two main types of revenue generating programs: title transfer transactions and non-title transfer transactions. Under title transfer transactions, we are involved in direct sales of our NanoChip® System to customers or distributors, leasing transactions either utilizing an outside leasing company or conducting the transaction internally whereby our customers can lease the system over a number of years and make monthly payments to either a leasing company or to us, and reagent rental transactions whereby the customers pay to either a financing company or directly to us, higher prices for our consumable cartridges over a number of years to cover the cost of the system. We may also generate revenue from such sales through the sale of consumable cartridges, extended warranties, certain Field Application Service assistance and eventually through the sale of ASR's and kit-based assay products. We require customers to assign system improvements created by them using the NanoChip® System to us.

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        Our main non-title transfer transactions involve our Development Site Program. Pursuant to the program, We permit our customers to utilize the NanoChip® Workstation for a limited period to evaluate their SNP-based assays on our system. Under this program, we may provide a limited number of NanoChip® Cartridges and certain Field Application Services to assist the customer in optimizing their assays on our system and thereafter require additional cartridges and service to be purchased from us. We normally require that all improvements to the NanoChip® technology be assigned to us and that certain intellectual property rights to such assays that are, owned by or licensed to the customer, be made available to us for the purposes of eventually commercializing such assays. We also seek to assist our Development Site customers to publish papers on the progress of the NanoChip® Workstation and to eventually convert such Development Sites into sales. In 2001, we assisted in the drafting of twelve papers and converted two Development Sites to sales.

Products and Applications Under Development

Genomics and biomedical research applications

        We began commercialization of the NanoChip® System during the second quarter of 2000. Unlike the high-density arrays and sequencing technologies now in the marketplace, our focus is on the targeted analysis of data from the genomics revolution helping clinical researchers define the function of genes rather than discover new genes. We believe our technology is well suited for this research, given the speed, user programmability, multiplexing capability and sensitivity of our unique platform.

        Given that researchers are just beginning to move beyond gene discovery into this targeted analysis area referred to as functional genomics, our product introduction may be well suited to meet this evolving market need. An independent market research study by Frost and Sullivan, published in February 2002, estimates that the molecular diagnostics market for U.S. clinical labs will grow from $1.9 billion in 2002 to $3.1 billion by 2005.

        Our initial strategy for entering this market is to focus on sophisticated commercial and academic users such as the research laboratories of large hospitals, academic and government institutions and genomics and pharmaceutical companies. We provide technical support and applications specialists to assist these customers in applying the technology. Our initial product offering includes features such as the ability to perform assays on SNPs, PMs and STRs in a multiplexed format using a variety of different methods. We plan to further define and develop additional capabilities, such as gene expression, on-chip amplification and sample processing. As these capabilities are added, we expect to start expanding our customer base to a wider group that may ultimately encompass a percentage of the biomedical research labs in the U.S. and other parts of the world.

Diagnostics applications

        We anticipate the introduction of array-based diagnostic testing will grow as effective technologies are introduced and validated. This multi-step process may allow for the development of relevant genetic-based tests that may evolve from biomedical research, and for the awareness and confidence in electronic-based technology to extend to medical practitioners. Finally, we anticipate the need for regulatory approval of certain diagnostic tests. Initially, to stimulate demand for the NanoChip® Workstation and for NanoChip® Cartridges, we have and will continue to internally validate a number of different protocols for use on our NanoChip® Workstation. Protocols are instructions that describe how research and high complexity CLIA certified laboratories may run certain SNP based assays on our system and such protocols are provided by us to our non-ASR customers on a request basis free of charge. We believe CLIA certified laboratories that adopt our technology may further validate these protocols in their own laboratories for use in a "home-brew" format. Under this model, our potential consumable revenues would result from the sale of NanoChip® Cartridges.

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        Next we expect to launch ASR's once we are Quality System Regulations ("QSR") compliant. ASR's are the specific reagents that permit our research and high complexity CLIA certified laboratory customers to run certain SNP assays on our system and on other systems and will be sold by us either directly or through our distributors. Under the ASR model, we expect to sell not only NanoChip® Cartridges, but also ASR sets that can be used to perform DNA- based tests capturing a larger percentage of the potential revenue from each analysis performed. We expect to further increase the potential revenue from each analysis performed with the launch of the SDA method of amplification. We also believe that with the launch of ASR's we will then be in a position to begin data collection on a protocol-by-protocol basis for a potential FDA submission for certain kit-based assays. Such kit-based assays normally include a protocol, ASR, other reagents and performance claims and can be used by a wider variety of customers to provide clinicians with results that they can provide to their patients.

