Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number: 0-29975

ACLARA BIOSCIENCES, INC.

(Exact Name of Registrant as specified in its Charter)

1288 Pear Avenue, Mountain View, California 94043

(Address of principal executive offices and Zip Code)

(650) 210-1200

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $0.001 PAR VALUE

(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  x  No  ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ¨  No  x

As of June 28, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $32 million (based upon the average bid and asked prices of such stock as reported by The Nasdaq Stock Market on such date). Shares of Common Stock held by each officer, director, and holder of 5% or more of the outstanding Common Stock on that date have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 25, 2003, the number of outstanding shares of the Registrants’ Common Stock was 35,463,049, excluding 900,000 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 10, 11, 12 and 13 of Form 10-K is incorporated by reference from the Registrant’s proxy statement for the 2003 Annual Meeting of Stockholders, which will be filed, with the Securities and Exchange Commission within 120 days after the close of the Registrant’s fiscal year ended December 31, 2002.

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under the section, “Factors Affecting Operating Results,” contained in Part II—Item 7 of this report that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not under any duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results, unless required by law.

Table of Contents

ACLARA BIOSCIENCES, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

Table of Contents

ITEM 1.    BUSINESS

OVERVIEW

We are a life sciences company focused on developing and commercializing novel assay chemistry solutions for drug discovery and development, providing critical high-value information about the expression and interaction of genes and proteins within cells. The company develops, manufactures, and supplies these innovative biology assays as part of the eTag^™ Assay System. The system comprises reagent kits, software and services that simplify and automate various aspects of drug development, pre-clinical testing, and clinical assessment. Our eTag assays are easy to use. They require no time-consuming sample preparation steps, and provide for the simultaneous analysis of tens to hundreds of different biological analytes across tens of thousands of samples. This multiplexing capability is critical to the overall high performance of eTag assays. eTag assays represent a universal platform for the analysis of genes, proteins and cellular pathways and can be analyzed using existing capillary electrophoresis instrumentation systems.

Our eTag assays enable an efficient, high throughput systems biology approach for developing new drug targets and leads. This approach seeks broad understanding about the interaction of genes and proteins within and among cells rather than simply focusing on the activity of a particular gene or protein. In other words, the approach looks at the whole system rather than individual components. Moreover, these assays have broad applicability in the development of the new paradigm of molecular medicine for patient-specific therapeutic treatments based on individual genotypes and phenotypes derived from predictive biomarkers. In the future, we believe that physicians may use these novel assays to determine if specific clinical biomarkers, or combinations of biomarkers are present, making an individual patient amenable, or not, to the use of specific medicines.

Assays of these types are critical for effectively assessing drug efficacy and disease status across relevant cellular pathways or clinical biomarkers by quantitating many genes and proteins, cell signaling and pathway activation, protein-protein interactions, and/or cell-receptor binding from a single biological sample. We are developing and commercializing these high content assays initially in the target areas of oncology and toxicogenomics. While we are focused on developing tools for biopharmaceutical applications today, we expect eTag assays can also play a larger role in the future as predictive tests for treatment response and disease management. We introduced the eTag Assay System commercially through two separate programs in late 2002. We are making the eTag Assay System available through a scalable license-based eTag^™ Expert Access Program, whereby researchers have easy access to common applications, reagents, software, service and support. A Discovery Partners Program is also available for more proprietary applications with eTag technology.

ACLARA was formed by a spin-off transaction from Soane Technologies, Inc., which was incorporated in 1991 and subsequently changed its name to 2C Optics, Inc. We were incorporated in Delaware in 1995 under the name Soane BioSciences, Inc. and changed our name to ACLARA BioSciences, Inc. in 1998. We maintain an Internet website at www.aclara.com; however, information found on our website is not incorporated by reference into this report. On our website we make available, free of charge, the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act of 1934. You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our reports, proxy statements, and other documents filed electronically with the SEC are available at the website maintained by the SEC at http://www.sec.gov.

INDUSTRY BACKGROUND

Paradigm Shift in Drug Discovery and Development.    Prior to the advent of genomics research, one of the most significant challenges facing scientists in the pharmaceutical industry was finding suitable therapeutic targets, i.e. genes or proteins with which a drug will interact. Today, the critical barriers impeding more efficient

1

Table of Contents

and effective drug discovery and development have shifted. The genomics revolution is providing pharmaceutical researchers with a dramatic increase in the number of potential targets against which to conduct screens of compound libraries. A significant challenge today is to efficiently select the most promising targets from a large and growing number of alternatives. In addition, pharmaceutical researchers are expanding the size of compound libraries they use to screen against new targets. Researchers require new laboratory technologies capable of screening increasingly large libraries of potential drug candidates against an increasing number of targets in a cost-effective, automated and rapid manner.

Effectively screening larger libraries of candidates is not sufficient. It is also necessary to characterize toxic responses as early in the drug development process as possible so that questionable candidates can be removed from the development pipeline and vital resources are not wasted on their further optimization. Today, 90% of pharmaceutical drug candidates fail during the development process despite extensive pre-clinical testing and positive animal testing data. To implement ADME/Tox (Absorption, Distribution, Metabolism, and Excretion/Toxicology) profiling cost effectively in the early phase of the drug discovery process, a high throughput, multiple analyte assay technology is required.

Biology is Complex: Systems Biology and the Need for More Effective Tools.    Genomics and proteomics are yielding an extraordinary mass of new biological data, which is in turn generating a fundamental shift in the nature of information and the way it is used to discover therapeutics. Scientists are discovering patterns of gene and protein expression associated with health and disease. They are using these patterns to discover and test potential new pharmaceuticals, even though they often do not yet know the underlying biological and disease mechanisms. However, the enormous challenge still remains of interconnecting these molecular events in living cells to provide insight into the pharmacological pathways that drug discovery programs require. It is critical to gain a perspective that is cell-based, where researchers look at the effect of a potential treatment on and among cells. Information held in the cell defines the temporal and spatial interactions of its components and therefore, its normal and abnormal functions. The concept of systems biology has led to research areas that target the whole cell and physiological pathways.

Unlike traditional biology that examines single genes or proteins in isolation, systems biology simultaneously studies the complex interaction of many levels of biological information—genomic DNA, mRNA, proteins, pathways and networks—to understand how they work together. This understanding requires scientists to run more assays and to develop new assays to determine to the fullest possible extent the effects of disease on the organism and the outcome of treatment on diseased and normal tissues. This has fueled a dramatic increase in the number of cell-based assays as screening tools in both research and drug discovery. Just as automated gene and protein analysis and their database tools are pushing the genomics and proteomics frontiers, automated cell and pathway analysis using rapid screening methods and bioinformatics will also be essential to understanding systems biology. Not only are more effective tools needed to measure pathway analytes, but these tools also need to be many times more productive and cost-efficient if they are to be used effectively. Without both better and more complete information as well as significant productivity enhancements, the promise of molecular medicine will never become a reality.

Drug discovery and development in the systems biology era demands an analytical system that efficiently and effectively measures tens to hundreds of different mRNAs, proteins, protein modifications, and protein-protein interactions from the same sample. In addition, sample throughput of tens of thousands of samples per day is required as well as high sensitivity and quantitation precision to measure subtle changes in analyte expression and pathway activation—a standard of performance that exceeds the capabilities of traditional systems—in order to accurately measure beneficial or toxic effects of a new drug. The new system must provide:

2

Table of Contents

Multiplexing Requirements for New Methods to Perform Systems Biology and Secondary Screening. Multiplexed assays, or the ability to simultaneously analyze tens to hundreds of different biological analytes across tens of thousands of samples, are an ideal method of securing high content data and for increasing the speed and efficiency of drug discovery. However, most measurement systems rely on solid-phase formats such as microarrays and beads, which prevent effective quantitative measurement of many critical cell-based analytes such as, for example, cell receptors. Only flexible, solution-phase multiplexing provides greater versatility and effective performance for addressing cell-based assays as well as gene and protein assays with high sensitivity and precision.

