##### Table of Contents




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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 September 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





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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 October 31, 2002 was 36,193,512.





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##### Table of Contents




ACLARA BIOSCIENCES, INC.





TABLE OF CONTENTS





PAGEPart I:

Financial InformationItem 1.

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

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

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

5Notes to the Condensed Financial Statements

6Item 2.

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

9Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16Item 4.

Controls and Procedures

17Part II:

Other InformationItem 1.

Legal Proceedings

17Item 2.

Changes in Securities and Use of Proceeds

17Item 3.

Defaults upon Senior Securities

17Item 4.

Submission of Matters to a Vote of Security Holders

17Item 5.

Other Information

17Item 6.

Exhibits and Reports on Form 8-K

17Signatures



21Certifications



21




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##### 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)





September 30, 2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
69,561


$
30,970Restricted cash


34,125



34,125Short-term marketable investments


15,626



45,883Accounts receivable


173



1,540Prepaid expenses and other current assets


608



546Inventories


10



14Total current assets


120,103



113,078Long-term marketable investments


32,954



60,598Restricted cash






500Property and equipment, net


7,094



8,887Other assets, net


100



119Total assets

$
160,251


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

$
722


$
974Accrued payroll and related expenses


1,233



1,077Accrued expenses and other current liabilities


3,294



1,987Deferred revenue


331



596Litigation settlements accrual


30,937



27,197Accrued restructuring charges


839



Current portion of loans payable


198



55Total current liabilities


37,554



31,886Loans payable, net of current portion


594



507Deferred rent


396



322Total liabilities


38,544



32,715Contingencies (Note 3)Stockholders equity:Common stock, $0.001 par value:Authorized 150,000,000 shares; Issued and outstanding: 36,193,512 shares at September 30, 2002 and 35,871,066 shares at
December 31, 2001


36



36Additional paid-in capital


259,147



259,327Deferred stock-based compensation


(1,344
)


(2,785
)Stockholder notes receivable for common stock


(587
)


(571
)Accumulated other comprehensive income


414



281Deficit accumulated during development stage


(135,959
)


(105,821
)Total stockholders equity


121,707



150,467Total liabilities and stockholders equity

$
160,251


$
183,182





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




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##### 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 September 30,


Nine Months Ended September 30,


Cumulative Period from May 5, 1995 (Inception) to September 30,2002


2001


2002


2001


2002Revenues

$
505


$
507


$
1,768


$
2,290


$
17,136Costs and operating expenses:Research and development


5,516



6,126



18,576



17,802



81,821Selling, general and administrative


3,318



2,365



9,229



7,781



43,439Litigation settlement


396



2,839



3,740



5,227



43,787Restructuring


3,327







3,327







3,327Total costs and operating expenses


12,557



11,330



34,872



30,810



172,374Loss from operations


(12,052
)


(10,823
)


(33,104
)


(28,520
)


(155,238
)Interest income


873



1,749



3,004



6,438



22,103Interest expense


(13
)


(12
)


(38
)


(38
)


(1,238
)Net loss before extraordinary loss


(11,192
)


(9,086
)


(30,138
)


(22,120
)


(134,373
)Extraordinary loss on early retirement of debt


















(1,103
)Net loss

$
(11,192
)

$
(9,086
)

$
(30,138
)

$
(22,120
)

$
(135,476
)Dividends related to beneficial conversion feature of preferred stock


















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


















(6,292
)Net loss attributable to common stockholders

$
(11,192
)

$
(9,086
)

$
(30,138
)

$
(22,120
)

$
(146,768
)Net loss per common share, basic and diluted

$
(0.31
)

$
(0.26
)

$
(0.84
)

$
(0.63
)Shares used in net loss per common share calculation, basic and diluted


36,148



35,525



36,020



35,111





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




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ACLARA BIOSCIENCES, INC.