—Pharmacogenomics

        We believe that the ability of our technology to screen simultaneously for various DNA sequences and the ability to differentiate between SNPs has potentially wide applicability to the field of genetic testing in general and pharmacogenomics in particular. Pharmacogenomics is the science of individualizing therapy based on genetic differences among patients.

        Our NanoChip® System may provide pharmaceutical and biotechnology companies with the ability to identify important genetic variations early in the drug development process. We believe our system may help stratify patients during clinical trials and identify those receiving the maximum benefit from treatment. We intend ultimately to develop a small sample-to-answer, FDA-approved diagnostic test that can be used in a doctor's office potentially while a patient is waiting. We have a development program underway, in conjunction with our manufacturing development partner Hitachi, to develop a more compact and inexpensive version of our NanoChip® System.

—Infectious diseases

        We believe we have the potential to apply our technology in the field of infectious disease diagnostics to develop automated tests to replace the manual and time-intensive procedures used in hospitals and reference laboratories. The role of the clinical microbiology laboratory is to detect, identify and determine antibiotic sensitivity of disease causing microorganisms. To accomplish this task, colonies of microorganisms from patient specimens are grown, or cultured, in various growth media. Following colony growth, various direct and indirect techniques are utilized to determine the identity and, as required, the sensitivity of the microorganism to specific antibiotics. Using currently available technologies, the entire process may take days or weeks to complete. In the meantime, a patient requiring immediate therapy, must often be treated by the clinician based upon the best clinical facts available at that time. Upon receipt of the diagnostic analysis from the laboratory, the initial patient treatment protocol may need to be modified in order to treat the patient more effectively.

        Current culture-based methods detect a single microorganism at one time. Because a particular infectious episode may be caused by one of many microorganisms or several microorganisms together, multiple tests may be required to determine the correct diagnosis. "Single tube" (one at a time) DNA probe diagnostics, which were first introduced to the marketplace in the mid-1980's, have been unsuccessful in displacing culture based diagnostic tests in part due to their inability to identify several organisms simultaneously. Our technology addresses these shortcomings by allowing the simultaneous analysis of multiple microorganisms from a single patient sample. We believe our technology and integrated system may speed the time-to-result for diagnostic tests and patient treatment and offer our customers the opportunity to lower their costs and improve productivity by automating all or a significant portion of their labor-intensive testing.

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—Other genetic testing applications

        As the Human Genome Project opportunity and other public and private genetic sequencing efforts yield increasing amounts of genetic information, the demand for genetic predisposition testing will continue to grow. Because many important genetic diseases are ideally suited to diagnosis in multiplexed arrays, we believe that our technology platform could contribute significantly to the expansion of testing in this area. For example, we are focused on developing and validating a protocol for cystic fibrosis, because it is the first molecular based test recommended for nationwide screening of healthy individuals. Cystic fibrosis is an autosomal recessive genetic disorder. To express the disease, a child must inherit two copies of the defective gene, one from each parent. Many people carry a single cystic fibrosis gene, and they do not experience any significant health problems as a result. In the general population, approximately 1 in 31 Americans carries the gene. This is the reason the American College of Obstetrics and Gynecology ("ACOG") announced on July 17th of 2001 that the Standard of Medical Care includes screening women contemplating pregnancy for cystic fibrosis. To meet the standard of medical care, a physician must at least offer screening to each woman contemplating pregnancy. However, the disease can only occur in babies with two carrier parents. If initial screening of the prospective mother is positive for the cystic fribrosis gene, then further testing of the prospective father is warranted. When both parents are carriers, they have a 25 percent chance with every pregnancy of passing two copies of the defective gene to their child. The current recommendation from ACOG is for a 25-mutation screen. We are working towards validating a cystic fibrosis protocol for the ACOG recommended 25-mutations in 2002. We believe that the ACOG recommendations may drive a significant increase in genetic testing for cystic fibrosis. While our development efforts in this area with respect to specific genetic tests are still at an early stage, our core technology platform for other diagnostic applications may be well suited for these opportunities.

Drug discovery applications

        We believe we have a powerful tool that will help clarify appropriate pathways for therapeutic intervention, identify and evaluate lead compounds and simultaneously assess the efficacy and toxicology of these compounds in model systems. It is estimated that the pre-clinical drug discovery process takes an average of six and one-half years. Consequently, we believe there is a significant demand for improved tools that accelerate the drug discovery process.

        We believe the microelectronic array format and independent test site control of our system are well suited for applications in drug discovery. In addition, we believe the use of electronics beyond the microchip format may provide a valuable tool for the high throughput screening of compounds. One such application is the high throughput screening of drug candidates acting on protein kinases. Protein kinases are particularly important in signal transduction pathways and are thought to be key elements in many forms of cancer. Our electronic, fluorescent assays are free of antibodies and have the potential of improving the cost and quality of the screening process.

