##### Table of Contents



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



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FORM 10-Q



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(MARK ONE)



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

For the quarterly period ended September 30, 2001 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 or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

1288 Pear AvenueMountain View, California 94043
(Address of principal executive offices including zip code)

650-210-1200
(Registrants telephone number, including area code)

Check whether the issuer (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 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, 2001 was 35,781,452.





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TABLE OF CONTENTS



|                               |                                                                                               |                                         |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONDENSED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION    
|                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                               | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                               | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                               | ITEM 5. OTHER INFORMATION                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EXHIBIT 10.1                  
|EXHIBIT 10.2                  



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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 Amounts)


|                                                                                                                                          |                                                |                           |         |               |        |              |         |         |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------- | ------- | ------------- | ------ | ------------ | ------- | ------- | ------ | 
|                                                                                                                                          |                                                |                           |         | September 30, |        | December 31,
|                                                                                                                                          |                                                |                           |         | 2001          |        | 2000        
|                                                                                                                                          |                                                |                           |         |               |        |             
|                                                                                                                                          |                                                |                           |         | (unaudited)   |        |              |         |        
|ASSETS                                                                                                                                    |                                                |                           |         |               |        |              |         |        
|Current assets:                                                                                                                           |                                                |                           |         |               |        |              |         |        
|                                                                                                                                          | Cash and cash equivalents                      |                           | $       | 25,423        |        |              | $       | 108,886 |       
|                                                                                                                                          | Restricted cash                                |                           |         | 34,125        |        |              |         | 1,250   |       
|                                                                                                                                          | Short-term marketable investments              |                           |         | 41,777        |        |              |         | 83,726  |       
|                                                                                                                                          | Accounts receivable                            |                           |         | 1,830         |        |              |         | 1,063   |       
|                                                                                                                                          | Prepaid expenses and other current assets      |                           |         | 794           |        |              |         | 893     |       
|                                                                                                                                          | Inventories                                    |                           |         | 15            |        |              |         |        |       
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|Total current assets                                                                                                                      |                                                |                           | 103,964 |               |        |              | 195,818 |        
|                                                                                                                                          | Long-term marketable investments               |                           |         | 75,464        |        |              |         |        |       
|                                                                                                                                          | Restricted cash                                |                           |         | 500           |        |              |         | 500     |       
|                                                                                                                                          | Property and equipment, net                    |                           |         | 8,029         |        |              |         | 6,521   |       
|                                                                                                                                          | Other assets, net                              |                           |         | 131           |        |              |         | 169     |       
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|Total assets                                                                                                                              |                                                | $                         | 188,088 |               |        | $            | 203,008 |        
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      |                                                |                           |         |               |        |              |         |        
|Current liabilities:                                                                                                                      |                                                |                           |         |               |        |              |         |        
|                                                                                                                                          | Accounts payable                               |                           | $       | 119           |        |              | $       | 41      |       
|                                                                                                                                          | Accrued payroll and related expenses           |                           |         | 1,231         |        |              |         | 809     |       
|                                                                                                                                          | Accrued expenses and other current liabilities |                           |         | 2,335         |        |              |         | 3,048   |       
|                                                                                                                                          | Litigation settlement accrual, current         |                           |         | 26,627        |        |              |         | 1,250   |       
|                                                                                                                                          | Current portion of loans payable               |                           |         | 54            |        |              |         | 51      |       
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|                                                                                                                                          |                                                | Total current liabilities |         |               | 30,366 |              |         |         | 5,199  | 
|Loans payable, less current portion                                                                                                       |                                                |                           | 521     |               |        |              | 562     |        
|Deferred rent                                                                                                                             |                                                |                           | 294     |               |        |              | 192     |        
|Litigation settlement                                                                                                                     |                                                |                           |        |               |        |              | 32,500  |        
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|                                                                                                                                          |                                                | Total liabilities         |         |               | 31,181 |              |         |         | 38,453 | 
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|Contingencies (note 4)                                                                                                                    |                                                |                           |         |               |        |              |         |        
|Stockholders equity:                                                                                                                     |                                                |                           |         |               |        |              |         |        
|Common stock, $0.001 par value:                                                                                                           |                                                |                           |         |               |        |              |         |        
|Authorized
150,000,000 shares; Issued and outstanding:
35,780,797 shares at September 30, 2001 and
34,547,784 shares at December 31, 2000 |                                                |                           | 36      |               |        |              | 35      |        
|Additional paid-in capital                                                                                                                |                                                |                           | 259,515 |               |        |              | 248,175 |        
|Deferred stock-based compensation                                                                                                         |                                                |                           | (3,718  | )             |        |              | (6,345  | )      
|Notes receivable for common stock                                                                                                         |                                                |                           | (563    | )             |        |              | (542    | )      
|Accumulated other comprehensive income                                                                                                    |                                                |                           | 538     |               |        |              | 13      |        
|Deficit accumulated during the development stage                                                                                          |                                                |                           | (98,901 | )             |        |              | (76,781 | )      
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|Total stockholders equity                                                                                                                |                                                |                           | 156,907 |               |        |              | 164,555 |        
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        
|Total liabilities and stockholders equity                                                                                                |                                                | $                         | 188,088 |               |        | $            | 203,008 |        
|                                                                                                                                          |                                                |                           |         |               |        |              |         |        