(A Company in the Development Stage)





CONDENSED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





Nine Months Ended September 30,


Cumulative Period from May 5, 1995 (Inception) to September 30,2002


2001


2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(30,138
)

$
(22,120
)

$
(135,476
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


1,413



1,154



5,294Amortization of discount on marketable investments


(309
)


(488
)


(3,146
)Amortization of note and long-term debt discount










597Amortization of deferred stock based compensation


959



1,866



12,180Write down of fixed assets


2,488







2,488Loss on sale of fixed assets


24







24Amortization of other assets






38



81Preferred stock issued for interest expense










128Interest income from notes receivable from stockholders


(25
)


(24
)


(86
)Revaluation of litigation settlement


3,740



5,827



10,137Changes in assets and liabilities:Accounts receivable


1,367



(767
)


(173
)Prepaid expenses and other assets


(39
)


84



(573
)Accounts payable


(252
)


78



723Accrued payroll and related expenses


156



422



1,233Accrued expenses and other liabilities


1,307



(713
)


3,293Restructuring


839







839Litigation settlement accrual






(1,250
)


32,500Deferred revenue


(265
)






331Deferred rent


74



102



395Net cash used in operating activities


(18,661
)


(15,791
)


(69,211
)CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property and equipment


(1,874
)


(2,673
)


(13,047
)Sale of property and equipment


38



11



54Change in restricted cash


500



(32,875
)


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


58,344



(32,502
)


(45,019
)Change in other assets










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


57,008



(68,039
)


(92,359
)CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under capital lease obligations


(24
)


(38
)


(1,527
)Proceeds from issuance of notes payable to related parties










2,487Proceeds from issuance of loans payable










4,365Repayments of loans payable


(41
)






(3,984
)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


7



4



120Proceeds from issuance of common stock


302



401



1,610Net cash provided by financing activities


244



367



231,131Net increase in cash and cash equivalents


38,591



(83,463
)


69,561Cash and cash equivalents, beginning of period


30,970



108,886



Cash and cash equivalents, end of period

$
69,561


$
25,423


$
69,561





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




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##### 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 consisting of normal, recurring 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 for the year ended December 31, 2001, 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.





Comprehensive Income





Comprehensive income generally
represents all changes in stockholders equity (deficit) except those resulting from investments or contributions by stockholders. ACLARAs unrealized gains on available-for-sale securities represent the only component of comprehensive
income that is excluded from ACLARAs net loss for three and nine months ended September 30, 2001 and 2002 and for the cumulative period from May 5, 1995 (date of inception) to September 30, 2002. As this component of comprehensive income is
not significant, individually or in the aggregate, no separate statements of comprehensive income have been presented.





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) and common
stock subject to repurchase. 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 September 30,


Nine Months Ended September 30,2002


2001


2002


2001Basic and diluted:Net loss

$
(11,192
)

$
(9,086
)

$
(30,138
)

$
(22,120
)Weighted average shares of common stock outstanding


36,170



35,738



36,064



35,396Less: weighted average shares subject to repurchase


(22
)


(213
)


(44
)


(285
)Weighted-average shares of common stock used in basic and diluted net loss per share calculations


36,148



35,525



36,020



35,111Net loss per common sharebasic and diluted

$
(0.31
)

$
(0.26
)

$
(0.84
)

$
(0.63
)




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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 September 30,

Nine Months Ended September 30,2002

2001

2002

2001Options and Warrants

3,407

3,737

3,407

3,109Common stock subject to repurchase

17

178

17

178





Recent Accounting Developments





In April of 2002, the Financial Accounting Standards Board (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.





2.    RESTRICTED CASH





Current restricted cash at September 30, 2002 and December 31, 2001 comprised $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, 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 $0.4
million and $2.8 million were recorded in the accompanying Statements of Operations for the three months ended September 30, 2002 and 2001, respectively, and revaluation expenses of $3.7 million and $5.2 million were recorded in the
accompanying Statements of Operations for the nine months ended September 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. (See note 5.)




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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 was 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 opposed that motion, which is now fully submitted and is pending before the court. 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.





4.    RESTRUCTURING





During the third quarter of 2002 ACLARA approved and initiated a restructuring plan that reduced costs associated with the microfluidics
aspect of our business so we could increase our focus on our eTag assay chemistry. Accordingly, we recognized a restructuring charge of $3.3 million during the third quarter. The reduction included $0.8 million of severance and benefits related to
the involuntary termination of approximately 50 employees. The terminated employees were primarily in research and development associated with microfluidics. 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 third quarter
restructuring charges (in thousands):





Severance and Benefits


Fixed Assets


Other Charges


TotalRestructuring provision:Severance and benefits

$
753


$



$



$
753Property and equipment write off






2,469







2,469Other charges










114



114Total

$
753


$
2,469


$
114


$
3,336Non-cash charges






(2,469
)






(2,469
)Cash paid


(11
)






(17
)


(28
)Reserve balance at September 30, 2002

$
742


$



$
97


$
839





ACLARA anticipates the remaining reserve balance of $0.8 million
will be substantially paid out by the first quarter of 2003.