Forensic applications

        STRs are the genetic sequences chosen by the U.S. government and various foreign governments to populate their national criminal identification databases. These databases are intended to provide nationwide tools for identifying repeat criminals by comparing a given piece of evidence or sample from a suspect with the sequences stored in the database. Currently, we have four overseas Development Sites working on forensic applications. We believe our NanoChip® System may be useful in human identity testing.

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Collaborative Alliances

        We have established collaborative alliances in the areas of drug discovery and genomics as part of our strategy to expand the applications and accelerate the commercialization of products derived from our technology. In July 2001, we formed a company with Aventis named Nanogen Recognomics GmbH. In January 2000, we entered into a manufacturing, development and distribution agreement with Hitachi, Ltd. In July 2000, we entered into an additional agreement with Hitachi, Ltd., Nissei Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan (collectively, "Hitachi") to develop, manufacture and distribute additional potential products based on the parties' proprietary technologies, potentially including, among other things, reduced-size instruments for genetic testing, integrated amplification and point-of-care detection. We are directly involved with marketing our first product line to the biomedical research and genomics market. Additionally, we may distribute products in Japan and select Asian markets through the distribution arm of Hitachi, Nissei Sangyo Co., Ltd.

Aventis

        In December 1997, we entered into a Letter Agreement with Aventis for an exclusive research and development collaboration relating to new drug discovery tools and immunodiagnostics research. In connection with the Letter Agreement, we entered into a definitive Collaborative Research and Development Agreement with an effective date of January 1, 1998. The term of this original collaboration agreement expired at the end of 2000. In September 1999 we entered into an additional collaboration agreement with Aventis that involved two new research and development programs focused on gene expression arrays and on an electronics-based high throughput screening system. We retained full commercialization rights for any products resulting from these new projects, while Aventis retains the right to use the technology for internal research and development. The September 1999 agreement expired at the end of 2001. We do not expect to receive additional funding for these projects.

        In July 2001, we formed a company with Aventis named Nanogen Recognomics GmbH. This company may allow us to benefit from the development of new technological advances for our platform while still focusing on our near-term goal of entry into molecular diagnostics. Nanogen Recognomics adds intellectual property and expertise in synthetic oligonucleotide chemistry and advanced molecular biology to Nanogen.

Hitachi

        In January 2000, we executed an agreement with Hitachi, Ltd., effective as of December 15, 1999, for the full-scale commercial manufacturing and distribution of the NanoChip® Molecular Biology Workstation in specified research markets. Hitachi, Ltd.'s Instrument Group provides technology and technical support to aid in the manufacturing of the NanoChip® Molecular Biology Workstation's components.

        Under this agreement, Hitachi, Ltd. has the right to be the sole distributor of Hitachi, Ltd. produced NanoChip® Molecular Biology Workstations in Japan. Hitachi, Ltd. also has the non-exclusive right to distribute NanoChip® Cartridges in Japan. We retained the right to distribute, directly or through others, Hitachi, Ltd. produced NanoChip® Molecular Biology Workstations outside of Japan. In addition, we currently develop and manufacture the NanoChip® Cartridges for distribution worldwide. We also retain the right to form other manufacturing and distribution agreements.

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        In July 2000, we executed a ten-year agreement with Hitachi, Ltd., Nissei Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan (collectively, "Hitachi") to develop, manufacture and distribute products based on the parties' proprietary technologies, potentially including, among other things, reduced-size instruments for genetic testing, integrated amplification and point-of-care detection. The agreement provides that the parties will jointly determine which projects to prioritize over the term of the agreement. The agreement may be terminated before its expiration by either party, subject to certain restrictions. The agreement expands on the existing agreement executed by us and Hitachi in January 2000. Hitachi has the right to be the exclusive distributor of collaboration products in Japan and, based upon the attainment of minimum sales targets to be mutually agreed upon, in other Asian countries. We retain the exclusive right to distribute collaboration products outside of these countries.

Becton Dickinson

        In connection with our joint venture with Becton Dickinson in October 1997, The Nanogen/Becton Dickinson Partnership, or the Partnership, a Delaware general partnership was established. The Partnership was formed to develop and commercialize products in the field of in vitro nucleic acid-based diagnostic and monitoring technologies in infectious diseases.