Secondary screening and lead optimization involve performing a variety of measurements on each potential drug candidate identified in a primary screen. While the number of compounds under investigation is smaller than in primary screening, the number and diversity of measurements performed on each compound is much larger. The purpose of these measurements is to verify and further characterize the biological activity of each potential drug candidate, or “hit.” For example, researchers may test each hit against the target at different concentrations to determine its potency. Also, each hit may be tested against a panel of different enzyme targets. Current technologies typically measure only a single data point at a time, such as the activity of one compound on a particular enzyme, limiting the efficiency and economy of secondary screening and lead optimization. The change in paradigm is to measure multiple indicators in pathways that may be affected. Multiplexing is an ideal method of securing data needed for increasing the speed and efficiency of secondary screening. Multiplexed assays for both gene and protein expression that are sensitive, precise and reproducible are essential. Only flexible, solution-phase multiplexing can include multiple biological controls and multiple assay controls in every well.

MOLECULAR MEDICINE AND THE NEW THERAPEUTICS

According to the new paradigm of molecular medicine, a systems level understanding of disease and drug treatment is paired with information about specific individual patient differences in order to prescribe individualized medicines. Diagnostic and prognostic tests based on each individual patient’s genotype and/or phenotype are used to direct and monitor the progress of treatment.

Pharmacogenomics Using Genotyping and Phenotyping Clinical Biomarkers.    Genotyping is the identification of the specific “alleles” (or variants) at specific positions within the DNA sequence of an individual. Phenotype is the observed biochemical or physiological characteristics of an individual as determined by his or her genotype and the environment in which it is expressed. Pharmacogenomics is the study of how individual phenotypic and/or genetic makeup influences drug response. The benefits of this knowledge include the potential for streamlining clinical trials by targeting a candidate drug to a specific responsive phenotype, reducing both the cost and time of drug development. An additional benefit is the potential for tailoring drug prescriptions by phenotypic or genetic profile to maximize efficacy and minimize toxic side effects.

To complement the pharmacogenomics concept, there is a large and growing need for versatile techniques to both quantify and measure a broad range of protein targets and activation events in normal and diseased cells; in other words, to measure phenotypic responses. Protein targets may be within a cell, secreted from a cell, or on a cell surface and may be associated with many other proteins. Many of these protein targets may need to be

3

Table of Contents

analyzed from each individual sample. Scientists want to be able to measure cellular responses to external stimuli, such as drug treatments, or in disease. Phenotyping of proteins and genotyping of DNA need to be done in parallel utilizing a multiplexed analysis to produce high content, cost-effective knowledge.

Gene expression analysis, another form of phenotyping, involves measuring the extent to which specific genes are represented as messenger RNA (mRNA) “copies” within a cell. Typically, a differential gene expression analysis is performed, where researchers compare the mRNAs expressed in healthy and diseased samples to identify specific genes involved in a particular disease process. Another common application involves measuring a change in expression of certain genes when researchers challenge cells using candidate drug compounds. The current leading technologies for gene expression analysis are:

We believe neither of these approaches is suitable for measuring large numbers of genes (tens to hundreds) over thousands of biological samples, as the testing of patient samples or of pharmaceutical drug candidates requires. We believe that a technology that could provide this capability would address a significant unmet need in the marketplace.

Oncology.    The oncology area is uniquely suited for early pharmacogenomic application. With more than 500,000 cancer-related deaths reported annually in the United States and the expectation that the number of cancer cases will double in the next 50 years, the oncology area is particularly open to adopting the most innovative medical advances. Although therapeutic options might abound for a given indication, treatment typically is expensive and accompanied by a host of adverse side effects that are detrimental to patients’ quality of life. The optimal therapy for a disease can vary from patient to patient; moreover, the consequence of suboptimal therapy can range from ineffectiveness to death from extreme adverse reactions. This results in the economic burden of trying multiple treatments, along with added costs of physician time and increased hospitalization. The ability to predict which therapies are most likely to be effective for certain patients would constitute a powerful advance in oncology. Such predictions would likely arise only from an understanding of disease and therapeutic effect on both a cellular and molecular level. An early success in treatment based on molecular knowledge of cancer is the use of Herceptin^® in the treatment of breast cancer. Breast cancer can be classified according to the expression of the HER-2/neu oncogene, which is amplified in approximately 30% of primary breast tumors. Herceptin is a HER-2 antibody that slows the progression of breast cancers in cases in which the HER-2 receptor is over-expressed. Therefore, Herceptin has been marketed along with a test for HER-2 expression to guide its usage. Future therapeutics linked to predictive efficacy—prognostic tests—may be expected to offer even greater potential than Herceptin. In fact, many oncology drugs in late stage development today will likely go through clinical trials with tests using clinical surrogate markers to phenotype patients and therapeutic response.

ADME/Tox screening/Toxicogenomics.    Adverse drug reactions (ADRs) lead to more than 100,000 deaths per year in the United States. ADRs ranked as one of the top six leading causes of death in the US in 1994. Additionally, 90% of pharmaceutical drug candidates fail during the development process despite extensive pre-clinical testing and positive animal testing data. Poor efficacy, pharmacokinetics and adverse clinical effects account for 70% of the failures. A large proportion of failures result from conducting pre-clinical drug tests in animals and not in human tissues. Conversely, it is likely that a large proportion of failed drugs in animals could be recovered if tested in human tissues. Ideally, a high throughput-screening assay would allow simultaneous profiling of gene and protein expression directly from stimulated cells. The results would enable functionally equivalent characterization of ADME/Tox properties of lead compounds. The promise of the use of human hepatocytes with a consistent population of cells will likely make routine the in vitro toxicity testing of human

4

Table of Contents

tissues before clinical trials. Lead compounds could likely be eliminated much earlier in the development process and would thereby save time and eliminate significant pre-clinical and clinical costs.

THE ACLARA SOLUTION

We are developing eTag assay chemistries to address the critical need for an analytical system that would allow researchers to perform high throughput systems biology in order to easily and efficiently assess tens to hundreds of cellular pathway or clinical biomarker analytes across thousands of samples.

Solution-Phase Multiplexing.    The eTag Assay System uses our proprietary eTag reporters and high performance “solution-based” assay chemistries to multiplex the analysis of cellular signaling pathways and biomarkers. Tens to hundreds of genes, proteins, protein phosphorylation events and protein-protein interactions can be quantitatively analyzed from the same sample. The eTag Assay System represents a universal platform for sensitive and quantitative analysis of genes and proteins, including cell surface receptors. Specific molecular binding events that occur during the reaction result in the release of electrophoretically distinct eTag reporters, which are then separated to provide precise, sensitive quantitation of multiple analytes. Because multiple analytes can be analyzed directly from cell lysates in the same assay, biological sample requirements are greatly reduced, enabling applications where the quantities of biological samples are limited. This is especially important in oncology where tumor biopsies are small and difficult to obtain. Furthermore, researchers can include multiple biological and internal controls in each individual microwell, thus providing the means for data normalization across experiments and across laboratories. Our universal platform for quantitative analysis of both genes and proteins provides significant improvements in productivity, throughput and cost, and a simple workflow for direct analysis from lysed human or other tissues.

