##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    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: 0-27316
 Molecular Devices Corporation
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-2914362
(I.R.S. Employer Identification No.)
 
 
 þ o
  o þ o
 o þ




---



##### 



MOLECULAR DEVICES CORPORATION
 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
 INDEX
 PAGE NOPART I.
    
    FINANCIAL INFORMATION
    
    
    3ITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    3CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30,
2006 AND DECEMBER 31, 2005
    
    
    3CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
    
    
    4CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR NINE
MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
    
    
    5NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    6ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    18ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    19PART II.
    
    OTHER INFORMATION
    
    
    19ITEM 1A.
    
    RISK FACTORS
    
    
    19ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    29ITEM 6.
    
    EXHIBITS
    
    
    29SIGNATURE
    
    
    
    
    30EXHIBIT 10.54EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 MOLECULAR DEVICES CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts, unaudited)
 September 30,
    
    December 31,2006
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,280
    
    
    $
    28,908Accounts receivable, net
    
    
    39,582
    
    
    
    41,197Inventories, net
    
    
    29,820
    
    
    
    23,197Deferred tax assets
    
    
    5,917
    
    
    
    5,873Prepaid and other current assets
    
    
    2,241
    
    
    
    2,353Total current assets
    
    
    90,840
    
    
    
    101,528Equipment and leasehold improvements, net
    
    
    10,712
    
    
    
    9,902Goodwill
    
    
    104,172
    
    
    
    102,835Developed technology
    
    
    25,245
    
    
    
    25,152Intangible and other assets
    
    
    21,734
    
    
    
    17,999$
    252,703
    
    
    $
    257,416LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,487
    
    
    $
    7,676Accrued compensation
    
    
    6,522
    
    
    
    9,759Other accrued liabilities
    
    
    11,835
    
    
    
    13,623Deferred revenue
    
    
    8,280
    
    
    
    7,806Total current liabilities
    
    
    35,124
    
    
    
    38,864Other long-term liabilities
    
    
    968
    
    
    
    993Deferred tax liabilities
    
    
    4,486
    
    
    
    4,486Total liabilities
    
    
    40,578
    
    
    
    44,343Commitments and contingencies (Note 9)Stockholders equityCommon stock, $.001 par value;
60,000,000 shares authorized;
20,797,728 and 20,076,495 shares
issued and 16,480,398 and 16,681,727
outstanding at September 30, 2006 and
December 31, 2005, respectively
    
    
    21
    
    
    
    20Additional paid-in capital
    
    
    291,320
    
    
    
    271,300Retained earnings
    
    
    12,189
    
    
    
    7,023Treasury stock, at cost; 4,317,330
and 3,394,768 shares at September 30,
2006 and December 31, 2005,
respectively
    
    
    (93,523
    )
    
    
    (66,519
    )Accumulated other comprehensive income
    
    
    2,118
    
    
    
    1,249Total stockholders equity
    
    
    212,125
    
    
    
    213,073$
    252,703
    
    
    $
    257,416
  3




---



##### Table of Contents



MOLECULAR DEVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    45,512
    
    
    $
    45,156
    
    
    $
    132,892
    
    
    $
    128,758Cost of revenues
    
    
    16,834
    
    
    
    17,393
    
    
    
    49,920
    
    
    
    50,040Gross profit
    
    
    28,678
    
    
    
    27,763
    
    
    
    82,972
    
    
    
    78,718Operating expenses:Research and development
    
    
    5,688
    
    
    
    6,421
    
    
    
    17,034
    
    
    
    18,956Write-off of acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    4,272
    
    
    
    Selling, general and administrative
    
    
    18,440
    
    
    
    14,947
    
    
    
    52,279
    
    
    
    43,854Total operating expenses
    
    
    24,128
    
    
    
    21,368
    
    
    
    73,585
    
    
    
    62,810Income from operations
    
    
    4,550
    
    
    
    6,395
    
    
    
