##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549



---



FORM 10-Q



---



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



For the quarterly period ended September 30, 2003



OR



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



For the transition period from
 to  .



Commission file number: 0-29975



---



ACLARA BioSciences, Inc.

(Exact name of registrant as specified in its charter)



---



|Delaware                 |  | 94-3222727                          
|------------------------ |  | ------------------------------------
|(State of incorporation) |  | (IRS Employer Identification Number)



1288 Pear Avenue

Mountain View, California 94043

(Address of principal executive offices and zip code)





650-210-1200

(Registrants telephone number, including area code)



---



Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.    YES  x    NO ̈.



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



The number of shares
outstanding of the registrants common stock as of November 8, 2003 was 35,810,932.



---



---

##### Table of Contents

ACLARA BIOSCIENCES, INC.



TABLE OF CONTENTS



|           |  |         |  |                                                                                                                                                                                     |  | PAGE
|---------- |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |         | 
|Part I:    |  |         |  | Financial Information                                                                                                                                                               |  |     
|           |  |         | 
|           |  | Item 1. |  | Financial Statements (Unaudited)                                                                                                                                                    |  |     
|           |  |         | 
|           |  |         |  | Condensed Balance Sheets as of September 30, 2003 and December 31, 2002                                                                                                             |  | 3   
|           |  |         | 
|           |  |         |  | Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 and for the Cumulative Period From May 5, 1995 (Inception) to September 30, 2003 |  | 4   
|           |  |         | 
|           |  |         |  | Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 and for the Cumulative Period from May 5, 1995 (Inception) to September 30, 2003           |  | 5   
|           |  |         | 
|           |  |         |  | Notes to Condensed Financial Statements                                                                                                                                             |  | 6   
|           |  |         | 
|           |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                               |  | 10  
|           |  |         | 
|           |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                          |  | 18  
|           |  |         | 
|           |  | Item 4. |  | Controls and Procedures                                                                                                                                                             |  | 18  
|           |  |         | 
|Part II:   |  |         |  | Other Information                                                                                                                                                                   |  |     
|           |  |         | 
|           |  | Item 1. |  | Legal Proceedings                                                                                                                                                                   |  | 18  
|           |  |         | 
|           |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                                                                                           |  | 18  
|           |  |         | 
|           |  | Item 3. |  | Defaults upon Senior Securities                                                                                                                                                     |  | 18  
|           |  |         | 
|           |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                                 |  | 19  
|           |  |         | 
|           |  | Item 5. |  | Other Information                                                                                                                                                                   |  | 19  
|           |  |         | 
|           |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                    |  | 19  
|           | 
|Signatures |  | 23     



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1. Financial Statements



ACLARA BIOSCIENCES, INC.

(A Development Stage Enterprise)



CONDENSED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)



|                                                                                                                                          |  | September 30, 2003 |          |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | -
|ASSETS                                                                                                                                    |  |                    |          |   |                  |  
|Current assets:                                                                                                                           |  |                    |          |   |                  |  
|Cash and cash equivalents                                                                                                                 |  | $                  | 34,088   |   |                  | $
|Restricted cash                                                                                                                           |  |                    |         |   |                  |  
|Short-term marketable investments                                                                                                         |  |                    | 32,962   |   |                  |  
|Accounts receivable                                                                                                                       |  |                    | 302      |   |                  |  
|Prepaid expenses and other current assets                                                                                                 |  |                    | 557      |   |                  |  
|Inventories                                                                                                                               |  |                    | 2,767    |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total current assets                                                                                                                      |  |                    | 70,676   |   |                  |  
|Long-term marketable investments                                                                                                          |  |                    | 26,105   |   |                  |  
|Property and equipment, net                                                                                                               |  |                    | 6,153    |   |                  |  
|Other assets, net                                                                                                                         |  |                    | 1,404    |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total assets                                                                                                                              |  | $                  | 104,338  |   |                  | $
|                                                                                                                                          |  |                    |          |   |                  |  
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                        |  |                    |          |   |                  |  
|                                                                                                                                          |  |                   
|Current liabilities:                                                                                                                      |  |                    |          |   |                  |  
|Accounts payable                                                                                                                          |  | $                  | 623      |   |                  | $
|Accrued payroll and related expenses                                                                                                      |  |                    | 1,099    |   |                  |  
|Accrued expenses and other current liabilities                                                                                            |  |                    | 2,902    |   |                  |  
|Deferred revenue                                                                                                                          |  |                    | 206      |   |                  |  
|Restructuring accrual                                                                                                                     |  |                    |         |   |                  |  
|Current portion of loans payable                                                                                                          |  |                    | 196      |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total current liabilities                                                                                                                 |  |                    | 5,026    |   |                  |  
|Loans payable, net of current portion                                                                                                     |  |                    | 399      |   |                  |  
|Deferred rent                                                                                                                             |  |                    | 459      |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total liabilities                                                                                                                         |  |                    | 5,884    |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Contingencies (Note 3)                                                                                                                    |  |                    |          |   |                  |  
|                                                                                                                                          |  |                   
|Stockholders equity:                                                                                                                     |  |                    |          |   |                  |  
|Common stock, $0.001 par value:                                                                                                           |  |                    |          |   |                  |  
|Authorized 150,000,000 shares; Issued and outstanding: 35,723,494 shares at September 30, 2003 and 35,391,018 shares at December
31, 2002 |  |                    | 36       |   |                  |  
|Treasury stock at cost (900,000 shares at September 30, 2003 and December 31, 2002)                                                       |  |                    | (1,350   | ) |                  |  
|Additional paid-in capital                                                                                                                |  |                    | 259,110  |   |                  |  
|Deferred stock-based compensation                                                                                                         |  |                    | (108     | ) |                  |  
|Accumulated other comprehensive income                                                                                                    |  |                    | 126      |   |                  |  
|Deficit accumulated during development stage                                                                                              |  |                    | (159,360 | ) |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total stockholders equity                                                                                                                |  |                    | 98,454   |   |                  |  
|                                                                                                                                          |  |                    |          |   |                  |  
|Total liabilities and stockholders equity                                                                                                |  | $                  | 104,338  |   |                  | $
|                                                                                                                                          |  |                    |          |   |                  |  



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



3



---

##### Table of Contents

ACLARA BIOSCIENCES, INC.