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 Amounts)
(Unaudited)


|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |             |         | 
|------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | ------- | ------------------ | ------ | ----------------- | ------- | --------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | -------- | ----------- | ------- | 
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | Cumulative 
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | Period     
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | From       
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | May 5,     
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | 1995       
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          | (Inception)
|                                                                         |                                     |                          |         | Three Months Ended |        | Nine Months Ended |         | to       
|                                                                         |                                     |                          |         | September 30,      |        | September 30,     |         | September
|                                                                         |                                     |                          |         |                    |        |                   |         | 30,      
|                                                                         |                                     |                          |         | 2001               |        | 2000              |         | 2001      |        | 2000 |         | 2001  
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |       
|Revenues                                                                 |                                     | $                        | 507     |                    |        | $                 | 946     |           |        | $    | 2,290   |        |        | $ | 2,736   |        |        | $ | 14,413   |            
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|Costs and operating expenses:                                            |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|                                                                         | Research and development            |                          |         | 6,126              |        |                   |         | 6,029     |        |      |         | 17,802 |        |   |         | 15,757 |        |   |          | 57,502      |        
|                                                                         | Selling, general and administrative |                          |         | 2,365              |        |                   |         | 4,995     |        |      |         | 7,781  |        |   |         | 11,169 |        |   |          | 31,237      |        
|                                                                         | Litigation settlement               |                          |         | 2,839              |        |                   |         | 1,750     |        |      |         | 5,227  |        |   |         | 1,750  |        |   |          | 39,477      |        
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|                                                                         |                                     | Total operating expenses |         |                    | 11,330 |                   |         |           | 12,774 |      |         |        | 30,810 |   |         |        | 28,676 |   |          |             | 128,216 | 
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|Loss from operations                                                     |                                     |                          | (10,823 | )                  |        |                   | (11,828 | )         |        |      | (28,520 | )      |        |   | (25,940 | )      |        |   | (113,803 | )          
|Interest income                                                          |                                     |                          | 1,749   |                    |        |                   | 3,450   |           |        |      | 6,438   |        |        |   | 7,173   |        |        |   | 17,677   |            
|Interest expense                                                         |                                     |                          | (12     | )                  |        |                   | (93     | )         |        |      | (38     | )      |        |   | (487    | )      |        |   | (1,189   | )          
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|Net loss before extraordinary loss                                       |                                     |                          | (9,086  | )                  |        |                   | (8,471  | )         |        |      | (22,120 | )      |        |   | (19,254 | )      |        |   | (97,315  | )          
|Extraordinary loss on early retirement
of debt                           |                                     |                          |        |                    |        |                   | (1,103  | )         |        |      |        |        |        |   | (1,103  | )      |        |   | (1,103   | )          
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|Net loss                                                                 |                                     | $                        | (9,086  | )                  |        | $                 | (9,574  | )         |        | $    | (22,120 | )      |        | $ | (20,357 | )      |        | $ | (98,418  | )          
|                                                                         |                                     |                          |         |                    |        |                   |         |           |        |      |         |        |        |   |         |        |        |   |          |            
|Net loss per common share before
extraordinary loss  basic
and diluted  |                                     | $                        | (0 26   | )                  |        | $                 | (0 25   | )         |        | $    | (0.63   | )      |        | $ | (0.58   | )      |        |   |          |            
|Extraordinary loss per share on
retirement of debt                       |                                     | $                        |        |                    |        | $                 | (0.03   | )         |        | $    |        |        |        | $ | (0.03   | )      |        |   |          |            
|Net loss per common share  basic
and diluted                            |                                     | $                        | (0.26   | )                  |        | $                 | (0.28   | )         |        | $    | (0.63   | )      |        | $ | (0.61   | )      |        |   |          |            
|Shares used in net loss per common
share calculation  basic and diluted |                                     |                          | 35,525  |                    |        |                   | 33,783  |           |        |      | 35,111  |        |        |   | 33,554  |        |        |   |          |            

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 CASH FLOWS


(in thousands)
(Unaudited)