    9,387
    
    
    
    15,908Gain on sale of equity securities
    
    
    
    
    
    
    
    
    
    
    1,669
    
    
    
    Interest income
    
    
    126
    
    
    
    78
    
    
    
    544
    
    
    
    271Interest expense
    
    
    (21
    )
    
    
    (19
    )
    
    
    (59
    )
    
    
    (66
    )Other expense, net
    
    
    (109
    )
    
    
    (40
    )
    
    
    (145
    )
    
    
    (788
    )Income before income taxes
    
    
    4,546
    
    
    
    6,414
    
    
    
    11,396
    
    
    
    15,325Income tax provision
    
    
    1,764
    
    
    
    1,783
    
    
    
    6,227
    
    
    
    5,185Net income
    
    $
    2,782
    
    
    $
    4,631
    
    
    $
    5,169
    
    
    $
    10,140Basic net income per share
    
    $
    0.17
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.60Diluted net income per share
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    0.30
    
    
    $
    0.59Shares used in computing basic net income per share
    
    
    16,578
    
    
    
    16,567
    
    
    
    16,740
    
    
    
    16,841Shares used in computing diluted net income per share
    
    
    16,852
    
    
    
    16,890
    
    
    
    17,164
    
    
    
    17,158
  4




---



##### Table of Contents



MOLECULAR DEVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 Nine Months Ended September 30,2006
    
    2005Cash flows from operating activities:Net income:
    
    $
    5,169
    
    
    $
    10,140Adjustments to reconcile net income to net cash provided by operating actives:Depreciation and amortization
    
    
    4,725
    
    
    
    4,902Amortization of intangible assets
    
    
    2,771
    
    
    
    2,195Amortization of deferred stock compensation
    
    
    
    
    
    
    113Charge for acquired in-process research and development
    
    
    4,272
    
    
    
    Equity investment exchanged for services
    
    
    
    
    
    
    393Loss on disposal of fixed assets
    
    
    30
    
    
    
    5Employee stock-based compensation
    
    
    3,821
    
    
    
    Excess tax benefits from stock-based compensation
    
    
    (1,501
    )
    
    
    537(Increase) decrease in assets:Accounts receivable
    
    
    2,522
    
    
    
    (1,713
    )Inventories
    
    
    (6,217
    )
    
    
    34Deferred tax assets
    
    
    264
    
    
    
    1,389Prepaid and other current assets
    
    
    161
    
    
    
    178Increase (decrease) in liabilities:Accounts payable
    
    
    801
    
    
    
    804Accrued liabilities
    
    
    (2,991
    )
    
    
    (6,709
    )Deferred revenue
    
    
    (467
    )
    
    
    (320
    )Net cash provided by operating activities
    
    
    13,360
    
    
    
    11,948Cash flows from investing activities:Acquisitions
    
    
    (11,247
    )
    
    
    Capital expenditures
    
    
    (3,850
    )
    
    
    (1,966
    )Purchase of intangible and other assets
    
    
    (1,213
    )
    
    
    (11,712
    )Net cash used in investing activities
    
    
    (16,310
    )
    
    
    (13,678
    )Cash flows from financing activities:Issuance of common stock from stock option exercises
    
    
    12,989
    
    
    
    3,936Purchase of treasury stock
    
    
    (27,004
    )
    
    
    (19,924
    )Excess tax benefits from stock-based compensation
    
    
    1,501
    
    
    
    Net cash used in financing activities
    
    
    (12,514
    )
    
    
    (15,988
    )Effect of exchange rate changes on cash
    
    
    (164
    )
    
    
    (266
    )Net decrease in cash and cash equivalents
    
    
    (15,628
    )
    
    
    (17,984
    )Cash and cash equivalents at beginning of period
    
    
    28,908
    
    
    
    30,175Cash and cash equivalents at end of period
    
    $
    13,280
    
    
    $
    12,191
  5




---



##### Table of Contents



MOLECULAR DEVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note 1. Description of Business and Basis of Presentation
       6