Gene Expression Profiling of Tens to Hundreds of Genes.    For gene expression analysis, we have licensed Invader^® technology and Cleavase^® enzyme from Third Wave Technologies, Inc. (“Third Wave”). The combination of eTag reporter molecules and the Invader technology provides superior performance and orders of magnitude improvement in productivity for profiling the expression of many genes compared to other DNA and RNA detection methods. eTag-Multiplex Invader assays quantitate gene expression with high precision, accuracy and efficiency, enabling researchers to obtain decision-critical results more rapidly and have greater success at detecting targets and drug response. Researchers can easily perform these analyses at high throughput using far less bio-sample and can compare results across different samples, experiments and labs. They can profile many genes simultaneously in a single reaction directly from crude cell lysates, without the need for sample preparation, polymerase chain reaction (PCR) or reverse transcription and with built-in internal controls.

Proteomic Multiplex Assays for Tens of Proteins and Cell-based Assays.    Our eTag chemistries are designed for simultaneous measurement of protein expression in cell signaling pathways, phosphoprotein activation events and protein-protein interactions. A versatile menu of assay methods has been developed to analyze many types of proteins.

The solution phase multiplexing capability of eTag assays can be applied to the following diverse areas:

5

Table of Contents

KEY BENEFITS OF OUR eTAG PRODUCTS

We believe that the eTag Assay System offers researchers a universal platform with superior screening performance while providing large improvements in productivity and cost. This is critical if investigators are to successfully put cellular pathway screens into practice. The key benefits of our eTag products include the following:

OUR STRATEGY

We are developing the eTag Assay System to address major segments of biopharmaceutical development. Our objective is to be a leading provider of enabling protein and genomic assays for systems biology research and disease management. In addition, we are addressing the new paradigm of molecular medicine with the use of eTag assays for the development of new therapeutic applications and clinical biomarkers. Our strategic focus in oncology provides a direct pathway for development of new clinical applications and diagnostic tests linked to the new therapeutics of the future.

Key elements of our strategy include:

6

Table of Contents

OUR TECHNOLOGY

eTag Chemistry Platform.    Our proprietary eTag Assay System has been developed in response to our pharmaceutical partners’ desire to screen compound libraries against panels of many types of analytes and their need to develop tests for surrogate biomarkers that assess drug efficacy and safety. We have developed an assay platform that has the following characteristics:

7

Table of Contents

eTag System Solution.    Building upon our proprietary eTag chemistries, we are developing a software solution for the analysis of the data generated in our multiplexed assays. Our eTag Informer^™ software makes use of multiple internal controls to assign eTag peaks to particular analytes and to quantify these analytes. The eTag Informer Software is designed to be compatible with the common capillary electrophoresis instruments that are used to perform eTag assays.

We have developed multiplexed eTag assays for profiling cellular pathways and clinical biomarkers. Tens of proteins, protein phosphorylation or protein-protein interactions can be quantitatively measured. In addition, quantitative analysis of both mRNA expression panels and protein expression panels can be made from the same sample.

We have developed “ready to use” assay kits for panels of mRNA and proteins to address many of the commonly studied events and pathways in drug development, including cytokines (cell growth factors), and metabolic pathways that are involved in drug toxicity. We are continuing the development of important cell signaling assays for major pathways involved in cancer, inflammation and cell death. In addition, custom eTag multiplex assays are developed and manufactured for customers through our assay services, part of the eTag Expert Access Program.

SEGMENTS

As of December 31, 2002, ACLARA did not have any separately reportable business segments.

COLLABORATIONS AND STRATEGIC PARTNERSHIPS

We have entered into collaboration agreements with market leaders in various sectors of the life sciences industry. Our objectives with these agreements, as well as those we plan to execute with other leading companies and academic institutions, are to increase the awareness of, and sponsorship of, our eTag technology, to broaden the applications of and increase the demand for our products and thereby to speed the commercialization of our eTag Assay System.

Third Wave Technologies—In October 2002, we entered into License and Supply Agreements with Third Wave Technologies, Inc. (“Third Wave”) under which we were granted a license to certain of Third Wave’s intellectual property. Under these agreements, we have rights to incorporate Third Wave’s Invader technology and Cleavase enzyme with our eTag technology to offer the eTag Assay System for multiplexed gene expression applications for the research market. In addition to licensing the Invader technology platform to us, Third Wave will supply Cleavase enzyme to ACLARA for incorporation into eTag-Invader gene expression assays. Under these agreements we paid a license fee to Third Wave, purchased an initial quantity of Cleavase enzyme and will make royalty payments to Third Wave. For 2003, 2004 and 2005, as we initiate our eTag commercialization efforts, these royalty payments are fixed in amount. These License and Supply Agreements superceded a previous Joint Development and Marketing Agreement, signed in October 2001, between ACLARA and Third Wave.

8

Table of Contents

Amersham—In March 2003, we entered into a Joint Marketing and Services Agreement with Amersham Biosciences, Inc. (“Amersham”). Under this non-exclusive agreement, Amersham will sell and support the MegaBACE^™, its automated high-throughput DNA analysis system, for use with our eTag assay chemistries. Amersham is a leader in the marketing of capillary electrophoresis instrumentation to the life sciences research market and has a worldwide installed base of over a thousand systems. Amersham markets and provides support for the instrumentation, and we market and provide support for the eTag Assay System.

Applied Biosystems—We had entered into collaboration agreements with Applied Biosystems (“ABI”) for the purpose of co-developing systems, which would use our microfluidic devices (“Labcards”) in genetic analysis and pharmaceutical drug screening. Agreements related to these two separate fields were executed in April 1998 and March 1999, respectively. Under these agreements, systems were to be jointly developed and ABI was awarded exclusive marketing rights for Labcard products for these systems. During 2001, we agreed with ABI to amend the Agreement related to pharmaceutical drug screening to make it nonexclusive and to change the related trilateral agreement between ABI, ACLARA and Johnson & Johnson to a bilateral agreement between ACLARA and Johnson & Johnson. In March 2002, the agreement related to genetic analysis was amended to render it nonexclusive. Under both of these amended agreements, if ABI wishes to develop a Labcard product, we will have the right to negotiate to jointly develop and supply the Labcard product. ABI would obtain nonexclusive rights under certain of our patents if no agreement is reached on jointly developing the Labcard product, and we will receive royalties on product sales. We currently have no ongoing development programs under these agreements.

MARKETING, SALES AND DISTRIBUTION

We market the eTag Assay System through our own business development organization to leading pharmaceutical and biotechnology companies for research applications. We currently have a small group of employees engaged directly in business development, sales and marketing activities, along with active support in key accounts from technical personnel and from executive management.

We introduced the eTag Assay System in late 2002 through two access programs. Under the eTag Expert Access Program, customers can gain access to eTag assays for gene expression profiling, protein expression analysis, and cell-surface antigen assays. This is a license-based program under which customers can buy eTag reagent kits, software, custom assay services, and consulting support. Under the Discovery Partners Program, customers can gain access to applications that may allow them to discover and adopt novel drug targets, lead compounds, protein and antibody therapeutics and diagnostics.