|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |        |             |          |  
|--------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ----------------- | ------- | -------------- | ------ | ------ | -------- | -------- | ------ | ----------- | -------- | -
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |        | Cumulative 
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |        | Period From
|                                                                            |                                                         |                                           |                                           |       | Nine Months Ended |         | May 5, 1995   
|                                                                            |                                                         |                                           |                                           |       | September 30,     |         | (Inception) to
|                                                                            |                                                         |                                           |                                           |       |                   |         | September 30, 
|                                                                            |                                                         |                                           |                                           |       | 2001              |         | 2000           |        | 2001  
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|Net loss                                                                    |                                                         | $                                         | (22,120                                   | )     |                   | $       | (20,357        | )      |        | $        | (98,418  | )     
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|                                                                            | Depreciation and amortization                           |                                           |                                           | 1,154 |                   |         |                | 788    |        |          |          | 3,439  |            
|                                                                            | Amortization of discount on marketable investments      |                                           |                                           | (488  | )                 |         |                | (1,588 | )      |          |          | (2,555 | )          
|                                                                            | Amortization of note and long-term debt discount        |                                           |                                           |      |                   |         |                | 438    |        |          |          | 597    |            
|                                                                            | Amortization of deferred stock-based compensation       |                                           |                                           | 1,866 |                   |         |                | 6,616  |        |          |          | 10,755 |            
|                                                                            | Amortization of other assets                            |                                           |                                           | 38    |                   |         |                |       |        |          |          | 69     |            
|                                                                            | Preferred stock issued for interest expense             |                                           |                                           |      |                   |         |                |       |        |          |          | 128    |            
|                                                                            | Interest income from notes receivable from stockholders |                                           |                                           | (24   | )                 |         |                |       |        |          |          | (53    | )          
|                                                                            | Revaluation of litigation settlement                    |                                           |                                           | 5,827 |                   |         |                |       |        |          |          | 5,827  |            
|                                                                            | Loss on write down of property plant and equipment      |                                           |                                           |      |                   |         |                | 213    |        |          |          |       |            
|                                                                            | Changes in assets and liabilities:                      |                                           |                                           |       |                   |         |                |        |        |          |          |        |            
|                                                                            |                                                         | Accounts receivable                       |                                           |       | (767              | )       |                |        | (202   | )        |          |        | (1,830      | )       
|                                                                            |                                                         | Prepaid expenses and other current assets |                                           |       | 99                |         |                |        | (1,509 | )        |          |        | (768        | )       
|                                                                            |                                                         | Inventories                               |                                           |       | (15               | )       |                |        |       |          |          |        | (15         | )       
|                                                                            |                                                         | Accounts payable                          |                                           |       | 78                |         |                |        | 1,106  |          |          |        | 119         |         
|                                                                            |                                                         | Accrued payroll and related expenses      |                                           |       | 422               |         |                |        | 760    |          |          |        | 1,230       |         
|                                                                            |                                                         | Accrued expenses and other liabilities    |                                           |       | (713              | )       |                |        | 2,985  |          |          |        | 2,335       |         
|                                                                            |                                                         | Litigation settlement accrual             |                                           |       | (1,250            | )       |                |        |       |          |          |        | 32,500      |         
|                                                                            |                                                         | Deferred rent                             |                                           |       | 102               |         |                |        |       |          |          |        | 294         |         
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|                                                                            |                                                         |                                           | Net cash used in operating activities     |       |                   | (15,791 | )              |        |        | (10,750  | )        |        |             | (46,346  | )
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|Acquisition of property and equipment                                       |                                                         |                                           | (2,673                                    | )     |                   |         | (1,617         | )      |        |          | (9,873   | )     
|Sale of property and equipment                                              |                                                         |                                           | 11                                        |       |                   |         |               |        |        |          | 16       |       
|Investment in restricted cash                                               |                                                         |                                           | (32,875                                   | )     |                   |         | (1,250         | )      |        |          | (34,750  | )     
|Purchases and maturities of investments                                     |                                                         |                                           | (32,502                                   | )     |                   |         | (98,460        | )      |        |          | (114,148 | )     
|Change in other assets                                                      |                                                         |                                           |                                          |       |                   |         | (100           | )      |        |          | (97      | )     
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|                                                                            |                                                         |                                           | Net cash used in investing activities     |       |                   | (68,039 | )              |        |        | (101,427 | )        |        |             | (158,852 | )
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|Principal payments under capital lease obligations                          |                                                         |                                           | (38                                       | )     |                   |         | (570           | )      |        |          | (1,541   | )     
|Proceeds from issuance of notes payable to related parties                  |                                                         |                                           |                                          |       |                   |         |               |        |        |          | 2,487    |       
|Proceeds from issuance of loans payable                                     |                                                         |                                           |                                          |       |                   |         |               |        |        |          | 4,365    |       
|Repayment of loans payable                                                  |                                                         |                                           |                                          |       |                   |         | (3,720         | )      |        |          | (3,892   | )     
|Proceeds from issuance of preferred stock, net of issuance costs            |                                                         |                                           |                                          |       |                   |         | 58             |        |        |          | 29,889   |       
|Repayment of 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                |                                                         |                                           |                                          |       |                   |         | 201,003        |        |        |          | 201,003  |       
|Proceeds from notes receivable from stockholders                            |                                                         |                                           | 4                                         |       |                   |         | 42             |        |        |          | 114      |       
|Proceeds from issuance of common stock                                      |                                                         |                                           | 401                                       |       |                   |         | 153            |        |        |          | 1,028    |       
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|                                                                            |                                                         |                                           | Net cash provided by financing activities |       |                   | 367     |                |        |        | 196,966  |          |        |             | 230,621  |  
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|Net increase (decrease) in cash and cash equivalents                        |                                                         |                                           | (83,463                                   | )     |                   |         | 84,789         |        |        |          | 25,423   |       
|Cash and cash equivalents, beginning of period                              |                                                         |                                           | 108,886                                   |       |                   |         | 10,250         |        |        |          |         |       
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       
|Cash and cash equivalents, end of period                                    |                                                         | $                                         | 25,423                                    |       |                   | $       | 95,039         |        |        | $        | 25,423   |       
|                                                                            |                                                         |                                           |                                           |       |                   |         |                |        |        |          |          |       

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 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 the Annual Report on Form 10-K for the year ended
December 31, 2000 and the Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2001 and June 30, 2001, as filed with the Securities and Exchange
Commission on April 2, 2001, May 15, 2001 and August 14, 2001, respectively.
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.

Revenue Recognition

ACLARA recognizes revenue based on services performed pursuant to
collaboration agreements and government grants, primarily in the period in
which the costs are incurred.

Non-refundable milestone fees are recognized as earned upon completion of
specified milestones according to contract terms and in the absence of any
on-going performance obligations. Any amounts received in advance of
performance are recorded as deferred revenue.

Product revenue is recognized when the product has been shipped, remaining
obligations are insignificant and collection of any remaining related account
receivable is probable. ACLARA does not offer warranties on its products.