(A Development Stage Enterprise)



CONDENSED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)



|                                                                                                        |  | Three Months Ended September 30 |        |   | Nine Months Ended September 30 |   |         | Cumulative Period from May 5, 1995 (Inception) to September 30 2003 | 
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------- | ------------------------------------------------------------------- | 
|                                                                                                        |  | 2003                            |        |   | 2002                           |   |         | 2003                                                                | 
|Revenues                                                                                                |  | $                               | 276    |   |                                | $ | 505     |                                                                     | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Costs and operating expenses:                                                                           |  |                                 |        |   |                                |   |         |                                                                     | 
|Research and development                                                                                |  |                                 | 3,847  |   |                                |   | 5,516   |                                                                     | 
|Selling, general and administrative                                                                     |  |                                 | 1,714  |   |                                |   | 3,318   |                                                                     | 
|Litigation settlement                                                                                   |  |                                 |       |   |                                |   | 396     |                                                                     | 
|Restructuring                                                                                           |  |                                 |       |   |                                |   | 3,327   |                                                                     | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Total costs and operating expenses                                                                      |  |                                 | 5,561  |   |                                |   | 12,557  |                                                                     | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Loss from operations                                                                                    |  |                                 | (5,285 | ) |                                |   | (12,052 | )                                                                   | 
|Interest income                                                                                         |  |                                 | 377    |   |                                |   | 873     |                                                                     | 
|Interest expense                                                                                        |  |                                 | (13    | ) |                                |   | (13     | )                                                                   | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Net loss                                                                                                |  |                                 | (4,921 | ) |                                |   | (11,192 | )                                                                   | 
|                                                                                                        |  |                                 |        |   |                               
|Dividends related to beneficial conversion feature of preferred stock                                   |  |                                 |       |   |                                |   |        |                                                                     | 
|Accretion to redemption value and accrued dividends on mandatory redeemable convertible preferred stock |  |                                 |       |   |                                |   |        |                                                                     | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Net loss attributable to common stockholders                                                            |  | $                               | (4,921 | ) |                                | $ | (11,192 | )                                                                   | 
|                                                                                                        |  |                                 |        |   |                                |   |         |                                                                     | 
|Net loss per common share, basic and diluted                                                            |  | $                               | (0.14  | ) |                                | $ | (0.31   | )                                                                   | 
|                                                                                                        |  |                                 |        |   |                               
|Weighted average shares used in net loss per common share calculation, basic and diluted                |  |                                 | 35,681 |   |                                |   | 36,148  |                                                                     | 



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



4



---

##### Table of Contents

ACLARA BIOSCIENCES, INC.

(A Development Stage Enterprise)



CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                            |  | Nine Months Ended September 30 |         |   | Cumulative Period from May 5, 1995 (Inception) to September 30 2003 |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------------------------------------------- | -
|                                                                            |  | 2003                           |         |   | 2002                                                                |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                        |  |                                |         |   |                                                                     |  
|Net loss                                                                    |  |                                |         |   |                                                                     |  
|Adjustments to reconcile net loss to net cash used in operating activities: |  | $                              | (16,292 | ) |                                                                     | $
|Depreciation and amortization                                               |  |                                | 1,432   |   |                                                                     |  
|Amortization of discount on marketable investments                          |  |                                | (48     | ) |                                                                     |  
|Amortization of note and long-term debt discount                            |  |                                |         |   |                                                                     |  
|Amortization of deferred stock based compensation                           |  |                                | 451     |   |                                                                     |  
|Loss on sale of fixed assets                                                |  |                                | 25      |   |                                                                     |  
|Amortization of other assets                                                |  |                                | 161     |   |                                                                     |  
|Preferred stock issued for interest expense                                 |  |                                |         |   |                                                                     |  
|Non-cash restructuring charge                                               |  |                                |         |   |                                                                     |  
|Interest income from notes receivable from stockholders                     |  |                                |         |   |                                                                     |  
|Revaluation of litigation settlement                                        |  |                                |         |   |                                                                     |  
|Changes in assets and liabilities:                                          |  |                                |         |   |                                                                     |  
|Accounts receivable                                                         |  |                                | 166     |   |                                                                     |  
|Prepaid expenses and other current assets                                   |  |                                | (134    | ) |                                                                     |  
|Inventories                                                                 |  |                                | 13      |   |                                                                     |  
|Accounts payable                                                            |  |                                | (66     | ) |                                                                     |  
|Accrued payroll and related expenses                                        |  |                                | 76      |   |                                                                     |  
|Accrued expenses and other liabilities                                      |  |                                | 1,547   |   |                                                                     |  
|Restructuring accrual                                                       |  |                                | (501    | ) |                                                                     |  
|Litigation settlement                                                       |  |                                |         |   |                                                                     |  
|Deferred revenue                                                            |  |                                | 102     |   |                                                                     |  
|Deferred rent                                                               |  |                                | 45      |   |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|Net cash used in operating activities                                       |  |                                | (13,023 | ) |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |  |                                |         |   |                                                                     |  
|Acquisition of property and equipment                                       |  |                                | (597    | ) |                                                                     |  
|Sales of property and equipment                                             |  |                                | 73      |   |                                                                     |  
|Change in restricted cash                                                   |  |                                | 34,125  |   |                                                                     |  
|Purchase of investments                                                     |  |                                | (74,881 | ) |                                                                     |  
|Sales and maturities of investments                                         |  |                                | 50,145  |   |                                                                     |  
|Change in other assets                                                      |  |                                |         |   |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|Net cash provided by (used in) investing activities                         |  |                                | 8,865   |   |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                                |         |   |                                                                     |  
|Principal payments for leasehold obligations                                |  |                                | (45     | ) |                                                                     |  
|Principal payments under capital lease obligations                          |  |                                | (95     | ) |                                                                     |  
|Proceeds from issuance of notes payable to related parties                  |  |                                |         |   |                                                                     |  
|Proceeds from issuance of loans payable                                     |  |                                |         |   |                                                                     |  
|Repayments of loans payable                                                 |  |                                |         |   |                                                                     |  
|Proceeds from issuance of preferred stock, net of issuance costs            |  |                                |         |   |                                                                     |  
|Principal payments for notes payable to related parties                     |  |                                |         |   |                                                                     |  
|Repurchase of Series A preferred stock and one share of common stock        |  |                                |         |   |                                                                     |  
|Proceeds from initial public offering, net of issuance costs                |  |                                |         |   |                                                                     |  
|Proceeds from notes receivable from stockholders                            |  |                                |         |   |                                                                     |  
|Proceeds from issuance of common stock                                      |  |                                | 380     |   |                                                                     |  
|Repurchase of common stock                                                  |  |                                |         |   |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|Net cash provided by financing activities                                   |  |                                | 240     |   |                                                                     |  
|Net increases (decreases) in cash and cash equivalents                      |  |                                | (3,918  | ) |                                                                     |  
|Cash and cash equivalents, beginning of period                              |  |                                | 38,006  |   |                                                                     |  
|                                                                            |  |                                |         |   |                                                                     |  
|Cash and cash equivalents, end of period                                    |  | $                              | 34,088  |   |                                                                     | $
|                                                                            |  |                                |         |   |                                                                     |  



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



5



---

##### Table of Contents

ACLARA BIOSCIENCES, INC.