        In September 2000, both companies modified the joint venture to permit the partners the opportunity to commercialize certain of the Partnership's technology and allow them to collaborate with third parties to develop and commercialize certain products in the field of infectious diseases. Pursuant to amendments to the Master Agreement, the General Partnership Agreement and the Collaborative Research and Development and License Agreement, the Partnership exclusively licensed other Partnership technology developed up to that date to Becton Dickinson and Becton Dickinson exclusively sublicensed the Partnership technology to us to commercialize products in the field of infectious diseases. Becton Dickinson also agreed to non-exclusively license SDA technology to us for its use and for sublicensing purposes in the field of infectious diseases. Becton Dickinson also expanded the field of use for our SDA license outside of the Partnership to not only include in vitro human genetic testing and in vitro cancer diagnostics, but also in vitro testing of environmental, agricultural and veterinary samples. Pursuant to the amendments, Becton Dickinson paid us $300,000. We do not expect to receive any additional funding from Becton Dickinson.

Research and Product Development

        We seek to further develop the NanoChip® System, integrating new features and broadening the applications of the currently marketed system, including enhancing chip design and capabilities to simplify instrument design. Our scientists will investigate new opportunities and develop and validate new protocols and analytic specific reagents and other products for use on the NanoChip® System, while customers may create new assays by taking advantage of the flexible format of the system.

        We also intend to pursue new opportunities utilizing electronics beyond the current microchip concept. Future technologies may include integration of sample processing and DNA amplification. The NanoChip® System may be designed to provide analysis of other charged molecules and antigen-antibody, enzyme substrate, cell-receptor, and cell-separation techniques. The NanoChip® System eventually may also become a portable lab on a chip for use in the field, away from the laboratory bench.

        We may also continue to develop leading edge technologies such as micro electro-mechanical systems ("MEMS"), micro-fluidics, miniaturized capillary electrophoresis and the application of electronics to high throughput screening.

        One mechanism to fund and implement new technologies or applications is through the government grant system. In 2001, our scientists were awarded a three-year, $1.5 million grant from the U.S. Army to continue development of a miniaturized electronic device for isolating and detecting

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biological warfare and infectious disease agents from human blood samples. The U.S. Army Medical Research Institute of Infectious Disease at Fort Detrick, Maryland will supervise the research. The development of these new technologies represent important elements in our long-term platform development strategy.

Proprietary Technology and Patents

        As of December 31, 2001, we have forty issued U.S. patents, twenty foreign issued patents and a number of pending patent applications filed in the U.S. and abroad. In addition to pursuing patents and patent applications relating to our platform technology, we have and may enter into other license arrangements to obtain rights to third-party intellectual property where appropriate.

        Our or our licensors' patent applications may not be issued. Issued patents may not be found valid if challenged. In addition, intellectual property rights licensed by us may not be successfully integrated into commercial products. Others may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing, and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent, which could adversely affect our ability to protect future product development and, consequently, our business, financial condition and results of operations.

        We seek to protect our inventions through filing U.S. patents and foreign counterpart applications in selected other countries. Because patent applications in the U.S. are maintained in secrecy for at least eighteen months after the applications are filed and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our issued or pending patent applications or that we were the first to file for protection of inventions set forth in such patent applications. Our planned or potential products may be covered by third-party patents or other intellectual property rights, in which case continued development and marketing of the products would require a license. Required licenses may not be available to us on commercially acceptable terms, if at all. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around the patents, or could find that the development, manufacture or sale of products requiring these licenses is foreclosed.

        We are aware of U.S. and European patents and patent applications owned by Isis Innovations Ltd. (E.M. Southern). We have opposed one allowed European Patent which has broad claims to array technology for analyzing a predetermined polynucleotide sequence. Isis Innovation's position with respect to the opposed patent is that the claims relate to what it terms the "diagnostic mode." Those claims have now been narrowed before the Opposition Division to the point that, if these claims remain final before the European Patent Office, we believe they would not be infringed by our technology. In the Oral Proceedings before the Opposition Division on November 13, 14, and 15, 2001, the Division determined that the claims' language must be limited to arrays with "smooth, impermeable' surfaces. If the decision of the Opposition Division is successfully appealed by Isis Innovations and the original claims are reinstated, or if an application relating to arrays issued in another country with claims as broad as the original European patent, we would be subject to infringement accusations that could delay or preclude sales of some or all of our anticipated diagnostic products.

        In addition to the patent litigation with CombiMatrix and Dr. Montgomery described in Item 3 herein, other litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the U.S.

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Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings could result in substantial costs to and diversion of our effort, and could have a material adverse effect on our business, financial condition, and results of operations. Any such efforts may not be successful.

        We may rely on trade secrets to protect our technology. Trade secrets are difficult to protect. We seek to protect our proprietary technology and processes by confidentiality agreements with our employees and certain consultants and contractors. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees or our consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions. We are currently in litigation concerning trade secret issues against CombiMatrix and Dr. Montgomery as described in Item 3.