RESEARCH AND DEVELOPMENT

We began developing our microfluidic technologies related to “lab-on-a-chip” products in the early 1990s and have developed a substantial base of intellectual property in this field. However our primary research and development focus has more recently been on our unique eTag assay chemistries. Currently, all of our research and development programs are directed at continuing the development of the eTag Assay System and at broadening the applications for which it can be used. The application areas on which we are focusing include gene expression profiling, protein expression analysis and cell signaling and protein-protein interaction assays. In addition we are developing applications that may facilitate the discovery and adoption of novel drug targets, lead compounds, protein and antibody therapeutics and diagnostics. Research and development expense for the years ended December 31, 2002, 2001 and 2000 was $23.6 million, $23.5 million and $21.0 million, respectively.

COMPETITION

We are aware that other companies are developing and applying microfluidics, microarray and assay technology to applications in life science research, including certain of the applications at which our products are targeted. In addition, a number of established companies, such as Affymetrix, Inc., Applied Biosystems (a

9

Table of Contents

member of Applera Corporation), Amersham Biosciences Corp., and BD Biosciences provide technology and products to the genomics and pharmaceutical research markets. We believe that the principal competitive factors in our markets are product capability, product reliability, customer service, supplier reputation, cost effectiveness of the technology and the sales and marketing strength of the supplier.

The markets for life science research and diagnostic products are highly competitive. Many of our potential competitors in these markets have substantially greater financial, technical and human resources than we do. We cannot assure you that they will not succeed in developing technologies and products that would render our technologies and products obsolete and noncompetitive. We also cannot assure you that we will be able to compete effectively with these competitors’ greater marketing presence.

INTELLECTUAL PROPERTY

We seek patent protection on our core technologies, applications and improvements of these technologies, and on related inventions that will help ensure the company of access to desired markets. As of March 2003, the company owns or has licensed over 240 patents or patent applications. Our policy is to file patent applications and to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. In line with the company’s business plans, emphasis has been placed on building our patent estate in eTag technology and its applications while consolidating and maintaining our patent estate in microfluidics technology. Patent applications filed by the company last year relate to the following essential areas:

Our issued patents have expiration dates from 2009 to 2022.

We also rely upon trade secrets, know-how, trademarks, copyright protection and continuing technological and licensing opportunities to develop and maintain our competitive position. Our success will depend in part on our ability to obtain patent protection for our products and processes, to preserve our trade secrets, trademarks and copyrights, to operate without infringing the proprietary rights of others, to acquire licenses related to enabling technology or products and to enforce our intellectual property portfolio.

Our practice is to require our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties, subject to a right to publish certain information in the scientific literature in certain circumstances and subject to other specific exceptions. In the case of employees, the agreements provide that all inventions conceived by the individual while employed by us will be our exclusive property.

MANUFACTURING

We have developed in-house capabilities for the limited manufacture of eTag Assay Kits and components of those kits.

The nature of our assay chemistries necessitates access to specialized chemicals, reagents and raw materials. There are only a limited number of vendors who supply certain of these materials and in certain cases, the

10

Table of Contents

suppliers are the sole source of supply. We have a contractual arrangement with Third Wave for supply of Cleavase enzyme that is a critical component of our gene expression products that we will commercialize for gene expression applications and this enzyme is proprietary to Third Wave. We will need to enter into additional contractual relationships to secure supply of antibodies for use in our protein applications. We currently have no such supply arrangements in place. Certain of these suppliers will be the sole source of supply for the materials supplied.

While certain manufacturing processes will be performed internally by us, we intend to develop relationships with third party suppliers and manufacturers for commercial scale production of certain components and kits.

We also provide our eTag Informer software to customers to enable them to perform analyses of the data obtained from our eTag assays. In complex multiplexed assays, software to analyze the results and maintain the related database is an important element of the overall solution.

EMPLOYEES

As of December 31, 2002 we had 95 regular employees, of whom 72 are in research and development including pilot manufacturing, and 23 are in business development, marketing and administration. None of our employees is covered by collective bargaining agreements, and we consider relations with our employees to be good.

RECENT DEVELOPMENTS

On March 20, 2003, we announced the appointment of Thomas G. Klopack as our chief executive officer and a member of our Board of Directors. Mr. Klopack brings to ACLARA over 25 years’ experience commercializing new technologies and substantial life science operating management experience.

ITEM 2.    PROPERTIES

We lease approximately 44,000 square feet of laboratory and office space in Mountain View, California. Most of this space is currently devoted to research and development, pilot manufacturing, marketing and administration. Our lease expires in July 2009.

ITEM 3.    LEGAL PROCEEDINGS

Information with respect to this item is incorporated by reference to note 10 in the Notes to Financial Statements.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

11

Table of Contents

PART II

Our common stock trades publicly on The Nasdaq Stock Market under the symbol “ACLA”. The following table sets forth for the periods indicated, the quarterly high and low closing sales prices of the common stock on The Nasdaq Stock Market.

As of March 25, 2003, there were approximately 181 holders of record of 35,463,049 shares of outstanding Common Stock. ACLARA has not paid any dividends since its inception and does not intend to pay any dividends on its Common Stock in the foreseeable future.

12

Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

The statements of operations data for each of the years ended December 31, 2002, 2001 and 2000, and the balance sheet data as of December 31, 2002 and 2001, have been derived from our audited financial statements included elsewhere in this report. The statement of operations data for the years ended December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and 1998 have been derived from our audited financial statements not included in this report. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below has been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read with our financial statements, including the accompanying Notes to the Financial Statements, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

13

Table of Contents

The following discussion of the financial condition and results of operations should be read in conjunction with our financial statements and the notes to those statements included elsewhere in this Form 10-K.

OVERVIEW

We were formed by a spin-off transaction from Soane Technologies, Inc. that was incorporated in 1991 and subsequently changed its name to 2C Optics, Inc. We were incorporated in Delaware in 1995 under the name Soane BioSciences, Inc. and changed our name in 1998 to ACLARA BioSciences, Inc. ACLARA is a leading developer of assay chemistry for life science research. Since our inception we have engaged primarily in research and development activities related to the application of our proprietary microfluidics and assay chemistry technologies to genomic and proteomic applications in the field of drug discovery and development.

Essentially all our revenues to date have been generated from commercial research collaborations and from government grants. Total revenues were $2.5 million, $3.2 million and $3.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Substantially all of these revenues have been derived from collaborations and grants that will not be active in 2003. Our sources of potential revenue in 2003 and for the next several years are likely to be primarily from commercialization of our eTag assay chemistries. In late 2002, we introduced commercial access programs under which customers can gain access to our eTag Assay System.

We have invested substantial amounts in establishing our assay chemistries for life science research. From our inception to December 31, 2002, we have incurred $86.8 million in research and development expenses. Over 70% of our 95 employees at December 31, 2002 were engaged in research and development activities.

We have incurred significant losses since our inception. As of December 31, 2002, our accumulated deficit was $143.1 million and total stockholders’ equity was $114.1 million. Operating expenses were $43.3 million (including a $3.3 million charge related to restructuring and $4.0 million related to litigation settlement), $40.1 million (including a $5.8 million charge related to settlements of litigation) and $71.6 million (including a $34.3 million charge related to settlements of litigation) for the years ended December 31, 2002, 2001 and 2000, respectively. We expect to incur additional operating losses over at least the next two years as we continue to invest heavily in research and development activities, build our sales and marketing organizations and commercialize our eTag products.