---



##### Table of Contents



Note 2. Business Combination
    In-process research and development
    
    $
    4,272Acquired goodwill
    
    
    1,337Acquired developed technology (amortized over five to ten years)
    
    
    2,762Acquired trade name
    
    
    1,002Acquired patents (amortized over ten years)
    
    
    1,797Net book value of acquired assets and liabilities which approximate fair value
    
    
    72Total preliminary purchase price
    
    $
    11,242
   Note 3. Stock Based Compensation
   7




---



##### Table of Contents



Three MonthsEnded September 30,
    
    Nine Months Ended2006
    
    September 30, 2006Cost of revenues
    
    $
    100
    
    
    $
    314Research and development
    
    
    278
    
    
    
    827Selling, general and administrative
    
    
    866
    
    
    
    2,680Income before income taxes
    
    
    1,244
    
    
    
    3,821Income tax benefit
    
    
    (299
    )
    
    
    (1,041
    )Net stock-based compensation expense
    
    $
    945
    
    
    $
    2,780Net stock-based compensation expense per basic share
    
    $
    0.06
    
    
    $
    0.17Net stock-based compensation expense per diluted share
    
    $
    0.06
    
    
    $
    0.16
  8




---



##### Table of Contents



Three MonthsEnded September 30,
    
    Nine Months Ended2005
    
    September 30, 2005Net income  as reported
    
    $
    4,631
    
    
    $
    10,140Plus: Stock based compensation expense included in reported net income, net of tax
    
    
    
    
    
    
    113Less: Stock based compensation expense determined using the fair value method, net of tax
    
    
    (2,004
    )
    
    
    (5,464
    )Net income  pro forma
    
    $
    2,627
    
    
    $
    4,789Net income per share:Basic  as reported
    
    $
    0.28
    
    
    $
    0.60Basic  pro forma
    
    $
    0.16
    
    
    $
    0.28Diluted  as reported
    
    $
    0.27
    
    
    $
    0.59Diluted  pro forma
    
    $
    0.16
    
    
    $
    0.28
   Three and Nine Months EndedSeptember 30,2006
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    49
    %
    
    
    77
    %Risk-free interest rate
    
    
    4.3
    %
    
    
    4.0
    %Expected life of options
    
    5.2 years
    
    6.0 years
  SharesAvailable for
    
    
    
    
    
    Weighted AverageFuture Grant
    
    Options Outstanding
    
    Exercise PriceBalance at December 31, 2005
    
    
    1,076,718
    
    
    
    3,084,330
    
    
    $
    25.15Granted
    
    
    (336,250
    )
    
    
    336,250
    
    
    
    29.49Exercised
    
    
    
    
    
    
    (718,199
    )
    
    
    18.04Cancelled
    
    
    134,243
    
    
    
    (134,243
    )
    
    
    33.27Balance at September 30, 2006
    
    
    874,711
    
    
    
    2,568,138
    
    
    $
    27.23
 9




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted Average
    
    
    
    
    
    
    
    
    
    Weighted AverageRemaining
    
    
    
    
    
    
    
    
    
    RemainingRange of Exercise
    
    
    
    
    
    Contractual Life
    
    Weighted Average
    
    
    
    
    
    Contractual Life
    
    Weighted AveragePrices
    
    Number Outstanding
    
    (Yr.)
    
    Exercise Price
    
    Number Exercisable
    
    (Yr.)
    
