##### Table of Contents




---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON DC 20549





---




FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended June 30, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period from __________ to __________.





Commission file number: 0-29975





---




ACLARA BioSciences, Inc.


(Exact name of registrant as specified in its charter)





Delaware

94-3222727(State of incorporation)

(IRS Employer Identification Number)





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)





Indicate by check mark whether 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  ̈ .





The number of shares outstanding of the registrants common stock as of July 31,
2002 was 36,154,955.





---



---

##### Table of Contents




ACLARA BIOSCIENCES, INC.





TABLE OF CONTENTS





PAGEPart I:

Financial InformationItem 1.

Financial Statements (Unaudited)Condensed Balance Sheets as of June 30, 2002 and December 31, 2001

3Condensed Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 and for the Cumulative Period From May 5, 1995 (Inception) to June 30, 2002

4Condensed Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 and for the Cumulative Period from May 5, 1995 (Inception) to June 30, 2002

5Notes to the Condensed Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

7Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15Part II:

Other InformationItem 1.

Legal Proceedings

15Item 2.

Changes in Securities and Use of Proceeds

16Item 3.

Defaults upon Senior Securities

16Item 4.

Submission of Matters to a Vote of Security Holders

16Item 5.

Other Information

17Item 6.

Exhibits and Reports on Form 8-K.

17Signatures

20




2




---

##### Table of Contents




PART IFINANCIAL INFORMATION





ITEM 1.    Financial Statements





ACLARA BIOSCIENCES, INC.


(A Company
in the Development Stage)





CONDENSED BALANCE SHEETS


(In Thousands, Except Share and Per Share Amounts)


(Unaudited)





June 30, 2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
45,780


$
30,970Restricted cash


34,125



34,125Short-term marketable investments


30,917



45,883Accounts receivable


152



1,540Prepaid expenses and other current assets


629



546Inventories


42



14Total current assets


111,645



113,078Long-term marketable investments


48,316



60,598Restricted cash






500Property and equipment, net


9,356



8,887Other assets, net


100



119Total assets

$
169,417


$
183,182LIABILITIES & STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
941


$
974Accrued payroll and related expenses


1,057



1,077Accrued expenses and other current liabilities


2,908



1,987Deferred revenue


519



596Litigation settlements accrual


30,541



27,197Current portion of loans payable


57



55Total current liabilities


36,023



31,886Loans payable, net of current portion


478



507Deferred rent


378



322Total liabilities


36,879



32,715Contingencies (Note 3)Stockholders equity:Common stock, $0.001 par value:Authorized 150,000,000 shares; Issued and outstanding: 36,148,437 shares at June 30, 2002 and 35,871,066 shares at
December 31, 2001


36



36Additional paid-in capital


259,235



259,327Deferred stock-based compensation


(1,695
)


(2,785
)Stockholder notes receivable for common stock


(579
)


(571
)Accumulated other comprehensive income


308



281Deficit accumulated during development stage


(124,767
)


(105,821
)Total stockholders equity


132,538



150,467Total liabilities and stockholders equity

$
169,417


$
183,182





The accompanying notes are an integral part of these condensed financial
statements.




3




---

##### Table of Contents




ACLARA BIOSCIENCES, INC.


(A Company in the Development Stage)





CONDENSED STATEMENTS OF OPERATIONS


(In Thousands, Except Per Share Data)


(Unaudited)





Three Months Ended June
30,


Six Months Ended June
30,


Cumulative Period from May 5, 1995 (Inception) to June 30, 20022002


2001


2002


2001Revenues

$
673


$
849


$
1,263


$
1,783


$
16,631Costs and operating expenses:Research and development


6,668



5,921



13,060



11,676



76,305Selling, general and administrative


3,078



2,537



5,911



5,416



40,121Litigation settlement


1,810



(2,389
)


3,344



2,388



43,391Total costs and operating expenses


11,556



6,069



22,315



19,480



159,817Loss from operations


(10,883
)


(5,220
)


(21,052
)


(17,697
)


(143,186
)Interest income


1,037



2,014



2,130



4,689



21,230Interest expense


(12
)


(13
)


(24
)


(26
)


(1,225
)Net loss before extraordinary loss


(9,858
)


(3,219
)


(18,946
)


(13,034
)


(123,181
)Extraordinary loss on early retirement of debt


















(1,103
)Net loss

$
(9,858
)

$
(3,219
)

$
(18,946
)

$
(13,034
)

$
(124,284
)Dividends related to beneficial conversion feature of preferred stock


















(5,000
)Accretion to redemption value and accrued dividends on mandatorily redeemable convertible preferred stock


















(6,292
)Net loss attributable to common stockholders

$
(9,858
)

$
(3,219
)

$
(18,946
)

$
(13,034
)

$
(135,576
)Net loss per common share, basic and diluted

$
(0.27
)

$
(0.09
)

$
(0.53
)

$
(0.37
)Shares used in net loss per common share calculation, basic and diluted


36,051



35,360



35,955



34,892





The accompanying notes are an integral part of these condensed financial
statements.