14

Table of Contents

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

Revenue.    Our total revenues for the years ended December 31, 2002, 2001 and 2000 were $2.5 million, $3.2 million and $3.5 million, respectively. Our revenues to date have derived primarily from commercial collaboration agreements and government grants. Variations in these revenues have derived from the timing and amount of the award of the government grants and the completion of the collaboration efforts. Revenue from product sales has not been material. Substantially all of these revenues have been derived from collaborations and grants that will not be active in 2003. Our sources of potential revenue in 2003 and for the next several years are likely to be primarily from commercialization of our eTag assay chemistries. In late 2002, we introduced commercial access programs under which customers can gain access to our eTag Assay System. Under the eTag Expert Access Program, customers can gain access to eTag assays for gene expression profiling, protein expression analysis, and cell-surface antigen assays. This is a license-based program under which customers can buy eTag reagent kits, software, custom assay services, and consulting support. Under the Discovery Partners Program, customers can gain access to applications that may allow them to discover and adopt novel drug targets, lead compounds, protein and antibody therapeutics and diagnostics.

Research and Development.    Research and development expenses for the years ended December 31, 2002, 2001 and 2000 were $23.6 million, $23.5 million and $21.0 million, respectively. Research and development expenses were essentially unchanged in total for 2002 and 2001. Increased expense in 2002 related to the first of two $2.5 million minimum royalty payments under a litigation settlement was offset by a decrease of $1.6 million in personnel and project expenses and a $1.2 million decrease in stock-based compensation expense. The increase in research and development expenses from 2000 to 2001 was primarily due to increased staffing and other project and personnel related costs, being partially offset by a reduction of $5.3 million in stock-based compensation expense. We expect to continue to devote substantial resources to research and development. Essentially all of our research and development expenditures are now focused on developing the eTag Assay System and on expanding the applications for which it can be used.

Selling, General and Administrative.    Selling, general and administrative expenses for the years ended 2002, 2001 and 2000 were $12.5 million, $10.8 million and $16.4 million, respectively. The increase of $1.7 million from 2001 to 2002 was primarily due to increased personnel expenses related to an increase in marketing and business development staffing and activity. The decrease from 2000 to 2001 was primarily due to a reduction of $7.8 million in litigation-related legal fees, being partially offset by an increase in expenses related to the number of personnel in the marketing and business development functions We expect that our selling, general and administrative expenses will continue to be substantial as we commercialize our products, and as a result of the administrative and support infrastructure required to support our operations.

Litigation Settlements.    As part of the litigation settlement with Caliper, 900,000 shares of ACLARA common stock were issued in March 2001 with a guaranteed liquidation price of $36.11 per share if Caliper sold the shares after August 21, 2002 but before February 21, 2003. ACLARA initially valued the put obligation associated with these shares at $20.8 million. Based on the change in ACLARA’s stock price and in accordance with EITF No. 96-13 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 96-13”) and its related interpretations, and Statement of Financial Accounting Standards No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“SFAS 133”), the put obligation was subsequently revalued on a quarterly basis and at December 31, 2001, March 31, 2002, June 30, 2002 and September 30, 2002, the put obligation had a value of $27.2 million, $28.7 million, $30.5 million, and $30.9 respectively. As a result of these revaluations, revaluation expenses of $4.0 million and $6.4 million were recorded in the accompanying Statements of Operations for the years ended December 31, 2002 and 2001, respectively. The revaluation of the put obligation used a Black-Scholes pricing model with changes in valuation being recorded in the Statements of Operations. (See Note 9 in the accompanying Notes to Financial Statements.)

15

Table of Contents

In October 2002, we paid Caliper $32.5 million related to this settlement. Of this amount approximately $1.4 million was for the repurchase at the then-current market price of the 900,000 shares previously issued to Caliper in the original settlement agreement. On February 15, 2003 the letter of credit that had been issued to secure our performance under the settlement agreement was terminated.

Restructuring.    During the third quarter of 2002 ACLARA initiated a restructuring plan to streamline our operations, reduce costs associated with the microfluidics aspect of our business and increase our focus on our eTag assay chemistry. Accordingly, we recognized a restructuring charge of $3.3 million during the third quarter, including $0.8 million of severance and related costs related to the reduction of our employment level by over 50 employees. This reduction was phased in over the second half of 2002 and primarily affected the microfluidics area of our business, where essentially all of our active programs were eliminated. Termination benefits related to severance packages, out-placement services and other associated costs are included in restructuring expense on the statement of operation and restructuring accrual on the balance sheet at December 31, 2002. We also wrote off approximately $2.5 million of fixed assets that are not expected to be used prospectively.

The following table sets forth an analysis of the components of the restructuring charges (in thousands):

ACLARA anticipates the remaining reserve of $501,000 will be substantially paid out by the first quarter of 2003.

Interest Income (Expense), Net.    Interest income (expense) net represents income earned on our cash and cash equivalents, short-term investments, long-term investments and restricted cash, and interest paid on bridge loans, capital leases and equipment loans. Net interest income was $3.6 million, $7.8 million and $10.0 million in 2002, 2001 and 2000, respectively. The decrease in net interest income from 2001 to 2002 and 2000 to 2001 was primarily due to lower average balances in cash, cash equivalents, short-term and long-term investments and lower market interest rates.

Extraordinary Loss.    In 2000, we recorded an extraordinary loss of $1.1 million related to the early payoff of capital leases and equipment financing loans. These leases and loans were paid off on September 1, 2000 with a cash payment totaling $4.1 million.

Income Taxes.    We incurred net operating losses in 2002, 2001 and 2000 and consequently we did not pay any federal, state or foreign income taxes. As of December 31, 2002, we had federal net operating loss carryforwards of approximately $126 million and California net operating loss carryforwards of approximately $57 million. We also had federal research and development tax credit carryforwards of approximately $1.8 million and California research and development tax credit carryforwards of approximately $2.3 million. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2005 through 2010. Utilization of net operating losses and credits may be subject to substantial annual limitations due to change of ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. See Note 16 in the accompanying Notes to Financial Statements.

16

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through our initial public offering in March 2000 that raised net proceeds of $201.0 million, private placements of preferred stock totaling $32.3 million, loans from the landlord of our Mountain View facility and equipment financing lines of credit totaling $4.4 million, capital leases totaling $1.8 million, and research and development funding from collaborators and government grants. As of December 31, 2002, we had total cash resources of $106.6 million, comprising $38.0 million in cash and cash equivalents, $12.8 million in short-term marketable investments, $21.6 million in long-term marketable investments and $34.1 million in restricted cash. The restrictions on this restricted cash balance were eliminated in February 2003 upon the termination of the underlying letter of credit that had been issued in relation to a litigation settlement. Although the litigation settlement amount was fully paid in October 2002, the letter of credit securing that payment was not cancelled until February 2003.

Financing activities used cash of $416,000 for the year ended December 31, 2002 and provided cash of $633,000 and $197.4 million for the years ended December 31, 2001 and 2000, respectively. These amounts represent the net proceeds that we received from the sale of preferred stock, common stock and proceeds from stockholder notes receivable being offset by repayments of equipment financing loans and capital leases and a repurchase of stock. In October 2002, we repurchased for $1.35 million 900,000 shares of Common Stock previously issued to Caliper in relation to a litigation settlement. In March 2000, we completed an initial public offering of 10,350,000 shares of common stock at an offering price of $21.00 per share, raising net proceeds of $201.0 million.

Our operating activities used cash of $61.6 million, $20.0 million and $16.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. Uses of cash in operating activities primarily resulted from operating losses adjusted for non-cash expenses and changes in working capital and other liabilities. Included in 2002 was $31.2 million related to the payment of a previous litigation settlement, $2.5 million minimum royalties related to the same litigation settlement and $2.8 million of inventory purchases. Excluding these items, cash used in operations was $25.5 million, substantially less than net loss due to non-cash charges included in net loss.