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

|                                                                                                  |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                  |  | Three Months Ended |        | Nine Months Ended
|                                                                                                  |  | September 30,      |        | September 30,    
|                                                                                                  |  |                    |        |                  
|                                                                                                  |  | 2001               |        | 2000              |  | 2001 |        | 2000
|                                                                                                  |  |                    |        |                   |  |      |        |     
|Basic and diluted:                                                                                |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                                          |  | $                  | (9,086 | )                 |  | $    | (9,574 | )    |  | $ | (22,120 | ) |  | $ | (20,357 | )
|Weighted average shares of common stock outstanding                                               |  |                    | 35,738 |                   |  |      | 34,489 |      |  |   | 35,396  |   |  |   | 34,217  |  
|                                                                                                  |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Less: weighted average shares subject to repurchase                                               |  |                    | (213   | )                 |  |      | (706   | )    |  |   | (285    | ) |  |   | (663    | )
|Weighted-average shares of common stock used in basic
and diluted net loss per share calculations |  |                    | 35,525 |                   |  |      | 33,783 |      |  |   | 35,111  |   |  |   | 33,554  |  
|                                                                                                  |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Net loss per common share  basic and diluted                                                     |  | $                  | (0.26  | )                 |  | $    | (0.28  | )    |  | $ | (0.63   | ) |  | $ | (0.61   | )
|                                                                                                  |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

The following weighted outstanding options and warrants were excluded from
the computation of diluted net loss per share as they had an anti-dilutive
effect (in thousands):

|                     |  |                    |       |                   |  |      |       |      |  |  |       |  |  |  |       | 
|-------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                     |  | Three Months Ended |       | Nine Months Ended
|                     |  | September 30,      |       | September 30,    
|                     |  |                    |       |                  
|                     |  | 2001               |       | 2000              |  | 2001 |       | 2000
|                     |  |                    |       |                   |  |      |       |     
|Options and warrants |  |                    | 3,737 |                   |  |      | 2,945 |      |  |  | 3,109 |  |  |  | 2,849 | 

2. INVENTORIES

Inventories at September 30, 2001 consisted of raw materials and finished
goods, and are stated at the lower of average cost or net realizable value.

3. RESTRICTED CASH

Restricted cash at September 30, 2001 includes $500,000 held in the form
of a certificate of deposit as collateral against operating lease payments and
$34.125 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 $34.125 million was recorded as restricted cash in our financial
statements at September 30, 2001 and is invested in short-term US government
debt and money market funds. At June 30, 2001, $1.3 million that had been
included in restricted cash, relating to the settlement of the Rodenstock
litigation was discharged from escrow in August 2001.

4. LITIGATION SETTLEMENT AND CONTINGENCIES

As part of the litigation settlement with Caliper, 900,000 shares of
ACLARA common stock were issued to Caliper in March 2001, with a guaranteed
liquidation price of $36.11 per share if Caliper sells the shares between 18
and 24 months after the date of issuance of the common stock. ACLARA valued the
put obligation associated with these shares at $32.5 million at December 31,
2000. The put obligation was 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





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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 Derivative Instruments and Hedging Activities (SFAS
133), the put obligation was subsequently revalued at $25.6 million, $23.2
million and $26.6 million, at March 31, 2001, June 30, 2001, and September 30,
2001, respectively. As a result of these revaluations, revaluation charges of
$3.4 million and $5.8 million were recorded in the Statement of Operations for
the three and nine months ended September 30, 2001, respectively. The put
obligation has been classified as a current liability at September 30, 2001.
The put obligation will be revalued on a quarterly basis using a Black-Scholes
pricing model with changes in valuation being recorded in the Statement of
Operations. The value of the put obligation represents the fair value of
ACLARAs obligation pursuant to EITF No. 96-13 and SFAS 133.

On August 2001, a third party agreed to pay ACLARA $600,000 as a
settlement resolving all disputes between the third party and ACLARA. The
payment of $600,000 is recorded as an offset to litigation settlement in the
accompanying Statement of Operations for the three and nine months ended
September 30, 2001.

5. SUBSEQUENT EVENTS

On October 26, 2001, ACLARA entered into an exclusive worldwide
distribution agreement (Agreement) with Roche Diagnostics Corporation
(Roche) for ACLARAs LabCard products. The Agreement also
includes a fee payable to ACLARA within 30 days after the effective date of the
Agreement which provides Roche with exclusive rights of first refusal and
negotiation rights to access certain other products of ACLARA.

In March 1999, ACLARA entered into an agreement with Applied Biosystems
and the R.W. Johnson Pharmaceutical Research Institute (PRI), a division of
the Johnson and Johnson Development Corporation. Under this agreement, ACLARA
and Applied Biosystems agreed to develop and provide to PRI advanced prototype
microfluidic systems for pharmaceutical drug screening. Under a side agreement
between ACLARA and Applied Biosystems, any royalty received from PRI for the
manufacturing or selling of microfluidic electrophoresis devices would be split
between Applied Biosystems and ACLARA. In October 2001, ACLARA, PRI and Applied
Biosystems agreed to modify the three-way drug screening collaboration
agreement which enables a two-way collaboration on this program between ACLARA
and PRI, without Applied Biosystems.

In November 2001, ACLARA entered into change of control agreements with certain
Officers of ACLARA. The forms of these agreements are filed as an exhibit to
this Form 10-Q.

6. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, The Financial Accounting and Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141),
Business Combinations, and No. 142 (SFAS No. 142),





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Goodwill and Other Intangible Assets. SFAS No. 141 required that all
business combinations initiated after June 30, 2001 be accounted for under a
single method  the purchase method. Use of the pooling-of-interests method is
no longer permitted. SFAS No. 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment upon initial adoption of
the Statement and on an annual basis going forward. The amortization of
goodwill will cease upon adoption of SFAS No. 142. The provisions of SFAS No.
142 will be effective for fiscal years beginning after December 15, 2001.
ACLARA is required to adopt SFAS 142 in the first quarter of fiscal year 2002.
ACLARA believes that the adoption of these standards will have not have a
material impact on ACLARAs financial position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal
of Long-Lived Assets, which is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal periods. This
Statement supersedes FASB Statement No. 121 and APB 30, however, this Statement
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. This Statement
addresses financial accounting and reporting for the impairment of certain
long-lived assets and for long-lived assets to be disposed of. Management does
not expect the adoption of SFAS No. 144 to have a material impact on
ACLARAs financial position and results of operations.