4




---

##### Table of Contents

ACLARA BIOSCIENCES, INC.


(A Company in the Development Stage)





CONDENSED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





Six Months Ended June
30,


Cumulative Period from May 5, 1995 (Inception) to June 30, 20022002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(18,946
)

$
(13,034
)

$
(124,284
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,004



742



4,884Amortization of discount on marketable investments


(276
)


(287
)


(3,113
)Amortization of note and long-term debt discount










597Amortization of deferred stock based compensation


705



1,353



11,926Amortization of other assets






25



81Preferred stock issued for interest expense










128Interest income form notes receivable from stockholders


(16
)


(16
)


(77
)Revaluation of litigation settlement


3,344



2,388



9,741Changes in assets and liabilities:Accounts receivable


1,388



(904
)


(152
)Prepaid expenses and other assets


(64
)


92



(599
)Inventories


(28
)


(22
)


(28
)Accounts payable


(33
)


(12
)


942Accrued payroll and related expenses


(20
)


81



1,057Accrued expenses and other liabilities


921



(1,137
)


2,907Litigation settlement accrual










32,500Deferred revenue


(77
)






519Deferred rent


56



75



377Net cash provided by (used) in operating activities


(12,044
)


(10,656
)


(62,594
)CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property and equipment


(1,474
)


(1,460
)


(12,647
)Sale of property and equipment


1



11



17Investment in restricted cash


500



(34,125
)


(34,250
)Purchase and maturities of investments, net


27,553



76,000



(75,810
)Change in other assets










(97
)Net cash provided by (used in) investing activities


26,580



40,426



(122,787
)CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under capital lease obligations


(27
)


(25
)


(1,530
)Proceeds from issuance of notes payable to related parties










2,487Proceeds from issuance of loans payable










4,365Repayments of loans payable










(3,943
)Proceeds from issuance of preferred stock, net of issuance costs










29,889Principal payments for notes payable to related parties










(119
)Repurchase of Series A preferred stock and one share of common stock










(2,713
)Proceeds from initial public offering, net of issuance costs










201,003Proceeds from notes receivable from stockholders


6



4



119Proceeds from issuance of common stock


295



376



1,603Net cash provided by financing activities


274



355



231,161Net increase in cash and cash equivalents


14,810



30,125



45,780Cash and cash equivalents, beginning of period


30,970



108,886



Cash and cash equivalents, end of period

$
45,780


$
139,011


$
45,780





The accompanying notes are an integral part of these condensed financial
statements.




5




---

##### Table of Contents




ACLARA BIOSCIENCES, INC.


(A Company in the Development Stage)





NOTES TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)





1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





The
accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, the accompanying unaudited condensed financial statements contain all adjustments necessary for a fair presentation of the interim financial information for ACLARA BioSciences, Inc. (ACLARA). Accordingly, they do
not include all of the information and footnotes required by generally accepted accounting principles for the presentation of complete financial statements. The preparation of interim financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results could differ from these estimates.





This Form 10-Q
should be read in conjunction with the financial statements and notes thereto included in ACLARAs Form 10-K and Form 10-Q for the year and quarter ended December 31, 2001 and March 31, 2002, respectively, as filed with the Securities and
Exchange Commission. Furthermore, interim results of operations are not necessarily indicative of the results that may be expected for the entire year or for other interim periods.





Recent Accounting Developments





In April of 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections,which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30. SFAS 145 also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the
adoption of SFAS 145 will not have a material impact on the financial position or results of operations of the Company.





In June of 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities,which is effective for exit or disposal
activities initiated after December 31, 2002. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). Under SFAS 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered by FASB Statements No. 143 and 144. The Company believes that the adoption of SFAS 146 will not have a material impact on the
financial position or results of the operations of Company.





Net Loss Per Share





Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during the period. Diluted
earnings per share would give effect to the dilutive effect of common stock equivalents consisting of stock options and warrants (calculated using the treasury stock method). Potentially dilutive securities have been excluded from the diluted
earnings per share computations as they have an antidilutive effect due to ACLARAs net loss.





A
reconciliation of shares used in the calculations is as follows (in thousands, except per share data):





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Basic and diluted:Net loss

$
(9,858
)

$
(3,219
)

$
(18,946
)

$
(13,034
)Weighted average shares of common stock outstanding


36,086



35,644



36,010



35,212Less: weighted average shares subject to repurchase


(35
)


(284
)


(55
)


(320
)Weighted-average shares of common stock used in basic and diluted net loss per share calculations


36,051



35,360



35,955



34,892Net loss per common sharebasic and diluted

$
(0.27
)

$
(0.09
)

$
(0.53
)

$
(0.37
)




6




---

##### Table of Contents




The following outstanding options, warrants and common stock subject to
repurchase (prior to the application of the treasury stock method), were excluded from the computation of diluted net loss per share as they had an anti-dilutive effect (in thousands):





Three Months Ended June 30,

Six Months Ended June 30,2002

2001

2002

2001Options and Warrants

3,407

2,797

3,407

2,797Common stock subject to repurchase

27

249

27

249





2.    RESTRICTED CASH





Current restricted cash at June 30, 2002 and December 31, 2001 comprised of $34.1 million held in escrow as part of our settlement of
litigation with Caliper Technologies Corporation (Caliper). Pursuant to the Caliper settlement agreement, ACLARA has provided a letter of credit to Caliper in the amount of $32.5 million as a guarantee of ACLARAs performance. The
banking institution, which had issued the letter of credit, required ACLARA to maintain a balance of 105% of the letter of credit amount in a segregated account. This amount of $34.1 million is invested in short-term US government agency debt and
money market funds.