(A Development Stage Enterprise)



NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



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



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



Comprehensive
Income



Comprehensive income generally represents all
changes in stockholders equity except those resulting from investments or contributions by stockholders. ACLARAs unrealized gains on available-for-sale securities represent the only component of comprehensive income that is excluded from
ACLARAs net loss for the three and nine months ended September 30, 2003 and 2002 and for the cumulative period from May 5, 1995 (date of inception) to September 30, 2003. As this component of comprehensive income is not significant,
individually or in the aggregate, no separate statements of comprehensive income have been presented.



Net Loss Per Share



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



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



|                                                                                                  |  | Three Months EndingSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | -
|                                                                                                  |  | 2003                             |        |   | 2002                           |  
|Basic and diluted:                                                                                |  |                                  |        |   |                                |  
|Net loss                                                                                          |  | $                                | (4,921 | ) |                                | $
|                                                                                                  |  |                                  |        |   |                                |  
|Weighted average shares of common stock outstanding                                               |  |                                  | 35,681 |   |                                |  
|Less: weighted average shares subject to repurchase                                               |  |                                  |       |   |                                |  
|                                                                                                  |  |                                  |        |   |                                |  
|Weighted-average shares of common stock used in basic and diluted net loss per share calculations |  |                                  | 35,681 |   |                                |  
|                                                                                                  |  |                                  |        |   |                                |  
|Net loss per common share  basic and diluted                                                     |  | $                                | (0.14  | ) |                                | $
|                                                                                                  |  |                                  |        |   |                                |  



6



---

##### Table of Contents

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



|         |  | Three MonthsEndedSeptember 30, |  | Nine MonthsEndedSeptember 30,
|-------- |  | ------------------------------ |  | -----------------------------
|         |  | 2003                           |  | 2002                         
|Options  |  | 4,216                          |  | 3,407                        
|Warrants |  | 139                            |  | 274                          



Accounting for Stock-Based
Compensation



ACLARA accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and its related interpretations and has elected to follow the
disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under APB No. 25, compensation expense is based on the difference, if any, on the date
of the stock option grant between the fair value of ACLARAs stock and the exercise price of the stock option.



The Company has adopted SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. Had compensation cost for
stock-based employee compensation arrangements been determined based on the fair value at the date of the awards consistent with the provisions of SFAS No. 123, the impact on ACLARAs net loss would be as follows (in thousands, except per share
data):



|                                                                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                                                       |  | 2003                            |        |   | 2002                           |  
|Net loss attributable to common stockholders:                                                          |  |                                 |        |   |                                |  
|As reported                                                                                            |  | $                               | (4,921 | ) |                                | $
|Add: Stock-based compensation expense included in reported net loss                                    |  |                                 | 146    |   |                                |  
|Deduct: Total stock-based compensation expense determined under fair value based method for all awards |  |                                 | (762   | ) |                                |  
|                                                                                                       |  |                                 |        |   |                                |  
|Pro forma net loss                                                                                     |  | $                               | (5,537 | ) |                                | $
|                                                                                                       |  |                                 |        |   |                                |  
|Net loss per share:                                                                                    |  |                                 |        |   |                                |  
|Basicas reported                                                                                      |  | $                               | (0.14  | ) |                                | $
|                                                                                                       |  |                                 |        |  
|Dilutedas reported                                                                                    |  | $                               | (0.14  | ) |                                | $



ACLARA accounts for
equity instruments issued to non-employees based on fair value in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.



Recent
Accounting Developments



In May 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of SFAS Nos. 4, 44, 64, Amendment of SFAS 13, and Technical Corrections as of April 2002. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, which required that gains and losses from extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item, net of the related income
tax effect. Under SFAS No. 145, gains or losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principals Board Opinion No. 30 (APB 30), Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Applying the criteria in APB 30 will distinguish transactions that are part of
an entitys recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The Company adopted SFAS No. 145 on January 1, 2003. The losses of $1.1 million on early
extinguishment of debt obligations that were classified as extraordinary items in prior periods that did not meet the criteria of APB 30 for classification as extraordinary items were reclassified to general and administrative from operations.



7



---

##### Table of Contents

2. RESTRICTED CASH



Restricted cash at December 31, 2002 comprised $34.1 million held in escrow as part of its settlement of litigation with Caliper Technologies Corporation
(Caliper). Pursuant to the Caliper settlement agreement, ACLARA provided a letter of credit to Caliper in the amount of $32.5 million as a guarantee of ACLARAs performance. The banking institution that had issued the letter of
credit required ACLARA to maintain a balance of 105% of the letter of credit amount in a segregated account. On February 15, 2003 the letter of credit was terminated and the restricted cash was released.



3. LITIGATION SETTLEMENT AND CONTINGENCIES



As part of the litigation settlement with Caliper, 900,000 shares of ACLARA
common stock were issued in March 2001 with a guaranteed liquidation price of $36.11 per share if Caliper sold the shares after August 21, 2002 but before February 21, 2003. ACLARA initially valued the put obligation associated with these shares at
$20.8 million. Based on the change in ACLARAs stock price and in accordance with EITF No. 96-13 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF No.
96-13) and its related interpretations, and Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities (SFAS 133), the put obligation was subsequently revalued at
the end of each reporting period prior to its settlement in October 2002. The revaluation of the put obligation used a Black-Scholes pricing model with changes in valuation being recorded in the Statements of Operations. At December 31, 2001, March
31, 2002, June 30, 2002 and September 30, 2002, the put obligation had a value of $27.2 million, $28.7 million, $30.5 million, and $30.9 respectively. As a result of these revaluations and the eventual settlement, in October 2002, revaluation
expenses of $4.0 million and $6.4 million were recorded in the years ended December 31, 2002 and 2001, respectively, and revaluation expense of $3.7 million and $5.2 million, respectively was recorded in the accompanying Statement of Operations for
the three and nine months ended September 30, 2002. In October 2002, we paid Caliper $32.5 million related to this settlement. Of this amount approximately $1.4 million was for the repurchase at the then-current market price of the 900,000 shares
previously issued to Caliper in the original settlement agreement. Accordingly, no revaluation adjustments are applicable in periods after December 31, 2002.