    Exercise Price$0.00 to $12.58
    
    
    90,423
    
    
    
    4.1
    
    
    $
    7.72
    
    
    
    86,914
    
    
    
    4.0
    
    
    $
    7.69$12.59 to $25.16
    
    
    1,569,271
    
    
    
    6.3
    
    
    
    19.61
    
    
    
    1,108,402
    
    
    
    5.7
    
    
    
    19.52$25.17 to $37.74
    
    
    460,985
    
    
    
    7.3
    
    
    
    28.86
    
    
    
    144,735
    
    
    
    2.8
    
    
    
    27.50$37.75 to $50.33
    
    
    278,285
    
    
    
    3.5
    
    
    
    47.03
    
    
    
    278,285
    
    
    
    3.5
    
    
    
    47.03$50.34 to $62.91
    
    
    53,575
    
    
    
    3.4
    
    
    
    53.13
    
    
    
    53,575
    
    
    
    3.4
    
    
    
    53.13$62.92 to $75.49
    
    
    41,250
    
    
    
    4.3
    
    
    
    75.27
    
    
    
    41,250
    
    
    
    4.3
    
    
    
    75.27$75.50 to $88.08
    
    
    74,349
    
    
    
    4.1
    
    
    
    77.74
    
    
    
    74,349
    
    
    
    4.1
    
    
    
    77.742,568,138
    
    
    
    
    
    
    $
    27.23
    
    
    
    1,787,510
    
    
    
    
    
    
    $
    28.59
  Note 4. Balance Sheet Components (in thousands)
 September 30,
    
    December 31,2006
    
    2005(in thousands)Inventories, net:Raw materials
    
    $
    14,652
    
    
    $
    11,350Work-in-process
    
    
    2,080
    
    
    
    2,127Finished goods and demonstration equipment, net
    
    
    13,088
    
    
    
    9,720$
    29,820
    
    
    $
    23,197Other accrued liabilities:Accrued income tax
    
    $
    2,116
    
    
    $
    3,051Warranty accrual
    
    
    2,679
    
    
    
    2,663Other
    
    
    7,040
    
    
    
    7,909$
    11,835
    
    
    $
    13,623
 Note 5. Developed Technology and Intangible and Other Assets
  10




---



##### Table of Contents



September 30, 2006
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross Carrying Value
    
    Amortization
    
    Net Carrying Value
    
    Gross Carrying Value
    
    Amortization
    
    Net Carrying ValueDeveloped technology
    
    $
    31,130
    
    
    $
    5,885
    
    
    $
    25,245
    
    
    $
    28,743
    
    
    $
    3,591
    
    
    $
    25,152License fees
    
    
    4,235
    
    
    
    1,057
    
    
    
    3,178
    
    
    
    2,688
    
    
    
    772
    
    
    
    1,916Patents
    
    
    3,169
    
    
    
    787
    
    
    
    2,382
    
    
    
    1,372
    
    
    
    610
    
    
    
    762Tradename
    
    
    200
    
    
    
    30
    
    
    
    170
    
    
    
    200
    
    
    
    15
    
    
    
    185Total
    
    $
    38,734
    
    
    $
    7,759
    
    
    $
    30,975
    
    
    $
    33,003
    
    
    $
    4,988
    
    
    $
    28,015
  For the Year Ended December 31,
    
    Amortization Expense2006 (remaining 3 months)
    
    $
    9962007
    
    
    3,9812008
    
    
    3,9812009
    
    
    3,9812010
    
    
    3,981Thereafter
    
    
    14,055$
    30,975
 Note 6. Net Income Per Share
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Weighted average common
shares outstanding for the
period
    
    
    16,578
    
    
    
    16,567
    
    
    
    16,740
    
    
    
    16,841Common equivalent shares
assuming the exercise of
stock options under the
treasury stock method
    
    
    274
    
    
    
    323
    
    
    
    424
    
    
    
    317Shares used in computing
diluted net income per
share
    
    
    16,852
    
    
    
    16,890
    
    
    
    17,164
    
    
    
    17,158Net income
    
    $
    2,782
    
    
    $
    4,631
    
    
    $
    5,169
    
    
    $
    10,140Basic net income per share
    
    $
    0.17
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.60Diluted net income per share
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    0.30
    