3.    LITIGATION SETTLEMENT AND CONTINGENCIES





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 sells 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. The put obligation is classified as a
liability as ACLARA had posted collateral in the form of a letter of credit to Caliper in the amount of $32.5 million, as a guarantee of ACLARAs performance under the terms of the litigation settlement.





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 and June 30, 2002, the put obligation had a value of $27.2 million, $28.7 million and
$30.5 million, respectively. As a result of these revaluations, a revaluation expense of $1.8 million and a revaluation credit of $2.4 million were recorded in the accompanying Statements of Operations for the three months ended June 30, 2002 and
2001, respectively, and revaluation expenses of $3.3 million and $2.4 million were recorded in the accompanying Statements of Operations for the six months ended June 30, 2002 and 2001, respectively. The revaluation of the put obligation uses a
Black-Scholes pricing model with changes in valuation being recorded in the Statements of Operations.





In August 2000, ACLARA entered into a settlement and release with Rodenstock N.A. (Rodenstock) of alleged claims arising out of ACLARAs repurchase of its Series A
Preferred Stock from Rodenstock in 1999. The settlement agreement was approved by the board of directors of Rodenstock and a majority of Rodenstocks outstanding shares entitled to vote on the matter. On April 27, 2001, S&A Biotech
Investments, LLC (S&A), a stockholder of Rodenstock, filed a shareholder derivative suit in the Superior Court of California for the County of Santa Clara, naming the directors of Rodenstock as individual defendants, Rodenstock as a
nominal defendant, and ACLARA as a defendant. The purported claims by S&A are (1) breach of fiduciary duties and corporate waste by Rodenstock Instruments Corporation and the individual defendants, including Thomas Baruch, who is the chairman of
the boards of ACLARA and Rodenstock, in connection with the August 2000 settlement, and (2) aiding and abetting the breach of fiduciary duties by ACLARA. Among other remedies, S&A seeks rescission of the settlement agreement and repurchase of
the Series A Preferred Stock and injunctive relief. ACLARA filed its demurrer, and Rodenstock and Mr. Baruch filed their demurrers and motions for summary judgment, which were heard in April 2002. The Court denied all demurrers, but granted
Rodenstock and Mr. Baruchs motion for summary judgment. Plaintiff has dismissed without prejudice its claims against ACLARA while it considers appealing the judgment for the other defendants.





On June 15, 2001, ACLARA filed suit against its former General Counsel, Bertram Rowland (Rowland), in
the Superior Court of California, San Mateo County. ACLARAs action, which arises from Rowlands alleged dual representation of ACLARA and Caliper Technologies Corp., asserts various causes of action, including breach of fiduciary duty,
professional malpractice, and concealment, and seeks damages, as well as rescission of Rowlands employment agreement, stock option agreement and indemnity agreement. These agreements relate to Rowlands now terminated status as General
Counsel of ACLARA. Rowland has answered the Complaint, denied all claims and asserted various affirmative defenses. On or about October 2, 2001, Rowland filed a Cross-Complaint against ACLARA and Joseph Limber, the Companys President and Chief
Executive Officer. Rowland alleged a variety of claims, including fraud, negligent misrepresentation, breach of contract regarding the above-noted agreements, and securities fraud under California state law, and he seeks damages. The Company and Mr.
Limber have answered the Cross-Complaint, denied all claims and asserted affirmative defenses. In June 2002, Rowland dismissed his causes of action relating to alleged fraud or misrepresentation with respect to securities and alleged breach of
contract with respect to his employment agreement or stock option agreement. ACLARA believes that it has meritorious defenses and intends to defend itself vigorously against the remaining causes of action asserted by Rowland. As a result of this
belief, no liability for this suit has been recorded in the accompanying financial statements. The case is set for trial beginning January 27, 2003.





ACLARA and certain of its current or former officers and directors (the ACLARA defendants) are named as defendants in a securities class action lawsuit filed in the United States District
Court for the Southern District of New York. This action, which was filed on November 13, 2001 and is now captioned ACLARA Biosciences, Inc.  Initial Public Offering Securities Litigation, also names several of the underwriters involved
in ACLARAs initial public offering (IPO) as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARAs IPO (March 20, 2000) through December 6, 2000.
The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased ACLARA stock in the IPO and the
after-market. The complaint also alleges that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. (More than 300
issuers have been named in similar lawsuits.) In July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers (including ACLARA defendants) was filed by the entire group of issuer
defendants in these similar actions. Plaintiffs have not yet filed their opposition to the issuers omnibus motion to dismiss. ACLARA believes it has meritorious defenses and intends to vigorously defend itself against this suit. As a result of
this belief, no liability for this suit has been recorded in the accompanying financial statements. However, we could be forced to incur significant expenses in the litigation, and in the event there is an adverse outcome, our business could be
harmed.





ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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-Q, and in conjunction with the Form 10-K for the year ended December 31, 2001 and the Form 10-Q for the quarter ended March 31, 2002. Statements in this Managements Discussion and Analysis of Financial Condition and Results of
Operations which express that ACLARA believes, anticipates, expects or plans to as well as other statements which are not historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Act of 1995. Actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere, including, but not limited to, those factors discussed in Factors Affecting
Operating Results set forth below.




7




---

##### Table of Contents




OVERVIEW





ACLARA is a leading developer of assay chemistry and microfluidic products 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 genomics and proteomics in the field of drug discovery. Prospectively, our focus is expected to be primarily on our assay chemistry technologies since we believe that
these present the most significant opportunity.





Our business strategy is to commercialize our assay chemistries
and microfluidic devices for use in conjunction with multiple existing instrument platforms, and in the longer term, to integrate these assay chemistries and microfluidic technologies into powerful, new instrument systems.





We have invested substantial amounts in establishing our assay chemistries and microfluidic devices for life science research. From our
inception to June 30, 2002, we have incurred over $76.3 million in research and development expenses. Over 80% of our 145 employees at July 31, 2002 were engaged in research and development activities.





We have incurred significant losses since our inception. As of June 30, 2002, our accumulated deficit was $124.8 million and total
stockholders equity was $132.5 million. Total costs and operating expenses were $11.6 million (includes a $1.8 million charge related to a litigation settlement) and $6.1 million (includes a $2.4 million revaluation credit related to a
litigation settlement) for the quarters ended June 30, 2002 and 2001, respectively. We expect to incur additional operating losses over at least the next two years as we continue to invest significant resources in research and development
activities, build our sales and marketing organizations and commercialize our initial products.





Our sources of
potential revenue for the next several years are likely to be from receipts under existing and possible future collaborative arrangements, government research grants and product revenue derived primarily from our proprietary eTag assay chemistries.





In July 2002, we took steps to increase our focus on our eTag assay chemistry opportunities and to reduce costs,
particularly those costs associated with the microfluidics aspect of our business. As part of this refocusing of our operations, we expect to reduce our headcount by approximately 50 employees during the third and fourth quarters of the year. While
we are reducing the resources allocated to microfluidic activities, we expect that microfluidic technologies will continue to play a role in our operations prospectively but primarily in ways that enhance the market for our eTag assay chemistries.
Regarding our microfluidic products, (i) Roche has recently launched the Arteas Microfluidic Device and we will depend on Roche to develop the market for this product, and (ii) for our Plurex Multiplexing System, we are limiting our near-term
commercialization activities to developing an initial customer base and will seek a partner through whom a full scale commercialization effort can be initiated. Related to these actions, we anticipate taking a charge in the third quarter of 2002 of
approximately $2 million to $3 million. Of this charge, approximately $750,000 is related to anticipated severance and other associated costs and approximately $1.25 million to $2.25 million is related to the likely write-down of certain fixed
assets that are not expected to be used prospectively.





RESULTS OF OPERATIONS





PERIODS ENDED JUNE 30, 2002 AND 2001





Revenues.    Revenues for the three months ended June 30, 2002 and 2001 were $673,000 and $849,000, respectively. Revenues for the six months ended June 30, 2002 and 2001 were $1.3 million and $1.8
million, respectively. Our revenues to date have been derived primarily from commercial collaboration agreements and government grants. Variations in these revenues have been caused by the timing and amount of government grant awards and completion
of milestones in our collaboration efforts. During the quarter ended June 30, 2002, revenue included initial launch-related sales of Arteas devices to Roche pursuant to our collaboration with them on that product.





Research and Development.    Research and development expenses for the three months
ended June 30, 2002 and 2001 were $6.7 million and $5.9 million, respectively. Research and development expenses for the six months ended June 30, 2002 and 2001 were $13.1 million and $11.7 million, respectively. The increase from 2001 to 2002
was primarily due to increased license fees and increased personnel-related expenses as a result of an increased level of staffing related to our proprietary eTag assay chemistries, and other costs associated with joint development of certain
initial products pursuant to our agreement with Third Wave Technologies, Inc. These increases were partially offset by a reduction of $278,000 and $554,000 in stock-based compensation expense for the three and six month periods, respectively. A
portion of our research and development expenditures relates to our joint development programs with Third Wave. Under our agreement with Third Wave, we share certain development and commercialization costs, as well as the related revenues, with
Third Wave. As of June 30, 2002, we had not recognized any revenues from our agreement with Third Wave. We are exploring with Third Wave some possible changes to that agreement that may put more of the responsibility for development and
commercialization efforts on us. The headcount reduction described earlier is expected to reduce research and development expenditures, particularly on microfluidic products. However, because the reduction in headcount is expected to occur over the
third and fourth quarters of 2002, the full impact of the cost reduction will not be felt earlier than the first quarter of 2003, and may be partially offset by increased spending in our eTag assay chemistry activities. Notwithstanding these cost
reductions, we expect to continue to devote substantial resources to research and development.