5.    SUBSEQUENT EVENTS





On October 15, 2002, ACLARA entered into License and Supply Agreements with Third Wave Technologies, Inc. (Third Wave) and
terminated the previous Development and Commercialization Agreement between the parties. The License Agreement allows ACLARA to incorporate certain of Third Waves technology into products for certain applications in the gene expression field.
ACLARA paid an upfront license fee of $1.5 million and will pay fixed royalties in 2003 through 2005 and royalties on applicable revenues on an escalating scale in years after 2005. Under the Supply Agreement, Third Wave will supply enzyme to ACLARA
for use in accordance with this agreement. ACLARA has committed to purchase a certain amount of enzyme prior to December 31, 2002 and has paid a deposit with regard to this commitment.




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On October 15, 2002, ACLARA made a payment of $32.5 million to Caliper related to
a previous settlement of litigation. Of this amount, $1.3 million represents the repurchase at the then-current market price of 900,000 shares of the companys common stock that had been issued to Caliper upon execution of the settlement
agreement. These 900,000 shares will be accounted for as treasury stock. Restricted cash totaling $34.1 million will be released upon cancellation of the letter of credit in early 2003. (See Notes 2 and 3 above for additional information.)





On October 10, 2002, ACLARA and Roche Diagnostics Corporation (Roche) terminated a Supply and
Distributorship agreement under which Roche had been granted distribution rights for the Arteas Microfluidic Device.





On October 23, 2002 promissory notes from an officer and director totaling $567,616 in the aggregate and including accrued interest of $82,465 were repaid in full. On November 11, 2002, a promissory note from an officer and director
totaling $69,293 in the aggregate and including accrued interest of $10,543 was repaid in full. As of November 14, 2002, ACLARA has no promissory notes outstanding from its officers or directors.





|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 and the Form 10-Q for the quarters ended March 31, 2002 and
June 30, 2002, statements included elsewhere in this Form 10-Q, and in conjunction with the Form 10-K for the year ended December 31, 2001. Statements in this Managements Discussion and Analysis of Financial Condition and Results of Operations
that express that ACLARA believes, anticipates, expects or plans to as well as other statements that 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.





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 for applications 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 eTag assay chemistries to pharmaceutical and biotechnology customers for applications in gene expression, protein expression and protein function analysis. The
eTag Expert Assay Program has been introduced in October 2002 to facilitate commercialization of the eTag Assay System.





We have invested substantial amounts in establishing our assay chemistries and microfluidic devices for life science research. From our inception to September 30, 2002, we have incurred over $81.8 million in research and development
expenses. Over 80% of our 137 employees at October 31, 2002 were engaged in research and development activities.





We have incurred significant losses since our inception. As of September 30, 2002, our accumulated deficit was $136.0 million and total stockholders equity was $121.7 million. Total costs and operating expenses were $12.6
million (includes a $0.4 million charge related to a litigation settlement and a $3.3 million charge related to restructuring) and $11.3 million (includes a $2.8 million revaluation credit related to a litigation settlement) for the quarters ended
September 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 product revenue derived from our proprietary eTag assay chemistries, receipts under possible future collaborative arrangements, and government research grants.





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. 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. Related to these actions, we have taken a charge in the third quarter of 2002 of $3.3 million. Our eTag Assay System was introduced commercially in October 2002 and we expect this to be the primary source of our revenues
in 2003 and beyond.