    
    $
    0.59
  11




---



##### Table of Contents



Note 7. Comprehensive Income
  Note 8. Restructuring
   Note 9. Commitments and Contingencies
 Guarantees
 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,
   12




---



##### Table of Contents



Warranty
  Balance December 31, 2005
    
    $
    2,663New warranties issued during the period
    
    
    3,199Warranties assumed through the acquisition of Arcturus
    
    
    186Cost of warranties incurred during the period
    
    
    (3,369
    )Balance September 30, 2006
    
    $
    2,679
 Note 10. Revolving Credit Facility
  Note 11. Income Taxes
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
 Except for the historical information contained herein, the following discussion contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements that are not statements of historical fact may be deemed to be forward-looking
statements. Words such as believes, anticipates, plans, predicts, expects, estimates,
intends, will, continue, may, potential, should and similar expressions are intended to
identify forward-looking statements. There are a number of important factors that could cause our
results to differ materially from those indicated by these forward-looking statements, including,
among others, those discussed in this section as well as under Item 1A of Part II  Risk Factors
and Item 3 of Part I  Quantitative and Qualitative Disclosures About Market Risk, and the risks
detailed from time to time in our future SEC reports.
   13




---



##### Table of Contents



Critical Accounting Policies
  14




---



##### Table of Contents



Stock Based Compensation
    Results of Operations  Three and Nine Months Ended September 30, 2006 and 2005
 Revenues
   Gross Profit
  15




---



##### Table of Contents



Research and Development Expenses
   Selling, General and Administrative Expenses
   Gain on Sale of Equity Securities
  Interest Income
  Interest Expense
  Other Expense, Net
  Income Tax Provision
  16




---



##### Table of Contents



Liquidity and Capital Resources
      
    
    the progress of our research and development;
    
    the number and scope of our research and development programs;
    
    our need to develop new and enhanced products;
    
    market acceptance of and demand for our products;
 17




---



##### Table of Contents




    
    the costs that may be involved in enforcing our patent claims and other intellectual property rights;
    
    potential acquisition and technology licensing opportunities;
    
    the costs associated with repurchasing shares of our common stock;
    
    manufacturing capacity requirements; and
    
    the costs of expanding our sales, marketing and distribution capabilities both in the United States and abroad.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Foreign Currency Exchange
  Interest and Investment Income
  Debt and Interest Expense
  18




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 Part II. Other Information
 
 Item 1A. Risk Factors
  Variations in the amount of time it takes for us to sell our products and collect accounts
receivable and the timing of customer orders may cause fluctuations in our operating results,
which could cause our stock price to decline.
     19




---



##### Table of Contents



We depend on orders that are received and shipped in the same quarter and therefore have
limited visibility of future product shipments.
  Many of our current and potential competitors have significantly greater resources than we do, and
increased competition could impair sales of our products.
    If we are not successful in developing new and enhanced products, we may lose market share to our
competitors.
  20




---



##### Table of Contents



We must expend a significant amount of time and resources to develop new products, and if these
products do not achieve commercial acceptance, our operating results may suffer.
  We obtain some of the consumables, components and subassemblies used with or included in our
systems from a single source or limited group of suppliers, and the partial or complete loss of
one of these suppliers could cause customer supply or production delays and a substantial loss of
revenues.
   
    
    our suppliers may cease or interrupt production of required consumables, components or
subassemblies or otherwise fail to supply us with an adequate supply of required
consumables, components or subassemblies for a number of reasons, including contractual
disputes with our suppliers or adverse financial developments at or affecting the supplier;
    
    we have reduced control over the pricing of third party-supplied consumables, components
and subassemblies, and our suppliers may be unable or unwilling to supply us with required
consumables, components and subassemblies on commercially acceptable terms, or at all;
    
    we have reduced control over the timely delivery of third party-supplied consumables,
components and subassemblies; and
    
    our suppliers may be unable to develop technologically advanced products to support our
growth and development of new systems.
  We may encounter manufacturing and assembly problems or delays, which could result in lost
revenues.
  21