8




---

##### Table of Contents




Selling, General and Administrative.    Selling,
general and administrative expenses for the three months ended June 30, 2002 and 2001 were $3.1 million and $2.5 million, respectively. Selling, general and administrative expenses for the six months ended June 30, 2002 and 2001 were $5.9 million
and $5.4 million, respectively This primarily reflects an increase in compensation related expense and an increase in sales and marketing expense related to the initiation of commercialization activities for our proprietary eTag assay chemistries.
We expect that our selling, general and administrative expenses will increase in absolute dollar amounts as we increase our sales and marketing activities related to the commercialization of our products and as we increase the administrative and
support infrastructure required to support our customers.





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 sells 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, the put obligation was subsequently revalued on a quarterly
basis and at December 31, 2001, March 31, 2002 and June 30, 2002, the put obligation had a value of $27.2 million, $28.7 million and $30.5 million, respectively. As a result of these revaluations, a revaluation expense of $1.8 million and a
revaluation credit of $2.4 million were recorded in the accompanying Statements of Operations for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, revaluation expenses of $3.3 million and
$2.4 million were recorded in the accompanying Statements of Operations, respectively. The put obligation has been classified as a current liability at June 30, 2002. The put obligation will continue to be revalued on a quarterly basis until
settlement using a Black-Scholes pricing model with changes in valuation being recorded in the Statements of Operations.





Net Interest Income (Expense).    Net interest income (expense) represents income earned on our cash and cash equivalents, short-term investments, long-term investments and restricted cash, and interest
paid on equipment loans. Net interest income was $1.0 million and $2.0 million for the three months ended June 30, 2002 and 2001, respectively, and $2.1 million and $4.7 million for the six months ended June 30, 2002 and 2001, respectively. The
decrease in net interest income from 2001 to 2002 was primarily due to lower average balances of cash and cash equivalents, short-term and long-term investments and lower market interest rates.





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 $1.5 million, and research and development funding from collaborators and government grants. As of June 30, 2002, we had total unrestricted cash
resources of $125.0 million, comprising $45.8 million in cash and cash equivalents, $30.9 million in short-term marketable investments and $48.3 million in long-term marketable investments. In addition, we had $34.1 million in restricted cash.





A loan agreement with the landlord of the 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 June 30, 2002 was $535,000. The note matures on July 1, 2009.





Financing activities provided cash of $274,000 and $355,000 for the six months ended June 30, 2002 and 2001, respectively. This primarily reflects cash proceeds received through the employee exercise
of stock options and employee participation in the employee stock purchase program.





Operating activities used
cash of $12.0 million and $10.7 million for the six months ended June 30, 2002 and 2001, 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.





Investing activities for the six months ended June 30, 2002 provided cash of $26.6 million,
primarily reflecting $27.6 million of net investments maturing. Investing activities for the six months ended June 30, 2001 provided cash of $40.4 million, primarily reflecting $76.0 million of net investments maturing being partially offset by the
increase in restricted cash of $34.1 million.





We believe that our current cash and cash equivalents, short-term
and long-term marketable investment balances and funding received from collaborators and government grants 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 before the end of the next 24 months. 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.




9




---

##### Table of Contents




As part of our litigation settlement with Caliper, we have 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 June 30, 2002.





RECENT
ACCOUNTING DEVELOPMENTS





In April of 2002, the FASB issued Statement of Financial Accounting Standards No. 145
(SFAS 145), Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and
losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS 145 also addresses financial accounting and reporting for capital leases that are
modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS 145 will not have a material impact on the financial position or results of operations of the Company.





In June of 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities,which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under SFAS 146, a liability is required to be recognized for a cost associated
with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered
by FASB Statements No. 143 and 144. The Company believes that the adoption of SFAS 146 will not have a material impact on the financial position or results of the operations of Company.





FACTORS AFFECTING OPERATING RESULTS





The
following risk factors outline certain risks and uncertainties concerning future results and should be read in conjunction with the information contained in our Annual Report on Form 10-K for the year ended December 31, 2001 and Quarterly Report on
Form 10-Q for the three months ended March 31, 2002. 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, and we may never achieve profitability. Net losses for the six months ended June 30, 2002 and the years ended December 31, 2001, 2000, and 1999 were $18.9 million, $29.0 million, $59.2 million and $8.2 million, respectively. As of June 30,
2002, we had an accumulated deficit of $124.8 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 our collaborative partners, to successfully design, develop, manufacture and commercialize our
proprietary assay chemistry systems and microfluidic products in a timely manner. Our revenue to date has been generated principally from collaborative research and development agreements and government grants. 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:





| |  |  | expiration or termination of contracts with collaborators or government research grants, which may not be renewed or replaced;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------




| |  |  | final outcome of litigation to which we are currently a party or threatened claims against us;
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | the timing and willingness of collaborators to commercialize our products;
| | - |  | --------------------------------------------------------------------------