Manufacturing

        In January 2000, we formed a collaboration with Hitachi for the manufacture of our NanoChip® Molecular Biology Workstation instruments. In July 2000, we executed a ten-year agreement with Hitachi, Ltd., Nissei Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan to develop, manufacture and distribute products based on the parties' proprietary technologies. For the manufacture of the NanoChip® Cartridge, we perform many of the proprietary assembly steps in-house. We believe our technology allows for large-scale microchip production at a relatively low cost. We believe that the implementation of this scalability and low cost will help promote the rapid acceptance of our proprietary semiconductor-based platform technology as an industry standard. However, achieving these efficiencies will require substantial commercial volumes and there can be no assurance we will be successful in generating sufficient demand to scale up manufacturing capacity to levels that will allow our products to be priced competitively.

Sales and Marketing

        We began commercializing the NanoChip® Molecular Biology Workstation during the second quarter of 2000. We have built a commercial structure that allows us to sell directly in certain markets, while selling through distributors and partners in other markets. Our commercial organization includes direct sales representatives and sales management, field support personnel and marketing. We began selling our product directly to customers in the United States, Canada, Mexico and several European countries. Hitachi's distribution company, Nissei Sangyo Co. Ltd. began distributing our product in Japan during the second half of 2000. We expect to augment our commercial selling process by adding additional distributor partners in other countries. To support the commercial efforts in Europe, in August 2000 we established Nanogen Europe B.V., a company with limited liability, in The Netherlands. This wholly-owned subsidiary operates as our primary European sales and marketing office. In San Diego, we are supporting world-wide field activities with a customer applications laboratory. This laboratory is used to assist in early customer demonstrations, protocol development and training.

Competition

        As we develop applications of our technology, we expect to encounter intense competition from a number of companies that offer products competing in our targeted applications. The molecular diagnostic test market, in particular, is highly competitive, and we expect the intensity of competition to increase. We anticipate that our competitors in all the areas we expect to compete will include health care companies that manufacture laboratory-based tests and analyzers, diagnostic and pharmaceutical companies, as well as companies developing drug discovery technologies. To the extent we are successful in developing products in these areas, we will face competition from established and development-stage companies both in the United States and abroad.

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        In many instances, our competitors have substantially greater financial, technical, research, and other resources and larger, more established marketing, sales, distribution and service organizations than we. Moreover, competitors may offer broader product lines and have greater name recognition than we, and may offer discounts as a competitive tactic. In addition, several development stage companies are making or developing products that compete with our potential products. There can be no assurance that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our potential products, or that would render our technologies and products obsolete. Also, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with respect to our technologies. Rapid technological development by others may also result in competing products or technologies.

Government Regulation

        For our initial commercial market, the biomedical research market and the high complexity CLIA certified laboratory market, we do not anticipate the need for FDA or other regulatory approval for our NanoChip® System and certain ASR products prior to marketing. We have not applied for FDA or other regulatory approvals with respect to any of our products under development. We anticipate, however, that the manufacturing, labeling, distribution and marketing of some or all of the diagnostic products we may develop and commercialize in the future will be subject to regulation in the U.S. and in other countries. In addition to clinical diagnostic markets, we also may pursue forensic, agricultural, environmental, laboratory and industrial applications for our products which may be subject to different government regulation. Aspects of our manufacturing and marketing activities may also be subject to federal, state and local regulation by various governmental authorities.

        In the U.S., the FDA regulates, as medical devices, most diagnostic tests and in vitro reagents that are marketed as finished test kits and equipment. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, design, manufacture, labeling, distribution and promotion of medical devices. We will not be able to commence marketing or commercial sales in the U.S. of our new medical devices that fall within the FDA's jurisdiction 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, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, or criminal prosecution.

        In the U.S., medical devices are generally classified into one of three classes (i.e., 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, premarket notification, and adherence to Quality System Regulation, or QSR). Class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, Class III devices are new devices which must receive premarket 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 device can be introduced in the market, the manufacturer must generally obtain FDA clearance of a 510(k) notification or approval of a PMA application. Our products will vary significantly in the degree of regulatory approvals required. We believe that certain of our products labeled for research, genomics, drug discovery and industrial applications will not require regulatory approvals or clearance. Some in vitro diagnostic products will require 510(k) approvals, while other diagnostic and genetic testing products will require PMA approvals.