As part of our investing activities, cash outflows for additions of property and equipment were $2.3 million, $4.0 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. In 2002 we purchased a license for $1.5 million from Third Wave.

A loan agreement with the landlord of our Mountain View facility allowed us to borrow $663,000 for leasehold improvements at an annual interest rate of 8.5%. The principal balance of this loan at December 31, 2002 was $507,000. The note matures on July 1, 2009.

17

Table of Contents

In March 1999, ACLARA entered into a ten year operating lease agreement for our Mountain View facility. The future annual minimum loan payments including accrued interest and lease payments under the loan and lease agreements at December 31, 2002 are as follows (in thousands):

We are involved in certain litigation as discussed in Note 10 of Notes to Financial Statements.

We believe that our current cash and cash equivalents, short-term and long-term marketable investment balances and funding anticipated from collaborators and customers will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 24 months. After that time, we cannot be certain that additional funding, if required, will be available on acceptable terms, or at all. Despite our expectations, we may need to raise additional capital in the future. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.

As part of our litigation settlement with Caliper, we provided a letter of credit to Caliper in the amount of $32.5 million as a guarantee of our performance under the settlement agreement. The banking institution that issued the letter of credit required us to maintain a balance of 105% of the letter of credit amount in a segregated account. This amount of $34.1 million is recorded as restricted cash in our financial statements at December 31, 2002. In October 2002, we paid Caliper $32.5 million related to this settlement. Of this amount, approximately $1.4 million was for the repurchase at the then-current market price of the 900,000 shares previously issued to Caliper in the original settlement agreement. On February 15, 2003 the letter of credit was terminated and the restricted cash was released.

CRITICAL ACCOUNTING POLICIES

ACLARA regularly reviews its selection and application of significant accounting policies and related financial disclosures. Our significant accounting policies are described in Note 2 in the accompanying Notes to Financial Statements. The application of these accounting policies requires that management make estimates and judgments. On an ongoing basis, ACLARA evaluates its estimates, which are based on historical experience and market and other conditions and on assumptions that we believe to be reasonable. Actual results may differ from these estimates due to actual market and other conditions, and assumptions being significantly different than was anticipated at the time of preparation of these estimates. Such differences may affect future financial results. We believe the following estimates reflect the application of our most critical accounting policies and require our most significant judgments.

Revenue Recognition.    ACLARA recognizes revenue from government grants in the period in which research and development costs are incurred. Non-refundable milestone payments received related to substantive at-risk milestones are recognized when our performance of the milestone under the terms of the collaboration is

18

Table of Contents

achieved and there are no further performance obligations. Research and development fees from commercial collaboration agreements are generally recognized as revenue on a straight-line basis over the life of the collaboration agreement or as the research work is performed. Any amounts received in advance of performance, or with ongoing obligations still present, are deferred until performance has been completed and such obligations have been met. Product revenue is recognized when title and risk of ownership has transferred, remaining obligations are insignificant and collection of any remaining related account receivable is reasonably assured. ACLARA did not offer warranties on its products sold through December 31, 2002.

Litigation Settlements.    As part of the litigation settlement with Caliper, 900,000 shares of ACLARA common stock were issued in March 2001 with a guaranteed liquidation price of $36.11 per share if Caliper sold the shares after August 21, 2002 but before February 21, 2003. In accordance with, EITF No. 96-13 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 96-13”) and its related interpretations, and Statement of Financial Accounting Standards No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“SFAS 133”), the put obligation associated with these shares was revalued on a quarterly basis until it was settled. ACLARA estimates the fair value of the put obligation using a Black-Scholes pricing model with changes in valuation being recorded in the Statement of Operations. The Black-Scholes pricing model requires certain estimates and assumptions, including estimated volatility of ACLARA’s common stock and estimated life of the put obligation. On October 15, 2002, ACLARA made a payment of $32.5 million to Caliper related to this settlement of litigation and put obligation.

From time to time, ACLARA may become involved in litigation relating to claims arising from the ordinary course of business. Management considers such claims on case-by-case basis. We accrue for loss contingencies if both of the following conditions are met:

Future changes in these estimates may require us to record additional reserves and may materially affect our results of operations, financial condition and future cash flows.

Cash Equivalents and Marketable Investments.    ACLARA maintains investment portfolio holdings of various issuers, types and maturities. ACLARA considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Management determines the appropriate classification of its short-term and long-term marketable investment securities at the time of purchase and reevaluates such determination as of each balance sheet date. At December 31, 2002, these investment securities are classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss). Management also assesses whether declines in the fair value of investment securities are other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value and the amount of the write down is included in earnings. In determining whether a decline is other than temporary, management considers the following factors:

Inventory.    Our inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. We review inventories periodically and reduce items considered to be slow moving or obsolete to estimated net realizable value through an appropriate reserve. No reserve was provided as of

19

Table of Contents

December 31, 2002, however if our estimates of the market value or demand of our inventory are more favorable than actual market conditions, we may be required to make inventory write-downs in the future. We had inventories with a carrying value of $2.8 million at December 31, 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

For recent accounting pronouncements, see Note 2 in the accompanying Notes to Financial Statements.

FACTORS AFFECTING OPERATING RESULTS

The following risk factors outline certain risks and uncertainties concerning future results and should be read in conjunction with the other information contained in this Annual Report on Form 10K. Any of these risk factors could materially and adversely affect our business, results of operations, financial condition and future growth prospects. Additional risks and uncertainties that we do not currently know about or that we currently deem immaterial may also impair our business, financial condition, results of operations and future growth prospects.

WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.

Since we were founded in May 1995, we have engaged primarily in research and development efforts. We have incurred operating losses every year since inception, and we may never achieve profitability. Net losses for the years ended December 31, 2002, 2001 and 2000 were $37.2 million, $29.0 million and $59.2 million, respectively. As of December 31, 2002, we had an accumulated deficit of $143.1 million. Our losses have resulted principally from costs incurred in connection with our research and development activities, from litigation settlement charges and from selling, general and administration costs associated with our operations.

To date, we have not generated any significant revenue from the sale of products. Our ability to generate revenues from product sales or to achieve profitability is dependent on our ability, alone or with collaborative partners, to successfully design, develop, manufacture and commercialize our proprietary assay chemistry systems in a timely manner. Our revenue to date has been generated principally from collaborative research and development agreements, government grants and commercial collaborations related to our former microfluidics activities. None of these revenue sources are expected to be significant in 2003, when our eTag Assay System is anticipated to be the primary source of revenue. We expect that our costs will continue to exceed our revenues on an annual basis for at least the next two years. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

Our operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include:

20

Table of Contents

If revenue declines in a quarter, whether due to a delay in recognizing expected revenue or otherwise, our earnings will decline because many of our expenses are relatively fixed in the short-term. In particular, research and development and selling, general and administrative expenses are not affected directly by variations in revenue.

Due to fluctuations in our revenue and operating expenses, we believe that period-to-period comparisons to results of historical operations are not a good indication of our future performance. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors, or will be below the level of prior periods. In these cases, our stock price could fluctuate significantly or decline.

NONE OF OUR PRODUCTS HAS YET BEEN SUCCESSFULLY COMMERCIALIZED.