10




---

##### Table of Contents




| |  |  | the timing of the release, and the competitiveness of our products;
| | - |  | -------------------------------------------------------------------




| |  |  | the adoption of our technologies by customers;
| | - |  | ----------------------------------------------




| |  |  | general and industry-specific economic conditions, which may affect our customers research and development expenditures and use of our products; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | a quarterly revaluation of a put obligation which is dependent, among other things, on the volatility and level of ACLARAs stock price.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------




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. In that case, 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 one productthe Arteas Microfluidic Deviceand are
in the initial stages of commercializing our eTag assay chemistries. However, we have limited experience with developing, manufacturing, distributing or selling commercial products using either our assay chemistry or microfluidic technologies. 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. For instance, we have limited experience establishing the high
degrees of accuracy, reliability and ease of use required for commercial introduction of our products. 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 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 systems by those launch dates, or at all. If we are
unable to design commercially viable assay chemistry products, LabCard 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 AND LABCARD PRODUCTS AND RELATED SYSTEMS. IF THEY
DO 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 LabCard products as tools for applications in genomics 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 and microfluidic products will achieve substantial acceptance in our target markets. Market acceptance will depend on many factors, including:





| |  |  | our ability and the ability of our collaborative partners to demonstrate to potential customers the benefits and cost effectiveness of our assay chemistry
products and LabCard products, relative to competing technologies and products; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the extent and success of our efforts and our partners efforts to market, sell and distribute the assay chemistry products and LabCard products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------




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





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 have not fully developed sales and
distribution channels for our products. We will depend on our marketing partner, Roche Diagnostics Corp., to market and sell our Arteas Microfluidic Device. For our Plurex Multiplexing System, we are seeking a partner to initiate full commercial
launch of the product, and we will depend on that partner, if such a partner can be identified, to market the Plurex system. We will depend in part on our partner, Third Wave Technologies, Inc. to develop the market and sell our eTag assay
chemistries for certain genomic applications. For our eTag assay chemistries, especially for




11




---

##### Table of Contents




applications in proteomics, we will 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 sales 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.





WE DEPEND ON A COLLABORATIVE PARTNER TO DEVELOP AND MARKET KITS THAT INCORPORATE OUR ASSAY CHEMISTRY PRODUCTS. IF OUR COLLABORATIVE PARTNER DOES NOT PERFORM AS EXPECTED, WE MAY BE UNABLE TO DEVELOP
AND MARKET OUR PRODUCTS IN CERTAIN TARGET MARKETS.





We have entered into an agreement with Third Wave
Technologies, Inc. (Third Wave) to jointly develop and market products for applications in the field of genomics. Generally, Third Wave is expected to incorporate our eTag assay chemistry as a component of products that also include
their Invader ® product. While we will jointly market these products and the
related technological approach to customers, Third Wave will have the primary marketing responsibility. Accordingly, we will be substantially relying on Third Wave to market our eTag assay chemistry products for genomic applications. If Third Wave
does not perform these functions satisfactorily, our ability to market, sell and distribute our products could be severely limited.





We generally do not have control over the resources or degree of effort that Third Wave may devote to our joint development and marketing programs. If Third Wave fails to conduct these collaborative activities successfully,
with a suitable level of priority and in a timely manner, our business would be harmed. In addition, Third Wave could cease operations, fail to devote adequate resources to our collaborative activities, eliminate relevant product lines, or offer,
design, manufacture or promote competing lines of products. Any of those occurrences would increase our losses.





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.





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 250 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 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




12




---

##### Table of Contents




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 FINALIZING CONTRACTUAL ARRANGEMENTS, TRANSFERRING TECHNOLOGY AND MAINTAINING RELATIONSHIPS WITH THIRD-PARTY MANUFACTURERS TO MANUFACTURE OUR LABCARD CHIPS.





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 the pilot manufacturing of limited volumes of Arteas and Plurex microfluidic devices, and 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 LabCard products requires the use of sophisticated injection molding and other manufacturing processes that are not widely available. For this reason, only a
limited number of vendors currently have the expertise to manufacture our products. We have relationships with outside suppliers who are currently manufacturing limited quantities of our LabCard products for initial product launch quantities and for
research and development purposes. The nature of our assay chemistries necessitates access to specialized raw materials, such as antibodies used in conjunction with our eTag product. There are only a limited number of vendors who supply these
materials. We cannot be certain that these vendors will continue to 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
for commercial scale production of LabCard products and assay chemistries, 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. 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 LabCard products or 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.





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 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
alternative technologies for applications such as gene expression analysis and protein functional 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. 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.




13




---

##### Table of Contents




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 we will continue to receive funding under existing collaborative arrangements or 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 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 $1.45 and $66.00 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 in our Form 10-K for the year ended December
31, 2001, we have recently been sued in a securities class action lawsuit. Although we believe that the class action lawsuit and the other lawsuits described in our Form 10-K for the year ended December 31, 2001 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.