In August 2000, ACLARA entered into a settlement and release with Rodenstock North America (Rodenstock) (formerly 2C Optics) relating to a
dispute arising out of ACLARAs repurchase of its Series A Preferred Stock from Rodenstock in 1999. The settlement agreement was approved by the board of directors of Rodenstock and a majority of Rodenstocks outstanding shares entitled to
vote on the matter. On April 27, 2001, S&A Biotech Investments, LLC (S&A), a stockholder of Rodenstock, filed a shareholder derivative suit in the Superior Court of California for the County of Santa Clara, naming the directors
of Rodenstock as individual defendants, Rodenstock as a nominal defendant, and ACLARA as a defendant. S&A alleges breach of fiduciary duties by Rodenstock and the individual defendants, including Thomas Baruch, who was the chairman of the boards
of ACLARA and Rodenstock, in connection with the August 2000 settlement between ACLARA and Rodenstock. S&A also asserts a claim against ACLARA for allegedly aiding and abetting the purported breach of fiduciary duty by Rodenstock and
Rodenstocks directors. Among other remedies, S&A seeks rescission of the settlement agreement and the above-referenced stock repurchase. ACLARA filed its demurrer, and Rodenstock and Mr. Baruch filed their demurrers and notices of summary
judgment, which were heard in April 2002. The Court denied all demurrers, but granted Rodenstock and Mr. Baruchs notice for summary judgment. Plaintiff dismissed without prejudice its claim against ACLARA, while it appealed the judgment for
the other defendants. In September 2003 plaintiffs appeal was rejected. We believe that the time period within which the plaintiff had to appeal this latter decision of the appeals court has expired, and that no further appeal is therefore
possible. Accordingly ACLARA does not believe that it will have any liability from this litigation.



ACLARA and certain of its current or former officers and directors (the ACLARA defendants) are named as defendants in a securities class
action lawsuit filed in the United States District Court for the Southern District of New York. This action, which was filed on November 13, 2001 and is now captioned ACLARA Biosciences, Inc. Initial Public Offering Securities Litigation,
also names several of the underwriters involved in ACLARAs initial public offering (IPO) as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARAs
IPO (March 20, 2000) through December 6, 2000. The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors
who purchased ACLARA stock in the IPO and the after-market. The complaint also alleges that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly
undisclosed arrangements. More than 300 issuers who went public between 1998 and 2000 have been named in similar lawsuits. In July 2002, an omnibus motion to dismiss all complaints against issuers and individual defendants affiliated with issuers



8



---

##### Table of Contents

(including ACLARA defendants) was filed by the entire group of issuer defendants in these similar actions. On February 19, 2003, the Court in this action
issued its decision on Defendants omnibus motion to dismiss. This decision dismissed the Section 10(b) claim as to ACLARA but denied the motion to dismiss Section 11 claim as to ACLARA and virtually all of the other defendants. On June 26,
2003, the plaintiffs in the consolidated class action lawsuits announced a proposed settlement with us and the other issuer defendants. The proposed settlement, which has been approved by our board of directors, provides that the insurers of all
settling issuers will guarantee that the plaintiffs recover $1 billion from non-settling defendants, including the investment banks who acted as underwriters in those offerings. In the event that the plaintiffs do not recover $1 billion, the
insurers for the settling issuers will make up the difference. Under the proposed settlement, the maximum amount that could be charged to our insurance policy in the event that the plaintiffs recovered nothing from the investment banks would be
approximately $3.9 million. We believe that we have sufficient insurance coverage to cover the maximum amount that we may be responsible for under the proposed settlement. It is possible that the parties may not reach agreement on the final
settlement documents or that the Federal District Court may not approve the settlement in whole or part. If a final settlement is not reached or is not approved by the court, ACLARA believes it has meritorious defenses and intends, in that event, to
vigorously defend itself against the suit. As a result of this belief, no liability for this suit has been recorded in the accompanying financial statements. However, we could be forced to incur significant expenses in the litigation, and in the
event there is an adverse outcome, our business could be harmed.



4.
RESTRUCTURING



During the third quarter of 2002 ACLARA
initiated a restructuring plan to streamline its operations, reduce costs associated with the microfluidics aspect of our business and increase our focus on our eTag assay chemistry. Accordingly, we recognized a restructuring charge of $3.3
million during the third quarter of 2002, including $0.8 million of severance and related costs related to the reduction of our employment level by over 50 employees. This reduction was phased in over the second half of 2002 and primarily affected
the microfluidics area of our business, where essentially all of our active programs were eliminated. Termination benefits related to severance packages, out-placement services and other associated costs are included in restructuring expense on the
statement of operations and there was no remaining balance at September 30, 2003. We also wrote off approximately $2.5 million of fixed assets that are not expected to be used prospectively.



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



|                                      |  | Severanceand Benefits |      |   | FixedAssets |   |        | OtherCharges |  |   | Total |  
|------------------------------------- |  | --------------------- | ---- | - | ----------- | - | ------ | ------------ |  | - | ----- | -
|Restructuring provision:              |  |                       |      |   |             |   |        |              |  |   |       |  
|Severance and benefits                |  | $                     | 753  |   |             | $ |       |              |  | $ |      |  
|Property and equipment write off      |  |                       |     |   |             |   | 2,467  |              |  |   |      |  
|Other charges                         |  |                       |     |   |             |   |       |              |  |   | 107   |  
|                                      |  |                       |      |   |             |   |        |              |  |   |       |  
|Total                                 |  | $                     | 753  |   |             | $ | $2,467 |              |  | $ | 107   |  
|Non-cash charges                      |  |                       |     |   |             |   | (2,467 | )            |  |   |      |  
|Cash paid                             |  |                       | (280 | ) |             |   |       |              |  |   | (79   | )
|                                      |  |                       |      |   |             |   |        |              |  |   |       |  
|Reserve balance at December 31, 2002  |  | $                     | 473  |   |             | $ |       |              |  | $ | 28    |  
|Cash paid                             |  |                       | (473 | ) |             |   |       |              |  |   | (28   | )
|                                      |  |                       |      |   |             |   |        |              |  |   |       |  
|Reserve balance at September 30, 2003 |  | $                     |     |   |             | $ |       |              |  | $ |      |  
|                                      |  |                       |      |   |             |   |        |              |  |   |       |  



9



---

##### Table of Contents

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



OVERVIEW



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



We have invested substantial
amounts in establishing our eTag assay technology for life science research. From our inception to September 30, 2003, we have incurred $99.1 million in research and development expenses. Total costs and operating expenses were $18.4 million
and $34.9 million for the nine months ended September 30, 2003 and 2002, respectively. Over 70% of our 64 employees at September 30, 2003 were engaged in research and development activities.