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        A 510(k) clearance will generally only be granted if the information submitted to the FDA establishes that the device is "substantially equivalent" to a legally marketed predicate device. For any devices that are cleared through the 510(k) process, significant modifications or enhancements in the design or intended use that could significantly affect safety or effectiveness will require new 510(k) submissions. It generally takes at least three to six months or more from submission to obtain 510(k) premarket clearance, but the process may take longer if FDA requests more data or research.

        The PMA approval process is more expensive, uncertain, and lengthy than the 510(k) clearance process. A PMA must prove the safety and effectiveness of the device to the FDA's satisfaction, which typically requires extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate the safety and effectiveness of the device. Although clinical investigations of most devices are subject to the investigational device exemption requirements, clinical investigations of non significant risk in vitro diagnostic tests, such as our products and products under development, are exempt from the investigational device exemption requirements, including the need to obtain the FDA's prior approval. We believe our diagnostics are non significant risk devices because the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not 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 in vitro diagnostic tests must be labeled for research use only or investigational use only, and distribution and due diligence controls must be established by the company to assure that IVDs distributed for research or clinical investigation are used only for those purposes.

        The FDA may determine that we must adhere to the more costly, lengthy, and uncertain PMA approval process for our potential products. Significant modifications to the design, labeling or manufacturing process of an approved device may require approval by the FDA of a PMA supplement or a new PMA application.

        After a PMA is accepted for filing, the FDA begins its review of the submitted information, which generally takes between one and two years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided, as well as conduct a preapproval inspection of the manufacturing facility. If we are not in compliance with Quality System Regulations (QSRs) applicable to manufacturing, we will not receive PMA approval. Also during the review period, an advisory panel of experts from outside the FDA will be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. We may not be able to obtain necessary approvals on a timely basis, if at all, and delays in obtaining or failure to obtain such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

        Manufacturers of medical devices for marketing in the U.S. are required to adhere to the QSR requirements (formerly Good Manufacturing Practices), which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting 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 would be likely to cause or contribute to a death or serious injury upon recurrence. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.

        We may become subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, medical device reporting requirements and other applicable regulations. The QSR requirements include design controls that will likely increase the cost of compliance. We may incur significant costs to comply with laws and regulations in the future and these

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laws and regulations may have a material adverse effect upon our business, financial condition and results of operation.

        Any of our customers using our potential future diagnostic devices for clinical use in the U.S. may be regulated under the CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the U.S. by mandating specific standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests ("waived," "moderately complex" and "highly complex"), and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using our diagnostic products. Therefore, CLIA regulations and future administrative interpretations of CLIA may have a material adverse impact on us by limiting the potential market for our products.

        There can be no assurance that new legislation will not impose additional costs or lengthen review times for our products.

        Additionally, should we develop food pathogen products, they will be subject to the regulations of various domestic and foreign government agencies which regulate food safety and food adulteration, including the U.S. Department of Agriculture.

Employees

        As of December 31, 2001, we had 194 full-time employees, of whom 42 hold Ph.D. degrees and 24 hold other advanced degrees. Approximately 92 are involved in research and development, 36 in operations, manufacturing and quality assurance, 37 in sales and marketing, and 29 in finance, legal and other administrative functions. Our success will depend in large part upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations. None of our employees are covered by a collective bargaining agreement.

Factors That May Affect Results

Our products may not be successfully developed or commercialized, which would harm us and force us to curtail or cease operations.

        We are at an early stage of development. We currently have only two products for sale, our NanoChip® Molecular Biology Workstation and our NanoChip® Cartridge. All of our other potential products, such as our Analytic Specific Reagents ("ASR's"), are under development. Our NanoChip® System or our other products 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 of our new products, or if our products do not achieve a significant level of market acceptance, we would be forced to curtail or cease operations.

        We introduced our first two products into the marketplace in 2000. For the years ending December 31, 2001 and 2000, we recognized sales revenue from the sale of thirteen and eight NanoChip® Systems, respectively. In addition, we sold two NanoChip® Systems in 2001 and two systems in 2000 under sponsored research programs. We also place instruments at various customer sites under Development Site Agreements whereby title of the NanoChip® Molecular Biology Workstation does not pass to the customer and therefore no revenue is recognized. As of December 31, 2001, we had a total installed base of 61 instruments.

        Our success will depend upon our ability to overcome significant technological challenges and successfully introduce our products into the marketplace. A number of applications envisioned by us

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will require significant enhancements to our basic technology platform. There can be no assurance that we can successfully develop such enhancements.

Lack of market acceptance of our technology would harm us.