14




---

##### Table of Contents




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 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 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The following discussion of Quantitative and Qualitative Disclosures About Market Risk should be read in conjunction with the information contained in our Annual Report on Form 10-K for the year ended December 31, 2001. 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 maximizing 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 table
presents the hypothetical changes in fair values in ACLARAs cash and cash equivalents, short-term and long-term marketable investments held at June 30, 2002, that are sensitive to 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 June 30, 2002 (in
thousands).





Given an Interest Rate Decrease of X Basis Points

0 BPS

Given an Interest Rate Increase of X Basis PointsIssuer

150 BPS

100 BPS

50 BPS


50 BPS

100 BPS

150 BPSMoney Market

$
37,839

$
37,777

$
37,715

$
37,651

$
37,588

$
37,525

$
37,463Commercial Paper

$
6,118

$
6,075

$
6,031

$
5,988

$
5,944

$
5,900

$
5,858Government Agencies

$
82,774

$
82,311

$
81,844

$
81,374

$
80,904

$
80,440

$
79,980$
126,731

$
126,163

$
125,590

$
125,013

$
124,436

$
123,865

$
123,301





The weighted average maturity of ACLARAs long-term marketable
investments at June 30, 2002 was 747 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.





PART II.    OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS





Information with respect to this item
is incorporated in Litigation Settlement and Contingencies found elsewhere in this Form 10-Q.




15




---

##### Table of Contents




ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS





Not
applicable.





ITEM 3.    DEFAULTS UPON SENIOR SECURITIES





None.





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





At
the annual meeting of stockholders held on Tuesday, June 25, 2002, the following matters were submitted to a vote of the Companys stockholders:





Proposal 1.    Election of two directors to serve until the annual meeting of stockholders in 2005.





Nominee

Votes For

Votes Against

Abstained

Broker Non-VotesJean Deleage, Ph.D.

24,965,730

164,678Andre F. Marion

24,965,730

164,678





In addition to Messrs. Deleage and Marion, the terms of directors
Herbert H. Hoopers, Joseph M. Limber and Thomas R. Baruch continued after the annual meeting.




16




---

##### Table of Contents




| | Proposal 2. |  | Approval to increase the number of shares of Common Stock in the Employee Stock Purchase Plan from 450,000 to 800,000.
| | ----------- |  | ----------------------------------------------------------------------------------------------------------------------




Votes For

Votes Against

Abstained

Broker Non-Votes24,757,484

361,385

11,039





| | Proposal 3. |  | Ratification of the appointment of PricewaterhouseCoopers LLP as the Companys Independent Accountants for the fiscal year ending December 31, 2002.
| | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




Votes For

Votes Against

Abstained

Broker Non-Votes24,987,836

137,494

5,078





ITEM 5.    OTHER INFORMATION





None.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)  Exhibits.    The exhibits listed below are incorporated by reference as part of this report:





Exhibit Number


Description3.1


Amended and Restated Certificate of Incorporation of ACLARA BioSciences, Inc. (Incorporated by reference to Exhibit
3.1 to our Registration Statement on Form S-1 filed with the Securities and Exchange Commission, File No. 222-95107 (our Form S-1).)3.2


Certificate of Amendment to Amended and Restated Certificate of Incorporation of ACLARA BioSciences, Inc.
(Incorporated by reference to Exhibit 3.6 to our Form S-1.)3.3


Amended and Restated Bylaws of ACLARA BioSciences, Inc. (Incorporated by reference to Exhibit 3.4 to our Form
S-1.)10.1


Form of Indemnification Agreement between ACLARA and each of our directors and officers (Incorporated by reference
to Exhibit 10.1 to our Form S-1.)10.2


1995 Stock Option Plan (Incorporated by reference to Exhibit 10.2 to our Form S-1.)10.3


Amended and Restated ACLARA BioSciences, Inc. 1997 Stock Plan (Incorporated by reference to Exhibit 10.3 to our Form
S-1.)10.4


Amended and Restated Investors Rights Agreement, dated as of December 30, 1999 (Incorporated by reference to
Exhibit 10.4 to our Form S-1.)10.5


Change of Control Agreement by and between Joseph M. Limber and ACLARA BioSciences, Inc., effective as of January
19, 2000 (Incorporated by reference to Exhibit 10.5 to our Form S-1.)10.8


Lease Agreement between ACLARA BioSciences, Inc. and The Pear Avenue Group, dated March 1, 1999 (Incorporated by
reference to Exhibit 10.8 to our Form S-1.)10.9


Master Equipment Lease between Phoenix Leasing and Soane BioSciences, Inc., dated as of November 15, 1995
(Incorporated by reference to Exhibit 10.9 to our Form S-1.)10.10


Agreement for an Exclusive Alliance to Develop, Manufacture and Market a Chip-Based Screening System for Cell
Analysis between Cellomics, Inc. and ACLARA BioSciences, Inc, dated as of October 26, 1999 (Incorporated by reference to Exhibit 10.10 to our Form S-1.)