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, 2000 and Forms
10-Q for the three months ended March 31, 2001 and June 30, 2001. Statements in
this Managements Discussion and Analysis of Financial Condition and Results of
Operations which express that we believe, anticipate, expect or plan 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 Additional Factors That Might Affect Future
Results set forth below.

OVERVIEW

ACLARA BioSciences is a leading developer of assay technologies and
lab-on-a-chip systems for life science research. The company is developing
advanced tools for drug discovery, genomics and proteomics using its
proprietary eTag assay chemistries and microfluidics array technology. These
tools enable the rapid, parallel processing of large numbers of samples while
requiring only minute volumes of expensive or rare reagents.

ACLARAs business strategy is to commercialize its assay chemistries and
microfluidic LabCard devices for use in conjunction with existing instrument
platforms, as well as to integrate its assay chemistries and microfluidic
technologies to commercialize powerful, new instrument systems.

ACLARA was incorporated in Delaware in 1995. Since our inception, we have engaged primarily in
organization and research and development efforts related to the application of
proprietary microfluidics technology and assay chemistry technology
for genomics and pharmaceutical drug screening.

Our collaborators include Applied Biosystems Group (formerly PE
Biosystems), Third Wave Technologies, Inc., Roche Diagnostics and the R.W. Johnson Pharmaceutical Research
Institute, a subsidiary of Johnson & Johnson (PRI). We have government grants
from the Defense Advanced Research Projects Agency (DARPA).

We have invested substantial amounts in establishing our microfluidics
and assay chemistry technologies. Since our inception we have incurred $57.5 million of expense on
our research and development efforts. Over 80% of our 148 employees at





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October 31, 2001 were engaged in research and development activities.

Our sources of potential revenue for the next several years are likely to
be from product revenue, receipts under existing and possible future
collaborative arrangements, existing government research grants and
collaborations, and royalties from our collaborators based on revenue received
for the sale of reagents utilizing our technology.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

Revenue. Revenue for the three months ended September 30, 2001 and
September 30, 2000 was $507,000 and $946,000, respectively. The decrease in
revenue of $439,000 primarily reflects a decrease in collaboration revenue of
$521,000 and an increase in grant revenue of $82,000, primarily from DARPA.
Revenue for the nine months ended September 30, 2001 and September 30, 2000 was
$2.3 million and $2.7 million, respectively. The decrease in revenue of
approximately $400,000 reflects a decrease in collaboration revenue of $1.3
million being partially offset by an increase of $900,000 in grant and product
revenue.

Research and Development. Research and development expenses for the three
months ended September 30, 2001 and September 30, 2000 were $6.1 million and
$6.0 million, respectively. This increase was primarily due to $2.5 million of
increased expenditure on staffing, project and personnel related costs, being
partially offset by $2.4 million of reduced stock-based compensation expense.
Research and development expenses for the nine months ended September 30, 2001
and September 30, 2000 were $17.8 million and $15.8 million, respectively. This
increase was due to $6.6 million of increased expenditure on staffing, project
and personnel related costs, being partially offset by $4.6 million of reduced
stock-based compensation expense. We expect to continue to devote substantial
resources to research and development, and we expect that these expenses will
continue to increase on an absolute dollar basis.

Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2001 and September 30, 2000
were $2.4 million and $5.0 million, respectively. This decrease was primarily
due to reduced litigation expenses. Selling, general and administrative
expenses for the nine months ended September 30, 2001 and 2000 were $7.8
million and $11.2 million, respectively. This decrease was primarily due to
reduced litigation expenses, and to reduced stock-based compensation expense.
We expect that our selling, general and administrative expenses will increase
in absolute dollar amounts as we expand the infrastructure required to support
our activities.

Litigation Settlement. On January 4, 2001, ACLARA reached an agreement
with Caliper Technologies Corporation to settle all three lawsuits which were
pending between the companies. As part of this litigation settlement, 900,000
shares of ACLARA common stock were issued to Caliper and a liability was
recorded at December 31, 2000 for the issuance of common stock and the put
obligation associated with the common stock. The put obligation was
subsequently revalued at $25.6 million, $23.2 million and $26.6 million, at
March 31, 2001, June 30, 2001, and September 30, 2001, respectively. As a
result of these revaluations, revaluation charges of $3.4 million and $5.8
million were recorded in the Statement of Operations for the three and nine
months ended September 30, 2001, respectively. The charge for the three month
period ending September 30, 2001 reflects the increase in the valuation of the
put option from $23.2 million to $26.6 million, primarily attributed to the
decrease in ACLARAs stock price over the three month period ending September
30, 2001. The charge for the nine month period ending September 30, 2001
reflects the increase in the valuation of the put option from $20.8 million to
$26.6 million, primarily attributed to the decrease in ACLARAs stock price
over the nine month period ending September 30, 2001. The put obligation has
been classified as a current liability at September 30, 2001. The put
obligation represents the fair value of ACLARAs obligation under the terms of
the settlement and in accordance with EITF No. 96-13 Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock and its related interpretations, and Statement of Financial Accounting
Standards No. 133, Accounting for Derivatives Instruments and Hedging
Activities (SFAS 133).