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RESULTS OF OPERATIONS





PERIODS ENDED SEPTEMBER 30, 2002 AND 2001





Revenues.    Revenues for the three months ended September 30, 2002 and 2001 were $505,000 and $507,000, respectively. Revenues for the nine months ended September 30, 2002 and 2001 were $1.8 million and
$2.3 million, respectively. Our revenues to date have been derived primarily from commercial collaboration agreements, government grants and, in the second and third quarters of 2002, from initial sales of Arteas Microfluidic Devices under an
agreement that has subsequently been terminated in October 2002. We do not expect revenue from this agreement or from the Arteas product after the fourth quarter of 2002. In addition as a result of the refocusing of resources on our eTag Assay
System we do not anticipate future revenue from our Plurex product. The timing and amount of government grant awards and completion of milestones under these grants and in our commercial collaborations have caused variations in these revenues. While
revenue from all of these sources have been significant in the past, they are not expected to be significant in 2003 when the primary source of revenue is expected to be the eTag Assay System. Revenue related to the eTag Assay System has been a
minor component of revenue to date but is expected to increase as additional evaluations are conducted by customers and as customers are enrolled in our recently introduced access programs.





Research and Development.    Research and development expenses for the three months ended September 30, 2002 and 2001 were $5.5 million and $6.1
million, respectively. Research and development expenses for the nine months ended September 30, 2002 and 2001 were $18.6 million and $17.8 million, respectively. The increase in spending from 2001 to 2002 for the nine months ending September 30 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. These increases were partially offset by a reduction of $260,000 and
$908,000 in stock-based compensation expense for the three and nine month periods, respectively. The decrease in spending from 2001 to 2002 for the three-month periods ended September 30 was primarily due to decreased personnel-related expenses
offset by increased license fees. The headcount reduction described earlier is expected to reduce research and development expenditures, particularly on microfluidic products. However, because the reduction in headcount is occurring 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.





Selling,
General and Administrative.    Selling, general and administrative expenses for the three months ended September 30, 2002 and 2001 were $3.3 million and $2.4 million, respectively. Selling, general and administrative expenses
for the nine months ended September 30, 2002 and 2001 were $9.2 million and $7.8 million, respectively. The increase from 2001 to 2002 was primarily due to 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, 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 million,
respectively. As a result of these revaluations, revaluation expenses of $0.4 million and a revaluation credit of $2.8 million were recorded in the accompanying Statements of Operations for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002 and 2001, revaluation expenses of $3.7 million and $5.2 million were recorded in the accompanying Statements of Operations, respectively. The put obligation has been classified as a current
liability at September 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. Final settlement of
this obligation occurred in October 2002.





Restructuring.    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 have initiated a reduction
in our headcount by approximately 50. This reduction will be implemented over the third and fourth quarters of 2002 and we expect to end 2002 with less than 120 employees. 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. Related to these actions, we have taken a charge in the third quarter of
2002 of $3.3 million. Of this charge, approximately $800,000 is related to anticipated severance and other associated costs and approximately $2.5 million is related to the write-down of certain fixed assets that are not expected to be used
prospectively.




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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 $0.9 million and $1.7 million for the three months
ended September 30, 2002 and 2001, respectively, and $3.0 million and $6.4 million for the nine months ended September 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. Interest income will be reduced commencing in the fourth quarter of 2002 as a result of the reduction in cash investments due to the payment in
October 2002 of $32.5 million related to a litigation settlement.





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 September 30, 2002, we had total unrestricted cash resources of $118.1 million, comprising $69.6 million in cash and cash equivalents, $15.6 million in short-term marketable
investments and $33.0 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 September 30, 2002 was $521,000. The
note matures on July 1, 2009.





Operating activities used cash of $18.7 million and $15.8 million for the nine
months ended September 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.





Cash provided by investing activities was $57.0 million for the nine months ended September 30, 2002, including net maturities of
investments of $58.3 million compared to cash used in investing activities of $68.0 million for the nine months ended September 30, 2001 that included a $32.9 million transfer to restricted cash relating to a litigation settlement and the net
purchases of investments of $32.5 million. Cash provided by financing activities remained essentially flat for the nine months ended September 30, 2002 and 2001. Financing activity primarily reflects cash proceeds received through the employee
exercise of stock options and employee participation in the employee stock purchase program





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.





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 September 30, 2002. In October
2002, we paid Caliper $32.5 million related to this settlement. Of this amount approximately $1.3 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. The restricted cash will be released to us in early 2003 upon cancellation of the letter of credit issued to Caliper at the time of the original settlement.





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.