17




---

##### Table of Contents

10.11


Collaboration Agreement between ACLARA BioSciences, Inc. and The Perkin-Elmer Corporation, dated as of March 19,
1999 (Incorporated by reference to Exhibit 10.11 to our Form S-1.)10.12


Side Agreement between ACLARA BioSciences, Inc. and The Perkin-Elmer Corporation, dated as of March 19, 1999
(Incorporated by reference to Exhibit 10.12 to our Form S-1.)10.13


Custom Instrument Development and Commercialization Agreement between The R.W. Johnson Pharmaceutical Research
Initiative, The Perkin-Elmer Corporation and ACLARA BioSciences, Inc., signed in March 1999 (Incorporated by reference to Exhibit 10.13 to our Form S-1.)10.14


Collaboration Agreement between Soane BioSciences, Inc. and The Perkin-Elmer Corporation, dated as of April 25, 1998
(Incorporated by reference to Exhibit 10.14 to our Form S-1.)10.15


Master Loan and Security Agreement by and between ACLARA BioSciences, Inc. and Transamerica Business Credit
Corporation, dated as of May 27, 1999 (Incorporated by reference to Exhibit 10.15 to our Form S-1.)10.16


ACLARA BioSciences, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.16 to our Form
S-1.)10.17


Agreement between Packard BioScience Company and ACLARA BioSciences, dated as of February 21, 2000 (Incorporated by
reference to Exhibit 10.17 to our Form S-1.)10.18


Consulting Agreement with Dr. Eric Lander dated as of January 15, 2000 (Incorporated by reference to Exhibit 10.18
to our Form S-1.)10.19


Consulting Agreement with Mr. Andre Marion dated as of January 19, 2000 (Incorporated by reference to Exhibit 10.19
to our Form S-1.)10.20


Settlement Agreement and Mutual General Release between Caliper Technologies Corp. and ACLARA BioSciences, Inc.,
dated as of March 12, 2001 (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 15, 2001.)10.21


Cross-License Agreement between Caliper Technologies Corp. and ACLARA BioSciences, Inc., dated as of March 12, 2001
(Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 14, 2001.)10.22


Common Stock Issuance Agreement between ACLARA BioSciences, Inc. and Caliper Technologies Corp., dated as of March
12, 2001 (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on May 15, 2001.)10.23


Form of Change of Control Agreement between ACLARA BioSciences, Inc. and each of our executive officers.
(Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 14, 2001.)10.24


Amended and Partially Restated Collaboration Agreement between ACLARA BioSciences, Inc. and PE Corporation (NY),
executed as of March 22, 2002. (Incorporated by reference to Exhibit 10.24 to our Annual Report on Form 10-K filed on April 1, 2002.)10.25


Second Side Agreement Between ACLARA BioSciences, Inc. and PE Corporation (NY), effective as of September 30, 2000.
(Incorporated by reference to Exhibit 10.25 to our Annual Report on Form 10-K filed on April 1, 2002.)10.26


Supply and Distributorship Agreement between ACLARA BioSciences, Inc. and Roche Diagnostics Corporation, dated as of
October 26, 2001. (Incorporated by reference to Exhibit 10.26 to our Annual Report on Form 10-K filed on April 1, 2002.)




18




---

##### Table of Contents

10.27


First Amendment to the Custom Instrument Development and Commercialization Agreement between The R.W. Johnson
Pharmaceutical Research Institute and ACLARA BioSciences, Inc., executed as of October 1, 2001. (Incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K filed on April 1, 2002.)10.28


Second Amendment to the Custom Instrument Development and Commercialization Agreement between The R.W. Johnson
Pharmaceutical Research Institute and ACLARA BioSciences, Inc., dated as of October 26, 2001. (Incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K filed on April 1, 2002.)10.29


Development and Commercialization Agreement between Third Wave Technologies, Inc. and ACLARA BioSciences, Inc.,
dated as of October 24, 2001. (Incorporated by reference to Exhibit 10.29 to our Annual Report on Form 10-K filed on April 1, 2002.)10.30


Agreement between Third Wave Technologies, Inc. and ACLARA BioSciences, Inc. dated as of October 24, 2001.
(Incorporated by reference to Exhibit 10.30 to our Annual Report on Form 10-K filed on April 1, 2002.)10.31


Amendment to the ACLARA BioSciences, Inc. Employee Stock Purchase Plan, effective as of April 23, 2002.


---

| |  | Confidential treatment has been granted as to portions of this exhibit.
|- |  | -----------------------------------------------------------------------




(b)  Current Reports on Form 8-K.    ACLARA did not file any reports on Form 8-K during the quarter ended June 30, 2002.







19




---

##### Table of Contents




SIGNATURES





Pursuant to the requirements 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.





/s/    ALFRED G.
MERRIWEATHER Alfred G. Merriweather

Vice President, Finance and Chief Financial Officer (duly authorized officer and principal financial
officer)

August 14, 2002




20