As mentioned in
footnote 4, an agreement to pay ACLARA $600,000 is recorded as an
offset to litigation settlement in the accompanying Statement of
Operations for the three and nine months ended September 30,
2001.





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Net Interest Income. Net interest income represents income earned on our
cash, cash equivalents, short-term marketable investments, long-term marketable
investments and restricted cash, offset by interest paid on bridge loans,
capital leases and equipment loans. Net interest income was $1.7 million and
$3.4 million for the three months ended September 30, 2001 and September 30,
2000, respectively. This change primarily reflects a decline in market interest
rates. Net interest income was $6.4 million and $6.7 million for the nine
months ended September 30, 2001 and September 30, 2000, respectively. This
change primarily reflects a decline in market interest rates, being partially
offset by decreases in interest expenses due to the pay-off of loans and lease
obligations and higher average balances of cash and marketable investments.

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 that raised $32.3 million, a
loan from the landlord of our Mountain View facility for $663,000, and research
and development funding from collaborators and government grants. As of
September 30, 2001, we had $142.7 million in cash, cash equivalents, short-term
marketable investments and long-term marketable investments, and $34.6 million
of restricted cash.

Operating activities for the nine months ended September 30, 2001 and 2000
used cash of $15.8 million and $10.8 million, respectively. Uses of cash in
operating activities primarily resulted from operating losses adjusted for
non-cash expenses and changes in working capital.

Investing activities for the nine months ended September 30, 2001 used
cash of $68.0 million, primarily reflecting the net purchase of marketable
investments of $32.5 million and an increase in restricted cash of $32.9
million. Investing activities for the nine months ended September 30, 2000 used
cash of $101.4 million, primarily reflecting the investment in marketable
investments of the net proceeds from ACLARAs initial public offering. Net cash
outflows for additions to property and equipment for the nine months ended
September 30, 2001 and September 30, 2000 were $2.7 million and $1.6 million,
respectively. We expect to continue to make significant investments in property
and equipment to support our expanding operations.

Financing activities for the nine months ended September 30, 2001 and
September 30, 2000 provided cash of $367,000 and $197.0 million, respectively.
This decrease primarily reflects the initial public offering in March 2000 of
10,350,000 shares of common stock at an offering price of $21.00 per share.

We believe that our current cash and 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. 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 agreed to
provide 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 which 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
$34.125 million is recorded as restricted cash in our financial statements at
September 30, 2001.

RECENT ACCOUNTING DEVELOPMENTS

In July 2001, The Financial Accounting and Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141),
Business Combinations, and No. 142 (SFAS No. 142), Goodwill and Other
Intangible Assets. SFAS No. 141 required that all business combinations
initiated after June 30, 2001 be accounted for under a single method  the
purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment upon initial adoption of the
Statement and on an annual basis going forward. The amortization of goodwill
will cease upon adoption of SFAS No. 142. The provisions of SFAS No. 142 will
be





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effective for fiscal years beginning after December 15, 2001. ACLARA is
required to adopt SFAS 142 in the first quarter of fiscal year 2002. ACLARA
believes that the adoption of these standards will have not have a material
impact on ACLARAs financial position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal
of Long-Lived Assets, which is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal periods. This
Statement supersedes FASB Statement No. 121 and APB 30, however, this Statement
retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. This Statement
addresses financial accounting and reporting for the impairment of certain
long-lived assets and for long-lived assets to be disposed of. Management does
not expect the adoption of SFAS No. 144 to have a material impact on ACLARAs financial position and results of operations.

ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

The following risk factors outline certain risks and uncertainties
concerning future results and should be read in conjunction with the
information contained elsewhere in this Form 10-Q and in conjunction with, Form
10-K for the year ended December 31, 2000 and Forms 10-Q for the quarters ended
March 31, 2001 and June 30, 2001. Any of these risk factors could materially
and adversely affect our business, financial condition, results of operations
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
organizational, research and development efforts. We have incurred operating
losses every year, and we may never achieve profitability. Net loss for the
nine months ended September 30, 2001 was $22.1 million. Net losses for the
years ended December 31, 2000, 1999 and 1998 were $59.2 million, $8.2 million,
and $5.5 million, respectively. As of September 30, 2001 we had an accumulated
deficit of $98.9 million. Our losses have resulted principally from costs
incurred in connection with our research and development activities, general
and administration costs associated with our operations, and settlement of
litigation expenses.

We commercially launched our first microfluidics product, the Arteas
LabCard device, in the fourth quarter of 2000. 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 microfluidic systems in a timely manner. Our
revenue to date has been generated principally from collaborative research and
development agreements, technology access fees, interest on cash and investment
balances, 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, but
are not limited to:



| |  |  | expiration or termination of contracts with collaborators or government
research grants, which may not be renewed or replaced;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing and willingness of collaborators to commercialize our products;                                                    





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| |  |  | 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 dependant, among
other things, on the volatility and level of ACLARAs stock price.             

If there are 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 general and administrative expenses are not
affected directly by variations in revenue.

Due to fluctuations in our revenue and net income, we believe that
period-to-period comparisons of 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 those cases, our stock price could
fluctuate significantly or decline.

MOST OF OUR PRODUCTS ARE IN THE DEVELOPMENT STAGE AND MAY NOT SUCCESSFULLY BE
BROUGHT TO COMMERCIALIZATION.