---



##### Table of Contents



If we deliver products with defects, our credibility will be harmed and the sales and market
acceptance of our products will decrease.
  We have significantly expanded our international operations, which exposes us to risks inherent in
international business activities.
   
    
    political, social and economic instability;
    
    trade restrictions and changes in tariffs;
    
    the impact of business cycles and downturns in economies outside of the United States;
    
    unexpected changes in regulatory requirements that may limit our ability to export our
products or sell into particular jurisdictions;
    
    import and export license requirements and restrictions;
    
    difficulties and costs of staffing, managing and monitoring geographically disparate operations;
    
    difficulties in maintaining effective communications with employees and customers due to
distance, language and cultural barriers;
    
    disruptions in international transport or delivery;
 22




---



##### Table of Contents




    
    difficulties in protecting our intellectual property rights, particularly in countries
where the laws and practices do not protect proprietary rights to as great an extent as do
the laws and practices of the United States;
    
    difficulties in enforcing agreements through non-U.S. legal systems;
    
    longer payment cycles and difficulties in collecting receivables; and
    
    potentially adverse tax consequences.
   Most of our current and potential customers are from the pharmaceutical and biotechnology
industries and are subject to risks faced by those industries.
   Our products could infringe on the intellectual property rights of others, which may cause us to
engage in costly litigation and, if we are not successful, could also cause us to pay substantial
damages and prohibit us from selling our products.
  We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and,
if we lose, may cause us to lose some of our intellectual property rights, which would reduce our
ability to compete in the market.
  
    
    assert claims of infringement;
    
    enforce our patents;
 23




---



##### Table of Contents




    
    protect our trade secrets or know-how; or
    
    determine the enforceability, scope and validity of the proprietary rights of others.
  The rights we rely upon to protect our intellectual property underlying our products may not be
adequate, which could enable third parties to use our technology and would reduce our ability to
compete in the market.
   
    
    the pending patent applications we have filed or to which we have exclusive rights may
not result in issued patents or may take longer than we expect to result in issued patents;
    
    the claims of any patents which are issued may not provide meaningful protection;
    
    we may not be able to develop additional proprietary technologies that are patentable;
    
    the patents licensed or issued to us or our customers may not provide a competitive advantage;
    
    other companies may challenge patents licensed or issued to us or our customers;
    
    patents issued to other companies may harm our ability to do business;
    
    other companies may independently develop similar or alternative technologies or duplicate our technologies; and
    
    other companies may design around the technologies we have licensed or developed.
  24




---



##### Table of Contents



We may have difficulty managing our growth.
  We rely upon distributors for product sales and support outside of North America.
  If we choose to acquire new and complementary businesses, products or technologies instead of
developing them ourselves, we may be unable to complete these acquisitions or may not be able to
successfully integrate an acquired business or technology in a cost-effective and non-disruptive
manner.
  
    
    the potential disruption of our ongoing business and distraction of our management;
    
    the potential strain on our financial and managerial controls and reporting systems and procedures;
    
    unanticipated expenses and potential delays related to integration of the operations,
technology and other resources of acquired businesses;
    
    the impairment of relationships with employees, suppliers and customers as a result of
any integration of new management personnel;
    
    greater than anticipated costs and expenses related to restructuring, including employee
severance or relocation costs and costs related to vacating leased facilities; and
    
    potential unknown liabilities associated with any acquisition, including higher than
expected integration costs, which may cause our quarterly and annual operating results to
fluctuate.
   25




---



##### Table of Contents



We depend on our key personnel, the loss of whom would impair our ability to compete.
  Changes to financial accounting standards, or interpretations of those standards, may affect our results of operations and cause us to
change our business practices.
  Changes in our effective income tax rate could reduce our earnings.
 Share-Based
Payment
 Our operating results fluctuate and any failure to meet financial expectations may disappoint
securities analysts or investors and result in a decline in our stock price.
  