We have incurred significant losses since our inception. As of September 30,
2003, our accumulated deficit was $159.4 million and total stockholders equity was $98.5 million. We expect to incur additional operating losses over at least the next two years as we continue to invest heavily in research and development
activities, build our sales and marketing organization and commercialize our eTag products.



Essentially all our revenues through 2002 were generated from commercial research collaborations and from government grants related to discontinued
microfluidics programs that are not active in 2003. Our sources of potential revenue in 2003 and for the next several years are likely to be primarily from commercialization of our eTag assay system. Commencing in late 2002, we made our
eTag Assay System commercially available to potential customers.



In July 2002, we took steps to increase our focus on our eTag assay opportunities and to reduce costs, particularly those costs associated with the microfluidics aspect of our business. Related to these actions, we took a charge in
the third quarter of 2002 of $3.3 million. Additional cost reduction steps were taken in April 2003. All of our resources are currently directed at developing the eTag Assay System and expanding its applications.



RESULTS OF OPERATIONS



PERIODS ENDED SEPTEMBER 30, 2003 AND 2002



Revenues. Revenues for the three and nine months ending September 30, 2003 were $276,000 and $860,000, respectively, and were derived primarily
from collaborations related to our eTag Assay System. Revenues for the three and nine months ended September 30, 2002 were $505,000 and $1.8 million, respectively, and were derived primarily from commercial collaboration agreements and
government grants related to microfluidics-related programs that are no longer active. While revenue from these sources has been significant in prior years, they are not expected to be significant in 2003 and subsequent years. The timing and amount
of government grant awards and completion of milestones under these grants and in our commercial collaborations has caused quarterly variations in these revenues. Our sources of potential revenue in 2003 and for the next several years are likely to
be primarily from commercialization of our eTag Assay System. Commencing in late 2002, we made our eTagAssay System commercially available to potential customers. ACLARAs eTag Assay System is being commercialized for use
both in drug discovery research and to support preclinical and clinical development of specific targeted therapies. In these application areas, pharmaceutical researchers are able to access eTag reagent products, software, and services. For
multiplexed gene expression, ACLARA uses eTag Multiplex Invader® Assays, which incorporate Invader technology and Cleavase® enzyme and are licensed for use from Third Wave Technologies, Inc.



10



---

##### Table of Contents

Research & Development. Research and development expenses for the three months ended September
30, 2003 and 2002 were $3.8 million and $5.5 million, respectively. Research and development expenses for the nine months ended September 30, 2003 and 2002 were $12.3 million and $18.6 million, respectively. The decrease from 2002 to 2003 was
primarily due to decreased personnel related expenses, which were lower by $1.5 million and $4.5 million, and project costs and materials, which were lower by $257,000 and $715,000, for the three and nine months ended September 30, 2003,
respectively. These reductions were due to the restructuring plan implemented in July 2002, in which essentially all micro-fluidics-related programs were eliminated and the related staffing level correspondingly reduced over the second half of 2002.
Included in research and development expenses for the second quarter of 2003 was severance costs of $318,000 related to an additional staff reduction implemented in April 2003. At September 30, 2002, we had 79 employees engaged in research and
development activities, whereas by September 30, 2003, this had been reduced to 47 employees. Essentially all of our research and development expenditures are now focused on developing the eTag Assay System and on expanding the applications
for which it can be used.



Selling, General and
Administrative. Selling, general and administrative expenses for the three months ended September 30, 2003 and 2002 were $1.7 million and $3.3 million, respectively. Selling, general and administrative expenses for the nine months ended
September 30, 2003 and 2002 were $6.1 million and $9.2 million, respectively. The decrease from 2002 to 2003 was primarily due to decreased legal expenses, which were lower by $809,000 and $2.4 million and personnel related expenses, which were
lower by $575,000 and $587,000, for the three and nine months ended September 30, 2003 and 2002, respectively. Included in selling, general and administrative expenses for the second quarter of 2003 was severance costs of $121,000 related to an
additional staff reduction implemented in April 2003. We expect that our selling, general and administrative expenses will continue to be substantial as we increase our sales, marketing and business development activities related to the
commercialization of our products, and as a result of the administrative and support infrastructure required to support our operations.



Litigation Settlements. As part of the litigation settlement with Caliper, 900,000 shares of ACLARA common stock were issued in March 2001 with a
guaranteed liquidation price of $36.11 per share if Caliper sold the shares after August 21, 2002 but before February 21, 2003. ACLARA initially valued the put obligation associated with these shares using a Black-Scholes pricing model. The put
obligation was subsequently revalued with changes in valuation being recorded in the statement of operations. As a result of these revaluations, revaluation expense of $396,000 and $3.7 million was recorded in the accompanying Statements of
Operations for the three and nine months ended September 30, 2002, respectively. As a result of the final settlement payment to Caliper and the repurchase of the stock from Caliper in October 2002, revaluation adjustments are no longer necessary and
no expense has been recorded in 2003. (See Note 3 in the accompanying Notes to Condensed Financial Statements.)



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



Interest Income (Expense) Net. Interest income (expense) net represents income earned on our cash and cash equivalents, short-term investments,
long-term investments and restricted cash, and interest paid on bridge loans, capital leases and equipment loans. Net interest income was $364,000 and $1.2 million for the three and nine months ended September 30, 2003 respectively. Net interest
income was $860,000 and $3.0 million for the three and nine months ended September 30, 2002 respectively. The decrease in net interest income from 2002 to 2003 was primarily due to lower average balances in cash, cash equivalents, short-term and
long-term investments and lower market interest rates.