Most of our products are not commercially available. We have limited
experience developing, manufacturing, distributing or selling commercial
systems using our microfluidics technology and assay chemistries. We are
developing products that in many cases are part of complex systems that also
have not been fully developed, tested, manufactured or commercially introduced
by our major collaborative partners. We may not be able to perfect the design
of our products due to the complexity of the systems they are part of and the
demands of the scientific processes that they address. Even though we have
designed products, we cannot assure you that we will be able to adapt the
design to allow for large-scale manufacturing and commercialization. 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 a sufficient number of commercially viable
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
MICROFLUIDIC CHIPS, ASSAY CHEMISTRIES AND RELATED SYSTEMS. IF THEY DO NOT
ACHIEVE ACCEPTANCE, OUR ABILITY TO GENERATE SALES WILL BE LIMITED AND OUR
LOSSES WOULD INCREASE.

Demand for our products is substantially dependent upon widespread market
acceptance of systems utilizing our microfluidic chips and assay chemistries as
tools for genomics and pharmaceutical drug screening. Because most of our
products will be part of larger analytical systems marketed by our
collaborative partners, our ability to sell products in these cases depends on
the adoption by researchers of new analytical equipment. We cannot assure you
that microfluidic chips, eTag chemistries and related instrument systems
using our technology will achieve substantial acceptance in our target markets.
Market acceptance will depend on many factors, including but not limited to:



| |  |  | our ability and the ability of our collaborative partners to
demonstrate to potential customers the benefits and cost-effectiveness
of our microfluidic chips, eTag chemistries, and related systems,
relative to products already available at the time these systems are
introduced; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the extent and success of our partners efforts to market, sell and
distribute the microfluidic chips, eTag chemistries, and related
systems.                                                                                                                                             

Further, if our initial microfluidic chips, assay chemistries, and
related systems are not favorably received by the market, it could undermine
our ability to successfully introduce subsequent microfluidic chips, assay
chemistries, or related systems. If our microfluidic chips, assay chemistries,
and related systems do not gain market acceptance, our losses would increase
and we may be unable to remain in business.





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WE PREDOMINANTLY DEPEND ON COLLABORATIVE PARTNERS TO DEVELOP AND MARKET SYSTEMS
THAT UTILIZE OUR PRODUCTS TO END USERS. IF OUR COLLABORATIVE PARTNERS DO NOT
PERFORM AS EXPECTED, WE MAY BE UNABLE TO DEVELOP AND MARKET OUR PRODUCTS.

Because the majority of our products are components of larger systems, our
success depends on our ability to establish relationships with collaborative
partners to create products to address market needs. For example, our
collaborative relationship with Third Wave Technologies provides for the joint
development of systems for genomics research In this relationship, we provide
eTag assay reagents as one component of systems used by researchers for
genomics analysis Our ability to expand the applications for our technology
will largely depend on our ability to broaden our relationships with existing
partners and identify and enter into similar relationships with new
collaborative partners to address additional customer needs. If we are unable
to broaden our existing collaborative relationships or enter into relationships
with additional collaborative partners our business may suffer.

Our ability to sell products will also depend on the ability of our
collaborative partners to develop instrument systems that can utilize our
microfluidic chips and assay chemistries. If the development efforts of our
collaborative partners fail or are significantly delayed, our losses could
increase. We cannot assure you that our collaborative partners will be able to
develop products as planned.

We also intend to rely upon our current and future collaborative partners
to market, sell, distribute and promote our microfluidic chips and assay
chemistries. If our collaborative partners do 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 any of our existing collaborative partners may devote to our
collaborations. If our collaborators breach or terminate their agreements with
us or otherwise fail to conduct their collaborative activities successfully and
in accordance with agreed upon schedules, our business would be harmed. In
addition, our collaborative partners could cease operations, eliminate relevant
product lines, or offer, design, manufacture or promote competing lines of
products. Any of these occurrences could 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 190 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
issue 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, 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.





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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 licensing 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 (USPTO) to
determine the priority of inventions.

The defense and prosecution, if necessary, of intellectual property suits,
USPTO 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 non-issuance.

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 MICROFLUIDIC
CHIPS.

We have limited experience manufacturing our products in the volumes that
will be necessary for us to achieve significant commercial sales. The nature of
our 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 microfluidic chips. We will need to
enter into contractual relationships with these or other manufacturers for
commercial scale production of microfluidic chips and we cannot assure you that
we will be able to do so on a timely basis, for sufficient quantities of chips
or on commercially reasonable terms. In addition, the loss of any of these
suppliers may result in a delay or interruption of our supply of microfluidic
chips. Any significant delay or interruption could 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. We carry key
person life insurance on only two of our senior management 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 upon our research and development activities, sales revenue, operating
costs and future growth prospects.





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WE EXPECT INTENSE COMPETITION IN OUR TARGET MARKETS.

We compete with companies that design, manufacture and market analytical
instruments for genomics and pharmaceutical drug screening using technologies
such as gel electrophoresis, capillary electrophoresis, microwell plates and
robotic liquid handling systems. In addition, a number of companies are
developing new technologies for miniaturizing various laboratory procedures,
for genomics and drug screening markets targeted by us, using methods such as
beads, hybridization chips and high density microwell plates. Furthermore, we
are aware of other companies that are developing microfluidics technology,
including, but not limited to, Orchid BioSciences, Inc. and Caliper
Technologies Corp. for potential use in certain of the markets that we are
targeting. We anticipate that we will face increased competition in the future
as new companies enter the market with new technologies. Rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and new product introductions 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 AND OTHER CLAIMS AND MAY NOT BE ABLE TO
OBTAIN ADEQUATE INSURANCE, WHICH WOULD INCREASE OUR LOSSES IF SUCH CLAIMS
OCCURRED.