    
    customer confidence in the economy, evidenced, in part, by stock market levels;
    
    changes in the domestic and international economic, business and political conditions;
    
    economic conditions within the pharmaceutical and biotechnology industries;
    
    levels of product and price competition;
 26




---



##### Table of Contents




    
    market acceptance of and demand for our products;
    
    the length of our sales cycle and customer buying patterns;
    
    the size and timing of individual transactions;
    
    the timing of new product introductions and product enhancements;
    
    the mix of products sold;
    
    levels of international transactions;
    
    activities of and acquisitions by competitors;
    
    the timing of new hires and the allocation of our resources;
    
    changes in foreign currency exchange rates;
    
    our ability to develop and market new products and control costs; and
    
    changes in U.S. generally accepted accounting principles.
    Failure to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.
  27




---



##### Table of Contents



Our stock price is volatile, which could cause stockholders to lose a substantial part of their
investment in our stock.
   
    
    domestic and international economic, business and political conditions;
    
    economic conditions within the pharmaceutical and biotechnology industries;
    
    our failure to meet our performance estimates or the performance estimates of securities analysts;
    
    changes in financial estimates of our revenues and operating results by us or securities analysts;
    
    changes in buy/sell recommendations by securities analysts; and
    
    the timing of announcements by us or our competitors of significant products, contracts
or acquisitions or publicity regarding actual or potential results or performance thereof.
 Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the
price investors might be willing to pay in the future for our common stock.
  Our actual results could differ materially from those anticipated in our forward-looking
statements.
  28




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    Maximum number ofshares purchased as
    
    shares that may yetTotal number of
    
    Average price paid
    
    part of publicly
    
    be purchased underPeriod
    
    shares purchased
    
    per share
    
    announced programs
    
    the programsJuly 1, 2006 through July 31, 2006
    
    
    14,261
    
    
    $
    23.15
    
    
    
    14,261
    
    
    
    472,855August 1, 2006 through August 31, 2006
    
    
    285,739
    
    
    
    23.61
    
    
    
    285,739
    
    
    
    187,116September 1, 2006 through September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    300,000
    
    
    $
    23.58
    
    
    
    300,000
    
    
    
    187,116
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Exhibit3.1(1)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(1)
    
    Bylaws of the Registrant.3.3(2)
    
    Certificate of Amendment to Certificate of Incorporation.4.1(1)
    
    Specimen Certificate of Common Stock of the Registrant.10.54
    
    Forms of Stock Option Agreement for
Non-Employee Director under the 2005 Equity Incentive Plan.31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C 1350).
 
 (1)
    
    Incorporated by reference to the similarly described exhibit in our Registration Statement on
Form S-1 (File No. 33-98926), as amended.(2)
    
    Incorporated by reference to the similarly described exhibit in our Annual Report on Form
10-K for the year ended December 31, 2001 and filed on April 1, 2002.*
    
    The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 29




---



##### Table of Contents



SIGNATURE
   Date: November 7, 2006
    By:
    /s/ TIMOTHY A. HARKNESSTimothy A. HarknessChief Financial Officer and Senior Vice
President Finance and Operations
(Duly Authorized and Principal Financial and Accounting Officer) 30




---



##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description of Exhibit3.1(1)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(1)
    
    Bylaws of the Registrant.3.3(2)
    
    Certificate of Amendment to Certificate of Incorporation.4.1(1)
    
    Specimen Certificate of Common Stock of the Registrant.10.54
    
    Forms of Stock Option Agreement for
Non-Employee Director under the 2005 Equity Incentive Plan.31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C 1350).
 
 (1)
    
    Incorporated by reference to the similarly described exhibit in our Registration Statement on
Form S-1 (File No. 33-98926), as amended.(2)
    
    Incorporated by reference to the similarly described exhibit in our Annual Report on Form
10-K for the year ended December 31, 2001 and filed on April 1, 2002.*
    
    The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.