        We may not be able to develop commercially viable products. Even if we develop a product it may not be accepted in the marketplace. If we are unable to achieve market acceptance, we will not be able to generate sufficient product revenue to become profitable. We may also be forced to carry greater inventories of our products for longer periods than we may have anticipated. If we are unable to sell our inventory of our products in a timely fashion and at anticipated price levels, we may not become profitable. In addition, we may have to take accounting charges and reduce the value of our product inventory to its net realizable value. Market acceptance will depend on many factors, including our ability to:

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convince prospective strategic partners and customers that our technology is an attractive alternative to other technologies;



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manufacture products in sufficient quantities with acceptable quality and at an acceptable cost; and



•

sell, place and service sufficient quantities of our products.

        In addition, our technology platform could be harmed by limited funding available for product and technology acquisitions by our customers, internal obstacles to customer approvals of purchases of our products and market conditions in general.

Commercialization of some of our potential products depends on collaborations with others. If our collaborators are not successful or if we are unable to find collaborators in the future, we may not be able to develop these products.

        Our strategy for the research, development and commercialization of some of our products requires us to enter into contractual arrangements with corporate collaborators, joint venture partners, licensors, licensees and others. Our success depends in part upon the performance by these collaboration partners and potential collaboration partners of their responsibilities under these arrangements. Some collaborators may not perform their obligations as we expect or we may not derive any revenue or other benefits from these arrangements.

        We have collaborative agreements with a developer and manufacturer of instrumentation products and we formed a new company with the research and development subsidiary of a pharmaceutical company. We do not know whether these collaborations will successfully develop and market any products under our respective agreements. Moreover, some of our collaborators are also researching competing technologies targeted by our collaborative programs. We may be unsuccessful in entering into other collaborative arrangements to develop and commercialize our products. In addition, disputes may arise over ownership rights to intellectual property, know-how or technologies developed with our collaborators.

        We currently have agreements with Hitachi that contemplate the commercialization of products resulting from the agreements between the parties. In addition, we have a manufacturing and distribution agreement with Hitachi. In June 2001 we formed a company, Nanogen Recognomics GmbH, with Aventis Research and Technologies & Co. KG, in which we own 60% of the stock of Nanogen Recognomics and Aventis R&T owns the remaining 40%. Nanogen Recognomics seeks to combine our NanoChip® technology and Aventis R & T's intellectual property and expertise in synthetic oligonucleotide chemistry and advanced molecular biology to develop new products and applications for the NanoChip® System. These collaborations may not be successful.

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We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.

        We began selling our first two products in the second quarter of 2000, but we did not sell significant quantities of our first products during fiscal 2000 or during the year ended December 31, 2001. From our inception to December 31, 2001, we have incurred cumulative net losses totaling approximately $123.4 million. Moreover, our negative cash flow and losses from operations will continue to increase for the foreseeable future. We may never generate sufficient product revenue to become profitable. We also expect to have quarter-to-quarter fluctuations in revenues, expenses and losses, some of which could be significant. The amount and timing of product revenue recognition may depend on whether potential customers for the NanoChip® System choose to enter into title transfer or non-title transfer transactions.

        To develop and sell our products successfully, we will need to increase our spending levels in research and development, as well as in selling, marketing and administration. We will have to incur these increased spending levels before knowing whether our products can be sold successfully.

We may need additional capital in the future. If additional capital is not available, we may have to curtail or cease operations.

        We may need to raise more money to continue the research and development necessary to bring our products to market and to establish manufacturing and marketing capabilities. We may seek additional funds through public and private stock offerings, arrangements with corporate partners, borrowings under lease lines of credit or other sources. If we cannot raise more money we will have to reduce our capital expenditures, scale back our development of new products, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. The amount of money we will need will depend on many factors, including among others:

•

the progress of our research and development programs;



•

the commercial arrangements we may establish;



•

the time and costs involved in:



•

scaling up our manufacturing capabilities;



•

meeting regulatory requirements, including meeting necessary Quality System Regulations or QSR regulations, obtaining necessary regulatory clearances or approvals;



•

filing, prosecuting, defending and enforcing patent claims and litigation; and




•

the scope and results of our future preclinical studies and clinical trials, if any.

        Additional capital may not be available on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants.

Competing technologies may adversely affect us.

        We expect to encounter intense competition from a number of companies that offer products in our targeted application areas. We anticipate that our competitors in these areas will include:

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health care and other companies that manufacture laboratory-based tests and analyzers;



•

diagnostic and pharmaceutical companies;



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companies developing drug discovery technologies; and



•

companies developing molecular diagnostic tests.

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        If we are successful in developing products in these areas, we will face competition from established companies and numerous development-stage companies that continually enter these markets. In many instances, our 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 may offer broader product lines and have greater name recognition than us and may offer discounts as a competitive tactic.