The commercial launch of our microfluidic products, assay chemistries and
related systems could result in ACLARA being exposed to product liability
claims. Any product liability claims arising in the future, regardless of their
merit or eventual outcome may exceed the amount of our insurance or may be
excluded from coverage under the terms of our insurance policy. Furthermore, we
may be exposed to other types of legal claims.

WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL WHEN NEEDED OR TO 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 further
commercialize our products. We believe that the proceeds from our initial
public offering in March 2000 and projected revenue should be sufficient to
fund our anticipated levels of operations for 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 and capital
requirements for product development and commercialization. We cannot assure
you that additional funds will be a 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 largest stockholders and their
affiliates presently beneficially own or control a significant percentage of
the outstanding shares of common stock. Accordingly, our current executive
officers,





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directors, principal stockholders and their affiliates, if acting together,
could 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 MAY BE 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 $4.31 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; ACLARAs ability to successfully
commercialize products; technological innovations or the introduction of 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 the 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, following periods of volatility in
the market price of a companys securities, securities class action litigation
has often been instituted against the company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
managements attention and resources, which could have an adverse effect on our
business, results of operations and financial condition.

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, bylaws and
stockholder rights plan 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 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.

Furthermore, 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 provisions could also limit the price that investors might be
willing to pay in the future for our common





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stock.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is currently confined to our cash, cash
equivalents, short-term marketable and long-term marketable investments. We
maintain an investment portfolio of US government debt, corporate debt and
money market funds. Fixed rate securities may have their fair market value
adversely impacted due to fluctuations in interest rates. 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. To reduce the exposure due to adverse shifts in interest rates, we
maintain the investment portfolio at an average maturity of generally less than two years.
ACLARA also restricts its exposure to any single corporate issuer by imposing
concentration limits. We currently do not hedge interest rate exposure.

The table below presents our investment portfolio by expected maturity and
related weighted average interest rates at September 30, 2001:

|                                         |  |      |        |      |  |      |        |      |  |       |        |       |  |   |        |   |  |   |         |   |  |      |         | 
|---------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | ---- | ------- | 
|                                         |  |      |        |      |  |      |        |      |  |       |        |       |  |   |        |   |  |   |         |   |  | FAIR
|                                         |  | 2001 |        | 2002 |  | 2003 |        | 2004 |  | TOTAL |        | VALUE
|                                         |  |      |        |      |  |      |        |      |  |       |        |      
|Money market fund                        |  | $    | 15,544 |      |  |      |       |      |  |       |       |       |  |   |       |   |  | $ | 15,544  |   |  | $    | 15,544  | 
|Average interest rate                    |  |      | 3.4    | %    |  |      |        |      |  |       |        |       |  |   |        |   |  |   | 3.4     | % |  |      |         | 
|Available for sale marketable
securities |  | $    | 18,335 |      |  | $    | 46,332 |      |  | $     | 37,290 |       |  | $ | 24,625 |   |  | $ | 126,582 |   |  | $    | 127,120 | 
|Average interest rate                    |  |      | 3.5    | %    |  |      | 3.8    | %    |  |       | 4.4    | %     |  |   | 4.9    | % |  |   | 4.2     | % |  |      |         | 
|Total securities                         |  | $    | 33,879 |      |  | $    | 46,332 |      |  | $     | 37,290 |       |  | $ | 24,625 |   |  | $ | 142,126 |   |  | $    | 142,664 | 
|Average interest rate                    |  |      | 3.4    | %    |  |      | 3.8    | %    |  |       | 4.4    | %     |  |   | 4.9    | % |  |   | 4.1     | % |  |      |         | 




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

Information with respect to this item is incorporated by reference to Note
4 to the condensed financial statements contained in Part I herein.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

A Registration Statement on Form S-1 (No. 333-95107) was declared
effective by the SEC on March 20, 2000. We have continued to use the net
proceeds of the offering to fund our ongoing research and development
activities, working capital needs and other general corporate purposes. As of
September 30, 2001, we had applied the estimated aggregated net proceeds of
$201 million from our initial public offering as follows:





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|                                           |  |                  |  | 
|------------------------------------------ |  | ---------------- |  | 
|Working capital and marketable investments |  | $157.6 million  
|Restricted cash, non-current               |  | $  34.1 million 
|Capital expenditures                       |  | $    5.0 million
|Repayment of indebtedness                  |  | $    4.3 million

The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




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

None.




ITEM 5. OTHER INFORMATION

None.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. The
exhibits listed in the accompanying Exhibit Index are
filed with or
incorporated by reference as part of this Report.

(b) Current Reports
on Form 8-K. We did not file any reports on Form 8-K
during the
quarter ended September 30, 2001.



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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.

|                        |  |                          |  |                                                                                                                  
|----------------------- |  | ------------------------ |  | -----------------------------------------------------------------------------------------------------------------
|                        |  | ACLARA BIOSCIENCES, INC.
|                       
|                       
|Date: November 14, 2001 |  | By:                      |  | /s/ JOSEPH M. LIMBER                                                                                             
|                        |  |                          |  |                                                                                                                  
|                        |  |                          |  | Joseph M. Limber
President and Chief Executive Officer
(Duly Authorized Officer and
Principal Accounting Officer)





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EXHIBIT INDEX

|            |  |                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------
|           
|           
|Exhibit No. |  | Description                                                                                                             
|           
|10.1+       |  | Cross-License
Agreement between Caliper Technologies Corp. and ACLARA BioSciences,
Inc., dated as of March 12, 2001. (1)
|           
|10.2        |  | Form of Change
of Control Agreement between ACLARA BioSciences, Inc. and each of our
executive officers.                

+ Confidential treatment has been granted for portions of this
agreement.

(1) Previously filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2001.