We are in the process of commercially launching our eTag assay chemistries, through our Expert Access Program and Discovery Partners Program. However, we have limited experience with developing, manufacturing, distributing or selling commercial products. We may not be able to perfect the design of our products due to the complexity of the technologies on which they are based and/or the demands of the scientific processes that they address. Additionally we may not be able to adequately provide the desired level of services required under our access programs. For instance, we have limited experience establishing the high degrees of accuracy, reliability and ease of use required for commercial introduction of our products and services. Even though we have designed products that function in a prototype system or on a limited volume basis, we cannot assure you that we will be able to adapt the design or develop our organization to allow for large-scale manufacturing. Although we have projected launch periods for certain of our products, we cannot assure you that we will complete development of the products by those launch dates, or at all. If we are unable to design commercially viable assay chemistry products, or other products or systems, either independently or with our collaborative partners, we may be unable to remain in business.

COMMERCIALIZATION OF OUR PRODUCTS DEPENDS ON MARKET ACCEPTANCE OF OUR ASSAY CHEMISTRY TECHNOLOGY. IF THIS DOES NOT ACHIEVE ACCEPTANCE, OUR ABILITY TO GENERATE SALES WOULD BE LIMITED AND OUR LOSSES WOULD INCREASE.

Demand for our products is substantially dependent upon widespread market acceptance of our assay chemistry products for applications in drug discovery and for applications in genomics, proteomics and pharmaceutical drug screening. Our assay chemistry products represent a new technological approach, and our ability to sell assay chemistry products will depend on the willingness of customers to adopt such new technological approaches. We cannot assure you that our assay chemistry products will achieve substantial acceptance in our target markets. Market acceptance will depend on many factors, including:

Further, failure of our initial assay chemistry products to be favorably received by the market could undermine our ability to successfully introduce subsequent assay chemistry products. If our assay chemistry products do not gain market acceptance, our losses would increase and we may be unable to remain in business.

21

Table of Contents

OUR DIRECT AND THIRD PARTY SALES AND MARKETING CHANNELS NEED TO BE DEVELOPED. IF WE ARE UNABLE TO DO SO SUCCESSFULLY, WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUES.

We do not have fully developed sales and distribution channels for our products. We have recently restructured our relationship with Third Wave and have assumed direct responsibility for the commercialization of eTag assay chemistry products for the gene expression market that incorporate Third Wave’s technology. In addition, for applications in proteomics, we will continue to be dependent on our own sales and marketing organization, which has yet to be fully developed. We may not be able to successfully recruit executive management and sales and marketing personnel to market and sell our products.

Our ability to generate revenues will be dependent on the development of the appropriate partnerships, on the resources devoted by our partners to commercialization activities and on the success of those activities. Our ability to generate revenue will also be dependent on our success in recruiting management and business development personnel and in building a sales and marketing organization. We cannot assure you that we will be able to successfully build and manage effective sales and distribution channels, or that our partners will devote sufficient resources to our commercialization efforts to be effective.

IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE WOULD BE UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY, WHICH COULD IMPAIR OUR ABILITY TO COMPETE IN THE MARKET. THE COST OF ENFORCING OUR PROPRIETARY RIGHTS MAY BE EXPENSIVE AND RESULT IN INCREASED LOSSES. WE MAY BE FOUND TO INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

Our success will depend in part on our ability to obtain and maintain meaningful patent protection for our products, both in the United States and in other countries, and our inability to do so could harm our competitive position. We rely on our portfolio of over 240 issued and pending patent applications in the United States and in other countries to protect a large part of our intellectual property and our competitive position. We cannot assure you that any of the currently pending or future patent applications will be issued as patents, or that any patents issued to us will not be challenged, invalidated, held unenforceable or circumvented. Further, we cannot assure you that our intellectual property rights will be sufficiently broad to prevent third parties from producing competing products similar in design to our products.

In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and our collaborative partners upon commencement of a relationship with us. However, we cannot assure you that these agreements will provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information or that adequate remedies would exist if unauthorized use or disclosure were to occur. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. Further, we cannot assure you that others have not or will not independently develop substantially equivalent know-how and technology.

Our commercial success also depends in part on avoiding the infringement of other parties’ patents or proprietary rights and the breach of any licenses that may relate to our technologies and products. We are aware of various third-party patents that may relate to our technology. We believe that we do not infringe these patents but cannot assure you that we will not be found in the future to infringe these or other patents or proprietary rights of third parties, either with products we are currently developing or with new products that we may seek to develop in the future. If third parties assert infringement claims against us, we may be forced to enter into license arrangements with them. We cannot assure you that we could enter into the required licenses on commercially reasonably terms, if at all. The failure to obtain necessary licenses or to implement alternative approaches may prevent us from commercializing products under development and would impair our ability to be commercially

22

Table of Contents

competitive. We may also become subject to interference proceedings conducted in the U.S. Patent and Trademark Office to determine the priority of inventions.

The defense and prosecution, if necessary, of intellectual property suits, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings will result in substantial expense to us, and significant diversion of effort by our technical and management personnel. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities to third parties, could put our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Further, there is a risk that some of our confidential information could be compromised during the discovery process of any litigation. During the course of any lawsuit, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our stock.

WE HAVE LIMITED MANUFACTURING EXPERIENCE AND WILL BE SUBJECT TO THE RISK OF DEVELOPING AND MAINTAINING RELATIONSHIPS WITH THIRD PARTY MANUFACTURERS AND SUPPLIERS AND THE RISK OF IMPAIRMENT IN VALUE OF INVENTORY.

We have no experience manufacturing our products in the high volumes that will be necessary for us to achieve significant commercial sales. To date, we have limited our manufacturing activities to low volume manufacturing of eTag assay chemistry products for testing purposes and for validation use by our collaborative partners and potential customers. The nature of our assay chemistries necessitates access to specialized chemicals, reagents and raw materials, such as antibodies used in conjunction with our eTag components. There are only a limited number of vendors who supply these materials and for some of these materials the suppliers are the sole source of supply. We cannot be certain that we will be able to successfully secure supply of all needed materials, nor can we be certain that these vendors will supply these materials consistently or in the quantities necessary for high volume production. We will need to enter into contractual relationships with these or other manufacturers to facilitate commercial scale production of eTag assay chemistry products, and we cannot assure you that we will be able to do so on a timely basis, for sufficient quantities of products or on commercially reasonable terms. We will need to secure supply of antibodies for use in our protein applications and there can be no assurance that we will be able to do so on commercially reasonable terms. We will be dependent on Third Wave, for supply of Cleavase enzyme that is a critical component of products that we will commercialize for gene expression applications and this enzyme is proprietary to Third Wave. Failure of Third Wave to supply enzyme could seriously impair our business. Pursuant to the Supply Agreement with Third Wave, we purchased an initial quantity of Cleavase enzyme from Third Wave. This initial quantity of enzyme represents more than one year’s supply. Accordingly, we cannot assure you that we can establish or maintain reliable, high-volume manufacturing at commercially reasonable costs. In addition, the loss of any of these suppliers may result in a delay or interruption of our supply of assay chemistries. Any significant delay or interruption would have a material adverse effect on our ability to supply adequate quantities of our products and would result in lost revenues. In addition, we have limited experience in developing and providing the software tools necessary to perform analyses of data derived from our eTag assays.

WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO COMPETE.

Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel. The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of product development and other business objectives

23

Table of Contents

and could have a material adverse effect on our business, operating results and financial condition. Our future success will also depend on our ability to identify, recruit and retain additional qualified scientific, technical and managerial personnel. There is currently a shortage of skilled executives and intense competition for such personnel in the areas of our activities, and we cannot assure you that we will be able to continue to attract and retain personnel with the advanced qualifications necessary for the development of our business. The inability to attract and retain the necessary scientific, technical and managerial personnel could have a material adverse effect on our research and development activities, sales revenue, operating costs and future growth prospects.