        In addition, several development-stage companies are currently making or developing products that compete with or will compete with our potential products. Our competitors may succeed in developing, obtaining FDA approval or marketing technologies or products that are more effective or commercially attractive than our potential products, or that render our technologies and potential products obsolete.

        As these companies develop their technologies, they may develop proprietary positions that may prevent us from successfully commercializing products.

        Also, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future.

The uncertainty of patent and proprietary technology protection may adversely affect us.

        Our success will depend in part on obtaining and maintaining meaningful patent protection on our inventions, technologies and discoveries. Our ability to compete effectively will depend 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 rights to third-party proprietary rights, if necessary. Our pending patent applications may not result in the issuance of patents. Our patent applications may not have priority over others' applications, and even if issued, our patents may not offer protection against competitors with similar technologies. Any patents issued to us may be challenged, invalidated or circumvented and the rights created thereunder may not afford us a competitive advantage.

        We also rely upon trade secrets, technical know-how and continuing inventions 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 our technology and we may not be able to meaningfully protect our trade secrets, or be capable of protecting our rights to our trade secrets. We seek to protect our technology and patents, in part, by confidentiality agreements with our employees and contractors. Our employees may breach their existing Proprietary Information, Inventions, and Dispute Resolution Agreements and these agreements may not protect our intellectual property. This could have a material adverse effect on us.

Our products could infringe on the intellectual property rights of others, which may subject us to future litigation and cause us to be unable to license technology from third parties.

        Our commercial success also depends in part on us neither infringing valid, enforceable patents or proprietary rights of third parties, nor breaching any licenses that may relate to our technologies and products. We are aware of other third-party patents that may relate to our technology. It is possible that we may unintentionally infringe these patents or other patents or proprietary rights of third parties. We 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 may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes. In addition, these actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in an action and any license required under a patent may not be made available on commercially acceptable terms, or at all.

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        There are many U.S. and foreign patents and patent applications held by third parties in our areas of interest, and we believe that, besides our current litigation with CombiMatrix and Dr. Montgomery described below, there may be significant other litigation in the industry regarding patent and other intellectual property rights. Additional litigation could result in substantial costs and the diversion of management's efforts regardless of the result of the litigation. Additionally, the defense and prosecution of interference proceedings before the U.S. Patent and Trademark Office, or USPTO, and related administrative proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel. We may in the future become subject to USPTO interference proceedings to determine the priority of inventions. In addition, laws of some foreign countries do not protect intellectual property to the same extent as do laws in the U.S., which may subject us to additional difficulties in protecting our intellectual property in those countries.

        We are aware of U.S. and European patents and patent applications owned by Isis Innovations Ltd. (E.M. Southern). We have opposed one allowed European Patent which has broad claims to array technology for analyzing a predetermined polynucleotide sequence. Isis Innovation's position with respect to the opposed patent is that the claims relate to what it terms the "diagnostic mode." Those claims have now been narrowed before the Opposition Division to the point that, if these claims remain final before the European Patent Office, we believe they would not be infringed by our technology. In the Oral Proceedings before the Opposition Division on November 13, 14, and 15, 2001, the Division determined that the claims' language must be limited to arrays with "smooth, impermeable' surfaces. If the decision of the Opposition Division is successfully appealed by Isis Innovations and the original claims are reinstated, or if an application relating to arrays issued in another country with claims as broad as the original European patent, we would be subject to infringement accusations that could delay or preclude sales of some or all of our anticipated diagnostic products.

We were and are currently involved in intellectual property litigation that was and is costly, time-consuming and may impact our competitive position.

        In July 2001, we entered into a settlement agreement with Motorola, Genometrix and MIT concluding the declaratory judgment action by us against Motorola, Genometrix and MIT and Motorola's counterclaim against us. In connection with the settlement, we have secured a license from Motorola to certain claims of the "939 Patent. In exchange, Nanogen paid the parties involved a total of $2.5 million in cash and $2.5 million in Nanogen common stock (equal to 416,666 shares based upon a per share price of $6.00, the fair market value on the date of settlement). The settlement does not include any cross-licensing provisions of Nanogen technology to Motorola, Genometrix or MIT. Nanogen's lawsuit and Motorola's counterclaim have now been dismissed.

        In November 2000, we filed a complaint against CombiMatrix Corp. ("CombiMatrix") and Dr. Donald Montgomery in the United States District Court for the Southern District of California. Dr. Montgomery is a former Nanogen employee now affiliated with CombiMatrix. The Nanogen complaint alleges that the naming of Dr. Montgomery as the sole inventor on U.S. Patent No. 6,093,302, entitled "Electrochemical Solid Phase Synthesis" (the "302 patent"), and assignment of the "302 pate