LIQUIDITY AND
CAPITAL RESOURCES



Since inception, we have financed our
operations primarily through our initial public offering in March 2000 that raised net proceeds of $201.0 million, private placements of preferred stock totaling $32.3 million, loans from the landlord of our Mountain View facility and equipment
financing lines of credit totaling $4.4 million, capital leases totaling $1.8 million, and research and development funding from collaborators and government grants. As of September 30, 2003, we had total unrestricted cash resources of $93.2
million, comprising $34.1million in cash and cash equivalents, $33.0 million in short-term marketable investments and $26.1 million in long-term marketable investments.



11



---

##### Table of Contents

A loan agreement with the landlord of the Mountain View facility allowed us to borrow $663,000 for
leasehold improvements at an annual interest rate of 8.5%. The principal balance of this loan at September 30, 2003 was $463,000. The note matures on July 1, 2009.



In March 1999, ACLARA entered into a ten year operating lease agreement for our Mountain View facility. The future annual
minimum loan payments including accrued interest and lease payments under the loan and lease agreements at September 30, 2003 are as follows (in thousands):



|Years Ending December 31,               |  | Capital LeaseCommitments |     |   | LoanPayments |   |      | OperatingLeaseCommitments
|--------------------------------------- |  | ------------------------ | --- | - | ------------ | - | ---- | -------------------------
|2003                                    |  | $                        | 39  |   |              | $ | 25   |                          
|                                        |  |                          |    
|2004                                    |  |                          | 98  |   |              |   | 101  |                          
|                                        |  |                          |    
|2005                                    |  |                          |    |   |              |   | 101  |                          
|                                        |  |                          |    
|2006                                    |  |                          |    |   |              |   | 101  |                          
|                                        |  |                          |    
|2007                                    |  |                          |    |   |              |   | 101  |                          
|                                        |  |                          |    
|2008 and thereafter                     |  |                          |    |   |              |   | 201  |                          
|                                        |  |                          |     |   |              |   |      |                          
|Total minimum loan and lease payments   |  |                          | 137 |   |              |   | 630  |                          
|                                        |  |                          |     |   |              |   |      |                          
|Amount representing interest            |  |                          | (5  | ) |              |   | (167 | )                        
|                                        |  |                          |     |   |              |   |      |                          
|Present value of minimum lease payments |  | $                        | 132 |   |              | $ | 463  |                          
|                                        |  |                          |     |   |              |   |      |                          



Operating activities
used cash of $13.0 million and $18.7 million for the nine months ended September 30, 2003 and 2002, respectively. Uses of cash in operating activities primarily resulted from operating losses adjusted for non-cash expenses and changes in working
capital and other liabilities.



Cash provided by investing
activities was $8.9 million for the nine months ended September 30, 2003, including the release of restricted cash from the Caliper settlement of $34.1 million and net maturities of investments of $24.7 million, compared to cash provided by
investing activities of $57.0 million for the nine months ended September 30, 2002. As part of our litigation settlement with Caliper, we provided a letter of credit to Caliper in the amount of $32.5 million as a guarantee of our performance under
the settlement agreement. The banking institution that issued the letter of credit required us to maintain a balance of 105% of the letter of credit amount in a segregated account. This amount of $34.1 million is recorded as restricted cash in our
financial statements at December 31, 2002. In October 2002, we paid Caliper $32.5 million related to this settlement. Of this amount approximately $1.4 million was for the repurchase at the then-current market price of the 900,000 shares previously
issued to Caliper in the original settlement agreement. On February 15, 2003 the letter of credit was terminated and the restricted cash was released. Cash provided by financing activities remained essentially unchanged for the nine months ended
September 30, 2003 and 2002. Financing activity primarily reflects cash proceeds received through the employee exercise of stock options and employee participation in the employee stock purchase program.



We believe that our current cash and cash equivalents, short-term and
long-term marketable investment balances and funding received from collaborators and government grants will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 24 months. After that
time, we cannot be certain that additional funding, if required, will be available on acceptable terms, or at all. We expect that our costs will continue to exceed our revenues on an annual basis for at least the next two years. From time to time,
we may consider possible strategic transactions, including the potential acquisitions of products, technologies and companies, with the goal of further developing our business and maximizing stockholder value. Such transactions, if any, could
materially affect our future liquidity and capital resources. 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.



12



---

##### Table of Contents

CRITICAL ACCOUNTING POLICIES



There have been no material changes to our critical accounting policies and estimates from those disclosed in our report on
Form 10-K for our fiscal year ended December 31, 2002.



RECENT ACCOUNTING
DEVELOPMENTS



In May 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 145, Rescission of SFAS Nos. 4, 44, 64, Amendment of SFAS 13, and Technical Corrections as of April 2002. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, which required that gains and losses from extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item, net of the related income tax
effect. Under SFAS No. 145, gains or losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principals Board Opinion No. 30 (APB 30), Reporting the Results
of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Applying the criteria in APB 30 will distinguish transactions that are part of an
entitys recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The Company adopted SFAS No. 145 on January 1, 2003. The losses of $1.1 million on early
extinguishment of debt obligations that were classified as extraordinary items in prior periods that did not meet the criteria of APB 30 for classification as extraordinary items were reclassified to general and administrative from operations.



FACTORS AFFECTING OPERATING RESULTS



The following risk factors outline certain risks and uncertainties
concerning future results and should be read in conjunction with the other information contained in this Report on Form 10-Q and with the Companys Annual Report on Form 10-K for the year ended December 31, 2002. Any of these risk factors could
materially and adversely affect our business, results of operations, financial condition and future growth prospects. Additional risks and uncertainties that we do not currently know about or that we currently deem immaterial may also impair our
business, financial condition, results of operations and future growth prospects.



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



Since we were founded in May 1995, we have engaged primarily in research and development efforts. We have incurred operating losses every year since
inception, and we may never achieve profitability. Net losses for the years ended December 31, 2002, 2001 and 2000 were $37.2 million, $29.0 million and $59.2 million, respectively. Net losses for the three and nine months ended September 30, 2003
were $4.9 million and $16.3 million respectively. Net losses for the three and nine months ended September 30, 2002 were $11.2 million and $30.1 million respectively. As of September 30, 2003, we had an accumulated deficit of $159.4 million. Our
losses have resulted principally from costs incurred in connection with our research and development activities, from litigation settlement charges and from selling, general and administration costs associated with our operations.