WE EXPECT INTENSE COMPETITION IN OUR TARGET MARKETS.

We compete with companies that design, manufacture and market analytical instruments and reagents for genomics, proteomics and pharmaceutical drug screening using alternate technologies for applications such as gene expression analysis and protein function analysis and other products and systems. In addition, a number of companies are developing new technologies for miniaturizing various laboratory procedures for genomics, proteomics and drug screening markets targeted by us, using such methods as beads, hybridization chips and high-density microwell plates.

We anticipate that we will face increased competition in the future as companies enter the market with new technologies. Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and new product introduction, characterize the markets for our products. One or more of our competitors may render our technology obsolete or uneconomical by advances in existing technological approaches or the development of different approaches. Many of these competitors have greater financial and personnel resources and more experience in research and development than we have. We also cannot assure you that we will be able to compete effectively with the competitor’s greater market presence. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies which are our potential customers or our strategic partners will not develop competing products.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE, WHICH WOULD INCREASE OUR LOSSES IF SUCH CLAIMS OCCURRED.

As we begin commercialization of our products, we will face exposure to product liability claims. Any product liability claims arising in the future, regardless of their merit or eventual outcome, could increase our losses. We cannot assure you that we will continue to be able to maintain our current coverage or obtain new insurance on acceptable terms with adequate coverage, or at reasonable costs. In addition, potential product liability claims may exceed the amount of our insurance or may be excluded from coverage under the terms of the policy.

WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL WHEN NEEDED OR GENERATE THE CAPITAL NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS, WHICH COULD HURT OUR ABILITY TO COMPETE OR ACHIEVE PROFITABILITY.

It might be necessary for us to raise additional capital over the next few years to continue our research and development efforts and to commercialize our products. We believe that the proceeds from our initial public offering and projected revenue from collaborations should be sufficient to fund our anticipated levels of operations through at least the next 24 months. However, we cannot assure you that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. We also cannot assure you that existing or potential future collaborations or sales revenue will be adequate to fund our operations. We may need additional funds sooner than planned to meet operational needs, capital requirements for product development and commercialization and payment of monetary damages in any on-going or future litigation. We cannot assure you that additional funds will be available when needed, or on terms acceptable to us, or that sufficient revenue will be generated from sales. If adequate funds are not available, we may have to reduce substantially or eliminate expenditures for the development and production of certain of our proposed

24

Table of Contents

products or obtain funds through arrangements with collaboration partners that require us to relinquish rights to certain of our technologies or products. Either of these alternatives could have a material adverse effect on our business, operating results, financial condition and future growth prospects.

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.

Our executive officers, directors and their affiliates presently beneficially own or control a significant percentage of the outstanding shares of common stock. Accordingly, our current executive officers, directors and their affiliates, if acting together, would have the ability to influence the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transactions. The concentration of ownership could also delay or prevent a change of control of our company at a premium price if these stockholders oppose it.

THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.

There has only been a public market for our common stock since March 21, 2000, and since then our common stock has traded in a range between $1.30 and $60.00 per share.

The trading price of our common stock may continue to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: quarterly fluctuations in results of operations; our ability to successfully commercialize our products; technological innovations or new commercial products by us or our competitors; developments concerning government regulations or proprietary rights which could affect the potential growth of our customers; the execution of new collaborative agreements and material changes in the relationships with business partners; market reaction to trends in revenues and expenses, especially research and development; changes in earnings estimates by analysts; sales of common stock by existing stockholders; and economic and political conditions.

The market price for our common stock may also be affected by our ability to meet analysts’ expectations. Any failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the stock market, and the NASDAQ National Market and the market for technology companies in particular, is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, companies that have experienced volatility in the market price of their securities have been the subjects of securities class action litigation, and as noted elsewhere in this Form 10-K, we have been sued in a securities class action lawsuit. Although we believe that the class action lawsuit and the other lawsuits described elsewhere in this Form 10-K are without merit, an adverse determination in any of the lawsuits could have a very significant effect on our business and results of operations, and could materially affect the price of our stock. Moreover, regardless of the ultimate result, it is likely that the lawsuits will divert management’s attention and resources from other matters, which could also adversely affect our business and the price of our stock.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW LIMIT THE ABILITY OF ANOTHER PARTY TO ACQUIRE US, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

Certain provisions of our certificate of incorporation and our bylaws could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our stockholders. For example, we have a classified board of directors whose members serve staggered three-year terms and are removable only for cause. In addition, on March 16, 2001, ACLARA adopted a stockholder rights plan (the “Rights Plan”). Pursuant to the

25

Table of Contents

Rights Plan, ACLARA’s Board of Directors declared a dividend distribution of one Preferred Share Purchase Right (a “Right”) on each outstanding share of ACLARA’s common stock. Each Right will entitle stockholders to buy one-one hundredth of a share of newly created Series A Junior Participating Preferred Stock at an exercise price of $40.50 in the event that the Rights become exercisable. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer for 15% or more of the common stock. If ACLARA is acquired in a merger or other business combination transaction which has not been approved by the Board of Directors, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of the acquiring company’s common shares having a market value at the time of twice the Right’s exercise price. These provisions may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of ACLARA. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger or combination with us. These factors could also limit the price that investors might be willing to pay for our common stock in the future.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities, which have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than two years.

The following tables present the hypothetical changes in fair values in ACLARA’s cash, cash equivalents, short-term and long-term marketable investments held at December 31, 2002 that are sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. Fair values represent the market principal plus accrued interest at December 31, 2002 (in thousands).

The weighted average maturity of ACLARA’s long-term marketable investments at December 31, 2002 was 697 days.

With the exception of the put obligation associated with the settlement of litigation, we do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion.

26

Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Certain information required by this Item is included in Item 6 of Part II of this Report and is incorporated herein by reference. All other information required by this Item is included in Item 15 of this Report and is incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

27

Table of Contents

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission.

ITEM 11.    EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from our Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERS

Information required by this item is incorporated by reference from our Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from our Proxy Statement.

ITEM 14.    CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Securities Exchange Act 1934 Rules 13a-14(c) and 15d-14(c)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this annual report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

28

Table of Contents

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as a part of this report:

1.    Financial Statements:

2.    Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

3.    Exhibits

The exhibits listed in the accompanying exhibit index are filed with or incorporated by reference as part of this report.

(b)    Reports on Form 8-K:

None.

29

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Thomas G. Klopack and Alfred G. Merriweather, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

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

30

Table of Contents

CERTIFICATIONS

I, Thomas G. Klopack, certify that:

Date:    March 31, 2003

31

Table of Contents

I, Alfred G. Merriweather, certify that:

Date:    March 31, 2003

32

Table of Contents

ACLARA BIOSCIENCES, INC.

(A COMPANY IN THE DEVELOPMENT STAGE)

INDEX TO FINANCIAL STATEMENTS

F-1

Table of Contents

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of ACLARA BioSciences, Inc.

In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ACLARA BioSciences, Inc. (a development stage enterprise) at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 and, cumulatively, for the period from May 5, 1995 (date of inception) through December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/S/    PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 24, 2003, except for Note 4,  
as to which the date is February 15, 2003

F-2

Table of Contents

ACLARA BIOSCIENCES, INC.

(A Company in the Development Stage)

BALANCE SHEETS

(in thousands, except share and per share amounts)