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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 periods ended March 31, 2002 and June 30, 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 nine months ended September 30, 2002 and the years ended December 31, 2001, 2000, and 1999 were $30.1 million, $29.0 million, $59.2 million and $8.2
million, respectively. As of September 30, 2002, we had an accumulated deficit of $136.0 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 initial sales of Arteas Microfluidic Devices
to Roche. 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:





| |  |  | the willingness of our customers to enter into our access programs and the adoption of our technologies by customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------




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




| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | 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 that 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, or will be below the level
of prior periods. In these cases, our stock price could fluctuate significantly or decline.




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NONE OF OUR PRODUCTS HAS YET BEEN SUCCESSFULLY COMMERCIALIZED.





We are in the process of commercially launching our eTag assay chemistries, through technology access
programs. 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 systems 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:





| |  |  | our ability and the ability of our collaborative partners to demonstrate to potential customers the benefits and cost effectiveness of our assay chemistry
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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------




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.





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 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
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.





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 270 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.




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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 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.





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 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 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 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. 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.





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.




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Our CEO, Joseph M. Limber has resigned as President and Chief Executive Officer
effective December 1, 2002 and we have initiated a search for a new chief executive officer. We cannot assure you that we will be able to recruit an individual with the appropriate level of experience and skill to adequately perform the function of
chief executive officer. If we are unable to do so, our ability to build our business and commercialize our products will be impaired.





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. 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 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.




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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 $1.40 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 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.





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





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 principle if forced to sell securities that 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 three years. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of our total investments as of September 30, 2002 would have potentially declined by
approximately $750,000.




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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.





ITEM 4.    
CONTROLS AND PROCEDURES





The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to the Companys management, including its 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 report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective.





There have been no
significant changes in the Companys internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.





PART II  OTHER INFORMATION





ITEM
1.    
LEGAL PROCEEDINGS





Information with respect to this item is incorporated into the Part
II, Item 1 by reference to Note 3, Litigation Settlement and Contingencies contained in Part 1 above found elsewhere in this Form 10-Q.





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





Not applicable.





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.)




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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.)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.)




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##### Table of Contents




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.)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 April 23, 200210.32
*

License Agreement between Third Wave Technologies, Inc. and ACLARA Biosciences, Inc. dated October 15,
200210.33
*

Supply Agreement between Third Wave Technologies, Inc and ACLARA Biosciences, Inc. dated October 15,
200210.34
*

InvaderCreator Access Agreement between Third Wave Technologies, Inc and ACLARA Biosciences, Inc. dated October 15,
200210.35
*

Transition Manufacturing Plan Letter Agreement between Third Wave Technologies, Inc and ACLARA Biosciences, Inc.
dated October 15, 200210.36


InvaderCreator Access Letter Agreement between Third Wave Technologies, Inc and ACLARA Biosciences, Inc. dated
October 15, 2002




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10.37

Termination Agreement between Roche Diagnostics Corporation and ACLARA Biosciences, Inc. dated October 10,
200210.38

General Release and Separation Agreement between Joseph M. Limber and ACLARA Biosciences, Inc. dated October 10,
200210.39

Change in Control Agreement between Joseph M. Limber and ACLARA Biosciences, Inc. dated October 10, 2002


---

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

|* |  | Confidential treatment has been requested 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 September 30, 2002.




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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)

November 14, 2002





CERTIFICATIONS





I, Joseph M. Limber, certify that:





1.    I have reviewed this quarterly report on Form 10-Q of ACLARA BioSciences, Inc:





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





(a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the periods in which this quarterly report is being prepared;





(b)    Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





(c)    Presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.    The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):





(a)    All significant deficiencies in the
design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal
controls; and





(b)    Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls; and





6.    The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: November 14, 2002





By:

/s/    JOSEPH M. LIMBERJoseph M. LimberChief Executive Officer




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I, Alfred G. Merriweather, certify that:





1.    I have reviewed this quarterly report on Form 10-Q of ACLARA BioSciences, Inc;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





(a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the periods in which this quarterly report is being prepared;





(b)    Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





(c)    Presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.    The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors
(or persons performing the equivalent function):





(a)    All significant deficiencies in the
design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal
controls; and





(b)    Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls: and





6.    The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: November 14, 2002





By:

/s/    ALFRED G. MERRIWEATHERAlfred G. MerriweatherChief Financial Officer




22