To date, we have not generated any significant revenue from the sale of
products. Our ability to generate revenues from product sales or to achieve profitability is dependent on our ability, alone or with collaborative partners, to successfully design, develop, manufacture and commercialize our proprietary assay systems
in a timely manner and on adoption of our technological approach by customers. Our revenue through 2002 has been generated principally from collaborative research and development agreements, government grants and commercial collaborations related to
our former microfluidics activities. None of these revenue sources are expected to be significant in 2003 and subsequent years, when our eTag Assay System is anticipated to be the primary source of revenue. We expect that our costs will
continue to exceed our revenues on an annual basis for at least the next two years. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.



OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.



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



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



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



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



13



---

##### Table of Contents

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



| |  | disagreements regarding intellectual property rights; and
| | - | ---------------------------------------------------------



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



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



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



NONE OF OUR PRODUCTS HAS YET BEEN SUCCESSFULLY COMMERCIALIZED.



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



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



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



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



| |  | the extent and success of our efforts to market, sell and distribute the assay products; and
| | - | --------------------------------------------------------------------------------------------





| |  | adoption of the systems biology approach to drug discovery and development.
| | - | ---------------------------------------------------------------------------





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



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



We do not have fully developed sales and distribution channels for our products. In 2002, we restructured our relationship with Third Wave Technologies, Inc. and have assumed direct responsibility for the commercialization of eTag
assay system for the gene expression market that incorporate Third Waves technology. In addition, for applications in proteomics, we will continue to be dependent on our own business development organization, which has yet to be fully
developed. We may not be able to successfully recruit management and sales and marketing personnel to market and sell our products.





14



---

##### Table of Contents

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



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



Our
success will depend in part on our ability to obtain and maintain meaningful patent protection for our products, both in the United States and in other countries, and our inability to do so could harm our competitive position. We rely on our
portfolio of approximately 250 issued and pending patent applications in the United States and in other countries to protect a large part of our intellectual property and our competitive position. We cannot assure you that any of the currently
pending or future patent applications will be issued as patents, or that any patents issued to us will not be challenged, invalidated, held unenforceable or circumvented. Further, we cannot assure you that our intellectual property rights will be
sufficiently broad to prevent third parties from producing competing products similar in design to our products.



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



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



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



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



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



We have no
experience manufacturing our products in the high volumes that will be necessary for us to achieve significant commercial sales. To date, we have limited our manufacturing activities to low volume manufacturing of eTag assay products for
testing purposes and for validation use by our collaborative partners and potential customers. The nature of our assay products necessitates access to specialized chemicals, reagents and raw materials, such as antibodies used in conjunction with our
eTag components. There are only a limited number of vendors who supply these materials and for some of these materials the suppliers are the sole source of supply. We cannot be certain that we will be able to successfully secure supply of all
needed



15



---

##### Table of Contents

materials, nor can we be certain that these vendors will supply these materials consistently or in the quantities necessary for high volume production. We
will need to enter into contractual relationships with these or other manufacturers to facilitate commercial scale production ofeTag assay products, and we cannot assure you that we will be able to do so on a timely basis, for sufficient
quantities of products or on commercially reasonable terms. We will need to secure supply of antibodies for use in our protein applications and there can be no assurance that we will be able to do so on commercially reasonable terms. We will be
dependent on Third Wave for supply of Cleavase enzyme that is a critical component of products that we will commercialize for gene expression applications, and this enzyme is proprietary to Third Wave. Failure of Third Wave to supply enzyme could
seriously impair our business. Pursuant to the Supply Agreement with Third Wave, we purchased an initial quantity of Cleavase enzyme from Third Wave. This initial quantity of enzyme represents more than one years supply. Accordingly, we cannot
assure you that we can establish or maintain reliable, high-volume manufacturing at commercially reasonable costs. In addition, the loss of any of these suppliers may result in a delay or interruption of our supply of assay products. Any significant
delay or interruption would have a material adverse effect on our ability to supply adequate quantities of our products and would result in lost revenues. In addition, we have limited experience in developing and providing the software tools
necessary to perform analyses of data derived from our eTag assays.



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



Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel. The loss of the services of any member of our senior management, scientific or
technical staff may significantly delay or prevent the achievement of product development and other business objectives and could have a material adverse effect on our business, operating results and financial condition. Our future success will also
depend on our ability to identify, recruit and retain additional qualified scientific, technical and managerial personnel. There is currently a shortage of skilled executives and intense competition for such personnel in the areas of our activities,
and we cannot assure you that we will be able to continue to attract and retain personnel with the advanced qualifications necessary for the development of our business. The inability to attract and retain the necessary scientific, technical and
managerial personnel could have a material adverse effect on our research and development activities, sales revenue, operating costs and future growth prospects.



WE EXPECT INTENSE COMPETITION IN OUR TARGET MARKETS.



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



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



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



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



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



It might be necessary for us to raise additional capital over the next few years to continue our research and development efforts and to commercialize our products. We believe that the proceeds from our initial public
offering and projected revenue from collaborations should be sufficient to fund our anticipated levels of operations through at least the next 24 months. However, we cannot assure you that our business or operations will not change in a manner that
would consume available resources more



16



---

##### Table of Contents

rapidly than anticipated. We also cannot assure you that existing or potential future collaborations or sales revenue will be adequate to fund our
operations. We may need additional funds sooner than planned to meet operational needs, capital requirements for product development and commercialization and payment of monetary damages in any on-going or future litigation. From time to time, we
may consider possible strategic transactions, including the potential acquisitions of products, technologies and companies, with the goal of further developing our business and maximizing stockholder value. Such transactions, if any, could
materially affect our capital resources. We cannot assure you that additional funds will be available when needed, or on terms acceptable to us, or that sufficient revenue will be generated from sales. If adequate funds are not available, we may
have to reduce substantially or eliminate expenditures for the development and production of certain of our proposed products or obtain funds through arrangements with collaboration partners that require us to relinquish rights to certain of our
technologies or products. Either of these alternatives could have a material adverse effect on our business, operating results, financial condition and future growth prospects.



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



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



THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.



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



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



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



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



Certain provisions of our certificate of incorporation and our
bylaws could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our stockholders. For example, we have a classified board of directors whose members serve staggered three-year terms and are removable only for
cause. In addition, on March 16, 2001, ACLARA adopted a stockholder rights plan (the Rights Plan). Pursuant to the Rights Plan, ACLARAs Board of Directors declared a dividend distribution of one Preferred Share Purchase Right (a
Right) on each outstanding share of ACLARAs common stock. Each Right will entitle stockholders to buy one-one hundredth of a share of newly created Series A Junior Participating Preferred Stock at an exercise price of $40.50 in the
event that the Rights become exercisable. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Companys common stock or announces a tender offer for 15% or more of the common stock. If
ACLARA is acquired in a merger or other business combination transaction which has not been approved by the Board of Directors, each Right will entitle its holder to purchase, at the Rights then-current exercise price, a number of the
acquiring companys common shares having a market value at the time of twice the Rights exercise price. These



17



---

##### Table of Contents

provisions may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of
ACLARA. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders from consummating a merger or combination with us. These
factors could also limit the price that investors might be willing to pay for our common stock in the future.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely
impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principle if forced to sell securities that have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time
maximize yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate
issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than two years. Assuming a hypothetical increase in interest rates of one
percentage point, the fair value of our total investments as of September 30, 2003 would have potentially declined by approximately $674,000.



We do not utilize derivative financial instruments, derivative commodity instruments or other market-risk sensitive instruments, positions or transactions
in any material fashion.



ITEM 4. CONTROLS AND PROCEDURES



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



As required by SEC Rule 13a  15(b), we carried out an evaluation, under the supervision and with the participation of
the Companys management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



Not applicable.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not Applicable.



18



---

##### Table of Contents

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



Not Applicable.



ITEM 5. OTHER INFORMATION



Not
Applicable.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|ExhibitNumber |  | Description                                                                                                                                                                                                                                                            
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of ACLARA BioSciences, Inc. (Incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form S-1 filed with the Securities and Exchange Commission, File No. 222-95107 (our Form S-1).)             
|              | 
|3.2           |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of ACLARA BioSciences, Inc. (Incorporated by
reference to Exhibit 3.6 to our Form S-1.)                                                                                                  
|              | 
|3.3           |  | Amended and Restated Bylaws of ACLARA BioSciences, Inc. (Incorporated by reference to Exhibit 3.4 to our Form
S-1.)                                                                                                                                                    
|              | 
|10.1*         |  | Form of Indemnification Agreement between ACLARA and each of our directors and officers (Incorporated by reference to Exhibit
10.1 to our Form S-1.)                                                                                                                   
|              | 
|10.2*         |  | 1995 Stock Option Plan (Incorporated by reference to Exhibit 10.2 to our Form S-1.)                                                                                                                                                                                    
|              | 
|10.3*         |  | Amended and Restated ACLARA BioSciences, Inc. 1997 Stock Plan (Incorporated by reference to Exhibit 10.3 to our Form
S-1.)                                                                                                                                             
|              | 
|10.4          |  | Amended and Restated Investors Rights Agreement, dated as of December 30, 1999 (Incorporated by reference to Exhibit 10.4
to our Form S-1.)                                                                                                                           
|              | 
|10.5          |  | Lease Agreement between ACLARA BioSciences, Inc. and The Pear venue Group, dated March 1, 1999 (Incorporated by reference to
Exhibit 10.8 to our Form S-1.)                                                                                                            
|              | 
|10.6          |  | Master Equipment Lease between Phoenix Leasing and Soane BioSciences, Inc., dated as of November 15, 1995 (Incorporated by
reference to Exhibit 10.9 to our Form S-1.)                                                                                                 
|              | 
|10.7+         |  | Agreement for an Exclusive Alliance to Develop, Manufacture and Market a Chip-Based Screening System for Cell Analysis between
Cellomics, Inc. and ACLARA BioSciences, Inc., dated as of October 26, 1999 (Incorporated by reference to Exhibit 10.10 to our Form S-1.)
|              | 
|10.8+         |  | Collaboration Agreement between ACLARA BioSciences, Inc., and The Perkin-Elmer Corporation, dated as of March 19, 1999
(Incorporated by reference to Exhibit 10.11 to our Form S-1.)                                                                                   
|              | 
|10.9+         |  | Side Agreement between ACLARA BioSciences, Inc. and The Perkin-Elmer Corporation, dated as of March 19, 1999 (Incorporated by
reference to Exhibit 10.12 to our Form S-1.)                                                                                             
|              | 
|10.10+        |  | Custom Instrument Development and Commercialization Agreement between The R.W. Johnson Pharmaceutical Research Initiative, The
Perkin-Elmer Corporation and CLARA BioSciences, Inc., signed in March 1999 (Incorporated by reference to Exhibit 10.13 to our Form S-1.)



19



---

##### Table of Contents

|       | 
|------ | 
|10.11+ | 
|       | 
|10.12  | 
|       | 
|10.13  | 
|       | 
|10.14  | 
|       | 
|10.15  | 
|       | 
|10.16  | 
|       | 
|10.17+ | 
|       | 
|10.18+ | 
|       | 
|10.19  | 
|       | 
|10.20+ | 
|       | 
|10.21  | 
|       | 
|10.22+ | 
|       | 
|10.23  | 
|       | 
|10.24+ | 
|       | 
|10.25+ | 



20



---

##### Table of Contents

|       | 
|------ | 
|10.26+ | 
|       | 
|10.27  | 
|       | 
|10.28+ | 
|       | 
|10.29+ | 
|       | 
|10.30+ | 
|       | 
|10.31+ | 
|       | 
|10.32  | 
|       | 
|10.33  | 
|       | 
|10.34* | 
|       | 
|10.35* | 
|       | 
|10.36* | 
|       | 
|10.37* | 
|       | 
|10.38* | 
|       | 
|10.39* | 
|       | 
|10.40* | 



21



---

##### Table of Contents

|        | 
|------- | 
|10.41*  | 
|        | 
|10.42*  | 
|        | 
|10.43*  | 
|        | 
|10.44++ | 
|        | 
|10.45++ | 
|        | 
|31.1    | 
|        | 
|31.2    | 
|        | 
|32.1    | 
|        | 
|32.2    | 

---

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

|++ | Confidential treatment has been requested as to portions of this exhibit.
|-- | -------------------------------------------------------------------------

|* | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



(b) Current Reports on Form 8-K.



On July 30, 2003, the Company furnished a current report on Form 8-K under Item 12. Results of Operations and Financial Condition with respect
to a press release announcing its results of operation for the quarter ended June 30, 2003.



November 5, 2003, the Company furnished a current report on Form 8-K under Item 12. Results of Operations and Financial Condition with respect to a press release announcing its results of operation for the
quarter ended September 30, 2003.



22



---

##### Table of Contents

SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|/s/ Alfred G. Merriweather |  | Vice President, Finance and Chief Financial Officer (duly authorized officer and principal financial
officer) |  | November 14, 2003
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -----------------
|Alfred G. Merriweather     |  |                                                                                                               | 



23